Democratic Hopefuls and the Taxes to Come - Wall Street Journal

Feb. 9, 2020 2:02 pm ET

Regarding your editorial “The Tax Increases to Come” (Jan. 27): For those who are not subject to the proposed new, higher taxes, it can appear there is a free ride—get the benefits which the tax increases will provide without personally having to pay for them. And since the potential negative implications appear speculative, there is little need to worry about indirect costs such as job losses or a general economic decline.

California famously adopts tax increases that affect 49% or less of the taxpaying population while benefiting the remaining 51%. Taxes with across-the-board impact, such as gas or sales, rarely are approved, as their effects are more direct and can be easily observed and felt by the recipients who vote them down. One former California governor remarked that he could pass any tax as long as the majority of voters didn’t have to pay for it.

One way to help voters understand there is no free lunch is to use dynamic modeling or revenue analysis to estimate the potential economic effects of tax decisions. Such analysis looks to behavioral implications and is complicated, complex and sometimes prone to error, as is any form of analysis.

Unfortunately, this tool isn’t generally liked by political folks, especially when one party controls the legislature and thus the process for evaluating tax and other economic policy proposals.

People don’t need modeling or expert analysis to tell them that tax increases of any kind are bad in a down economy. It’s only when there appears to be extra money around that people feel comfortable spending it—provided, of course, that it’s someone else’s money.

Joseph P. Petito

Bethesda, Md.

One point of reference for election year expectations of a Democratic takeover of tax policy is 2008, although separating the effect of a deep recession from market concerns about a Democratic in office is tricky. Much of that year’s 37% stock market drop was attributable to economic fears, but some portion was due to expectations of lower returns on capital and higher taxes on income under a Democratic administration.

You summarize double-digit increases in the tax rate on labor proposed by four Democratic presidential candidates, but it would seem that capital-market investors aren’t yet worried. If President Trump isn’t re-elected, any of the Democratic tax packages should change investor expectations for future profit growth and stock-market returns. Given that capital-market pricing today incorporates risk-adjusted expectations for tomorrow, investors must not yet be contemplating a Democratic victory in November.

The Democratic appetite for taxes this year makes President Obama’s 2008 plans look almost regressive. The beauty of the 2020 plans is that if investors suddenly factor a likely Democratic victory into their portfolio decisions, the stock market could swoon; and because perceptions are true in their consequences, a tanking market could wag the economic dog and bring to an end the longest economic expansion in U.S. history, hurting President Trump. The more extreme and deleterious the Democratic tax proposals or the greater the likelihood of President Trump losing, the more likely a panic attack in the capital markets that further increases the odds of a Trump defeat.

For now, record stock prices suggest that investors believe President Trump will hold on or be replaced by former Vice President Joe Biden who will walk back extreme tax proposals and make only incremental changes.

If one of the more extreme candidates pulls ahead and depresses market sentiment, the odd, vicious-cycle result is that Democratic odds of winning the White House might go up.

Phil Campbell

Columbia, Md.

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