Volatility Alert — Biden Administration Plays the Tax Card
Author: Greg Valliere
April 23, 2021
OUR INITIAL TAKE is that Congress isn’t going to raise capital gains taxes to
ordinary income, but a hike is likely — along with growing anxiety in the financial markets that upcoming tax proposals may be bad for stocks.
THE CAPITAL GAINS PROPOSAL HAS BEEN ON THE TABLE since last fall, so it shouldn’t have been a surprise for the markets, which were rocked yesterday by a leak that capital gains taxes will rise. The important point is that a new tax as high as 43.8% is very unlikely because it would be opposed by all 50 Republican senators and a handful of Democrats.
THE BIDEN TAX PROPOSALS are the opening salvo in a negotiating process. It’s entirely possible that the top capital gains rate for millionaires will rise from 23.8% now to something like 30%. Most of the administration’s proposals will get watered down later this year.
BUT THAT WON’T DIMINISH THE HEADLINE RISK that will now become part of the landscape, as other tax provisions leak out, ahead of the introduction of a formal plan later this month. “The rich,” corporate and individual, are vilified by the progressives who dominate the administration, and this will keep the stock market on edge.
ONE OF BIDEN’S BRAGGING POINTS — a stock market that has surged, ignoring Donald Trump’s apocalyptic predictions — is now jeopardized. “The rich” have helped propel the market to record highs, and now they face a polarizing debate over how much they should be punished.
THE BIDEN MANTRA is that only people who earn above $400,000 will be hit by higher taxes, but that’s disingenuous. Plenty of people who earn less than $400,000 own stocks, which could sell off, and if businesses get hit with higher taxes, they could be passed along to everyone if companies raise prices in an effort to protect their profit margins.
BOTTOM LINE: The markets have to be on guard for other tax trial balloons — raising the estate tax, possibly combined with killing the “step up” basis; hiking the top individual rate; almost certainly increasing the corporate rate; imposing a minimum corporate tax; cracking down on business loopholes, including the sheltering of profits abroad, etc.
MODERATE DEMOCRATS IN THE SENATE, led by West Virginia Sen. Joe Manchin, will water down these proposals but it may take an angry message from Wall Street to convince the administration that imposing one of the highest capital gains tax rates in the world would be a negative for investors.
AFTER A FEEL-GOOD three months for Biden and the markets, we suspect the bloom is off the rose. A brawl between the president and Wall Street would benefit neither.
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