UPDATED: M&A professionals may be weighing where Hillary Clinton and Donald Trump stand on the following five issues that affect the middle market. (Also See related chart for comparison of the candidates’ economic advisers).
1. Global Trade Agreements
Why Dealmakers Care: Global trade agreements like the proposed Trans-Pacific Partnership would lower tariffs between countries and make other changes that could encourage M&A activity. Opposition to proposed and existing trade agreements, even if that opposition doesn’t result in negating the agreements, could change relationships and perceptions between countries and negatively affect the environment for cross-border deals, says Gary LaBranche, CEO of the Association for Corporate Growth, an industry group that advocates for middle-market company growth.
Party Line: Both candidates have come out in opposition to the Trans-Pacific Partnership, though Clinton supported it in 2012 as Secretary of State. In October, during the final Clinton-Trump debate, Clinton said she opposed the final TPP trade agreement because it wouldn't create jobs, raise incomes and advance U.S. national security interests. Trump has taken a more aggressive stance on trade agreements, particularly with China, stating that he would initiate a World Trade Organization case against China for currency manipulation, impose steep tariffs on Chinese imports and renegotiate the North American Free Trade Agreement, or withdraw from it if the U.S. didn’t get its way. He says he would also appoint “the toughest and smartest trade negotiators,” identify every trade agreement violation by other countries and use every tool available to end those violations. In his final debate with Clinton, he called NAFTA "one of the worst deals ever made of any kind...a disaster." During the same debate, Clinton vowed, if elected, to appoint the first "trade prosecutor" to enforce trade agreements. Earlier in the year, Clinton said in an economic speech that she would “stop any trade deal that kills jobs or holds down wages – including the Trans-Pacific Partnership.” But, she says: “The answer is not to rant and rave – or to cut ourselves off from the world. That would end up killing even more jobs. The answer is to finally make trade work for us, not against us.”
Potential Impact of Election: While both candidates have questioned the fairness for U.S. trade agreements, Trump would be more in favor of abrogating or removing trade treaties, and Clinton would be more likely to want smaller changes. Because the Senate must ratify trade treaties, it is unlikely that a President Trump would be able to simply tear up global trade agreements that are already in place. A Democratically controlled Senate would be more amenable to trade agreement renegotiations by a President Clinton, while a Republican controlled Senate would be more likely to block such changes. As the presidential race has tightened in the final weeks, so have the Senate races, so trade may be a key issue influenced on Election Day.
2. Labor Relations
Why Dealmakers Care: Recent National Labor Relations Board rulings have expanded the definition of “employee” to include workers who are not directly employed by a company, such as employees of a company’s franchisees or of a company’s contracted staffing agency. For private equity firms with portfolio companies, that means the firms could be more liable for unionization drives, health care and benefits obligations, labor complaints and worker lawsuits. For ACG’s LaBranche, the NLRB joint employer issue is “is perhaps the single biggest regulatory concern that the ACG middle-market dealmaker community should be concerned about.”
Party Line: Clinton's and Trump’s specific positions on the NLRB joint employer issue are not known. But Clinton has received union endorsements for her candidacy, with expectations that she would support NLRB efforts favoring organized labor. In April, the board certified a union for workers at the Trump International Hotel in Las Vegas, over management’s objections.
Potential Impact of Election:A President Clinton would be expected to continue with the Obama Administration’s labor policies, while a President Trump would be expected to reverse them. NLRB’s five national board members are appointed by the President to five-year terms, with the consent of the Senate.
3. Tax Inversions
Why Dealmakers Care: The U.S. Treasury Department recently created rules aimed at hindering tax inversions, or mergers in which U.S. companies are acquired by smaller foreign companies so that the combined company’s assets pay lower taxes in the foreign domicile. If those rules remain in place, tax experts warn, cross-border M&A will be hurt--even non-inversion deals—because of increased compliance costs and risks, and discouraged foreign investment. The rules would even have the IRS redefine what is debt and what is equity, in certain situations, using criteria that it hasn’t yet developed.
Party Line: Clinton has spoken out against tax inversions and, before the recent Treasury rules came out, stated that she would use the department’s regulatory powers to curb inversions in lieu of Congressional action. Trump has also spoken out against inversions, but his solution is to drop the corporate income tax rate to 15 percent so that the incentive to move to foreign tax domiciles would be reduced.
