Proposed increases to capital gains tax aren’t as big a threat as some suggest
Thursday 29 Apr 2021 Author: Tom Sieber

The latest tranche of Biden’s tax plan is provoking wails of protest on Wall Street. Proposals to boost capital gains tax have prompted warnings of a big market downturn in the US and already sparked some weakness in shares.

The argument is that people will sell their stocks ahead of any tax increase, causing the market to crash. In turn this will have an impact on the real economy and lower living standards for ordinary Americans.

Beyond this short-term risk there are fears it would encourage the wealthy to spend today and not invest their cash for the future, which could have a negative impact on the health of the economy longer term.

Set against this situation is the fact higher tax rates should help to pay for big spending on infrastructure to make the US fit for the 21st century.

The Biden tax plans are certainly a risk to watch but there are a few things to consider before we get too concerned.

NO REASON TO PANIC

First, the increase to capital gains tax itself is worth keeping in perspective – the idea is to tax people earning more than $1 million a year 39.6% on capital gains, around twice the current level.

This is certainly a big hike but one affecting a relatively small section of the population and not totally out of whack with where the rate has been historically.

Second, this move, and the other increases to corporation tax which have been trailed, are not in their final form. They still need to get past US lawmakers and while both houses of Congress are in the Democrats’ hands, their control of the Senate is razor thin (relying on vice-president Kamala Harris’ casting vote) and there are conservative members of the Democratic party who may well seek to soften the tax blow.

Think of what’s been reported so far as the opening pitch, not the final settlement. Finally, the idea of mass-selling of stocks seems unlikely.

With rates set to stay low and some assets out of favour such as bonds, where else are wealthier individuals going to put their cash to earn a decent return than stocks and shares? Tax changes may make a difference at the margin but stocks’ ability to deliver outsized returns over the long run should prove persuasive.

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