President Biden’s Tax Plan
On April 22nd, the White House leaked word of its impending proposal to almost double the capital gains tax rate for those earning $1 million or more to 39.6%. This increase will not affect many since only about 0.32% of American taxpayers reported adjusted gross income of more than $1 million on their returns, according to Internal Revenue Service tax return data from 2018. The move would send the top federal rate on the appreciation in assets sold by the wealthy to as high as 43.4% when including a surtax to help pay for The Affordable Care Act. At 43.4%, the long-term capital gains would be taxed at the highest rate in the more than 100 years since Congress established the income tax.
After the news of the proposal stocks dropped further than they have in more than a month, with the S&P 500 Index closing down 0.9%. Trading on Friday showed some stabilization. The next key date for this tax proposal is April 28 when Biden is expected to release his tax proposal ahead of his address to a joint session of Congress.
Our View
We had mentioned in our audiocast that President Biden was likely to propose a higher capital gains tax, so this announcement did not come as a surprise to us. We expect Congress will pass a scaled back version of this tax increase, but the issue will remain in flux over the next several months. While it is possible that Congress might pass the proposal in its entirety, we think a moderated version of around 28% is more likely considering the razor-thin majorities in the House and Senate, which is roughly halfway between the current rate and President Biden’s likely proposal.
We are unclear when the higher rate would be effective, but we believe there are three options:
- As of the date the bill is introduced in the House of Representatives, which would likely be no earlier than May.
- After the bill is enacted into law, which we think will be sometime between July and September.
- At the start of 2022.
As we also mentioned in our audiocast there is little historical data to suggest that the U.S. equity market has been primarily driven by changes in the tax code. The U.S. stock market has largely performed well even in the years in which taxes—be it personal, corporate, or capital gains—were increased. We believe that market performance is likely driven more by the state of the economic cycle rather than by changes in the tax code.
If you are concerned about the implications that this tax proposal could have on your portfolio we suggest talking to your advisor.