Capital gains tax hikes and stock market performance

Biden promises he will ‘not add an additional tax burden on the middle class’ in address to Congress

President pushes plan for the wealthy to pay their fair share in taxes in Wednesday night’s remarks to joint session of Congress

No question President Biden’s proposed higher 39.6% capital gains tax rate on those earning over $1 million is making many stock investors queasy, but the stock market impact may be more muted than some expected, according to Goldman Sachs. 

"S&P 500 returns have also been weak ahead of past capital gains tax hikes, but selling was short-lived and reversed afterward" the team, led by David  Kostin, wrote to clients earlier this week. 

  (Courtesy Goldman Sachs/US Weekly Kickstart 4/23/2021)

The team also noted, during the last hike in 2013, while high earners were the "biggest net sellers of equities," the blip was temporary. 

"Although the wealthiest households sold 1% of their assets prior to the rate hike, 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," the team said. The firm pointed out the action with the prior two hikes was "similar." 

Furthermore, these individuals are likely to plow funds back into stocks when the dust settles. "We forecast net equity buying by households will total $350 billion in 2021 and be driven by the wealthiest 1%," the team said.

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U.S. stocks are trading just below all-time highs as investors gauge the long-term impact. 

Biden, on Wednesday, during his first address to Congress stressed the rate will impact just 0.3% of the population. "I’m not looking to punish anyone" Biden explained adding, "I believe what I proposed is fair."

Not everyone agrees. According to analysis by the Tax Foundation, a higher rate will crimp economic growth by clipping 0.1% off GDP and "reduce federal revenue by $124 billion over 10 years." 

APPLE CFO HOPES BIDEN TAX PLAN WON'T PUT US COMPANIES 'AT A DISADVANTAGE'

How Biden’s capital gains tax will impact investors

BMO Capital Markets chief investment strategist Brian Belski provides insight into the possible market and economic impact of raising the capital gains tax, the Federal Reserve and earnings. 

Brian Belski, BMO's chief market strategists and others, say a higher corporate tax rate, proposed to go to 28% from 21%, is a bigger threat. 

"These are companies are the ones paying these people in terms of employment if you do see more of a jump, especially in the small businesses…if you see a corporate tax increase you are going to see jobs really slow down" he warned during an appearance on FOX Business' Mornings With Maria. 
 

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