AGF Management : Democrats Suddenly Have a Chance in Georgia — With Huge Implications for Tax Policy

Insights and Market Perspectives

Author: Greg Valliere

December 1, 2020

WHY SHOULD WE BOTHER TO VOTE? That seems to be the mantra from avidly pro-Trump conservatives in Georgia who believe his claims that the election was stolen. If they decide not to vote, there could be huge implications in the Senate, especially for tax policy in 2021.

THE DEMOCRATS NEED TO WIN both of the Georgia runoffs on Jan. 5, and they were considered underdogs - until the last week. Polls and betting odds have tightened; the well-organized Democrats have a chance.

TRUMP WANTS THE TWO REPUBLICANS TO WIN, but can he tone down his furious rants about an election he views as rigged? He will campaign for the GOP candidates on Saturday in Georgia, attempting to put out a fire that he ignited; conservatives in the state are asking whether their votes will make any difference if the results are likely to be fraudulent.

WHY THIS IS IMPORTANT FOR THE MARKETS: If the Democrats win both seats, they will gain control of the Senate in a 50-50 tie that would be broken by Vice President Kamala Harris. If the Republicans take even one of the seats, that would be sufficient for Mitch McConnell and the GOP to maintain control of the Senate.

THE FIREWALL: A Republican-controlled Senate would water down or kill all activist legislation that emerges from the House, forcing Joe Biden to the center if he wants to get anything done (cynics suggest Biden could be comfortable with this arrangement).

THE BIG ISSUE will be taxes, where the two parties are far apart. If Democrats control the Senate, they could prevail on several tax hikes - the top corporate rate, the maximum corporate rate and the estate tax rate are likely to rise, perhaps not by as much as Biden would prefer because even with a 50-50 tie, there are a couple of moderate Democrats who may not accept steep tax hikes.

AS WE PREDICTED, the Democrats got only a 'light blue wave,' so if the Senate stays Republican, only a handful of tax changes would have a chance of passage. There's support for a hike in child credits but if McConnell controls the Senate, several tax hikes will be off the table - a capital gains tax hike, changes in the step-up basis, etc.

IF THE DEMOCRATS TAKE THE SENATE in a tie, there could be a hike in taxes on the ultra-rich and a modest new corporate minimum tax, but these changes would test Biden's negotiating skills; McConnell is opposed to virtually all new taxes.

THUS THE GEORGIA RUNOFFS ARE CRUCIAL: We still think the GOP will win one of the two seats, but that looks less likely now than in early November.

THERE'S A REVOLT in the GOP base, which is convinced that Trump won the election; many Georgia conservative activists think the two Republican candidates haven't done enough to stop a stolen election. So does Trump, who's already campaigning for the presidency in 2024; will he fan the flames on Saturday, helping him but hurting the two GOP candidates?

* * * * *

BIDEN FACES FIRST CASUALTY: No, not his fractured foot, but his nomination of Neera Tanden to head the Office of Management and Budget, which has generated a tidal wave of opposition.

THE WALL STREET JOURNAL editorial page blasted her 'slash and burn' tweets against conservatives, while Politico cited her 'radioactive' status among Bernie Sanders supporters who saw her fingerprints on Hillary Clinton's purge of Progressives in 2016.

THE BOTTOM LINE is that Tanden probably doesn't have the votes to win Senate confirmation, which Biden's advisers should have realized immediately. This is Biden's first mis-step; all eyes now are on his Attorney General nomination.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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