By Andrew Busch and Leah Hamilton

2020 Democratic presidential candidates’ policies on the financial sector, corporations and fiscal revenues in the 2020 presidential election are focused on three areas: structural reform, new regulations, and new taxes.

There are two different camps of policies coming out of the Democratic candidates, with Biden and Buttigieg taking a more centrist or moderate approach, and Sanders and Warren proposing extensive changes.  Some of these proposals directly target the banking industry, such as reinstating Glass-Steagall, breaking up large banks and introducing postal banking. Other policies relate to bankruptcy and equity trading reform.  The final category of policies relates to changes to the tax system, including taxing the wealthiest Americans, increasing tax rates on corporations, and closing loopholes.

As an issue for the 2020 election, financial reform is not a major area of concern for most voters.  However, many Democrats are generally in favor of additional regulation for Wall Street and large banks.  In addition, the Brookings Institute notes that when Americans were asked in a Gallup Poll “what bothers them about the federal tax system, a sense that corporations and the wealthy are not paying their fair share” was at the top of the list.

Key Takeaways:

1.     Many candidates are in favor of tax reforms that would either reverse portions of the Tax Cuts and Jobs Act (TCJA) or reforms that would increase taxes on the ultra-wealthy and corporations.

2.     Biden and Buttigieg have more centrist policies, or very few policies relating to Wall Street and the finance industry, while Warren and Sanders have taken a much more extensive approach to financial reform.

3.     Warren and Sanders propose major changes to equity firm operations, bankruptcy, corruption, and corporate incentives.

Biden

On Biden’s main policy page, he notes that his intention is to “reward work, not just wealth.” He believes that “economic inequality is pulling this country apart” and to tackle this he proposes stronger labor laws, and a tax code more in favor of the middle class.  He would reverse the tax cuts in the TCJA that apply to the ultra-wealthy and corporations. He would also eliminate tax breaks that reward special interests, though he does not state what these interests would be. He also notes that he would get rid of the capital gains loophole for multi-millionaires.  While he doesn’t explicitly state this in his policies, it appears that what he means by this “loophole” is that he would remove the stepped-up basis treatment for capital upon inheritances.

He does not appear to have a specific plan to restructure the finance industry, or how he would reform or change any parts of the finance industry.  In the Biden Plan to Invest in Middle Class Competitiveness, he notes that “every cent of Joe Biden’s $1.3 trillion investment in our nation’s infrastructure will be paid for by making sure the super-wealthy and corporations pay their fair share.  Specifically, this investment will be offset by revenue raised through reversing the excesses of the Trump tax cuts for corporations; reducing incentives for tax havens, evasion, and outsourcing; ensuring corporations pay their fair share; closing other loopholes in our tax code that rewards wealth, not work; and ending subsidies for fossil fuels.”

He does not appear to state in any of his other policies how he would close these loopholes, or reduce these incentives for tax havens, evasion, and outsourcing.

Biden stated at an event with the Brookings Institute that he believes the tax code is “wildly skewed” in favor of investors over workers.  He noted that “we need a pro-growth, progressive tax code that treats workers as job creators … not just investors; that gets rid of unprotected loopholes like stepped-up basis; and it raises enough revenue to make sure that the Social Security and Medicare can stay.”  He stated that eliminating the stepped-up basis is “only” providing $17 billion in tax savings and that there is “no evidence that it produces any growth initiatives.” According to the Tax Foundation, “the cost basis of property transferred at death receives a “step-up” in basis to its fair market value.  This eliminates an heir’s capital gains tax liability on appreciation in the property’s value that occurred during the decedent’s lifetime.”

When Biden was part of the Obama administration, he supported the passage of the Dodd-Frank Act, which increased regulations and capital requirements for the majority of US banks.

Lastly on taxes, Biden has also proposed restoring the 39.6% top marginal tax rate for high income earners.

Sanders

Unlike Biden, Sanders has a number of policies on the finance industry and reforms that will affect banking and Wall Street.

His primary policy for the financial industry is his Real Wall Street Reform.  This policy sets out a number of proposals but is unfortunately light on details.  Sanders states that the “enormous concentration of ownership within the financial sector is hurting the middle class and damaging the economy by limiting choices and raising prices for consumers and small businesses.”  Sanders does not provide any studies or comments on this assertion.

