Are Capitalists Justified in Fearing a Bernie Sanders Presidency?

* On April 8, 2020, Bernie Sanders officially ended his presidential campaign, allowing Joe Biden to become the Democratic nominee. While some of Sanders' proposals, such as Universal Basic Income (UBI) and comprehensive healthcare, were deemed radical, the ongoing pandemic has highlighted the urgent need for such measures.

As the world grapples with the impacts of COVID-19, investors are starting to realize that the uncertainty around the virus will eventually settle. We adapt to crises, often becoming desensitized to alarming news—much like how we have responded to various tragedies over time.

While the current market turmoil may seem daunting, I believe there are lessons to be learned from this market chaos. As we look to the future, we might find ourselves wishing we had seized the opportunity to invest when prices were lower.

Yet, for capitalists, the clock never stops ticking. We must remain vigilant about variables that could affect our wealth-building strategies. As the initial panic fades, I anticipate that investors will turn their attention to the political landscape, particularly the presidential race.

Bernie Sanders, a Democratic Socialist, stands a strong chance of becoming the Democratic nominee for President of the United States. As his popularity increases, so does the potential for market volatility, especially given his outspoken stance against corporate America.

Should Sanders manage to defeat Donald Trump in the upcoming election (with odds of approximately 20%), we might witness a significant correction in the S&P 500—potentially a drop of at least 20%. The market could already be pricing in some of this uncertainty, as Sanders has been a vocal critic of large corporations, which comprise the S&P 500.

Aside from the implications for stock prices, there are also concerns about increased income taxes for American workers. This could be necessary to fund initiatives like universal healthcare, free college education, and the cancellation of over $1.6 trillion in student debt. For many, this trade-off may seem worthwhile, particularly if they are burdened by high healthcare costs and have children entering college.

As I reflect on Sanders’ rise in the political arena, I find myself reconsidering my perspective as a staunch capitalist. In fact, I’ve come to see that Sanders’ policies could ultimately benefit my family and me.

My motivation to explore this perspective stems from my significant monthly healthcare expenses of $2,380 and the looming costs of preschool tuition, which exceeds $4,000 per month for my two children.

If Sanders were to be elected president, I could potentially shift my focus from relentless money-making to spending quality time with my children. After all, they grow up fast.

However, I remain uncertain about whether Sanders can implement the necessary tax increases to fund his ambitious plans. Let us delve into how he intends to finance his proposals.

Bernie Sanders' Revenue-Generating Proposals

On “The Late Show with Stephen Colbert,” Sanders stated, “Is healthcare free? No, it is not. So what we do is exempt the first $29,000 of a person’s income. You make less than $29,000, you pay nothing in taxes. Above that, in a progressive way, with the wealthiest people paying the largest percentage, people do pay more in taxes.”

In a feature on CBS’s “60 Minutes,” Sanders estimated that his Medicare for All plan would cost around $30 trillion over a decade. He outlined nine strategies to generate revenue, which could together yield approximately $17.5 trillion over the same period. However, this still leaves a striking $12.5 trillion deficit.

Here’s a breakdown of Sanders' revenue-generating proposals:

• Implement a 4% income-based premium for employees, exempting the first $29,000 of income, potentially generating $4 trillion.
• Introduce a 7.5% income-based premium paid by employers, excluding the first $1 million in payroll, which could raise $5.4 trillion.
• Eliminate health tax expenditures, contributing an estimated $5.2 trillion.
• Equalize capital gains taxation with income tax rates, potentially raising $2.5 trillion.
• Restore the federal corporate tax rate to 35% (pre-Trump era) and allocate $1 trillion of the revenue towards Medicare for All.
• Increase the top marginal income tax rate to 52% on income exceeding $10 million to support universal healthcare.
• Lower the estate tax exemption below $11.58 million per person and increase the estate tax rate above 40%.

While many of these proposals may not be overly burdensome for the average American, certain aspects raise concerns:

• The 4% income-based premium for employees earning over $29,000.
• The potential negative impact on corporate profits and the resulting devaluation of companies if the corporate tax rate reverts to 35%.
• The estate tax level; reducing the exemption to $1 million could encourage wealthier individuals to spend more during their lifetime, which might have beneficial economic effects.

The Implications of Higher Corporate Tax Rates

To provide context, the 2017 Tax Cuts and Jobs Act (TCJA) reduced the U.S. corporate tax rate from 35% to 21%, with the average combined federal and state rate dropping from 38.9% to 25.8%. This reduction has positioned the U.S. corporate tax rate lower than that of all other major G7 economies, except for the United Kingdom (with a 19% rate).

Lower corporate tax rates tend to benefit investors, as higher earnings can lead to increased funds for research and development, expansion, and overall business stability. Consequently, share prices often climb, assuming valuations remain steady.

