- The Biden administration wants a top rate of 43.4% for capital gains
- Are wealth taxes next?
- Janet Yellen promotes “global taxes”
- Amazon, Apple, Alphabet, and Microsoft’s shareholders have massive gains
- Does selling shares to pay Uncle Sam end the bull market?
Life creates challenges as our paths can take twists and turns based on decisions we make. The only certainties are that we will all die one day, and each year we must pay our taxes. On the campaign trail in 2020, President Joe Biden pledged that he would raise taxes on the wealthiest Americans. On Thursday, April 22, the US stock market backed off from its all-time highs are he put some meat on the tax increase bone. Capital gains appear to be the first target as he will propose over doubling the rate on top earners.
Meanwhile, stocks snapped back on April 23 and were once again near the highs. The DJIA was just under the 33,900 level, and the S&P 500 was nearly at the 4,200 level. The technology-heavy NASDAQ was just below 14,000. In 2020, the NASDAQ led the way on the upside. While all of the leading equity indices posted impressive gains, the NASDAQ was over 43.6% higher on a year-on-year basis. In Q1 2021, the technology index added to the 2020 gains as it moved over 2.78% higher and was even higher at the end of last week. At the April 30 close, the NASDAQ was up another 5.4% in April.
Four leading NASDAQ stocks are Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT). Many investors have built wealth on investing in these companies with a combined over $7.53 trillion market cap. Time will tell if a substantial jump in capital gains tax rates will cause selling in these and other companies and if it marks a high in the NASDAQ index.
The Biden administration wants a top rate of 43.4% for capital gains
The stimulus necessary to keep the US economy going during the pandemic comes with a massive price tag. As the vaccines creating herd immunity to the virus fades into our rearview mirror, the costs will be a legacy.
The Biden Administration pledged that it would not increase taxes on anyone making over $400,000 each year. They recently rolled out a proposal that would increase capital gains taxes from 20% to 43.4% for the wealthiest Americans, those earning over $1 million each year.
Tax the rich is a popular notion in the US after the Trump administration’s tax cuts. Many favor closing loopholes so that the wealthiest Americans, the millionaires, and more specifically the billionaires, have nowhere to run or hide from the IRS. The fact is that under 25% of stocks are held in taxable accounts and taxable entities. Almost half of the 25% is owned by corporations that already pay capital gains tax equivalent to their corporate rate, which is likely to rise.
With under 15% left, around half would be over the income threshold. Simultaneously, more than 50% of the balance is multi-generational with zero cost basis under regular and routine plans for liquidation that are income-related and not motivated by capital gains. Therefore, less than 4% of the market would experience a meaningful impact from the capital gains tax hike. However, the 43.4% hike was only the first of a tidal wave of tax changes on the horizon.
Are wealth taxes next?
Progressive politicians, like Massachusetts Senator Elizabeth Warren, have been proposing an annual wealth tax. Senator Bernie Sanders, the progressive wing leader, and Senator Warren have proposed a 2% annual wealth tax on those with over $50 million, rising to 3% on those with over $1 billion in total assets. The Senators call their legislation the Ultra-Millionaire Tax Act, claiming that the ultrawealthy have profited handsomely during the global pandemic as the stock market exploded higher.
There is no bipartisan support for wealth taxes. The Democrats’ slim majority in the Senate will cause obstacles, but other ideas and proposals that will inevitably cause taxes to go up for all Americans. Those who earn less than the threshold level will still pay higher prices for products from companies as they raise them because of higher corporate tax rates.
Janet Yellen promotes “global taxes”
In April 2021, US Treasury Secretary Janet Yellen urged the adoption of a minimum global income tax in a move to at least partially offset any disadvantages that will result from the administration’s proposed increase in the corporate tax rate. She said, “Competitiveness is more about how the US-headquartered companies fare against other companies in global merger and acquisition bids. It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods.” The proposal is a move towards globalization.
The Trump administration cut corporate taxes from 35% to 21% in 2017. The Biden administration is looking to increase them to 28%. Coordinating global minimum taxes would require cross-border cooperation. The proposal includes penalizing countries that refuse to cooperate by heavily taxing their subsidiaries in the US. The tax hikes could likely translate to higher product prices for consumers.
Amazon, Apple, Alphabet, and Microsoft’s shareholders have massive gains
The massive earnings and share price appreciation in the technology sector is in the Biden administration’s crosshairs. Moreover, many portfolios hold shares of the leading companies with enormous long-term capital gains.
A $5,000 investment 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 $5,000 worth of GOOGL shares in 2014 at $568 may only be worth $21,216 at $2410.12, but the founders and other holders have millions and billions in capital gains.
Portfolios with the foresight to invest $5,000 in AAPL in 1984 at 12 cents per share are now worth over $5.48 million at the $131.46 level.
Those that invested $5,000 in AMZN in 1997 at $1.96 have a position worth nearly $8.85 million at $3467.42 per share.
A 43.4% capital gains tax rate would push long-term holders into the highest tax bracket, paying over twice the current rate.
Does selling shares to pay Uncle Sam end the bull market?
Tax hikes under the Biden administration will cause those selling shares to sell even more to pay the IRS. It is not a question of if US taxes are rising but by how much. There will be lots of horse-trading in Congress between Democrats and Republicans, likely resulting in much higher rates than are currently in place, but a bit lower than the initial proposals. Meanwhile, a global tax would likely include the US and Europe. China would not likely participate, which benefits their companies.
Moreover, increasing environmental regulations to address climate change is handing traditional energy pricing back to OPEC and Russia, likely leading to higher consumer costs. Tax revenues from the oil and gas sector will decline with US output.
All taxpayers will be paying more to the government, either directly through the hikes or via higher product prices.
Rising taxes are not bullish for the stock market. The next correction will likely result when the administration and Congress roll out the bill to US companies, individuals, and consumers. The President’s pledge to not raise taxes on those with incomes below the $400,000 level is a mirage. All Americans will be paying the bill either directly via payments to the IRS or indirectly as consumers.
Technology stocks rose to incredible heights since March 2020. The high-flying companies could receive the most substantial impact from increasing taxes.
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AAPL shares were trading at $133.15 per share on Monday morning, up $1.69 (+1.29%). Year-to-date, AAPL has gained 0.50%, versus a 12.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
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