What You Need to Know
- A new tax as high as 43.8% is very unlikely, according to Greg Valliere.
- A capital gains tax rate increase will be more likely in the 25% to 28% range, said Andy Friedman.
- The markets will also have to be on guard for other tax trial balloons like an estate tax hike proposal.
Political watchers voiced surprise Friday at the markets’ reaction to the news Thursday that President Joe Biden plans to release next week a proposal to increase the capital gains tax rate on the highest earners.
The Dow Jones Industrial Average, S&P 500 and Nasdaq slipped about 1% Thursday but rebounded Friday.
Biden’s capital gains proposal has been public “since last fall, so it shouldn’t have been a surprise for the markets, which were rocked yesterday by a leak that capital gains taxes will rise,” Greg Valliere, chief U.S. policy strategist for AGF Investments, said Friday in his Capitol Notes email briefing.
The important point, said Valliere: “A new tax as high as 43.8% is very unlikely because it would be opposed by all 50 Republican senators and a handful of Democrats.”
On Thursday, Bloomberg reported that Biden plans to propose “almost doubling the capital gains tax rate for wealthy individuals to 39.6% to help pay for a raft of social spending that addresses long-standing inequality.”
For those earning $1 million or more, Bloomberg reported that “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%.”
The new marginal 39.6% rate would be an increase from the current top marginal rate of 20%, which kicks in when taxable income exceeds $441,450 for an individual or $496,600 for a couple.
Andy Friedman, principal and founder of The Washington Update and a former tax attorney, told ThinkAdvisor Friday in an email that he’s “surprised that the leak of Biden’s plan to increase the capital gains tax rate is causing such a fuss.”
Biden, Friedman said, “has made clear since the campaign that he wants to raise the capital gains rate to the ordinary income tax rate (39.6% under his tax proposals). I have always assumed that Biden will propose this change publicly when he announces his individual tax plan.”