* On April 8, 2020, Bernie Sanders dropped out of the presidential race, paving way for Joe Biden to be the Democratic presidential candidate. Bernie's views were too extreme, even though proposals such as UBI and healthcare for all is needed now more than ever during the pandemic.
Sooner or later investors will stop freaking out about the coronavirus. We will become inured to the word and to the daily death toll numbers just like how we've become inured whenever we hear about something tragic has happened on the news.
In the long run, I'm hopeful that a lot of positives will come out of this coronavirus-induced market panic. I'm hopeful that as early as this summer, we'll be able to look back on this time period and wish we had bought more equities.
Unfortunately, for a capitalist, there is no time to rest. As capitalists, we must always be aware of the next variable that may benefit or hurt our wealth creation goals and adjust accordingly. Thus, after the panic surrounding the coronavirus starts to fade, I'm certain investors will turn their focus on the Presidential race.
Democratic Socialist, Bernie Sanders has a decent chance of becoming the Democratic nominee for the President of the United States. It's basically a two-man race between Bernie and Joe. As Bernie's popularity grows, given his anti-capitalistic policies, so will volatility in the stock market.
A Bernie Sanders Presidency
If Bernie Sanders beats Donald Trump in 2020 (~20% chance), we should expect the S&P 500 to correct by at least 20%. Perhaps the market is already baking some of this Bernie risk in. After all, Bernie has been one of the most vocal candidates against big corporations. And the S&P 500 is made up of the largest 500 corporations in America.
Besides potentially losing lots of money in the stock market, the other fear is that American workers will have to pay higher income taxes to pay for universal healthcare, free college, and wiping out more than $1.6 trillion in student debt. That's not a bad trade if you are paying high healthcare premiums and have kids who plan to go to college.
As I reflect on Bernie's rise, even though I'm a diehard capitalist, I've come to realize that Bernie could actually be the best thing for me and my family.
The main reasons why I've decided to get back on the saddle is due to my $2,380/month family healthcare bill and looming $4,000+/month preschool tuition bill for two children.
With Bernie as president, instead of expending a lot of my time and energy trying to make more money, I could throttle back and spend a lot more quality time co-raising my precious 10-week-old and 3-year-old. They sure grow up quick!
I'm just not sure whether Bernie can raise taxes high enough to pay for everything, but let's look at how he plans to pay for all his programs.
Bernie Sanders's Proposals To Raise Revenue
Sanders said on Stephen Colbert, “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 an interview on CBS's “60 Minutes,” Sanders said Medicare for All would cost $30 trillion over 10 years.
Sanders identified nine methods to finance the plan, which when combined, would raise about $17.5 trillion over a decade. Unfortunately, that still leaves a $12.5 trillion shortfall!
Here are his revenue-generating proposals:
- Create a 4% income-based premium for employees that exempts the first $29,000 of income for a family of four. This would generate $4 trillion.
- Enact a 7.5% income-based premium that employers pay, excluding the first $1 million in payroll. This would raise $5.4 trillion.
- Eliminate health tax expenditures. This would save $5.2 trillion.
- Tax capital gains the same as income. This would raise $2.5 trillion.
- Raise the federal corporate tax rate back to 35% before Trump became President and direct $1 trillion of the revenue towards financing Medicare for All.
- Raise the top marginal income tax rate to 52% on income above $10 million to fund universal healthcare.
- Lower the estate limit well below the $11.58 million per person and raise the estate tax rate above 40%
Most of these revenue-generating proposals aren't too punitive for most Americans. The main proposals I would be concerned about are:
- The 4% income-based premium paid by employees who make over $29,000
- How badly corporate profits will get hit and companies will get devalued if the corporate tax rate goes back up to 35%
- The estate tax level. If the estate tax level goes down to $1 million per person, people with more wealth will probably end up spending more money while living. This could be a good thing.
