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Tech stocks and fat valuations seen as at risk in Biden’s 43 per cent tax on wealthy Americans

  • Biden will propose almost doubling the capital gains tax rate for wealthy individuals to help pay for a raft of social spending to tackle inequality
  • Stocks that have gained the most may get hit hardest in the short-term drawdown, according to Goldman Sachs

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Biden will propose almost doubling the capital gains tax rate for wealthy individuals to 39.6 per cent to help pay for social spending that addresses long-standing inequality. Photo: Bloomberg
Bloomberg

Wall Street got its stimulus. Now it’s hearing about the bill.

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Aglow after trillions of dollars of government spending pushed markets to record after record in the first part of the year, securities professionals reacted cautiously to President Joe Biden’s proposal to raise taxes on investing profits. Many counselled calm, pointing to the likelihood of long negotiations, while also noting the plan had the potential to provoke pre-emptive selling, cut stock valuations and slow down the rally in tech shares.
Stocks buckled in the immediate aftermath of news that Biden plans to nearly double the capital gains rate on the wealthy, with the S&P 500 falling as much as 1.2 per cent on Thursday. Still, the decline was minor next to the index’s 85 per cent return over the last 13 months. Most institutional investors said they’d wait to see how the bill progressed before doing anything rash.

“The devil will be in the details. Will it be retroactive to Jan. 1 of this year and then you wouldn’t need to sell right away? Will it be the beginning of next year? That all begs the question, will it get passed?” said Chris Grisanti, chief equity strategist at MAI Capital Management. “There are a lot of moving parts. One thing investors can be sure of is that taxes are going up and we have to at least partially pay for all the money we’ve been spending on stimulus.”

Pedestrians pass the New York Stock Exchange, Wednesday, Jan. 27, 2021. Photo: AP
Pedestrians pass the New York Stock Exchange, Wednesday, Jan. 27, 2021. Photo: AP

Biden will propose almost doubling the capital gains tax rate for wealthy individuals to 39.6 per cent to help pay for a raft of social spending that addresses long-standing inequality in his economic package, according to people familiar with the proposal. For those earning US$1 million or more, the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could be as high as 43.4 per cent.

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Stocks slid the most in more than a month on the news, with the S&P 500 Index down 0.9 per cent at the close. Ten-year Treasury yields fell to 1.54 per cent from an intraday high of 1.59 per cent.

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