The prospect of higher taxes is likely to permeate discussions around US equities in the near-term.
News of the Biden administration’s proposed capital gains tax hike was a wakeup call of sorts for a market which, over the course of the post-election rally, largely ignored the risk of higher taxes, both corporate and individual.
It’s far from obvious that there are long-term ramifications from higher levies on capital gains for a tiny sliver of US investors. As Bloomberg wrote Friday, “only about 0.32% of American taxpayers reported adjusted gross income of more than $1 million and capital gains or losses on their returns” in 2018.
It’s also worth noting that at least some of the folks who comprise that 0.32% of filers likely didn’t pay their share under existing tax laws, at least if you extrapolate from recent research on tax enforcement.
The GOP is already keen to suggest that this admits of summary treatment and should be dismissed out of hand.
Chuck Grassley (not exactly an archvillain, by the way) offered a laughably simplistic assessment. “It’s going to cut down on investment and cause unemployment,” he said, of the prospective capital gains move, as though the calculus for the rich is that simple and admits of no nuance at all.
Something like this: “I brought you all here today to say that it looks like my portfolio gains, not to mention the windfall I was expecting from my yacht, will be taxed at twice the previous rate, so I’m shutting down the company. Unfortunately, all of you will need to find new jobs next week.”
To let Republicans tell it, the 0.3% of filers to whom this applies are just going to fire everybody, cut the lights off, take what they can carry and stroll off down the street like Steve Martin in The Jerk.
(“Well I’m gonna go then! And I don’t need any of this. I don’t need this stuff, and I don’t need you. I don’t need anything. Except this ashtray… And this paddle game. – The ashtray and the paddle game and that’s all I need… And this remote control. The ashtray, the paddle game, and the remote control, and that’s all I need.”)
Invariably, the wealthy and the GOP will attempt to undermine Biden’s “Families Plan” by disseminating misinformation about the ramifications of any capital gains tax hike. Unfortunately, many voters will believe the propaganda, despite the appeal to common sense embedded in the plan. As Ron Wyden, Senate Finance Committee Chairman, remarked, “There ought to be equal treatment for wages and wealth.”
Right. Unless, of course, you’re wealthy. In which case that’s a bitter pill to swallow. So, you’ll argue along the lines that investment gains are part of what motivates you to deploy your capital in a socially useful way, either through capex or hiring or something else you’re not really doing.
Sarcasm aside, how plausible is that narrative? I’ve been over this countless times previous. It tacitly assumes an almost direct connection between people who live off investment income and a capacity to facilitate economic growth in an expeditious way. While that assumption may well hold for some folks, it makes no sense at all for others.
Academics generally describe America’s elite as a class of “super-managers,” but the country still has a rentier class. Perhaps more importantly, it’s not a stretch to suggest that the children of today’s super-managers could form a new rentier generation straight out of some Belle Epoque novel.
In the same linked article (above), Bloomberg quoted a partner at a law firm which advises high-net worth individuals on tax planning. “It’s a high-anxiety time,” he said.
Right. But not as “high-anxiety” as that “time” around the 25th of each month, when lower- and middle-income households check and re-check their own math to make sure that once all the bills are debited, their account won’t be overdrawn, in which case their zero balance would be “taxed” into negative territory.