NEW YORK, April 22 (Reuters) - Stocks on Wall Street were thrown into reverse on Thursday on reports that U.S. President Joe Biden will propose hiking taxes on the wealthy, including capital gains taxes.
According to sources familiar with the plan, Biden next week will announce he wants the hikes in order pay for major investments in childcare, universal pre-kindergarten education, and paid leave for workers.
The proposals will include raising the marginal income tax rate to 39.6% from 37%, and nearly doubling taxes on capital gains to 39.6% for people earning more than $1 million, according to the sources.
The S&P 500 index closed down 0.92%, having traded higher before the news, first reported by Bloomberg, came out.
NORM CHAMP, PARTNER, LAW FIRM KIRKLAND & ELLIS, NYC, FORMER DIRECTOR, DIVISION OF INVESTMENT MANAGEMENT, SECURITIES AND EXCHANGE COMMISSION “It’s unfortunate to see the proposed capital gains tax increase. First, the capital gains tax is a second tax on money that has been earned and put to work in capital assets such as a business, real estate or stocks to grow the US economy which helps all Americans. Second, experience has shown that a high capital gains tax rate incentivizes asset holders to hold on longer which leads to inefficiency. The holder of the asset may not be best positioned to improve the asset or help it reach its maximum potential. With a lower capital gain rate, a capital asset is more likely to be transferred to an investor who can improve the asset for the benefit of the economy.”
JOHN GIMIGLIANO, HEAD OF TAX FEDERAL LEGISLATIVE AND REGULATORY SERVICES, KPMG
“This number was laid out clearly in Biden’s campaign tax proposal, so we shouldn’t be surprised to see the Administration move forward with their plan. History tells us that presidential campaign tax plans often do not mirror what ultimately becomes law, but they are important directionally. It’ll be up to Congress to decide which of Biden’s tax proposals become law and exactly how high the increases to the various rates will be.”
ISAAC BOLTANSKY, DIRECTOR OF POLICY RESEARCH, COMPASS POINT RESEARCH & TRADING, WASHINGTON, DC (email)
"Not sure if this helps but: Although the White House's plan has yet to be released, the Biden campaign proposed taxing capital gains and dividends as ordinary income for taxpayers earning over $1 million. Therefore, for example, the top rate for capital gains would move from 23.8% (i.e., 20% + 3.8% Net Investment Income Tax) to 43.4% (the top bracket of 39.6% + 3.8% Net Investment Income Tax) for those above the applicable threshold. The campaign also called for taxing unrealized capital gains at death. Without that step-up in basis, a taxpayer has a greater incentive to sell assets during their lifetime."
ALVINA LO, CHIEF WEALTH STRATEGIST, WILMINGTON TRUST, NEW YORK
“I don’t think anyone is ever comfortable paying more taxes, and we are telling clients it’s not an if, it’s a matter of when and how much.”
“Our clients are resigned to the fact that it’s happening, and they just want to do what they can to smartly plan about it.” She said her clients are identifying assets and stocks they are willing to sell, converting individual retirement accounts to lower-tax ROTH IRAs and even considering upping their charitable donations all in an effort to reduce their 2021 tax bill if some version of the president’s proposed capital gains tax passes.
CHARLES LEMONIDES, PORTFOLIO MANAGER, VALUEWORKS LLC, NEW YORK
“The market reaction has been pretty muted because there’s a long way between a proposal and event. If people put a high likelihood on that taking place the reaction in the markets would be more dramatic.”
“The market is going to be nervous and jittery about any threats to the economic recovery not just through 2021, but likely through 2022 as well.”
BURNS MCKINNEY, PORTFOLIO MANAGER, NFJ INVESTMENT GROUP, DALLAS
“A lot of stuff is getting proposed that when you have a razor-thin Democratic majority in the Senate, in which if you lose one single senator, tax increases and the likes thereof aren’t going get through. I do think it is probably unlikely that that would pass through.”
“Investors always should at least focus on any time there is a discrepancy between the capital gains tax and the dividend tax rate. If you do have the capital gains tax go above and beyond that that’s on dividends, it could actually end up favoring dividend-paying equities going forward.”
“Historically, when you have had large capital gains tax hikes, really what it tends to do more than anything is there oftentimes is a one-time market impact or effect. You have tax optimization strategies that basically lead to one-time asset selling. Specifically, for example, if the tax hikes are going to take place at the beginning of 2022 then it means that you might have some selling pressure…in the fourth quarter, later this year.”
PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW INVESTMENT MANAGEMENT, CHICAGO
“Anytime they are talking about raising taxes or capital gains, everybody gets all excited and sells first and asks questions later.”
“I think it is more of a short-term, knee-jerk reaction.”
“The question is, I sell now, I realize my capital gain, what do I do? Do I sit in cash? Do I buy bonds? Or do I go back in the stock market? And for a lot of investors, the answer is, I go back in the stock market. That’s why I said it’s a knee-jerk reaction, but it’s not anything that is going to be a long-term disincentive to buy stocks.”
KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS, PITTSBURGH
"If they’re going to tax people more and their net is going to fall, the value of that instrument is lower. Incentives matter."
"A lot of money that's in the market at this point is non taxable, and I don't think people do that calculation. Whenever they see news (like this), they just sell, they want to take the gains this year."
THOMAS HAYES, CHAIRMAN AND MANAGING MEMBER, GREAT HILL CAPITAL LLC, NEW YORK
“If it had a chance of passing, we'd be down 2,000 points.”
ED MOYA, SENIOR ANALYST AT FX BROKERAGE OANDA (email)
"Wall Street hit the panic button and headed for the sidelines after reports that President Biden will propose capital gains taxes as high as 43.4% for those making over $1M per year."
"Some traders are looking for an excuse to lock-in profits and they might choose to use this tax story as their catalyst."
OLIVER PURSCHE, SENIOR VICE PRESIDENT, WEALTHSPIRE ADVISORS, NEW YORK
“Yes, we will see higher capital gains taxes, but a number as high as 39% is unlikely to get through because things are so evenly balanced in the Senate.
"Higher capital gains taxes would cut into profits, so it forces some rethinking as to what earnings growth is going to look like in terms of the bottom line.
"Over the last few weeks, the market has shown itself to be out of breath. And this is one more reason for investors to take some profit.”
MATTHEW KEATOR, MANAGING PARTNER, THE KEATOR GROUP, LENOX, MASSACHUSETTS
“Democrats have a narrow margin (in the Senate), but if this goes through you could see a tremendous amount of M&A as a potential outcome. People are going to want to sell in lower capital gains rates than they could see in the future.
"If you look back at the Republicans when they passed the tax cuts, it was done with reconciliation and they didn’t need much of a margin. You have to consider it as a real possibility."
"And the market being near an all-time high with valuations stretched, (the sell-off) is understandable.” (Compiled by the Global Finance & Markets Breaking News team)