Higher Corporate Tax Rates
For background, the 2017 Tax Cut and Jobs Act (TCJA) reduced the top US corporate tax rate from 35 percent to 21 percent and the average combined federal and state rate from 38.9 percent to 25.8 percent.
As a result, the top US corporate tax rate, including the average state corporate rate, is now lower than that of all other leading economies in the G7 except the United Kingdom (with a 19 percent rate). Further, it is slightly below the average rate, weighted by gross domestic product (GDP), for the other Organization for Economic Co-operation and Development (OECD) countries.
Lowering corporate tax rates is good for investors because earnings go up. The greater the earnings, the more money for R&D, expansion, and maintenance. Balance sheets are stronger and share prices move higher if valuations do not change.
If Bernie Sanders becomes President and raises corporate tax rates by 10%, then we should see on average, a 10% decline in earnings, all else being equal. Investors should, therefore, expect the S&P 500 to sell-off by at least 10% if Sanders win.
Higher Income Tax Rates
Believe it or not, I can't find the definitive income tax rates proposed by Bernie Sanders. There seem to be only versions from when he ran in 2016 and various versions today. Maybe I'm just not looking hard enough.
The most helpful website I found that explains how Bernie's tax plan would affect you is BernieTax.com. The disclaimer says it is not officially affiliated with Bernie Sanders and it was last updated in July 2019. Regardless, I thought it would be fun to input some numbers.
Given I have a new goal of trying to earn $350,000 a year by 2022 to take care of my family of four in expensive San Francisco, I used this income figure to see how much more I would pay under Bernie's plan.
Here's what I got.
According to the website, my annual disposable income would be $15,536 HIGHER with a Sanders tax plan. How could that be given $350,000 is a top 5% income in America?
The answer is because my family of four is paying $2,380 a month in healthcare premiums. I'm guessing that I'm paying $13,024 more a year in taxes under Sanders's plan in EXCHANGE for saving $28,560 a year in healthcare (free healthcare). It sounds like a great deal, if true!
Whatever Bernie decides are the final income tax rates, the ultimate goal is to have the vast majority of Americans get more healthcare benefits than the higher taxes they will pay.
Below is a chart that highlights Bernie's proposed marginal income tax rates (not definite) versus the current marginal income tax rates (definite).
Under the proposal below, my income tax doesn't go up because the tax rates are the same up to $500,000 for married couples. And if the tax rates are really the same or similar for up to $500,000 for married couples, then 99% of Americans won't really be paying more in tax.
So how can I pay the same amount of taxes under Bernie's proposal, but save $15,536 a year on healthcare? Something isn't right.
However, based on the final chart below, we find out the answer.
Although I will be paying the same amount of income tax, my annual healthcare spending will go to $0 and be replaced with a 4% income-based premium tax on taxable income. In other words, I will now be paying 4% of my potential taxable income ($325,600 X 4% = $13,024) in lieu of our $28,560 healthcare costs.
The 4 percent income-based premium tax paid by employees is highlighted on Bernie's official website. Here is his official document explaining how he plans to pay for free healthcare for all. It sounds like a great deal.
Bernie's Real Marginal Income Tax Rates
Unfortunately, it makes no sense that marginal income tax rates would stay the same up to $500,000. The BernieTax website is wrong, but it does give some helpful calculations as to what happens to cash flow.
Although Bernie Sanders keeps assailing billionaires for not paying their fair share of taxes (so as to garner the most amount of voter support), I'm assuming he is logically going to raise taxes on the top 50% of American income-earners.
Bernie Sanders' real marginal income tax rates probably look something closer to this.
Everybody's marginal income tax rates go up, except for those making up to $9,525. That is below poverty wage, as I've highlighted in a previous post. Then again, the proposed income tax rates don't account for Bernie saying taxes are going up for everybody BUT those making under $29,000 a year.
Under this more likely Bernie Sanders marginal income tax plan, a $350,000 income would have to pay roughly $19,500 more in taxes. That's OK if my $28,560 annual healthcare premium is completely wiped out, as that would increase my disposable annual income by $9,000. However, if I'm then taxed a 4% income-based premium equal to $13,024, my disposable income would go down $4,024 a year.
