‘Sensationally unpredictable’ election clouds tax policy outlook

The shock replacement of the Democratic presidential candidate less than four months before the U.S. election has introduced a new element of uncertainty about the outlook for economic policy in 2025 and beyond.

The immediate unknown is whether President Joe Biden’s expected successor at the top of his party’s ticket, Vice President Kamala Harris, would recalibrate Democrats’ economic agenda. Economists and investors alike have been scouring her record as a U.S. senator and, before that, California’s attorney general, for clues.

While the assumption of many market participants had been that former President Donald Trump was the clear favorite for victory in November, a wave of enthusiasm over Harris has forced prognosticators to recalculate the odds.

Economists at Wells Fargo & Co. said there is now “tremendous uncertainty” about what lies ahead. Gavekal Research, a global economic research firm, described the US political situation as “sensationally unpredictable.”

“The scale and pace of dramatic events we have witnessed in U.S. presidential politics in the past month are unprecedented, which adds uncertainty to the election outlook and potentially harms confidence — a key pillar of investor sentiment,” said Clay Lowery, who served as a senior Treasury official in the George W. Bush administration and is now executive vice president for research and policy at the Institute for International Finance.

Trump’s agenda is one of lower taxes, higher tariffs and a strict crackdown on immigration — a recipe many economists see as inflationary.

While Harris has yet to map out her proposals, economists expect her to broadly adhere to the Biden administration’s current policy mix for now. That includes major subsidies for green energy, a focus on addressing high living costs and maintaining tax relief for lower- and middle-income families.

But there are also areas where she is expected to signal her own policies, including on individual income tax rates, climate and consumer protection.

“The big picture thing, when it comes to her economic policy, is that she’s a classic progressive,” said Ben Harris, who was a senior official at the Treasury in the Biden administration until last year. “She really doesn’t deviate from the standard progressive view on very much.”

With regard to the idea of taxing capital, the vice president is “probably even to the left of Biden a bit,” said Harris, who is now at the Brookings Institution. He pointed to her past support for measures including a financial transactions tax and a proposal that would have pushed the corporate tax rate all the way back up to 35%, from the current 21%. (Biden has favored 28%.)

On trade, the vice president’s record suggests a more protectionist approach than the Obama or Clinton administrations — which had pursued free-trade deals — and more in line with Biden, who’s maintained the tariff hikes that Trump imposed on China.

In 2016, Harris opposed the Trans-Pacific Partnership, a keystone Asia-Pacific trade agreement that President Barack Obama had pitched to deepen engagement in the region at the expense of Chinese influence.

Then campaigning for the Senate, Harris told the Los Angeles Times, “While I support finding ways to increase exports for U.S. goods and expanding trade opportunities, I will oppose any trade deal that doesn’t look out for the best interest of workers.”

Harris has won endorsements from unions since announcing her candidacy for president. She has touted economic benefits from unions both for union members and non-union workers.

Climate plan

As for climate, Harris proposed a $10 trillion package to reduce greenhouse gas emissions when she was a candidate for the Democratic presidential nomination in 2019. She also backed the so-called Green New Deal in Congress, going beyond what Biden has favored as president.

With regard to regulation, economists note her pursuit of a consumer -protection agenda while serving as California attorney general.

A Harris administration could bring “additional consumer-related regulatory actions,” Bloomberg Intelligence analysts Nathan Dean and Andrew Silverman wrote. They also expect an ongoing commitment to subsidies for the green industry and scrutiny of big-tech via antitrust actions.

One major priority that the outgoing administration failed to secure was a longer-term expansion in key areas of the so-called care economy, including efforts to make expanded child-tax credits permanent and to step up support for childcare and eldercare. That could be an area where she could make her mark, said Ben Harris at Brookings.

“The aspects of Bidenomics that she seemed most drawn to all relate to the care economy,” he said. 

Regardless, the bigger gulf is between Harris’ Trump’s policy proposals, said Elizabeth Pancotti, a former Senate staff member now at the Roosevelt Institute. “There are stark differences.”

Those differences only heighten focus on the race, which initial polling suggests might have tightened.

“The most important and inevitable market consequence of a U.S. election that has suddenly become more competitive, is a big increase in uncertainty about the outcome,” Anatole Kaletsky, chief economist and co-founder of Gavekal, wrote in a note this week. “Given U.S. hegemony in geopolitics and global finance, this effect will cast a shadow over every part of the world economy.”