If Bernie Sanders were elected and proceeded to raise corporate tax rates by 10%, we could anticipate an average 10% decline in corporate earnings, all else being equal. This scenario could trigger an immediate sell-off in the S&P 500, with investors expecting a decline of at least 10%.

Examining Higher Income Tax Rates

Interestingly, I have yet to find definitive income tax rates proposed by Bernie Sanders. Most available information consists of past versions from his 2016 campaign and speculative projections for today. A useful resource I found is BernieTax.com, although it is not officially affiliated with Sanders and was last updated in July 2019.

As I aim to earn $350,000 annually by 2022 to support my family in expensive San Francisco, I utilized this income figure to explore how Sanders' tax plan could impact my finances.

Interestingly, the calculations indicated that my annual disposable income would increase by $15,536 under Sanders' tax plan. This seems counterintuitive, considering that $350,000 qualifies as a top 5% income in America.

The rationale behind this scenario lies in the healthcare savings. While I would pay around $13,024 more in taxes, I would also save $28,560 annually in healthcare costs through the provision of free healthcare. If this holds true, it represents a compelling trade-off!

The ultimate aim of Sanders’ tax strategy appears to be ensuring that most Americans receive greater healthcare benefits than the additional taxes incurred. Below is a comparison of proposed marginal income tax rates versus current rates:

While my income tax might remain unchanged for earnings up to $500,000 for married couples, I would still save a substantial amount on healthcare—suggesting that the system might balance out well for many.

However, the question remains: if my healthcare spending drops to $0 and is replaced by a 4% income-based premium tax, would that lead to an increase or decrease in disposable income? Under Sanders' plan, I would only be liable for 4% of my taxable income, translating to $13,024 based on the earlier example.

Understanding Bernie’s Real Marginal Income Tax Rates

It seems illogical that marginal income tax rates would stay the same for incomes up to $500,000. The assumptions on the BernieTax website may not be accurate, but they provide a framework for understanding cash flow implications.

As Sanders continues to target billionaires for not contributing their fair share of taxes, it’s reasonable to assume that he will impose higher taxes on the top 50% of income earners. Thus, a more realistic view of Sanders' marginal tax rates might appear as follows:

• Individuals earning up to $9,525 (below poverty wage) likely see no tax increase.
• Those earning between $9,525 and $350,000 would face a marginal rate increase.
• High earners, particularly those above $350,000, could see their tax burden rise significantly.

For instance, under a more likely Sanders tax structure, individuals earning $350,000 could see an increase of approximately $19,500 in taxes. If this additional tax burden is offset by the elimination of the $28,560 healthcare premium, the net impact could still be favorable, raising disposable income by $9,000. However, the introduction of the 4% income-based premium could complicate the financial picture, resulting in a net decrease of $4,024 annually.

In summary, while the increase in overall taxes may not seem excessive for many, the combined impact of the income tax and the new healthcare premium could deter high earners from pursuing larger income brackets.

Potential Outcomes If Bernie Sanders Assumes the Presidency

Based on current proposals, the optimal financial situation should Sanders become president would likely involve:

• Income levels between $50,000 and $150,000 per person, or $100,000 to $250,000 per couple, depending on lifestyle choices.
• Reducing stock investments in favor of bonds, real estate, and cash reserves.
• Increasing charitable donations and spending down estates to minimize future estate tax liabilities.
• Adopting a more relaxed work-life balance, as healthcare costs and educational expenses would be managed differently under Sanders' policies.

Sanders has likely chosen not to be specific about his tax plans to avoid alarming potential voters with calculations highlighting how much more they might owe under his administration.

The general consensus is that those making under $29,000 annually will likely see little to no tax increase. Couples with incomes below $58,000 and an additional $5,000 exemption per child may also remain unaffected.

However, the concern is that Sanders's financing strategies for Medicare For All leave a substantial $12.5 trillion gap. This suggests that should he take office, tax increases might be even steeper than anticipated.

Given the current economic climate, which has been bolstered by low unemployment and robust market performance, it seems challenging for Sanders to secure a victory against Trump, barring an economic downturn linked to the pandemic. Yet, if such a recession occurs, it may enhance Sanders' chances in the election.

While I appreciate Sanders’ intent to ask more from a larger segment of the workforce to fund these initiatives, changing public perceptions and habits surrounding tax contributions and benefits is a complex endeavor.

Many individuals today expect free services and may not be willing to embrace a system where they have to contribute financially. Having spent years assisting others in achieving financial independence, I recognize the difficulties in shifting these long-held beliefs.

As we embark on this political discourse, I encourage individuals to reflect on how their actions may change under a Sanders presidency. Would you alter your spending habits to mitigate estate taxes? Would your work ethic shift? Let's keep this conversation civil as we navigate these complex issues.

Note: I continue to invest in stocks after a significant market correction, channeling funds into my daughter's 529 plan, as well as my Solo 401(k), SEP IRA, and after-tax investment accounts. Here are my thoughts on the stock market's recovery.

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