Markets have underappreciated Democrat’s higher tax direction: strategist

Brian Gardner, Stifel chief washington policy strategist, joins Yahoo Finance to discuss the outlook on a potential tax legislation and its implications for investors and corporations.

Video Transcript

MYLES UDLAND: All right, let's stay on this topic, bring in Brian Gardner now. He is Stifel's Washington Policy Analyst. Brian, thanks for joining the program this morning. On the topic of taxes, I want to start with corporate tax rates and how you guys are thinking about that and where you think the corporate tax rate is likely headed. 28% is in the plan. You note that maybe moderates would be happy with 24 or 25. But is it is it time for folks to start planning for an increase, even if it's just a couple percentage points in the US corporate tax rate?

BRIAN GARDNER: Yes. The answer is yes. Thanks for having me on this morning, Myles. So the when you look at the tax plan, it's different from the COVID relief package because Congress is eager to hand out money to everybody, but going to be wary about hiking taxes. So the politics are going to be very different. That's why I put a alternative from 28% of maybe 24% or 25% But-- so there's going to be a lot of jockeying, a lot of negotiating. But I think at the end of the day, corporate tax rates are probably going higher.

BRIAN SOZZI: And Brian, you know, you also write extensively about the potential for a financial transaction tax. Walk us through that. What would that look like and what would be the aftershocks of that?

BRIAN GARDNER: So it is a-- it is a-- proponents will say it's a small tax on every share or security that is traded. There are estimates that it raises multiple trillions of dollars over 10 years. It is an idea that has been floating around for quite some time. It has been tried in other countries, kept in some, dropped in others.

It is gaining a following in Democratic circles. So it was not part of the Biden tax plan, specifically. But at the same time, when Joe Biden was asked by a reporter during the campaign, what do you think about an FTT, off the cuff, he said, you know, I think it's kind of a good idea. You know, we should think about that.

So to me, it's something that wasn't in the plan. I would be paying very close attention to this. The chief proponent of the infrastructure plan in the house, Peter DeFazio from Oregon, he's a big supporter of the FTT. So it's one of those things that I don't think has gotten enough attention. It's going to get a very close look from Congress.

RICK NEWMAN: Brian, another element of Biden's plan was taxing capital gains at regular income tax rates, which would be a sizable tax hike. He wants to do that for people with incomes over $1 million. So number one, do you think that is plausible politically? And number two, would that have any impact on stocks?

BRIAN GARDNER: Politically, it is plausible. I do think it's tough because you're-- you're-- you're cutting the cord on the link between-- on how we treat capital. So that-- that is different. It's going to cause some angst especially with some Democrats who are closer with the business community than others, who are more business friendly than other Democrats. So it's not a political slam dunk.

Yeah, I do think-- I mean, I do think it has an impact on stocks. If you're changing your after-tax return, even though it is-- in theory, it is geared towards or targeted towards people making over a million dollars, so that slug of the population is smaller, but that is a huge percentage of-- of-- of the investment community. So I do think it has a big-- I think it has a potential big impact on the markets.

MYLES UDLAND: You know. Brian, obviously this morning because of just what's happened in the last 48, 72 hours, tax hikes are the flavor of the day. But just in a more and a broader sense, as someone whose job it is to watch the direction of policy broadly down in Washington DC and how that could affect investors and markets, how different of an environment do you think we are in now? Has it been underrated maybe, how different the tenor of Washington's broad impulses towards various policies that affect investors-- how different that is than it was a couple of years ago?

BRIAN GARDNER: Yes. I mean, when you-- when-- so Democrats are now in control of both Congress and the administration. The progressive wing of the Democratic party has been ascendant for several years. It is now taking control of the Democratic party. You look at the people that are populating the Biden administration. Once you get past a handful of White House staff and cabinet officials, you're seeing the second tier at different departments and key independent agencies being-- being-- those vacancies being filled with-- with progressives.

So there is this there's a sense that progressives are on the move. And in Congress, they clearly have the majority, the overwhelming majority of Democratic seats. The key, though, on how this all plays out is the leverage that centrists have. Even though they're a small minority within the Democratic party, because of the narrow margins in the House and the Senate, they have outsized influence.

So to me, the real interesting thing, politically, is, do the moderates throw their elbows and throw their weight around? Because they do have a lot of influence. But clearly the direction for Democrats is in a more progressive, higher tax direction. And I do think the markets have underappreciated that.

RICK NEWMAN: Brian, you know as well as anybody the 22-- 2022 midterm elections are already underway. At least in Washington, everybody's thinking about how do they get leverage. And we could see a change in the control-- in the control of Congress or we could see Democrats get a stronger hand in Congress. How do you see all of this playing toward the Democratic chances of increasing the tiny majority they have in the Senate and perhaps the very small majority they have in the House?

BRIAN GARDNER: It makes it more complicated, especially in the House, because majorities are built on swing districts that Democrats need to hold. They need to hold those suburban voters that they were successful at getting in 2018, lost some of them, but kept most of them in 2020. They can't really afford to lose too many more in 2022. So to the extent that upper-middle income, suburban voters are turned off by the tax hike, then-- then it really puts a Democratic majority very much in reach for Republicans.

MYLES UDLAND: All right, really interesting conversation. And again, certainly a new day down in Washington DC. Brian Gardner with Stiefel, appreciate the time this morning. Rick Newman, thanks for jumping on as well.