How involved traders must be about Biden’s tax proposals

U.S. President-elect Joe Biden gives a pre-holiday speech at The Queen in Wilmington, Delaware on December 22, 2020.

Alex Edelman | AFP | Getty Images

Stocks and Taxes: What Will Happen?

Democrats’ control of Congress has re-lit Biden’s tax proposals, particularly those that would affect stocks and bonds.

While Biden has repeatedly said he wouldn’t levy taxes on Americans who earn less than $ 400,000 a year, he has suggested:

1) Increase in marginal tax rate from 37% to 39.6% for those earning more than $ 400,000;

2) Increase in corporate income tax from 21% to 28% and a minimum book tax of 15%;

3) Taxing long-term capital gains and qualifying dividends at the normal income tax rate of 39.6 percent on income over $ 1 million.

Biden’s other proposals may also affect holders of stocks and bonds.

For example, he has suggested that those who earn more than $ 400,000 should be subject to an additional 12.4% wage tax, which is shared equally between employers and employees.

He has also proposed a change to the 401 (k) plans, from the current system, which allows all savers to receive up to $ 19,500 in tax deductions each year, to a flat-rate refundable tax credit given to low-income individuals greater tax sharing allows front and higher income earners a lower tax break.

What impact will these proposals have on inventory levels? Will some sectors be more affected than others?

Savita Subramanian of Bank of America Securities estimates that the Biden tax plan would reduce S&P 500 earnings by 7% under the current plan, largely due to higher corporate taxes. Growth-oriented sectors would be hardest hit:

S&P 500: Tax Charge (Estimated Impact of S&P 500 Result based on Biden’s Suggestions)

  • Technology down 9.2%
  • Health care down 8.4%
  • Communication services down 8.2%
  • Consumer Discretionary Down 7.5%
  • Financial stocks down 6.5%

Source: BofA Securities

How would these taxes affect stock market behavior? It’s complicated, but Dan Wiener, who leads the independent adviser to Vanguard Investors and chairs the Adviser Investment Management, says the impact of a capital gain on investors may be less than many think: “The people who do the most Active high-end traders and some hedge funds will be affected. Much of the stock is held with no-tax pension funds. 401 (k) and IRA accounts are not taxed until the money is withdrawn. “

Raising taxes on the rich will also reinvigorate the old debate that raising taxes won’t necessarily lead to a dramatic increase in revenue.

A recent study by the Tax Foundation concluded that the Biden tax proposal would raise $ 3.3 trillion over the next decade, and that an increase in capital gains taxes over the same period would raise only $ 469.4 billion , a relatively small sum of money. Most of the increase would result from the increase in the corporate tax rate and the increase in the social security wage tax.

A separate 2010 study by the Congressional Research Service examined what is called “behavioral responses” to changes in capital gains taxes. Capital gains tax prevents capital gains from being realized because capital gains are only taxed when they are realized. For this reason, “investors can be encouraged to hold sub-optimal portfolios or forego investment opportunities with higher pre-tax returns.” In other words, when capital gains taxes are high, investors are more likely to hold stocks than sell, making the market less efficient.

It also means that higher taxes do not necessarily lead to higher income.

One thing that most analysts seem to agree on is that it’s not about “when”, just “when”.

“We know that tax rates will likely rise,” Wiener told me. “The question is, will it be 2021 or 2022? I don’t think individual tax rates are the bigger problem, I think corporate tax rates and capital gains will be the focus.” Wiener believes major tax changes in 2021 are unlikely: “It is very unlikely that they will try to force a large increase in corporate tax this year.”

Citing other sources, Subramanian also anticipates tax changes in 2022, not 2021, as Democrats focus first on fiscal incentives and then on tax increases.

But even if a capital gains tax were introduced, Wiener isn’t sure there would be a massive rush to sell technology stocks that have made big capital gains for investors in recent years: “Why should I rush to sell stocks with big capital gains ? ” Just to avoid the tax? Who can say that someone won’t come along in four years and will lower them again? “

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