The Biden Administration’s Tax Rate Proposals – Impacts to Consider
(2 min. read)

Naturally there is a great deal of speculation on the current capital gains tax increase proposal. Headlines in the news center on President Biden’s proposal to raise the U.S. capital gains tax rate for Americans earning $1 million per year or more from investment income. If enacted by Congress into the tax code, it could affect several aspects of the overall economy, not to mention individuals and corporations and their long-term investing.

Every time there is an administration or political majority change there is talk of taxes. The conversations are not just red or blue. There is much more complexity to this issue and approval of changes would take bi-partisan support.

Currently, the capital gains tax rate for the highest income individual Americans in that bracket is 20%. (Up to 23.8% is the top rate on long-term capital gains now.) The reported increase would be to 39.6%. The White House has repeatedly pledged and emphasized that Americans earning $400,000 a year or less would not be affected. This group of people being affected only represents around 1.8% of American taxpayers.

One thing that taxing the success of entrepreneurs will affect is the cost of capital; it could discourage risk-taking. Or, it could lock an entrepreneur in to holding rather than selling assets.

Academic studies indicate that if/when the capital gains tax rate goes up, investors historically would require an increased rate of return to invest in stocks – that could be bearish. But, if investors instead are incented to hold rather than sell assets to avoid being taxed at a higher rate, it could be bullish.

In either event, the net effect of a capital gains tax hike on the stock market could be less dramatic than lobbyists want everyone to believe, based on the relatively small percentage of publicly traded U.S. stocks held in taxable accounts.

Furthermore, there is no certainty the proposed increase will become law. Or not in its present iteration. Or it could be reversed with a shift in control in Congress, so many investors could sit it out and wait. The timeline for something like this can be all over the place. A potential for change is always on the horizon. It is best to stay informed but understand that this type of policy will not happen overnight.

Whether we hear anything meaningful in the weeks and months ahead, we hope you will check in with us if you have any concerns.

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