One day after stocks tumbled almost 1% after Bloomberg rehashed an old report that Joe Biden will propose almost doubling the capital gains tax rate for the wealthy - "news" which had been publicly available since at least last October...
"Biden’s proposal is for the maximum tax rate for long-term capital gains to rise to 39.6% from 23.8% currently, a 66% proportional rise." - JPM— zerohedge (@zerohedge) October 9, 2020
... the White House rushed out to defend the proposal, with President Biden’s chief of staff, Ron Klain, appearing to confirm a proposal to increase tax rates by tweeting an article about Biden’s forthcoming proposal. Klain tweeted that the proposal, which Biden “campaigned on extensively, changes the tax rate for less than 1% of Americans (in fact, less than 1/2 of 1% of Americans).”
Yet despite Klain's implicit backing, analysts lined up to explain why fears about a 50% cap gains tax are be overblown, starting with Goldman economist who as we reported last night, said they expect Congress to pass a scaled back version of Biden’s proposed increase, noting that the 43.4% number that is being reported would be the highest in more than 100 years and that a 28% rate is a more likely outcome. Additionally, Goldman said while it wasn't clear when the proposed tax hike would be effective, the first of January is more likely than before May.
Others, such as the former CEO of Aegon asset management Gary Black, reaffirmed Goldman's bogey and in a tweet he said that the high number is just Biden’s negotiating style, "and he won’t get Dems from wealthy cap gain states (NY, NJ, CT, CA) to back a 35%+ CG rate." Furthermore, Black said that centrist Democrat Manchin "will not back on principle" and "neither will Sen Maj Ldr Schumer (D-NY)." The punchline: "Everyone in DC sees a 43.4% CG rate as a non-starter. My source believes top CG rate will be 26%-30% not retroactive."
2/ Manchin (D-WV) will not back on principle. Neither will Sen Maj Ldr Schumer (D-NY). This is to help fund $1T American Family Plan to be unveiled next week. Everyone in DC sees a 43.4% CG rate as a non-starter. My source believes top CG rate will be 26%-30% not retroactive. pic.twitter.com/6UqsTUezZk— Gary Black (@garyblack00) April 23, 2021
Others were similarly optimistic that the worst-case scenario pitched by the White House would not pass. Here are several takes courtesy of Bloomberg:
- Biden’s tax plan has been available online since before the election, so it’s unclear why stocks decided to suddenly react to what is essentially old news, says Adam Crisafulli
- “Stretched valuations and complacent sentiment have made for a precarious setup, leaving equities vulnerable to the most innocuous of tape bombs, even ones containing stale information”
- He notes that if stocks are going to be “taking their blinders off” they should also be focused on the Fed’s June meeting
- At this point, any tax proposals should be “viewed as negotiating markers rather than red lines,” says Isaac Boltansky
- Expects any increase to come with either a higher threshold than the reported $1 million level or lower than the 39.6% figure
Navellier & Associates
- Believes that the proposed tax increase will fail, most likely because of Democratic Senator Joe Manchin, who is a key swing vote, says Louis Navellier
- “If the long-term capital gains tax rate is raised above the qualified dividend tax rate, then Corporate America will just raise their dividends, so insiders can take money out of the corporation at a more favorable tax rate”
- Adds that an increase from 20% to 28% for long-term capital gains and qualified dividend tax rates is much more likely to pass
And so, in light of these optimistic views that Biden's cap gains plan will only pass in a sharply truncated format, it is probably not a surprise that risk is solidly bid this morning, with spoos jumping at the open.