Reports of major US tax increase sends stocks tumbling

U.S. President Joe Biden is proposing American’s earning at least $1 million pay a 43.4% tax on all capital gains, according to Bloomberg News’ sources. The yet-to-be-confirmed report sent US stocks immediately lower as investors are likely unwilling to sit around and wait for any confirmation.

The tax plan is yet to be confirmed

The White House has yet to officially announce a tax increase on wealthy and high net worth Americans. If accurate, Americans with a seven-digit income will see their capital gains tax rate jump from 20% to 39.6%. A separate 3.8% tax on investment income to fund former President Barack Obama’s “Obamacare” initiative will stay in place.

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The combination of the revised capital gains tax rate and the Obamacare tax would imply capital gain returns could be taxed at a higher rate than the top salary tax bracket, according to Bloomberg.

Biden, the former Vice President, and lifelong Democrat politician have not shied away from campaigning on what he described as a more equitable tax scheme. Given the Democrat’s full control of the US House and Senate, investors are assuming a tax increase is all but a done deal in time for 2022.

At last check, the Dow Jones Industrial Average was down 356 points or 1.04%. The S&P 500 index was down 42 points or 0.99% and the Nasdaq was down 1.02%, or 141 points. Canadian stocks were lower on the news but to a lesser degree. The TSX index was down 0.73%, or 139 points.

Initial reaction: ‘A sizable cost’, ‘market correction’

Cresset Capital Management Founding Partner and CIO Jack Ablin told CNBC that the White House’s potential move to more than double taxes represents a “sizable cost increase to long-term investors.”

He said investors are expected to sell their investments before a proposal transforms to law next year.

Mark Yusko, CEO, and CIO of Morgan Creek Capital separately told CNBC that investor concentration in growth stocks could pose a problem. He said that growth stocks account for much of the gains over the past years and Americans who would be subject to a higher tax are sitting on “significant gains” at current prices.

“Fear of higher capital gains rate could motivate selling of those names and trigger market correction, so some investors will try and front-run that potential move by selling or hedging through short selling.”

Meanwhile, Republicans are calling for President Biden to change his already announced $2 trillion infrastructure plan and focus on bridges, airports, roads, and water storage. The other side of the political aisle is not calling for any tax increases.