How concerned investors should be about Biden’s tax proposals

Stocks and taxes: what’s going to happen? 

The Democrats’ control of Congress has shone a new spotlight on Biden’s tax proposals, particularly those that would affect stocks and bonds. 

While Biden has repeatedly said he would not raise taxes on Americans earning less than $400,000 a year, he has proposed:

1) raising the marginal income tax rate from 37% to 39.6% for those making more than $400,000;

2) raising the corporate tax from 21% to 28%, and a 15% minimum book tax;

3) taxing long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million.

Biden’s other proposals also have the potential to affect holders of stocks and bonds.

For example, he has proposed that those making over $400,000 should be subject to an additional 12.4% Social Security payroll tax, split evenly between employers and employees. 

He’s also proposed a change in 401(k) plans, from the current system that allows all savers to take up to $19,500 in income-tax deductions each year to a flat refundable tax credit that would give low-income earners a bigger tax break up front, and higher income earners a smaller tax break.

What effect will these proposals have on stocks? Will some sectors be more affected than others? 

Savita Subramanian at Bank of America Securities estimates that the Biden tax plan would reduce S&P 500 earnings by 7% under the current plan, mostly stemming from higher corporate taxes. Growth-oriented sectors would be hit the hardest:

S&P 500: tax hit (Estimated S&P 500 earnings impact based on Biden’s proposals )

•  Technology                     down 9.2%
• Health Care                     down 8.4%
• Communication Services  down 8.2%
• Consumer Discretionary   down 7.5%
• Financials                         down 6.5%

Source: BofA Securities

What effect would these taxes have on stock market behavior? It’s complicated, but Dan Wiener, who runs the Independent Adviser for Vanguard Investors and is chairman of Adviser Investment Management, says the impact on investors from a capital gains hike may be more limited than many think: “The people who will be most concerned are high-end active traders and some hedge funds. Much of the stock is with pension funds who have no tax liability. 401(k) and IRA accounts are not taxed until the money is taken out.”

Raising taxes on the wealthy will also revive the old debate that raising taxes would not necessarily provide a dramatic increase in revenues.

A recent study by the Tax Foundation concluded the Biden tax proposal would raise $3.3 trillion over the next decade, and that raising capital gains taxes would raise only $469.4 billion over the same time period, a fairly small sum of money. Most of the increase would come from raising the corporate income tax rate…