It’s too late to sell!
I’m just kidding. Or maybe not. It depends on who you are, how much you earn and how accurate Thursday’s headlines were.
Call it distasteful (and it may end up being somewhat masochistic on my part), but the latest news on Joe Biden’s capital gains tax hike gave me the chuckles, not necessarily because I’m delighted about the prospect of higher taxes, but rather because the effective date is apparently April. Of 2021. So, last month.
“President Biden’s expected $6 trillion budget assumes that his proposed capital gains tax rate increase took effect in late April, meaning that it would already be too late for high-income investors to realize gains at the lower tax rates if Congress agrees,” the Wall Street Journal said.
The news came on the heels of a piece in The New York Times which detailed Biden’s budget proposal.
Read more: How To Think About Joe Biden’s Bajillion-Dollar Budget
“The effective date for the capital gains tax rate increase would be tied to Biden’s announcement of the tax increase as part of his American Families Plan, which includes an expanded child tax credit and funding for preschool and community college,” the Journal went on to note.
The White House will officially roll out the budget on Friday.
I’ve covered Biden’s prospective capital gains tax hike (the top rate would go to 43.4% from 23.8%) exhaustively in these pages. It applies to households with income over $1 million. Unless something’s changed, it would affect roughly 0.3% of filers.
I think it’s appropriate I take this opportunity to remind folks that, as Goldman wrote earlier this month, “top individual tax rates on ordinary income are relatively low in the US, at least for households in low-tax states, and even full implementation of the Biden program would only close the gap partly.”
Jamie Dimon lambasted Biden’s plan for individual and corporate taxes on Thursday, during a second day of congressional testimony. “The tax increase is actually four times the tax decrease from 2017,” Dimon claimed. “The details are all that matter, not the top line of 28%,” he remarked, in an effort to raise the fear level around Biden’s proposed corporate tax hike.
Naturally, Dimon couched his criticism in terms of competition with the rest of the world, suggesting Biden’s plan would make the US uncompetitive. “It would be detrimental to a lot of companies, it would push a lot of capital overseas,” he said. Dimon also criticized Biden’s plan to raise the US tax rate on foreign profits and, along with Citi’s Jane Fraser, expressed doubt about a global agreement to end what Janet Yellen derisively calls a “race to the bottom.”
I guess there’s just nothing we can do. We may as well go ahead and cut corporate tax rates to zero because that’s the only way to ensure we’re competi… oh, wait, that’s right! Some corporations already pay essentially zero in taxes.
Sarcasm aside, we’re about to see just how sincere some of corporate America’s biggest names really were when they supported various proposals aimed at reengineering capitalism or otherwise engaged in virtue signaling when it was convenient from a PR perspective. With the rubber set to meet the road, you may discover that some of the rhetoric was just rhetoric.
When it comes to the retroactive capital gains tax, it would still need to be approved by Congress, and as the Journal went on to note, there’s “already wariness about the full capital gains tax plan building among some congressional Democrats.”
The debate around the market implications primarily revolved around opportunistic selling. As the figure (below) shows, history suggests any weakness for equities would be short-lived.
For what it’s worth, Goldman estimates that the wealthiest households are currently sitting on somewhere between $1 to $1.5 trillion in unrealized equity capital gains.
That, the bank’s David Kostin said, “equates to 3% of total US equity market cap and roughly 30% of average monthly S&P 500 trading volume.”
Remember: The vast majority of Americans don’t own any stocks to speak of (figure below).
But if the capital gains tax hike is retroactive, none of that really matters. And that’s what I found funny on Thursday. One way to prevent tax-related selling is just to backdate the implementation.
“While the headline tripped a sell program… it’s likely misplaced,” Bloomberg’s Vincent Cignarella wrote. “A retroactive tax makes the levy unavoidable unless the bill doesn’t pass.”
In his own remarks to Congress Thursday, Goldman’s David Solomon said “anything that’s retroactive creates extra anxiety and extra uncertainty, and that would just slow down economic activity.”
