The path for taxes are a critical issue for the markets in this upcoming presidential election.

The evidence of this played out in the bond market this past week. Treasury yields spiked, driven by concerns of higher deficits, as investors began to price in the potential implications of a second Donald Trump presidency following President Joe Biden's underwhelming debate performance.

“It’s among the most consequential policy issues of the last decade,” AGF Investments’ Greg Valliere told me.

And here’s why: Several provisions from the 2017 Tax Cuts and Jobs Act, which lowered the corporate tax rate from 35% to 21% and reduced tax rates on individuals, are set to expire next year.

President Biden’s budget proposal, released earlier this year, called for imposing a 25% minimum tax rate on the wealthiest Americans as well as increasing the top income tax rate to 39.6% for those making more than $400,000 a year.

For corporations, President Biden has proposed raising the corporate tax rate to 28%, while a Republican sweep could push the rate as low as 15%.

Remember, enthusiasm for tax cuts contributed to a stock market rally back in 2017, and the thought on Wall Street is that another Trump presidency would make it more likely that those tax cuts are extended.

But, as we saw the action in the market this week, it may not necessarily be a home run view for investors, pros warn.

Truist’s Keith Lerner told me an extension of the tax cuts isn’t necessarily good news for the markets, emphasizing the importance of not overlooking bond vigilantes as investors assess the risk of higher debt.

“There is always the potential that the bond market looks negatively on the potential of lower taxes or extending current policy or increased spending from the candidates,” Lerner says.

For those preparing their investment playbooks, UBS’s chief investment officer Solita Marcelli notes that enthusiasm surrounding lower taxes and lighter regulation may be tempered by the impacts of higher tariffs.

In a note to clients, Marcelli wrote that, as a result, “interest rates and the dollar would likely rise initially.”

But remember, it’s still early, and the market may be getting ahead of itself by assuming a Republican sweep will guarantee tax cuts.

Valliere thinks both sides of the aisle are “getting cold feet” about extending tax cuts, as more Republican lawmakers worry about the deteriorating fiscal picture.

The Congressional Budget Office (CBO) estimates that extending the Tax Cuts and Jobs Act would add $4.6 trillion to the deficit over the next decade, $1.1 trillion more than previously estimated. The US federal debt currently totals over $34 trillion, and the government is expected to spend nearly $900 billion on interest payments in 2024.

Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.

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