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Analytics, 23 April 2021

How Investors are reacting to Biden’s Tax Plan

Global stocks are reacting to U.S. President Biden’s planned Tax plan. The proposed series of tax rises are meant to finance childcare and education spending plans in the US and could raises federal taxes to 43.4%.

Understanding Biden’s Tax Plan

During the election campaign, President Joe Biden proposed a tax plan that departs significantly from the policies and major tax reductions enacted during the Trump presidency. The Biden plan would increase tax rates for individuals whose incomes are $400,000 and higher as well as for corporations which also would be subject to a new minimum tax on book income.

The proposal could reverse a long-standing provision of the tax code that taxes returns on investment lower than on labor. Biden campaigned on equalizing the capital gains and income tax rates for wealthy individuals, saying it’s unfair that many of them pay lower rates than middle-class workers.

Other measures that the administration has discussed in recent weeks include enhancing the estate tax for the wealthy. Biden has warned that those earning over $400,000 can expect to pay more in taxes. The White House has already rolled out plans for corporate tax hikes, which go to fund the $2.25 trillion infrastructure-focused “American Jobs Plan.

Republicans have insisted on retaining the 2017 tax cuts implemented by former President Donald Trump and argued that the current capital-gains framework encourages saving and promotes future economic growth.

Biden will detail the American Families Plan in a joint address to Congress on April 28. It is set to include a wave of new spending on children and education, including a temporary extension of an expanded child tax credit that would give parents up to $300 a month for young children or $250 for those six and older.

Biden’s plan would effectively end carried interest benefits for fund managers making more than $1 million, because they would not be able to pay lower capital gains rates on their earnings. Those earning less than $1 million may be able to still claim the tax break unless Biden repeals the tax provision entirely.

For $1 million earners in high-tax states, rates on capital gains could be above 50%. For New Yorkers, the combined state and federal capital gains rate could be as high as 52.22%. For Californians, it could be 56.7%.

How stocks are reacting

While any tax increase will likely be lower than Biden’s initial proposal given the Democrat’s small advantage in the Senate, individual investors who are concerned about rising rates may start to unload shares in order to lock in current rates.

That would disproportionately weigh on technology stocks such as Apple Inc, which is up more than 90% over the last year, and hot growth stocks like Tesla Inc, whose shares have jumped nearly 400% since last April.

Stocks slid the most in more than a month on the news, with the S&P 500 Index down 0.9% at the close on Thursday. Ten-year Treasury yields fell to 1.54% from an intraday high of 1.59% before Bloomberg’s report.

What are analysts saying?

Investors selling stocks in reaction to the Biden administration’s plan to hike taxes on investments are making a mistake, CNBC’s Jim Cramer said Thursday.

“Please, do not fear the taxman. Don’t fixate on where a stock came from, only think about where it might be going,” the “Mad Money” host said, shrugging off the odds that the proposal would get through Congress as is.

Convinced that the situation is creating discounts in the market, Cramer is taking the other side of the trade. Cramer advises that investors buy stocks that are getting crushed by tax fears that have nothing to do with the fundamentals and watch for stocks with good yields if they are desperate for tax-efficient income.

Cramer advised investors to not sell the news, given the hurdles Democrats have to push the policy through a Senate with a slim majority.

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