Why Biden's plan to raise taxes for rich investors isn't hurting US stocks

The news that the Biden administration was considering lifting the tax sent stocks into the red, but the selling was limited.
The news that the Biden administration was considering lifting the tax sent stocks into the red, but the selling was limited.PHOTO: AFP

NEW YORK (NYTIMES) - Investors have largely shrugged off US President Joe Biden's proposal to raise taxes on investment income for wealthy Americans, as the stock market hovers near record highs after news of a strong economic rebound and blockbuster earnings reports from technology giants such as Apple and Amazon.

The indifference is well founded, analysts say.

Mr Biden wants to raise taxes on the income that the country's richest households make from investments - called capital gains - to fund his plans for economic-recovery and infrastructure projects. The increase would apply to people with annual income of US$1 million (S$1.33 million) or more.

In theory, higher taxes on investments like stocks should make them less appealing. But the outlook for economic growth and corporate profits is often a much bigger factor in the decision to buy, sell or hold on to a stock. And in a resilient market - when politicians typically propose them - higher taxes are even less of a deterrent.

"Markets can grow, and grow above trend, even if you're taking the capital gains tax rate up," said Lori Calvasina, head of US equity strategy at RBC Capital Markets. "That's not the silver bullet that will kill the bull market."

Ms Calvasina's team looked at what happens to the stock market when the capital gains tax rises. When the rate increased in past years, the team found, the S&P 500 index rose roughly 11 per cent.

Proposed increases to the capital gains tax can cause momentary wobbles as investors try to lock in the appreciation on current investments, but the market usually regains its footing and shares climb higher.

"Any potential equity selling will be short-lived and reversed in subsequent quarters," Goldman Sachs analysts wrote late last year about the prospect of a capital-gains tax increase under Democratic control in Washington.

That seems to be how the market is behaving. The news on April 22 that the Mr Biden administration was considering lifting the tax sent stocks into the red, but the selling was limited. Stocks dropped just 0.9 per cent for the day and bounced back a day later. Even after a 0.7 per cent decline on Friday (April 30), the market sat on a comfortable gain of more than 11 per cent this year. The S&P 500 was up 5.2 per cent in April, its best month in 2021.

Investor stoicism may also reflect the fact that Mr Biden's plan requires congressional approval, a tall order given the slim Democratic control of both chambers. That reduces the likelihood that the proposed increase - which would tax ordinary income and capital gains income in the richest households at the same 39.6 per cent rate - is enacted in its entirety.

"Most Democrats seem to be on board with narrowing the differential between the tax rate on capital gains and ordinary income, but there's opposition for treating the rates as the same," wrote analysts with Beacon Policy Advisors, a political consultancy. "This means there's probably a middle ground for raising the capital gains rate on top earners to, say, 28 per cent."