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How Worried Should Investors Be About Tax Hikes? Part 2 | The Mesh Report

How Worried Should Investors Be About Tax Hikes? Part 2

Dividend Sensei April 30, 2021 Comments Off on How Worried Should Investors Be About Tax Hikes? Part 2

In Part 1 of this series, we examined the corporate tax increase the Biden administration is proposing to pay for the $2.3 trillion infrastructure bill.

JPMorgan crunched the numbers for us, and concluded that a modest 5% market downturn might occur, hardly anything to lose sleep over.

But President Biden has also proposed doubling the long-term capital gains rate for some Americans. So here’s what you need to know about that significant potential tax hike.

Some Americans Might Pay A Lot More… But Almost Certainly Not You

Currently, the top capital gains rate for Americans is 20% for the top tax bracket + the 3.8% for the ACA surcharge.

Under the Biden proposal, the top capital gains rate would match the income tax rate.

  • the top marginal rate would rise from 37% to 39.6%
  • for those making over $1 million 43.4% would become the new long-term capital gains tax rate

Such a much higher rate would certainly affect some investors severely. Crypto, property, and stock portfolios might have to be adjusted because the higher taxes could amount to millions or even tens of millions of dollars.

However, before you panic, remember that the higher tax rate would only apply to those making over $1 million per year.

  • about 0.3% of Americans

If you’re not in the top 0.3%, then your long-term cap gains rate, for stocks, property, crypto, pretty much anything remains 15% to 23.8%.

For almost all Americans (anyone making less than $200K per year) it’s actually between 0% and 15% and there are no current proposals to raise that.

But what if you’re lucky enough to make over $1 million? Surely, it’s time for action right?

I think it’s another potential negative in terms of putting some selling pressure on individual investors who are generally overweight some of the stocks with the biggest gains in tech, mega-cap tech. I think that’s another area where we could see some anticipatory selling ahead of this potential hike in capital gains.” – Savita Subramanian, managing director, head of US equity and quantitative strategy at Bank of America Merrill Lynch

BAC’s head of quantitative research thinks that a small fraction of high earners might be inclined to sell some big winners to avoid a much larger tax bill.

However, as some other analysts have pointed out, the increased cap gains rate might be retroactive to January 1st, 2021. In that case, the selling pressure could a lot less.

That’s especially true since tax planners were warning ultra-high net worth clients that higher taxes might be coming in 2022, or even 2021. Thus a lot of selling actually occurred in late 2020, though not in a panicked fashion.

The Street views a meteor hitting earth as having a better chance than this tax plan getting through and passing Congress, which speaks to why stocks are taking this in stride. Clearly, the tax rates are going up, but for now, it’s containable in the Street’s view.” – Dan Ives, managing director, equity research at Wedbush Securities

Mr. Ives correctly points out that just because higher taxes are proposed doesn’t mean that the actual increase in taxes is likely to be anywhere close to that high.

Consider this. Democrats have a 50-seat majority. VP Kamala Harris has to break any party-line vote, which would be a tie.

While the $1.9 trillion stimulus bill did pass 51-50, the Democrats have no margin of error.

And there are eight conservative blue-dog Democrats that all have to sign off on a 43.4% top cap gains rate.

How conservative are these Democratic Senators? Well, here’s some context for you.

During the $1.9 trillion stimulus debate, the non-partisan Senate Parliamentarian declared that the $15 dollar minimum wage proposal could not be passed through reconciliation.

This surprised no one and effectively meant the issue was dead. However, what was surprising is that no less than eight Democrats demanded a vote on the minimum wage hike, specifically so they could vote “no”.

Regardless of what you personally think of that proposal, surveys show that up to 70% of Americans are in favor of it. That’s even after the Congressional Budget Office said that 1.3 million jobs would be lost if it passed.

90% of Democrats are in favor of a $15 minimum wage.

These eight Senators, including Joe Manchin of West Virginia, John Tester of Montana, and Kyrstin Sinema of Arizona, wanted to go on the record opposing something that had zero chance of actually passing, and is extremely popular with their base.

Does this sound like a Senate that is about to more than double the capital gains tax rate for even the top 0.3% of income earners?

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