To solve these issues, he would:

  • Break up too-big-to-fail banks.
  • End the too-big-to-jail doctrine.
  • Reinstate the Glass-Steagall Act.
  • Cap ATM fees.
  • Audit the Federal Reserve and make it a more democratic institution so that it becomes responsive to the needs of ordinary Americans, not just the billionaires on Wall Street.
  • Restrict rapid-fire financial speculation with a financial transactions tax.
  • Reform credit rating agencies.

Second, Sanders also has a plan on Corporate Accountability and Democracy.  He notes four main points in his plan, including shifting wealth back into workers’ hands, giving workers an ownership stake in the companies they work for, breaking up corporate mergers and monopolies, and reversing the tax cuts for corporations in the TCJA.

On his first point, he would share corporate wealth with workers, by requiring “corporations with at least $100 million in annual revenue, corporations with at least $100 million in balance sheet total, and all publicly traded companies” to provide at least 2 percent of stock to their workers every year, until the point where the company is at least 20% owned by employees.  To carry this out, he proposes a new scheme called Democratic Employee Ownership Funds. Employees would be guaranteed payments through these funds in proportion to their ownership of the shares they hold.

In addition, he would democratize corporate bonds, by requiring those same types of companies listed above to allow 45% of their board membership to be elected by their workers.  He would also require these large companies to have Federal “Stakeholder” charters. These charters would “require corporate boards to consider the interests of all of the stakeholders in a company – including workers, customers, shareholders, and the communities in which the corporation operates.”

Sanders would also ban stock buybacks.  In addition, he would require companies to convey shares to laid-off employees when they shift or outsource labor to low wage countries or go through automation processes that result in lost jobs.

He also proposes a US Employee Ownership Bank.  This bank would provide low-interest loans, loan guarantees and financial assistance to workers who want to purchase their own businesses.  In addition, if a company is going up for sale, workers at that company would be given a right of first refusal for purchasing that company and would be given financial assistance from this bank to make it possible.

Sanders also suggests plans to diversify corporate boards to include people from historically under-represented groups, but he does not specify how he would carry out this plan.

Sanders puts forward several plans to increase what he calls “Shareholder Democracy”.  His plans include:

  • Allow every employee the right to vote at work and have a voice in setting their pay.
  • Ban asset managers from voting on other people’s money.
  • Guarantee the right of every saver to elect representatives who set voting policy in corporations, in multi-employer pensions, single-employer pensions, in 401(k) funds, and every other form.
  • Organize sectoral pension plans, with more bargaining power, that can take voting in-house.

He also suggests more-detailed policies for breaking up monopolies and making markets more competitive.  First, he would review all mergers that have taken place during the Trump administration, and he would also have the FTC conduct a review of all mergers and acquisitions from the past 40 years to set up new guidelines for approval, with a larger focus on economic security, job security, and competition.

He would also break up corporations that have accumulated dominant market shares and can use their market power in anti-competitive ways.  He does not state exactly what he considers to be a “dominant market share” but does state later in his policy that he would create new guidelines for mergers, including setting caps for vertical mergers, horizontal mergers, and total market share.  The cap of what this “total market share” would be is also not stated. The concept of what a “dominant market share” in general is relatively subjective, though the Courts in the Third and Tenth circuits have noted that “monopolization is rarely found when the defendant’s share of the relevant market is below 70%,” and that to establish “monopoly power, lower courts generally require a minimum market share of between 70% and 80.”

Sanders would also specifically instruct the FTC to produce a report on “common practices that result in anti-worker behavior, threaten competition, or engage in price discrimination.”  He would also place a moratorium on mergers and vertical integration of large agribusiness.

He also states that he would expand the authority of the FTC generally, and give them greater powers.  He would expand the FTC’s authority to impose administrative fines, and also their authority to “review the non-coordinated effects of mergers by different entities in the same market.”  In addition, he would give the FTC additional rulemaking authority.

In his plan for corporate accountability Sanders also puts forward a number of changes to corporate tax rates and tax code changes generally.  He would restore the corporate tax rate to 35%, would transition to economic depreciation for all investments, and would limit the interest deduction to 20% of adjusted taxable income.

