Tech and high-growth stocks hit by Biden's capital gains tax plan

US President reportedly wants to increase the top marginal income tax rate to 39.6% from 37% and nearly double taxes on capital gains for people earning more than $1 million; but Wall Street doubts that the plan will pass through the Senate in its current form

Tech and high-growth stocks hit by Biden's capital gains tax plan
President Biden is expected to release details next week of a sweeping overhaul of the US tax system, which has been in the works for months, to make rich people and big companies pay more and help foot the bill for his economic agenda. File photo: Reuters. 

(ATF) News that US President Joe Biden wants to increase the top marginal income tax rate to 39.6% from 37%, and nearly double taxes on capital gains for people earning more than $1 million has hit technology and other stocks that soared during the Covid pandemic.

But doubts have emerged on Wall Street, since details were revealed yesterday, that Joe Biden's expected proposal to hike capital gains taxes will be able to win endorsement in the Senate.

The proposal, named the American Families Plan, is reportedly set to be unveiled on April 28 (next Wednesday).

Analysts have said that the Democrats' narrow advantage in the Senate is likely to mean that any tax increase could be lower than Biden's initial proposal – but, individual investors who are concerned about rising rates, may start to unload shares in order to lock in current rates.

The plan is seen as likely to weigh disproportionately on technology stocks such as Apple, which is up more than 90% over the last year, and hot growth stocks like Tesla, whose shares have jumped nearly 400% since last April, according to Steve Chiavarone, portfolio manager and equity strategist at Federated Hermes.

"There's a lot of capital gains built into those names, and we think they would be the ones who are most likely to take it on the chin," Chiavarone said.

High-flying stocks such as Tesla fell nearly 3% on Thursday afternoon following reports of the Biden tax plan. Apple dropped 1%, while Facebook fell 1.5%. The broad S&P 500 dropped 0.9%.

The rally in the US equity market since the start of the year will also likely prompt investors to pause until there is more clarity on the plan, Oliver Pursche, senior vice president at Wealthspire Advisors in New York, said.

"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," he said.

The S&P 500 is up 10.1% since the start of the year and trades at a price to earnings ratio of 29.9, a valuation level near its all-time highs.

"Some traders are looking for an excuse to lock-in profits and they might choose to use this tax story as their catalyst," Ed Moya, senior analyst at FX brokerage OANDA, said in a note.

Despite the declines in the stock market on Thursday, many on Wall Street do not expect capital gains taxes to rise substantially given that the Senate is divided with each party holding 50 seats and Vice President Kamala Harris acting as a tie-breaking vote.

"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 to get through," said Burns McKinney, a portfolio manager at NFJ Investment Group in Dallas.

Should some capital gains tax increase pass, however, dividend-paying stocks could become more attractive.

"If you do have the capital gains tax go above and beyond that on dividends, it could actually end up favouring dividend-paying equities going forward," he said.

Sources familiar with the proposal have said that Biden will roll out his plan to raise taxes on the wealthiest Americans, including the largest-ever increase in levies on investment gains, to fund about $1 trillion in childcare, universal pre-kindergarten education and paid leave for workers.

Sweeping tax overhaul

The plan is part of the White House's push for a sweeping overhaul of the US tax system to make rich people and big companies pay more and help foot the bill for Biden's ambitious economic agenda. The proposal calls for a top marginal income tax rate of 39.6% and would nearly double taxes on capital gains to 39.6% for people earning more than $1 million.

That would be the highest tax rate on investment gains, which are mostly paid by the wealthiest Americans, since the 1920s. The rate has not exceeded 33.8% in the post-World War Two era.

The proposal - which was a part of Biden's presidential campaign - would need to go through Congress, where the Democratic Party holds narrow majorities and is unlikely to win support from Republicans. It is also unclear if it would have the unanimous backing of congressional Democrats, particularly in the Senate.

"If it had a chance of passing, we'd be down 2,000 points," said Thomas Hayes, chairman and managing member at hedge fund Great Hill Capital LLC, referring to stock market indexes.

Sources said details will be released next week before Biden's address to Congress on Wednesday, but they said elements could change in coming days. White House officials are debating other possible tax increases that could ultimately be included such as capping deductions for wealthy taxpayers or increasing the estate tax, sources told Reuters.

Biden has promised not to raise taxes on households earning less than $400,000.

Tax details related to the plan, which has been in the works for months, were first reported by the New York Times on Thursday morning.

White House press secretary Jen Psaki said the president would discuss his "American Families Plan" during his speech to Congress but declined to comment on any details.

She said the administration had not yet finalised funding plans but stressed Biden's determination to make the wealthy and companies pay for new programs.

"His view is that that should be on the backs ... of the wealthiest Americans who can afford it and corporations and businesses who can afford it," Psaki said.

She said Biden and his economic team did not believe the measures would have a negative impact on investment in the United States.

Yields on Treasuries, which move in the opposite direction to their price, fell to the day's low.

CAPITAL GAINS

Biden's plan, is likely to generate about $1 trillion, comes after a $2.3 trillion jobs and infrastructure proposal that has already run into stiff opposition from Republicans. They generally support funding infrastructure projects but oppose Biden's inclusion of priorities like expanding eldercare and asking corporate America to pay the tab.

Tax hikes on the wealthy could harden Republicans' resistance against Biden's latest "human" infrastructure plan, forcing Democrats to consider pushing it - or least some of the measures - through Congress using a party-line budget vote known as reconciliation.

Senator Joe Manchin, a moderate Democrat from West Virginia who wields outsize power due to the party's slim majority, said recently said he was wary of expanding the use of reconciliation.

Wealthy Americans could face an overall federal capital gains tax rate of 43.4% including the 3.8% investment tax on individuals with income of $200,000 or more ($250,000 married filing jointly). The latter helps fund the Affordable Care Act, popularly known as Obamacare.

Currently, those earning more than $200,000 pay a capital gains rate of about 23.8% including the Obamacare net investment tax instituted as part of that law. For tax year 2021, the top marginal tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 and $628,300 for married couples filing jointly.

Erica York, an economist at the Tax Foundation, said the proposal would put US capital gains taxes at the top of the global charts. Average capital gains taxes in Europe are around 19.3%, and the highest rate there is in Denmark, which collects 42%. France and Finland charge 34%.

For residents of some states and cities that assess their own capital gains levy, Biden's plan would push the total capital gains rate to more than 50%, York said. The rate would rise to 56.7% in California, 68.2% in New York City and 57.3% in Portland, Oregon, York said.

With reporting by Reuters

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