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The Biden Tax Rates and the Corporate Capital Structure

July 13, 2020

Last Wednesday, Joe Biden , the presumptive democratic candidate for President of the United States, drove two and a half hours from his home in Delaware to Dunsmore Pennsylvania to give a major economic speech and visit the home he lived during his youth. While the average Joe is a good image to have in this election cycle, as economists and investors our focus in on the economy and, yes, the stock market. The Biden speech was described by many in the press as offering a populist economic vision. Vice-President Biden described a long list of possible policy initiatives that mixes some populist ideas with an explicit return to the policies of the Obama Administration. While this characterization may be considered unfair by his supporters, the fact is that he has explicitly called for a return to the Obama tax rate structure and then some. If the Biden tax rates are implemented , the calculations presented here point to a lower market valuation i.e. a decline in the high single digit range to well into the double digit. Then there are the tax induced changes in corporate capital structure. Our calculations show that the Biden tax plan will strongly favor of corporate debt and will fuel a new wave of financial engineering. The Biden proposed tax on foreign earnings will either foster corporate inversions or additional taxes and regulations aimed at stopping the corporations form inverting. Both alternative lead to a lower stock valuation.

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The ValueTiming™ strategy is based on the assumption that politicians and policymakers have particular views of the world, and that they will in general adopt policy measures that are consistent with these views.

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