Lengthy editorializing (on my part) around the latest weekly jobless claims figures proved accidentally prescient on Thursday afternoon.
Just hours after I knocked over a digital inkwell, spilling 800+ words about the distinction between “rich” and “wealthy,” reports indicated the Biden administration was poised to float a capital gains tax of as much as 43.4% for the wealthy.
The headlines, from Bloomberg, hit stocks, which were previously meandering near the flatline.
I assume readers don’t need an annotation to know when Bloomberg reported the news (figure above).
In a somewhat ironic testament to i) investor obliviousness vis-à-vis anything going on outside the market bubble, and ii) the hair-trigger reaction time for headline-scanning algos parsing BBG red heds while ignoring the full text of articles published by other outlets, some version of the news was seemingly flagged hours earlier by The New York Times.
“The next phase of President Biden’s $4 trillion push to overhaul the American economy will seek to raise taxes on millionaire investors to fund education and other spending plans,” Jim Tankersley wrote, before lunch in New York, adding that “Biden would also raise taxes on capital gains for people earning more than $1 million, effectively increasing the rate they pay on that income to 39.6% from 20%.”
I could be wrong, but it appeared that “efficient” markets and “omnipotent” machines simply weren’t paying any attention until the terminal lit up with the same news.
Of course, this isn’t really “news.” Actually, wait — it is news, but it’s not new.
Analysts have penned voluminous research over the past year (give or take) about a capital gains tax hike under Biden and the prospect for tax-related selling to front-run it. Back in October, for example, Goldman said past instances of tax-related selling around capital gains tax hikes suggested any equity weakness was likely to be short-lived.
The bank’s David Kostin observed 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.”
In September, JPMorgan’s Nikolaos Panigirtzoglou suggested 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. The macro backdrop matters, 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.
Obviously, Goldman, JPMorgan and other banks would need to update their estimates based on any concrete figures confirmed by the Biden administration, so I’m not suggesting that any of these estimates are definitive or even still applicable. Rather, I’m merely recounting what some analysts have written previously on the subject.
Biden’s plan would raise the capital gains rate to 39.6% for those earning $1 million or more, up sharply from the current rate. “A 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than the top rate on wage and salary income,” sources told Bloomberg, whose Laura Davison and Allyson Versprille noted that “the proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labor.”
The proposed hike will be incorporated into Biden’s upcoming American Families Plan, set to be unveiled next week.
Apparently, math shows that the increase could drive up the capital gains rate to 52% in New York and 56% in California.
At first, it wasn’t clear to me how the relevant income cohort would be able to survive such a grievous blow. Then I re-read the part about it applying to those earning $1 million or more.
As the Times helpfully reminded folks not steeped in this debate (i.e., the vast majority of Americans) this applies to “the proceeds of selling an asset like a stock or a boat.”
10% of Americans own more than 80% of stocks. Although I can’t say this with any degree of certainty, I imagine those figures are even smaller and larger, respectively, for boats.
If this were to come to pass I would expect to see an explosion in shell companies hiding income and gains. Trump will could easily become a real billionaire selling advice on how to pay no tax at all.
Does a higher capital gains rate act as a disincentive to trade and an incentive to buy-and-hold? Does that favor large caps over small and domestic over emerging?
Does a higher capital gains rate further accelerate the shift from mutual funds to ETFs, which are generally more tax-efficient?
I wish I had $10 for every HNW individual who pays less in taxes than I do.
So the US government will effectively allow (untaxed) transactions in bitcoin, but raise capital gain tax rates. LOL
I doubt BTC transactions will be untaxed for long.
Thinking about this a little more, I’m going to guess that investors come to see this more as a bargaining chip, meant to lubricate negotiations on a higher corporate tax rate where the initial 28% was itself a bargaining chip, to split the monied classes from the corporate classes, to split the high earners from the big estates, and to fire up the base. The ask is too much of a jump from current (2X) to expect the end result to be anywhere close.
Under MMT, it makes sense to increase taxes to increase demand to match the increased supply of dollars. This would also cause a re-allocation away from investments and into spending as wealth is transferred from HNW individuals who don’t spend to the govt who is spending like a madman. Seems like sensible policy
Mr. Lucky, I heard the other day that the tax people are going after Roger Stone and I don’t think they’ve given up on the Trumpers. I don’t know if his book would sell if he’s in jail for tax evasion. Might make for a musical on Broadway. Porky and Bess?
Surprised the backlash this has received. Doesn’t it simply harmonise the marginal tax rate between capital gains and wage income? I always found it strange that idle capital receives preferential treatment vs the sweat of one’s brow in the US (in the country where I live it’s all taxed at the marginal rate, regardless of the source)
Charm, evidently the wealthy in your country have failed to elect the best legislature that money can buy, as the wealthy in the US have done.