I am not in the 0.3% of filers who woiul be subject to the higher rate. But going from 23.8% to 43.4% in one step is not how you do this. Anyone who has played Sim City understands that. It makes no sense economically or politically, so I can only assume it’s a negotiating ploy . But that, too — because it’s obvious and DOA — is a boneheaded move by the Biden team. Kind of surprised, given how sure-footed they have been to date.
It’s Capital Gains tax. Investors have control over how much Capital Gains they make. How about just sell less this year so you end up under the 1 Million cap???
The last guy threw me in 22% tax limbo forever. No write offs, nothing. 1040 ez if I don’t sell stocks. Lost easily twice the standard deduction every year. It’s your turn?
Not quite sure what your situation is or was, but the last guy took away my SALT deduction b/c sanctuary city or some such stuff. FWIW, I’m thinking my little doughnut-hole bracket — between the lower middle class and the truly poor and the upper middle class and the truly wealthy — is the bracket doing the heavy lifting as a percentage of median income.
This country is of, by and for the 0.3% if you judge by the amount of ink they rate. Thank goodness they sometimes let the other 99.7% of us have a few crumbs even though we don’t deserve them. And we shouldn’t even think about universal healthcare, a living wage and enough free education so we have marketable skills. After all, the people that matter, those in the top 0.3%, must have access to plentiful slave labor or, so we are told, the glory that is American Capitalism will vanish from the earth. Looks like the money changers Jesus booted from the temple snuck right back in and now run the show.
Decades in the investment biz have conditioned me to decry capital gains taxes as obvious depressants to investments, but when I apply critical thought to the question, it isn’t so clear.
The most (economically and socially) valuable form of financial investment is when someone starts a new business or expands an existing business. Input investment to create or grow business, output earnings, creating value and jobs along the way. Interestingly, in tax terms that output is income, not capital gains.
The least valuable form of financial investment is when someone buys an asset, sticks it in a vault or brokerage account, then sells it for a higher price. Input investment to acquire asset, output the same asset, creating nothing along the way – other than some jobs for a part of Wall St. In tax terms, that output is capital gains, not income.
So exactly why is the more valuable investment output – income – taxed at a higher rate than the less valuable output – capital gains? Shouldn’t they be taxed the same, or perhaps give the lower rate to income?
Sure, a higher capital gains rate might gore my personal ox, but it’ll be but a scratch.
I love this for its commitment to intellectual honestty. You made my day.
Two quick things. First myself and others I know made estate arrangements in 2020 with the assumption Biden would raise taxes. So the retroactive aspect can be somewhat prepared for still though it is adding uncertainty. Second, there is a significant difference between what a corporation pays and the amount the tax. As Dimon pointed out, the details matter. The incentives would change as that tax number changes. Love what you write and thanks for doing what you do.
I can’t pretend to be able to empathize with an 0.3%er but, I actually see how this move may be a market stabilization mechanism. We see massive swings in bubble finance with asset prices growing and falling exponentially. Obviously this is owed largely in part to the many mechanisms available to manipulate asset prices and the market is no longer able to self correct. With this hike, those market participants now have to consider if they want to sell in massive quantities and pay the much higher tax rate or sit on their investments a little longer to try to avoid it. This could actually stabilize asset prices more and potentially provide a more fundamentally sound market for other participants.
If there is a topic less understood by the general public (besides how masks work), I think it HAS to be marginal tax rates. I think the GOP knowlingly exploits that ignorance (or perhaps is showing their own) with fear-mongering proclamations that the government is going to take half of everything everyone earns, starting with dollar one and regardless of income level.
The guy I worked for as a grad assistant in Finance back in the day (1960s) used to have three financial rules to remember: 1) Something is always better than nothing, 2) the government never takes it all, and 3) if you can’t make 6% on your money, drink it.
I do know this that ever since MAGA guy got me a tax cut, my tax increase has cost me $40k with no increase in income. No MAGA for me.
Congress hates passing retroactive tax increases. Best bet is that it won’t pass a retroactive tax. Also, with a 50-50 split Biden is making a gambit at a very high rate so he can negotiate down. Will capital gains rates go up for some- yes. But it is going to be less than what is being discussed by biden
I agree, what you said is my base case too.