Barring a life-ending meteor strike, nuclear war, or the literal End of Days, we know there will be a U.S. presidential election on November 5. 

But that’s really all we know. 

We don’t know if either presumptive candidate even makes it to the election. As my colleague Louis Navellier suspects, Joe Biden might be replaced in the next six months… and Donald Trump may very well be in prison or in exile by then. 

Because we don’t know who will be in the White House come January 2025 – let alone which party will control Congress – we also can’t know what to expect from the tax code. Trump’s 2017 Tax Cuts and Jobs Act are set to expire at the end of 2025. 

What does this mean? 

It means that we might all be paying a lot more in taxes in another two years… and not just on our paychecks. The hikes would potentially affect investment income as well as inherited estates. 

Freeport Society friend Jared Dillian of The Daily Dirtnap has an interesting take on this. He’s kindly given us permission to share his latest essay on this subject with you. Higher taxes mean lower after-tax returns for investors… which might incentivize high-income investors to sell early to lock in lower rates. 

Could this mean trouble ahead in the stock market?

Read to find out!

Jared, over to you.

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Elections and Taxes

The betting website PredictIt is probably the best tool we have for evaluating the probabilities of who will become president. Looking at the PredictIt odds, a few things stand out.

Donald Trump is in the lead for president, by a fair amount, but the Democratic Party is in the lead over the Republican Party, due to the not-so-remote chance that someone other than Joe Biden is the Democratic nominee.

Further down, prediction markets are calling for Georgia to go Republican, and Wisconsin to go Democratic, which would be unexpected results.

South Dakota Governor Kristi Noem seems to be the leading candidate to beTrump’s VP, but she’s got some baggage, and that could potentially be like a Sarah Palin pick. Or maybe it wouldn’t… What do I know? She’s photogenic, which is something that Trump clearly cares about. And the consensus seems to be that he will pick a female VP.

The thing I have said consistently about this election is that there are simply too many variables, too many permutations, to make an accurate prediction nine months out. Trump could be in jail. Trump could win in spite of being in jail. The slick Gavin Newsom could take Biden’s place, but the California governor is a walking billboard for how not to manage a state. Never mind RFK Jr. and No Labels, which could peel off votes from both major candidates. In other words, we just don’t know.

Let’s talk about taxes for a moment. Here’s an interesting thought experiment for you – if the 2017 Trump tax cuts expire, the top marginal rate in California will go to 55.45%. How do I compute that?

• 39.6% Federal
• 14.4% State
• 1.45% Medicare

Exclusive of Social Security taxes, property and sales taxes, and all that jazz.

By the way, the top marginal rate in Sweden is 52%. And I’d argue you get a lot more for your 52% in Sweden than you do for your 55.45% in California.

All-in top marginal rates of over 50% are kind of gross. 

It is the principle of the thing. If you’re keeping less than half of what you make, I’d argue that is a confiscatory tax rate. And I’m sure many of you are saying to yourselves that this is not the effective rate, but effective rates don’t matter. It is the top marginal rate that provides economic incentives (or in this case, disincentives). The top marginal rate is what motivates people to work, or not work. If the top marginal rate is confiscatory, it will discourage innovation and entrepreneurship, and lead to lower long-term growth.

I currently pay 40% (37% top rate, plus 3% state rate for single-member LLCs), and I think that is kind of gross. I could not imagine paying another 15%. I don’t know how people do it, especially when you take into account the cost of living in California.  

Now, you would think with all this revenue coming in that the state treasury would have money coming out of its ears.  

No, they have a $68 billion deficit. Funny how that works.  

And keep in mind that if PredictIt is true, and we have a Democratic president (and Congress) in 2024, tax rates are probably going to go up a lot. You’re probably going to get a top marginal rate of 45% or so, in a higher tax bracket of perhaps $2 million or so, which would take California’s all-in top marginal rate to 61%.  

And I’d imagine they’d lift the cap on Social Security wages, which would take the all-in top marginal rate up to 67%.  

We’ve had high tax rates before, but they’ve applied to very high levels of income. Basically, the super-rich. Someone who makes $600,000 a year is the working rich: dentists and doctors and financial advisors and such.  

Now in the old days, there were all kinds of deductions and loopholes, where you could get out of paying that 70% top marginal rate in the 1970s. But that doesn’t exist today. If you have a top marginal rate of 55.45%, you are going to be paying 55.45%. Especially with the limitation on the SALT deductions.  

I should point out that if the Democrats take over, they will probably eliminate the limitations on deductions of state and local taxes, which will bring California’s top rate down to about 49%.

People aren’t complaining much about taxes now, because they’ve been stable for the last 40 years, but they’re about to become unstable. And we haven’t even discussed taxes on capital gains and dividends, which is what the market cares about. If you’re looking at 40%+ investment taxes, the stock market is going to go down a lot.

Nobody is talking about this yet.

Here Is What Will Happen

Three to six months out, we will begin pricing in higher taxes. The market will go down 20%, bottoming on Election Day. Then, stocks will go up, and everyone will say that Democrats are good for stocks. That is always how this works.

I say all this without having a particular view on the election, only that it will be nuts and there will be surprises. It’s not a coincidence that you are seeing attacks on Biden’s cognitive abilities.  

I’ve been accused of being a conspiracy theorist for saying this, but I believe Barack Obama is behind that. Obama wants Biden out of there, and the Obama people are going to keep planting seeds about Biden’s significantly addled state until he resigns, or the 25th Amendment is put in place. But that is all conjecture. Right now, Joe Biden is at 74% to be the Democratic presidential nominee.

The Democratic field is at 26%. I would still bet on the field, although that probability has come up in recent weeks.  

Matt Levine did a Bloomberg Opinion piece on insider trading and prediction markets that was pretty interesting. Recommend reading it.

But I try to stay optimistic. It’s not easy. I would like a scenario where taxes go down and government spending goes way down, but nobody seems to be campaigning on that at the moment. 

I’ve never heard Trump talk about deficit reduction, not even for a second. Nobody seems to be campaigning on reducing the size of government. It’s not bad enough yet. How bad do things have to get? Much worse, apparently.

We collect a lot of revenue in this country. We don’t have a revenue collection problem, and we don’t have a “tax gap.”  We must do something on the spending side. We have to find a trillion to cut, which, if you were Calvin Coolidge, is actually not that hard. You can cut a trillion. I worked in government, and I can tell you that rush hour in D.C. starts at 2:30 p.m. There is plenty to cut.

• Jared Dillian, The Daily Dirtnap

P.S. Jared is the editor of The Daily Dirtnap, a daily market newsletter for investment professionals. He has a degree in Maths and Computer Science… a Master’s in Business Administration (with a concentration in Finance)… and a Master’s in Fine Arts in Writing. He’s been a trader for eight years, four of which he focused on ETF trading. If you liked his essay, and would like to read more, follow this link.

P.P.S. This threat of “confiscation taxes” is what we work to fight against, here at The Freeport Society. It’s why we created The Freeport Investor, to help you build your wealth so that, should the worst come to pass, you have the financial freedom to do what’s best for your country… be it to emigrate to a place where taxes are reasonable and worth paying… or to have enough to not suffer the effects of paying more of your hard earned money to the “extortionists.” I urge you to watch this special presentation from Louis Navellier now, and consider joining us.