Sanders also suggests strategies for eliminating offshore tax havens.  These strategies include:

·   Applying the same tax rate on offshore and domestic income.

·   Applying a per-country limit on the foreign tax credit.

·   Limiting interest deductions to 105 percent of a corporation’s share of net interest expense over worldwide earnings.

·   Treating companies managed and controlled in the US as domestic corporations.

·   Tightening the definition of inverted corporations to ones owned by 50 percent of the same shareholders after a merger.

·   Tightening other rules including limiting treaty shopping; reforming the base erosion and anti-abuse tax rate by lowering its threshold for application, raising its rate to 17.5 percent, and excluding deductible payments that give rise to includible US income.

·   Eliminating the tax break for foreign derived intangible income (FDII) and denying foreign tax credits for excise tax payments by oil, extractive, gambling, and other companies.

·   Requiring corporations with revenues over $25 million to publicly disclose significant portions of their tax returns and country by country financial information including earnings, financial accounts, and tax payments in other countries.

·   Eliminating the 20 percent deduction on pass-through business income and requiring large pass-through businesses to be subject to corporate taxes.

One of Sanders’ other policies that will affect the finance industry is titled Fair Banking for All.  In this policy Sanders proposes that he would cap consumer loans and credit card rates at 15 percent across all financial institutions.  He would also allow individual states to lower this cap even further. Part of the issue he notes is that people without access to basic banking services and traditional credit options often turn to “payday loans” and the high interest rates on these loans can make it even more difficult for struggling families.  In addition, he proposes that he would allow post offices to offer basic banking services, to try to avoid these kinds of lending practices.

Sanders also proposes a tax on the extremely wealthy.  His tax would start with a 1 percent tax on net worth above $32 million for a married couple.  After this, this rate would increase to:

·   2 percent on net worth from $50 to $250 million

·   3 percent from $250 to $500 million

·   4 percent from $500 million to $1 billion

·   5 percent from $1 to $2.5 billion

·   6 percent from $2.5 to $5 billion

·       7 percent from $5 to $10 billion

·   8 percent on wealth over $10 billion

All of these amounts would be halved for singles.

He also proposes a number of enforcement measures to ensure that this wealth tax is carried out in an effective way.  The enforcement measures he proposes are:

1.     Creating a national wealth registry with significant additional third-party reporting requirements.

2.     Increasing IRS funding for enforcement.

3.     Requiring the IRS to perform an audit of 30 percent of wealth tax returns for those in the 1 percent bracket and a 100 percent audit rate for all billionaires.

4.     Creating a 40 percent exit tax on all assets under $1 billion and 60 percent over $1 billion for all wealthy individuals seeking to leave the US to avoid the tax.

5.     Enhancing international tax enforcement and anti-money laundering regimes, including strengthening the Foreign Account Tax Compliance Act.

He has also put forward The Sanders Income Inequality Tax Plan. This plan would raise taxes on companies that have large pay gaps between their executives and their workers.  If the company has a ratio over 50:1 between CEO pay and worker pay, the following corporate taxes would apply:

  • Between 50 and 100: +0.5%
  • Between 100 and 200: +1%
  • Between 200 and 300: +2%
  • Between 300 and 400: +3%
  • Between 400 and 500: +4%
  • More than 500: +5%

Finally, Sanders has another plan called Making the Rich Pay Their Fair Share in Taxes.  This plan sets out a summary of a few proposals that are already mentioned in other plans.  In addition, it states that he would:

  • Pass the For the 99.8 Percent Act to establish a progressive estate tax on multi-millionaire and billionaire inheritances.
  • Tax Wall Street speculators through the Inclusive Prosperity Act.
  • Scrap the income cap on Social Security payroll taxes.
  • End special tax breaks on capital gains and dividends for the top 1%.
  • Substantially increase the top marginal tax rate on income above $10 million.

Warren

Like Sanders, Warren sets out a number of policies on the financial industry and on Wall Street, as well as changes to the tax system that would affect the finance industry and corporations.  Her primary plan is to Defend and Create American Jobs, and as part of this she proposes an idea of “economic patriotism.”  Included in this agenda for economic patriotism, she has set forward a plan on how to End Wall Street’s Stranglehold on Our Economy.

