Volatility Alert — Biden Administration Plays the Tax Card

by Greg Valliere, AGF Management Ltd.

OUR INITIAL TAKE is that Congress isn’t going to raise capital gains taxes to
ordinary income, but a hike is likely — along with growing anxiety in the financial markets that upcoming tax proposals may be bad for stocks.

THE CAPITAL GAINS PROPOSAL HAS BEEN ON THE TABLE 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. The important point is that 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.

THE BIDEN TAX PROPOSALS are the opening salvo in a negotiating process. It’s entirely possible that the top capital gains rate for millionaires will rise from 23.8% now to something like 30%. Most of the administration’s proposals will get watered down later this year.

BUT THAT WON’T DIMINISH THE HEADLINE RISK that will now become part of the landscape, as other tax provisions leak out, ahead of the introduction of a formal plan later this month. “The rich,” corporate and individual, are vilified by the progressives who dominate the administration, and this will keep the stock market on edge.

ONE OF BIDEN’S BRAGGING POINTS — a stock market that has surged, ignoring Donald Trump’s apocalyptic predictions — is now jeopardized. “The rich” have helped propel the market to record highs, and now they face a polarizing debate over how much they should be punished.

THE BIDEN MANTRA is that only people who earn above $400,000 will be hit by higher taxes, but that’s disingenuous. Plenty of people who earn less than $400,000 own stocks, which could sell off, and if businesses get hit with higher taxes, they could be passed along to everyone if companies raise prices in an effort to protect their profit margins.

BOTTOM LINE: The markets have to be on guard for other tax trial balloons — raising the estate tax, possibly combined with killing the “step up” basis; hiking the top individual rate; almost certainly increasing the corporate rate; imposing a minimum corporate tax; cracking down on business loopholes, including the sheltering of profits abroad, etc.

MODERATE DEMOCRATS IN THE SENATE, led by West Virginia Sen. Joe Manchin, will water down these proposals but it may take an angry message from Wall Street to convince the administration that imposing one of the highest capital gains tax rates in the world would be a negative for investors.

AFTER A FEEL-GOOD three months for Biden and the markets, we suspect the bloom is off the rose. A brawl between the president and Wall Street would benefit neither.

 

 


The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
©2021 AGF Management Limited. All rights reserved.
This post was first published at the AGF Perspectives Blog.
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