I'm assuming paying more income taxes and paying the 4% income-based premium is probably what Bernie Sanders has in mind for most Americans. In my case, the additional $4,024 a year in cash outflow isn't huge because I'm already paying a massive amount in healthcare premiums.
Under the above Sanders income tax proposal, earning up to $100,000 per person is probably ideal. $38,701 – $82,500 is taxed at a 26% marginal tax rate, while the remaining $17,500 is taxed at a still reasonable 28% marginal tax rate. You'd end up paying $4,000 a year in income-based premium to cover all healthcare costs, which is a good deal.
After you start earning over $157,501 per person, however, you're now paying a 36% marginal income tax rate. That doesn't sound too good since you've also got to pay state income tax and the 4% income-based premium.
I just don't know many people are willing to grind too hard to earn $250,000+ after standard deduction and pay a 44% federal marginal income tax rate plus a 4% income-based premium. Do you? People will find a way to hide their income or figure out other tax-saving strategies.
If Bernie Sanders Becomes President
Based on what we know so far about Bernie Sanders' proposals, the ideal financial scenario should Bernie become president is:
- Make between $50,000 – $150,000 per person / $100,000 – $250,000 per couple, depending on location and lifestyle desires
- Decrease your weighting in stocks and increase your weighting in bonds, real estate, and cash
- Donate more to charity and spend more of your estate while living to get down to his new lower estate tax limit figures
- Work less and relax more because you no longer need to save as much for healthcare, your children's education, and retirement
Bernie Sanders has probably purposefully not been explicitly clear about his income tax plan because he doesn't want people calculating how much more in income taxes they will probably have to pay under his presidency.
All we know is that individuals making under $29,000 a year are probably not going to have to pay more taxes if he keeps his word. We can guess that married couples making under $58,000 will be safe too. We can probably also assume that household income can increase by $5,000 per child and not have to face increased taxes either.
The problem with Bernie Sanders' revenue-generating proposals to pay for Medicare For All is that he's still $12.5 trillion, or 42% short. Therefore, it is only logical to assume that once Bernie enters office that he will raise taxes even higher.
If Bernie Sanders win, I will forgo my extra 10 hours a week of grinding to accumulate more capital in order to retire again by September 2022. I will be less stressed, happier, and have more time to spend with my wife and kids. Paying $28,560 a year in healthcare on top of potentially paying $48,000+ a year in preschool for two kids is a real back-breaker.
Unless the coronavirus, between now and the November election causes a recession in the United States, it's hard to see Bernie beating Donald Trump. The stock market was near an all-time high, unemployment is near an all-time low, and the economy is still strong overall.
Although nobody wishes the coronavirus to spread, if it aggressively does, it could actually help boost Bernie Sanders' chances of winning.
I like how Bernie is asking a greater percentage of American workers to pitch in to pay for everything. I think his heart is in the right place. However, as someone who has spent every day since 2009 trying to help folks achieve financial independence for free, it's very hard to change what people have become accustomed to.
As soon as you ask someone to pay for a benefit, those people tend to disappear. Over the years, I have had over a thousand people demand that I help them, without being thoughtful of my time. There is seldom an offer to even pay for a covfefe or a meal. Nevertheless, I continue to write because it feels good to help folks slice through money's mysteries.
When everybody wants everything for free nowadays, it's hard to see Bernie's plan succeeding.
Readers, will your actions change if Bernie Sanders becomes president? Will you start rapidly spending your estate to avoid the death tax? Will your work habits change? I know we're talking politics in this post, so please keep comments civil, otherwise, they will not be approved.
Note: I'm buying stocks as I always do after a 10%+ correction by funding my daughter's 529 plan and my Solo 401(k), SEP IRA, and after-tax investment accounts. Here are my thoughts on the stock market will bottom.