Significant Tax, Economic and Investment Implications of the Federal Republican Elections Sweep.
Given a Republican election sweep at the federal level, significant changes in tax, tariff, and regulatory policies are anticipated. We want to address those forthcoming policies that are most likely to have significant impacts on economic growth, interest rates, profits, inflation, and the impacts on select investments.
Summary of Key Economic and Investment Implications of the Republican Federal Election Sweep
- Tax Policy: Expected extension of individual and corporate tax cuts, potential SALT cap removal, and estate tax exemption expansion or repeal—aimed at boosting disposable income and corporate profits, though potentially increasing the U.S. budget deficit. Pushing taxable income from 2024 into 2025 may provide a tax benefit via a larger SALT deduction.
- Tariffs and Interest Rates: New tariffs may reduce the deficit but could spark inflation and higher long-term rates, potentially slowing economic growth. U.S. assets benefit from a strong dollar.
- Regulation and Federal Spending: Regulatory easing may stimulate capital investment, profits productivity, and economic growth. Major federal spending cuts are unlikely, but if enacted, they could meaningfully impact growth by reducing fiscal stimulus and household spending power.
Tax Policy
Making Tax Cuts Permanent: Republicans are likely to seek permanence for individual tax cuts set to expire in 2026, continuing lower tax rates beyond 2025 for individuals and households.
Lowering Corporate Tax Rates: Proposals could include reducing the corporate tax rate below the current 21%, possibly to 15%, especially favoring non-importing firms. Tax cuts will be good for U.S corporate profits and thus should boost stock prices by a modest amount.
Exempting Tips and Social Security Benefits: There may be an effort to exempt tips and Social Security benefits from taxation, which would increase disposable income for lower-paid service workers and retirees. This would boost spending and support future economic growth and employment.
SALT deduction: Potential Removal or Increase of the $10,000 Cap: Many Republicans have expressed a desire to remove the cap entirely or to increase the current $10,000 cap on the State and Local Tax (SALT) deduction, with support for this especially from members in high-tax states. Budget deficit concerns may result in some deduction cap still being imposed.
The possibility of a larger SALT deduction in 2025 does suggest shifting some income from 2024 into 2025 (e.g., selling assets at a gain, receiving bonuses, exercising stock options, Roth IRA conversions) for tax payers that live in high income tax states.
Estate Tax Exemption: Republicans may look to extend the current estate tax exemption beyond 2025 or even increasing it, thereby reducing the number of estates subject to tax. Some Republicans advocate for eliminating the estate tax entirely. Estate taxes do not provide much in federal revenue (about 0.5%), and the federal deficit would not be affected significantly by a total repeal of estate taxes.
Tarriff, Regulatory, Immigration and Spending Policy Shifts and Economic and Investment Implications
Tax cuts are likely to increase the federal deficit over what was anticipated previously. A widespread increase in tariffs may reduce this deficit, but also creates a noticeable one-time increase in inflation. Long-term interest rates, including for mortgages, have risen as a result of this increased concern about budget deficits and inflation. This in turn could cause longer-term interest rates to rise further and curtail the magnitude of future Federal Reserve interest rate cuts. Higher interest rates tend to slow economic growth, and higher prices may constrain household purchases. The net effect of this will depend upon whether large and widespread tariffs are actually imposed or whether tariffs are more targeted (e.g. China) and mostly used as a threat to negotiate more favorable trade terms.
If longer-term interest rates rise further, it may be a good time to lock-in longer term bond investments. However, for the present, tilting towards lower duration fixed income investments is more prudent.
Higher longer-term interest rates and potential tariffs have boosted the U.S. dollar against other currencies. This depreciation of other currencies may partly offset tariff price hikes and dull the inflationary impact of tariffs. It also favors dollar-denominated assets, and investors should consider currency hedges on non-U.S. investments. If tariffs are not widely enacted, the dollar’s value may decline, as it currently appears overvalued based on purchasing power parity (PPP) standards.
Regulatory easing is anticipated to increase capital expenditures and stimulate growth, earnings, and productivity, which in turn could mitigate inflation pressures. However, reduced regulation may encourage riskier corporate and financial behavior that undervalues future economic risks, thereby raising long-term stability and growth risks. Details will matter, and they are not yet available.
A more restrictive immigration policy is expected to modestly decrease the U.S. workforce and therefore result in a modest inflationary bump compared to the current immigration policy.
Cutting federal spending, as has been proposed, would reduce deficits, but would also reduce fiscal stimulus and cut into economic growth and household spending capacity. Given “untouchable” spending programs (e.g. Social Security, Medicare, Treasury interest, defense, etc.), there is not a lot of room for meaningful spending cuts. If there are large spending cuts in “discretionary” federal spending via major federal program cuts, the resulting federal employee lay-offs and secondary negative impact on private sector firms and employees may be unpalatable for those seeking re-election in two years. There may be some noticeable federal spending cuts, but likely not enough to meaningfully change either the deficit or the employment picture.
We focus here on the potential economic and investment impacts from the Republican federal election sweep. While new policies may also heighten both domestic and international tensions, only those posing significant economic or investment implications fall within the scope of this analysis.
For a more nuanced discussion and for more detailed investment implications (e.g. small caps, real estate, various sectors, natural resources, and alternative assets), please contact us.