She proposes to start tackling the problems she sees with Wall Street by transforming the private equity industry.  Her plan proposes to:

·   Make private equity firms responsible for the downside of their investments, including the debts of the companies they buy.

·   Hold private equity firms responsible for certain pension obligations of the companies they buy, so that workers have a better shot of getting the retirement funds they earned.

·   Eliminate the ability of private equity firms to pay themselves huge monitoring fees and limiting their ability to pay out dividends.

·   Change tax rules so that private equity firms don’t get special tax rates on the debt they put into companies they buy.

·   Modify bankruptcy rules to give workers more protection in bankruptcy events.

·   Require lenders and investment managers to retain some of the risk when making loans to private equity companies.

·   Require private equity companies to provide more information on investments, such as increased disclosure to pension funds.

·   Close the carried interest loophole.

Warren would also enact her 21st Century Glass-Steagall Act, and she proposes that this would reduce financial risk-taking in commercial banks, and would “better align the incentives of the financial sector with the long-term interests of the rest of the economy.”  Second, she also suggests that she would “impose tough new executive compensation rules for bankers that discourage needless speculation and encourage productive investments.” Third, she would also reinstate greater regulation with regard to rules on capital, liquidity, leverage, and resolution-planning for big banks.

Another one of Warren’s proposals is that she would advocate for postal banking, to provide lower-cost and more-accessible banking services to disadvantaged groups (such as families in rural areas).  She also notes that she would more heavily promote real-time payment technology to make banking more efficient.

With regard to the bankruptcy rules discussed above, Warren also suggests bankruptcy reform in general.  Her bankruptcy plan would aim to:

  • Make it easier for people to obtain relief through bankruptcy.
  • Expand people’s rights to take care of themselves during the bankruptcy process.
  • End rules that make it difficult to discharge student loan debt in bankruptcy.
  • Protect cars and homes during bankruptcy.
  • Help address racial and gender disparities in the bankruptcy system.
  • Close loopholes that allow the wealthy and corporate creditors to misuse the bankruptcy system.

On the first point, she would streamline the bankruptcy process by removing means testing and removing the current two pathways to bankruptcy (chapter 7 and chapter 13), replacing them with one pathway instead.  Debtors would disclose all of their debts, assets, and income, and creditors would stop collection other than through bankruptcy court. People filing for bankruptcy would be able to surrender all their non-exempt property in exchange for debts being discharged, as well as varying options that allow filers to maintain particular assets such as their house or car, with a payment plan that would need to be court approved.

Warren believes that her new approach to bankruptcy would make the process faster and less costly.  She would also waive filing fees for anyone below the poverty line and filing fees would be on a sliding scale above that line.  She would also make student loan debts dischargeable under the bankruptcy process.

She also proposes a uniform federal homestead exemption, which allows people to protect a certain amount of their home equity during bankruptcy.  This exemption exists under the current system, but there is a lot of variation state-by-state. She would also allow mortgages to be modified during bankruptcy.

With regard to racial disparities, Warren notes that “black middle-class families are three times more likely to file for bankruptcy, and Latinx families are twice as likely, than white families.”  She believes that her proposals will help to reduce the disproportionate effect that bankruptcy has on people of color.

Finally, she would change what she calls the “Millionaire’s Loophole” in bankruptcy processes by making it so that “assets in self-settled trusts and revocable trusts are not exempt from creditors’ claims in bankruptcy.”  She would also strengthen the fraudulent transfer law, to prevent transfers that the bankruptcy filer made “with the intent to hinder, delay, or defraud creditors.” In addition, she would aim to prevent companies from collecting debts that are expired or no longer valid.

Warren has also proposed a plan to stop what she sees as a potential economic crash, partially due to companies engaging in high-risk and highly-leveraged loans.  With regard to the financial sector, she has suggested that she would monitor and reduce leveraged corporate lending and would strengthen the Financial Stability Oversight Council.  She believes that the FSOC should “meet specifically to discuss these risks and announce a plan for addressing them.” She also proposes that “federal regulators should also enforce leveraged lending guidance that is intended to stop banks from issuing these risky loans in the first place.”

