On Thursday, news broke that Biden plans to raise income tax rates for the wealthy, and the three major Wall Street stock indexes fell. The S&P 500 closed down 0.92%, its biggest closing loss in five weeks, while the Dow Jones closed down 0.94%, its biggest loss in seven weeks; the Nasdaq closed down 0.94% and Bitcoin fell below $50,000 for the first time since March.
Bloomberg reported Thursday afternoon that Biden plans to raise capital gains taxes on the wealthiest Americans to a maximum of 39.6% from the current 20%, and with the existing 3.8% surtax on investment income, wealthy Americans could face an overall federal capital gains tax rate of up to 43.4%.
This means that U.S. taxpayers earning more than a million dollars a year could face a capital gains tax of more than 50%, and if this tax plan is implemented, such taxpayers in California could face a combined federal and state capital gains tax of up to 56.7%, and such overall capital gains tax for high-income people in New York State could be as high as 52.22%.
The Wall Street Journal reported on April 23 that prior to the Bloomberg report, the major stock indexes fluctuated between modest gains and losses for most of the day’s trading, and fell sharply after the report. The S&P 500 fell 38.44 points, or 0.92%, to 4,134.98. The Dow Jones Industrial Average fell 321.41 points, or 0.94%, to 33815.90. The Nasdaq Composite Index, which is dominated by technology stocks, fell 131.81 points, or 0.94%, to 13818.41 points.
Wall Street traders believe it’s too early to panic, but the prospect of a tax hike could put a selloff on the market in the near term if investors seek to avoid being hit with higher profits taxes.
Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, commented that no one was surprised that Biden was going to raise capital gains taxes, but he didn’t expect it to come so soon and by such a wide margin.
Chris O’Keefe, managing director of Logan Capital Management, expects the initial impact will be people deciding to close their profits now before the tax increase. If they have to pay such a high tax, investors will be less willing to trade.
Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC, said Biden’s plan is more aggressive than everyone expected. However, he personally believes that such a proposal seems highly unlikely to be passed by Congress, so its actual strength will be greatly cut.
Goldman Sachs predicts that if Biden’s tax increase plan is passed by Congress, it could result in a 9% reduction in earnings per share (EPS) for the S&P 500 next year. Tobias Levkovich, chief U.S. equity analyst at Citi, believes that compared to Biden’s proposed 7 percentage point increase in the corporate tax rate, an increase of only 4 percentage points could cause the S&P 500 EPS to fall by 3%.
In the face of the U.S. stock market plunge, Goldman Sachs said that the news is just a “daydream test balloon” for some people.
Goldman Sachs analyst Alec Phillips said that Biden’s proposed bill has no “surprises”, the specific content of the previous election period has been proposed.
Phillips believes that the U.S. Congress will only pass a scaled-down version of the tax increase bill. If, as reported, the long-term capital gains tax is raised to 43.4%, the rate will be the highest in more than 100 years.
Goldman Sachs expects the most likely rate to be 25%, which is between the current rate and Biden’s proposed rate, and the rate previously agreed to by President Reagan and the Democrat-controlled House.
Phillips expects that Biden may discuss the issue when he addresses Congress on April 28. The specific proposal may be presented in the FY2022 budget to be released in early May.
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