- The Biden administration wants the maximum capital gains rate to be 43.4%.
- Do Wealth Taxes Follow?
- Janet Yellen Promotes Global Taxes
- Shareholders of Amazon, Apple, Alphabet and Microsoft made huge profits
- Will the bull market stop selling shares to pay Uncle Sam?
Life creates problems because our path can change depending on the decisions we make. The only certainty is that we will all die one day and each year we have to pay taxes. In the 2020 election campaign, President Joe Biden pledged to raise taxes for the richest Americans. On Thursday, April 22nd, the US stock market retreated from its all-time highs after it put some meat on the bone of a tax hike. Capital gains appear to be the first target as it will suggest more than doubling the rate for the most profitable ones.
Meanwhile, on April 23, stocks fell sharply and again found themselves near highs. The DJIA was just below 33,900 points, while the S&P 500 was almost 4,200 points. The high-tech NASDAQ was just below 14,000. In 2020, the NASDAQ has seen growth. While all the leading stock indices posted impressive gains, the NASDAQ was more than 43.6% higher year over year. In the first quarter of 2021, the tech index gained more than 2020, when it climbed more than 2.78% and was even higher at the end of last week. At the close on April 30, the NASDAQ rose another 5.4% in April.
The top four NASDAQ stocks are Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT). Many investors have amassed wealth by investing in these companies with a combined market capitalization of over $ 7.53 trillion. Time will tell if a significant jump in capital gains tax rates will lead to sales at these and other companies, and whether it will go high in the NASDAQ index.
The Biden administration wants the maximum capital gains rate to be 43.4%.
The incentives needed to sustain the US economy during a pandemic come at a hefty price. As vaccines that create herd immunity to the virus disappear into our rearview mirror, costs will be inherited.
The Biden administration has pledged that it will not increase taxes on those who earn more than $ 400,000 a year. They recently put forward a proposal to raise the capital gains tax from 20% to 43.4% for the richest Americans, earning more than $ 1 million a year.
Taxing the rich is a popular concept in the United States after the Trump administration’s tax cuts. Many advocate closing loopholes so that the richest Americans, millionaires and billionaires in particular, have nowhere to run or hide from the IRS. The fact is that less than 25% of the shares are held in tax accounts and with taxable persons. Almost half of that 25% belongs to corporations, which already pay capital gains taxes equivalent to their corporate rate, which is likely to rise.
If there is less than 15% left, about half will be above the income threshold. Simultaneously, more than 50% of the balance is accounted for by several generations with a zero cost base in the framework of ordinary and planned liquidation plans that are related to income and not motivated by capital gains. Consequently, less than 4% of the market will be significantly impacted by a capital gains tax increase. However, the 43.4% rise was only the first of a tidal wave of tax changes on the horizon.
Do Wealth Taxes Follow?
Progressive politicians like Massachusetts Senator Elizabeth Warren are proposing an annual wealth tax. Senator Bernie Sanders, leader of the Progressive Wing, and Senator Warren have proposed an annual wealth tax of 2% for those with more than $ 50 million and an increase to 3% for those with total assets in excess of $ 1 billion. Senators call their legislation Supermillionaire Tax Act, arguing that the super-rich made good profits during the global pandemic when the stock market rose sharply.
There is no bipartisan support for wealth taxes. A small majority of Democrats in the Senate will cause obstacles, but other ideas and proposals will inevitably cause tax increases for all Americans. Those earning less than the threshold will continue to pay higher prices for companies’ products as they raise them due to higher corporate tax rates.
Janet Yellen Promotes Global Taxes
In April 2021, US Treasury Secretary Janet Yellen called for a minimum global income tax to at least partially offset any shortcomings that would arise from the administration’s proposed corporate tax rate hike. She said, “Competitiveness has more to do with the way US headquartered companies oppose other companies in global mergers and acquisitions. The point is for the government to have stable tax systems that generate sufficient income to invest in basic public goods.“This proposal is a step towards globalization.
The Trump administration cut corporate taxes from 35% to 21% in 2017. The Biden administration plans to increase it to 28%. Harmonizing minimum global taxes will require cross-border cooperation. The proposal includes punishing countries that refuse to cooperate by imposing high taxes on their US subsidiaries. Tax increases are likely to result in higher prices for consumer goods.
Shareholders of Amazon, Apple, Alphabet and Microsoft made huge profits
Huge growth in earnings and stock prices in the tech sector is the focus of the Biden administration. Moreover, many portfolios contain stocks of leading companies with huge long-term capital gains.
An investment of $ 5,000 in MSFT in 1987 at 35 cents was worth over $ 3.6 million at $ 252.18 at the end of last week.
Those portfolios that purchased GOOGL shares worth $ 5,000 in 2014 at $ 568 may be worth just $ 21,216 at $ 2,410.12, but founders and other holders have millions and billions of dollars in capital gains.
Portfolios that were supposed to invest $ 5,000 in AAPL in 1984 at 12 cents a share are now worth more than $ 5.48 million at $ 131.46.
Those who invested $ 5,000 in AMZN in 1997 at $ 1.96 have a position of about $ 8.85 million at $ 3,467.42 per share.
A capital gains tax rate of 43.4% will push long-term holders to the highest tax tier, paying double the current rate.
Will the bull market stop selling shares to pay Uncle Sam?
Tax hikes under the Biden administration will force those who sell shares to sell even more to pay the IRS. The question is not whether taxes in the United States are going up, but how much. There will be a lot of controversy in Congress between Democrats and Republicans, which will likely lead to much higher rates than those currently in existence, but slightly lower than the original proposals. Meanwhile, the global tax is likely to include the US and Europe. China is unlikely to participate, which is beneficial for their companies.
Moreover, tightening environmental regulations to tackle climate change is pushing traditional energy prices back to OPEC and Russia, which is likely to drive up consumer spending. Tax revenue from the oil and gas sector will decline as US production rises.
All taxpayers will pay more to the government, either directly or through higher prices for goods.
Tax hikes are not optimistic for the stock market. The next fix is likely to come when the administration and Congress present the bill to US companies, individuals, and consumers. The president’s promise not to raise taxes on those with incomes below $ 400,000 is a mirage. All Americans will pay their bills either directly through payments to the IRS or indirectly as consumers.
Tech stocks have surged to incredible heights since March 2020. Large companies can get the most significant impact from tax increases.
AAPL shares were trading at $ 133.15 a share on Monday morning, up $ 1.69, up 1.29%. From the beginning of the year to date, the AAPL is up 0.50%, compared with a 12.63% rise in the benchmark S&P 500 over the same period.
About the author: Andrew Hecht
Andy has worked on Wall Street for almost 35 years and is an in-demand commodities and futures trader, options expert and analyst. In addition to working with StockNews, he is the lead author of Seeking Alpha magazine. Find out more about Andy’s biography, as well as links to his latest articles. More…