In addition, Warren has proposed a policy for taxing ultra-millionaires, which will have some impacts on the financial sector and investors in general.  Her ultra-millionaire tax “applies only to households with a net worth of $50 million or more … Households would pay an annual 2% tax on every dollar of net worth above $50 million and a 6% tax on every dollar of net worth above $1 billion.”  Net worth is determined including all assets including those for retirement and those held in trust. She suggests that this tax will help to fix the “lopsided economy”.

Another tax that Warren would implement is the real corporate profits tax.  This tax would apply to “companies that report more than $100 million in profits … That first $100 million is left alone, but for every dollar of profit above $100 million, the corporation will pay a 7% tax.”  She notes that this tax is intended to bring in over $1 trillion in new revenue. She also believes that raising the regular corporate tax rate is not enough, due to loopholes in the tax code.

Warren also proposes a plan for Accountable Capitalism.  In this plan, she proposes four key changes to how corporations operate:

1.     American corporations with more than $1 billion in annual revenue would be required to obtain a federal charter as a “United States corporation,” which requires company directors to consider the interests of all corporate stakeholders, not just shareholders.

2.     Workers at big American corporations could elect no less than 40% of the company’s board members. 

3.     Directors and senior executives at big corporations would be restricted from selling company shares within five years of receiving them or within three years of a company’s stock buyback.  This is intended to shift the focus away from shareholder returns, and towards the long-term interests of all corporate stakeholders. 

4.     Big American corporations would have to receive the approval of at least 75% of their shareholders and 75% of their directors before engaging in any political expenditures.

Finally, she proposes a number of reforms to fight global financial corruption, which would also involve domestic policies on issues such as financial integrity requirements and anti-money-laundering rules.  Her proposals are:

·   Require disclosure of “beneficial ownership” in corporate ownership.

·   Enact anti-money laundering reforms and update basic financial integrity requirements, while collecting standardized identifying information about the ownership of every corporate entity created across the country.

·   Gather better data on cross-border financial flows.  As part of this, she would require US financial institutions to report information about individual cross-border payments and allow financial institutions to obtain information on the beneficial owner of a foreign entity involved in a payment.

·   Expand anti-bribery law authorities.

·   Expand US ability to hold foreign officials accountable.

·   Promote international cooperation to combat tax evasion.

·   Expand and institutionalize real estate disclosure requirements.

·   Update campaign finance rules to limit foreign interference.

·   Prohibit US subsidiaries of foreign companies, as well as firms with meaningful foreign ownership, and related trade associations from spending money in American elections.

·   Expand enforcement against financial institutions.

·   Clamp down on dark money enablers.

Buttigieg

Buttigieg does not have a dedicated policy for approaching Wall Street or the finance industry or corporations in general.  In some of his other economic policies he has stated that we need a “fundamentally new and different approach to fix our broken political and economic system,” and that we need “an economy where everyone has a role, and everyone can succeed.”  He also notes that he wants to restore “fairness and balance” to the economy. However, he proposes no specific reforms with regard to the finance industry to achieve these goals.

He has put forward a policy on Consumer Protections, specifically with regard to banks.  He states that he would overhaul the Federal Arbitration Act and would also pass strict regulations on predatory lenders.  Buttigieg also proposes to strengthen antitrust rules and protect individuals’ rights to data privacy and protection. He would also revive the Consumer Financial Protection Bureau’s enforcement authority and fight what he calls “big data discrimination”.  He does not specify what exactly this refers to.

Buttigieg also has a policy titled An Economic Agenda for American Families, but it does not specifically address any policies targeted at the finance industry or corporate tax changes.

It has been reported that Buttigieg proposes to roll back the TCJA tax cuts for high earners, and that he would return the top corporate tax rate to 35% as part of this.  He has also proposed increases in the capital gains tax and has stated that a higher marginal tax rate should be considered for high income earners.

He has also suggested that a financial transactions tax should be considered, though has not provided any details on this.

Summary

All of the Democratic candidates have proposed some taxes, policies, or regulation changes that will affect the finance industry.  However, Sanders and Warren have the most policies on the finance industry, with Biden and Buttigieg only touching on certain topics briefly.  The director at Compass Point Research & Trading noted to American Banker that “banks may not be a specific target for the candidates, but will likely play a role in the discussions about economic inequality in general,” and that financial services is a “secondary issue” in the Democratic primary race.

