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Jeremy Siegel: Get Ready for Corporate Tax Hike if Democrats Take Senate

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Professor Jeremy Siegel speaks at LINC 2018. (Photo: Lila Photo for TD Ameritrade Institutional)

While the presidential race looks like a “tossup,” it is highly likely the Democrats will hang onto the House of Representative and it is starting to look like the Democrats could win back the Senate also, which could result in major changes to tax law, including a higher corporate tax rate, according to Jeremy Siegel, professor of finance at Wharton and WisdomTree senior investment strategy advisor.

The November election, now six months away, “looks extremely competitive,” Siegel said Monday, during his weekly conference call on the state of the markets. “In the betting markets, for the presidency it is now virtually a dead heat between” Donald Trump and Joe Biden, with “maybe a tiny advantage [for] the Democrat,” with 52 to 48 odds. And that has been the case for a while, he noted.

However, “what has changed significantly and does give me some concern” is the odds increasingly looking better for Democrats in the Senate races, he said. There are, after all, “several very strong Democratic challengers to what were considered to be relatively safe Republican seats,” he told listeners. Only 2-3 months ago, the odds in the betting markets were 70 to 30 that Republicans would hold onto Senate control, but that has “now sunk all the way down, almost to even money,” with “probably a tiny, slight edge [for] the Republicans,” he said. Despite that slight Republican edge, 52 to 48, if you look at polling for all the Senate races, the Democrats could win control of the Senate also, he added.

Siegel considers the Senate to be a “bulwark to protect against” the other branches of government, he said, adding he considers Democratic Senate control to be a “negative for equity prices.” However, the impact on equity prices wouldn’t be “devastating” – maybe reducing them 5-10% — and investors shouldn’t start selling everything if the trend continues, he said.

What instead “concerns me the most” if the Democrats control all of Congress, is that “my feeling is we’re going to basically repeal and rewrite the corporate tax cut that the Republicans put in place shortly” after Trump’s victory as president, he said, referring to the sweeping tax overhaul enacted in 2017.

“Not everything will be undone, but a lot will be undone and that will increase taxes on corporations,” he predicted. On the plus side, he pointed out, “Biden is not a far-left candidate” and the result will likely not be “radical” changes, he predicted.

“A lot of things can happen in six months,” Siegel added, predicting that if we get a vaccine or “very effective therapeutics,” there isn’t a major resurgence of COVID-19 and the economy opens up and improves, “it’s favorable to the Trump administration.” However, he predicted that, if we get spikes and [the economy] comes down again, then the Democrats” will be able to use it as part of their criticism about how Trump is handling the crisis and “the public will be very discouraged, public sentiment will be down and that would tend to favor a turnover in November.”

More Good News With Markets, COVID-19

“It’s always good to address you guys when the market’s up over 900 points,” he said at the start of the call, referring to the increase seen in the Dow Jones Industrial Average Monday afternoon.

Drug maker Moderna reporting positive early results of a COVID-19 vaccine trial was likely a “significant part” of the reason for investor optimism Monday, Siegel said. “But the market was actually up even before that,” he noted.

When Siegel wakes up each morning now, he checks virus news first, he told listeners, adding: “I don’t really care about the economic news. I know the economic news is bad. All these announcements of jobless claims [and] unemployment … We know it’s terrible. But it doesn’t tell us what’s going to happen in the future.”

There continues to be “good news” on several fronts when it comes to COVID-19 vaccines and therapeutics, as well as U.S. state economy reopenings, he said, noting he continued to be optimistic there will be a vaccine available to the public faster than many experts have been projecting. It is still “very early” on in those state reopenings, he conceded, but said he believed the early promising signs were also helping the stock market.

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