No, A Capital Gains Tax Hike Under Biden Won’t Be The End Of The World, Goldman Says

A couple of weeks back, JPMorgan’s Nikolaos Panigirtzoglou weighed in on the possible ramifications for US equities of a hypothetical capital gains tax hike under a Joe Biden administration.

Long story short, Panigirtzoglou concluded that tax-related selling during the fourth quarter of 2021 (ahead of a presumed January 2022 effective date) could pressure stocks to the tune of around 5%.

Of course, any such selling wouldn’t happen in a vacuum. There’s no telling what the macro backdrop might look like a year from now, and while it’s true that tax-related selling could exacerbate the situation if equities were already under pressure, countervailing flows tied to any number of possible factors could easily offset the ~$200 billion in tax-related equity selling implied by Panigirtzoglou’s rough estimate.

Read more: Hypothetical, Tax-Related Selloff A Year From Now Would Be Good Buying Opportunity

In a note dated Friday, Goldman weighed in on the same subject.

“With one week until the election, polls and prediction markets suggest that the Democrats will control the White House, Senate, and House of Representatives,” the bank’s David Kostin wrote, adding that “Superforecaster and FiveThirtyEight probabilities of a ‘blue wave’ are even higher [than prediction markets] at around 80%.”

The bank goes on to recap Biden’s plan, which would entail taxing long-term capital gains and qualified dividends at 43.3% (up from 23.8%) for filers with over $1 million in annual income.

In the past, stock prices and household equity allocations have tended to decline around capital gains tax hikes. As Kostin notes, “unsurprisingly, the wealthiest 1% were the biggest net sellers of equities… around the last capital gains rate hike in 2013.”

“Unsurprising” indeed. Remember, the further down the ladder you go in terms of wealth distribution, the lower the concentration of equity ownership. In other words, even if the middle-class wanted to engage in tax-related equity selling, they simply don’t have that much to sell — especially not on a relative basis. Here’s “that” chart again:

“In the three months prior to the hike, the wealthiest households sold 1% of their starting equity assets, which would equate to around $100 billion of selling in current terms,” Goldman’s Kostin went on to say Friday, adding that based on Fed data, “the wealthiest households now hold around $1 trillion in unrealized equity capital gains… equat[ing] to 3% of total US equity market cap and roughly 30% of average monthly S&P 500 trading volume.”

Consistent with JPMorgan’s analysis from earlier this month, Goldman concludes that past instances of tax-related selling around capital gains tax hikes and any attendant equity weakness, are likely to be short-lived.

In fact, Kostin observes that “although the wealthiest households sold 1% of their assets prior to the rate hike [in 2013] they bought 4% of starting equity assets in the quarter after the change and therefore only temporarily reduced their equity exposures in order to realize gains at the lower rate.”

Goldman doesn’t put it this way, but the bottom line is that the notion that a capital gains tax hike will trigger a sizable, prolonged selloff is just another example of a canard not supported by history or data. And, naturally, it’s applicable primarily to the top 1%, who generally end up re-buying stocks a few months later anyway.

Kostin went on to say that Goldman “expect[s] US household equity allocations will rise in 2021 irrespective of the election outcome.” No matter who wins, stocks should be “roughly” 10% higher by the middle of next year, Goldman says.

Meanwhile, according to an attendee at a private fundraiser held this week in Nashville, Donald Trump told a “closed-door gathering” that it will be “very tough” for the GOP to hold the Senate. “Trump said there were some GOP senators he didn’t want to help in their reelection bids,” the Washington Post says, citing the same source.

I suppose that’s only fair. After all, Mitch McConnell doesn’t seem too keen on helping Trump get a second term these days.

Waterloo And ‘The People’


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4 thoughts on “No, A Capital Gains Tax Hike Under Biden Won’t Be The End Of The World, Goldman Says

  1. Love this: “The bank goes on to recap Biden’s plan, which would entail taxing long-term capital gains and qualified dividends at 43.3% (up from 23.8%) for filers with over $1 million in annual income.” hahahaha Ok. Took me 20 seconds but I picked myself up off the floor. I’d love to have the problem of $1M annual income and worry about the tax rate on my capital gains going up 15% whole percentage points. These people are so encumbered. I feel bad for them.

    This is laughable. No one cares about people making this much money each year. I just drove by a park in the city where I live. There’s a tent encampment. The people living in the encampment care less about whiner babies making a $1M in annual income.

    In fact, why don’t we find an eloquent speaker and groom this individual, one who can cross geographical and ethnic lines, one who connects and who is charismatic. Let’s organize the disenfranchised around the issue of who the system doesn’t benefit them. Give the $1M annual income households something to worry about rather than the capital gains rate.

  2. I am okay with such taxes – looking at them from the viewpoint of MMT – they are a way to redistribute wealth when things are out of balance in a society now rife with inequality. We had our run: Investors benefited greatly from asset inflation propelled by QE, and low rates, while others lost ground. As the clamor in the market about fiscal stimulus attests, investors will benefit from the coming installments of fiscal stimulus which will also help non investors. It’s not wise nor fair to be too greedy

    1. Raising taxes has nothing to do with “envy.” Just ask Warren Buffett, who said this last year: “The wealthy are definitely undertaxed relative to the general population.”

      You reckon Warren is jealous?

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