We are now one month away from the next Presidential election, and the race continues to look like it will be very close.
What the Polls Say
The Economist forecasting model, which we’ve been following, has shown no change during the past month. The projection as of October 4 shows Harris leading by 274 electoral votes to 264, with 270 electoral votes required to win.
Source: The Economist
The Economist also keeps a running average of national head-to-head polls, which gives a sense of how the race is progressing. In early September, Harris was ahead 49% to 47%. This margin has expanded slightly in favor of the Democrat, and as of early October was 50% to 46%.
Interestingly, during his previous two presidential campaigns, Trump never led in general-election polling averages. In 2016, he trailed Clinton by four percentage points on election day. In 2020, Trump’s deficit was eight percentage points.
The seven swing states, where the race likely will be decided, remain highly competitive according to the latest forecast from The Economist.
Currently, Democrats seem to have a slight edge in Michigan, Nevada and Wisconsin. Republicans have the lead in North Carolina, Georgia, and Arizona. And Pennsylvania appears to be a virtual dead heat.
Policy Points
While it’s unclear who will be sitting in the Oval Office in mid-January 2025, we can take a closer look at the two parties’ tax and spend proposals to get a better understanding of candidate and party priorities, and the future impact on Federal finances.
The bottom line is that both candidates’ proposals are out of balance (in terms of dollars and cents) and will continue the trend of running large deficits and push the US further into debt.
From what has been revealed so far, the impact on the deficit and debt looks to be less bad under Harris.
The two charts below, courtesy of Michael Cembalest of JP Morgan Asset Management, show the fiscal impact of the tax and spend policies of each candidate.
Harris’ fiscal policies take a standard redistributionist approach, where there are an additional $1.3 trillion of taxes on the wealthy and $2.8 trillion of taxes on corporations over a 10-year period.
This revenue would be used to extend tax cuts for people earning less than $400,000 in income and for a variety of entitlements for families and home buyers.
The Harris tax and spend plans will have about a $1.5 trillion net negative impact on the deficit, compared to the baseline forecast of the Congressional Budget Office.
Source: JP Morgan Asset Management
The fiscal impact under Trump would likely be two to three times worse than under Harris and translate to a $4 trillion net negative impact on the deficit, compared to the baseline forecast of the Congressional Budget Office.
Trump is proposing large tax cuts, including extending all the individual and business tax cuts initiated in 2017 that are set to expire in 2026; eliminating taxation on Social Security benefits; and repealing the cap on the State and Local Tax (SALT) deduction.
Also, further cuts to the corporate income tax rate have been floated. The cuts are to be partially offset by revenue raised from tariffs and a repeal of clean energy subsidies.
Source: JP Morgan Asset Management
Jason Furman, Harvard professor and former chair of the White House Council of Economic Advisors, recently noted that “the first modern presidential race between two candidates with undergraduate degrees in economics hasn’t thrilled economists”.
Both candidates’ plans pose longer-term risks to the US economy by further expanding the Federal deficit, but regarding this measure of risk, the scales are currently tipped toward Trump.
Apart from a widening budget deficit, a major risk under the Harris proposal is that higher corporate tax rates could push businesses to relocate headquarters out of the US to save on taxes.
This activity, known as “corporate inversion”, has slowed meaningfully since the Federal corporate tax rate dropped to 21% from 35% in 2017.
A major risk under the Trump proposal is the re-ignition of inflation from higher prices that are likely to result from tariffs on imports and potential retaliation from other countries.
It is worth noting that estimates of the fiscal impact of the Democrat and Republican policy proposals vary widely.
For example, the Committee for a Responsible Federal Budget, a nonpartisan group that favors lower deficits, estimates an even larger negative fiscal impact from both red and blue party policy proposals than what the JP Morgan analysis shows.
A Republican sweep or a Democratic sweep of the executive and legislative branches would probably result in more caution in the markets, as investors wait to see the scope and speed of enactment of new policies.
But the most likely outcome in the coming election is some kind of split government.
If this were to happen, neither candidate’s proposals likely would be passed into law as currently articulated. And divided government tends to have fewer negative implications for investors.
-RK