Biden’s policies appear to be the least extensive, and he notes only that he will eliminate certain tax loopholes and reverse some of the tax cuts in Trump’s Tax Cuts and Jobs Act.  Fox Business notes that “Biden has been consulting the financial class about various economic issues … [and many] Wall Street executives believe Biden might be the only Democrat who can beat President Trump in the general election.”  This is generally because Biden’s policies are more centrist, which are less likely to have a large effect on the financial sector, particularly when compared to policies from candidates such as Sanders and Warren.

The response to Warren’s policies from Wall Street has been mixed, with many professionals from the financial sector not entirely shutting down her policies.  However, numerous other Wall Street advisors and economists believe her policies would have negative effects. Vox notes that “Warren may not be the most popular candidate on Wall Street, but she’s not the least popular one, either … A director at Bank of America Merrill Lynch said he’d seen all the stories about Wall Street loathing Warren and reached out to show that it’s not everyone.  “There are some of us who think that fairness is important and not just maximizing how much money I have,” he said.”

On the other hand, Reuters also notes that other Wall Street investors and professionals have concerns: they explain that policymakers must “confront rising income inequality or face long-term adverse social and economic repercussions.  But many … feared her plan to fund trillions of dollars in social projects through a range of taxes could have unintended adverse consequences, such as reducing economic growth or dampening the stock market.”

The taxes that would apply to the ultra-wealthy are controversial.  These kinds of taxes do not exist in many countries, and the OECD notes that there are “limited arguments for having a net wealth tax in addition to broad-based personal capital income taxes and well-designed inheritance and gift taxes.”

The Brookings Institute also sets out that advocates of these taxes “say a wealth tax would dilute the largest fortunes in the U.S. and … could encourage the wealthy to dissipate their fortunes by spending the money, giving it to charity, or giving it to their children.”  On the other hand, opponents of this tax note that it could “discourage or penalize the most successful entrepreneurs … [and that] these sorts of taxes are hard to administer … [and] often don’t meet the redistributive goals their proponents envision.” However, Brookings explains that these kinds of wealth taxes, particularly Warren’s, are relatively popular with voters.  

On the other hand, a report from The Mercatus Center sets out that “a direct wealth tax would have the least effect on those whose wealth grows the fastest, while having the most punishing effect on those who are less successful,” which disincentivizes growth and economic risk-taking. 

Finally, a new policy of allowing the US government to seize assets of private individuals will likely raise serious questions over ownership and the US civil code protections for it.  The US civil code is one of the best in the world and this change could cause a serious re-evaluation for not only investors, but also corporations looking to move their operations to the country.

As well, the changes to corporate structures and board members could change corporate strategy and execution of that strategy for most large companies.  This loss of control could prompt a re-evaluation of whether the US remains a comparatively better place to invest than other countries without these provisions.

In addition, the candidates’ proposals for corporate tax rate increases can also have mixed effects.  First, increasing the rate may initially bring in more revenue into the government coffers. On the flipside, the Tax Foundation notes that “imposing a corporate income tax raises the pretax return required to yield an acceptable after-tax return, as the return must cover the tax,” so the higher the corporate tax rate, the less likely that businesses are to take risks to build capital, if they cannot guarantee a return that will certainly cover the tax. This can potentially discourage “growth in productivity, output, employment, and wages.”

Warren’s corporate profit tax could also have mixed impacts.  In general, the primary burden of the corporate profits tax falls upon the owners of capital.  However, it has the potential to also affect workers, by corporations compensating for this tax by reducing benefits or compensation that workers receive.  This could be somewhat counteracted by increases in wages mandated by the government, but it is hard to predict how the interplay of these different drivers will impact the economy overall.

All of the candidates have proposed a number of policies impacting the financial industry, corporations and the ultra-wealthy, though their policy suggestions in this area are not as extensive as their proposals in other areas, such as healthcare and the environment.  Biden and Buttigieg in particular have been relatively light on policy in the area of financial industry reform, while Sanders and Warren have proposed significant changes.