“Our lower business tax will also end job-killing corporate inversions, and cause trillions in new dollars and wealth to come pouring into our country,” Trump said in an August speech. "To help unleash this new job creation, we will allow businesses to immediately expense new business investments.”
Clinton, in an August speech, proposed making tax breaks refundable when companies move production overseas, along with an added tax: “Right now, when a corporation outsources jobs and production, it can write off the costs. We must stop that, and we must make them pay back any tax breaks they received from any level of government in our country. For those that move their headquarters overseas to avoid paying their fair share of taxes, they’re going to have to pay a new exit tax. So if they want to go, they’re going to have to pay to go.”
Potential Impact of Election: If Clinton wins the presidency, the Treasury Department inversion rules would remain and the Clinton Administration would defend them, in the event of a legal challenge. It isn’t clear what Trump’s position on the Treasury inversion rules is. If Democrats are elected to a majority in the Senate, it’s doubtful that a Trump tax rate change would be passed by Congress.
4. Corporate Interest Tax Deduction
Why Dealmakers Care: Eliminating or cutting back on the ability of companies to deduct interest payments on debt could drive up the cost of capital. Eliminating the deduction, referred to as the Corporate Interest Tax deduction, would also lead to a loss in equity value of 6.3 percent of the middle-market companies in the U.S.—those with $10 million to $1 billion in annual revenues, according to a study by RGL Forensics of Dallas and ACG. Added up, that total loss in equity value would be more than $1 trillion.
Party Line: This is one issue where Clinton and Trump would seem to agree, because of their general statements in favor of cutting itemized deductions. Trump proposes reducing the current number of income tax brackets to three from seven, at 12, 25 and 33 percent. Clinton would charge a 4 percent "Fair Share Surcharge" on individuals making more than $5 million per year. It’s not clear if either candidate has directly addressed the Corporate Interest Tax deduction, however.
Potential Impact of Election: As with other issues, as long as the Republicans maintain control of at least the House of Representatives, then it is unlikely that any legislation removing a tax advantage for businesses will pass, regardless of who the President is.
5. Carried Interest
Why Dealmakers Care: This hits dealmakers where it hurts: the bottom line. The tax on carried interest, or the share of profits received by private equity managers, is currently at the capital gains rate, which tops out at 20 percent, or 23.8 percent when the net investment income surtax is added. The top rate for ordinary income is 39.6 percent. Advocates of the carried interest tax break say removing it not only would nearly double the taxes paid by PE managers, but it would also take away an important incentive for investors to risk capital—a critical tool for middle-market company growth. Opponents of the carried interest tax break have portrayed it as a loophole that helps fat-cat Wall-Street financiers get richer.
Party Line: This is another issue where the presumptive Republican and Democratic presidential candidates agree: They have both stated they want to get rid of the carried interest tax rate. Clinton has told reporters she would even have the Treasury Department end the tax break if Congress wouldn’t. On a related issue, Trump would eliminate the 3.8 percent net investment income surtax, according to the Tax Foundation independent research group.
In an August speech, Trump said: “I am proposing an across-the- board income tax reduction, especially for middle-income Americans. This will lead to millions of new good-paying jobs. The rich will pay their fair share, but no one will pay so much that it destroys jobs, or undermines our ability to compete. As part of this reform, we will eliminate the Carried Interest Deduction and other special interest loopholes that have been so good for Wall Street investors, and people like me, but unfair to American workers.”
Clinton, speaking in August, said that “Wall Street, corporations, and the super-rich, should finally pay their fair share of taxes. That’s why I support the so-called ‘Buffett Rule,’ because multi-millionaires should not be able to pay a lower tax rate than their secretaries. We should also add a new tax on multi-millionaires, crack down on tax gaming by corporations and close the carried interest loophole – something I’ve advocated for years.”
Potential Impact of Election: Several legislative proposals to get rid of the carried interest tax rate have failed, and as long as Republicans maintain control of at least the House of Representatives--which is highly likely—we expect that trend to continue. If the next president tries to change the carried interest rate without Congressional action, the move would face stiff legal challenges.
Some things may not change, no matter who wins the White House. Says ACG’s LaBranche, “I think we’ll all see a gridlocked legislative branch just as we’ve seen it in the last couple of sessions of Congress. It’s going to be more painful on the regulatory side, more challenging on the regulatory side." But, he says, the individual races that will determine which party controls the Senate are much tighter than expected.