Most of President Biden's big proposals are now on the table and stock market investors have concluded that everything will be okay.
They won't necessarily say that.Big battles are underway over raising the corporate tax rate, the income tax rate for millionaires and the top income tax bracket.CEOs and some economists insist that higher taxes on business activity and investments will depress both, with some workers eventually losing out because of slower job growth or weaker income gains.They may even turn out to be right.The evidence now suggests that none of this will harm stocks.
The clearest sign of this is market itself.The day after Biden unveiled his American Family Plan — and the tax hikes he wants to pay for about $2 trillion in social reform spending — the S&P 500 and NASDAQ stocks hit record highs.They weren't necessarily cheering for Biden's plans, but were mostly driven upward by earnings news.But that's good: markets normally function again, without political interference messing things up.
Three factors are reassuring investors.First, Congress is unlikely to pass the exact tax hikes Biden is asking for.Biden wants to raise corporate tax from 21% to 28%, but Congress likely will only go as far as 25%.The corporate rate used to be 35%, and stocks continued to go up most of the time, so a 25% rate seems relatively benign.
Biden wants to raise the capital gains rate by 23.8% to 43.4% for investors earning more than $1 million.He won't get that either, with a likely outcome being a top rate of 28% to 30%.As Biden wants, Congress likely will raise the Top Income Tax rate to 37%, but this would only affect about 1% of taxpayers.
Even the little tax hikes would boost profits on corporate stocks and not hurt stock prices?Maybe a little, but all that Biden wants to do would likely have a contracting effect rather than offsetting the stimulating effect of tax hikes.In particular, infrastructure build-outs tend to have a long term positive return because they make the economy more efficient and productive.The most benefit is to sell your company.
Moody's Analytics analyzed the Biden Infrastructure PlanBiden Infrastructure Plan and predicted it would boost GDP growth by 1.5 percentage points 2024.If the job market is not expanding, there would be 2.4 million additional jobs and jobs from the United States.By the end of the decade, productivity growth — the key to boosting the living standards — would be stronger.Other studies find a smaller or even negative economic impact from Biden's plans, but changes would be so distant the market doesn't seem to care.And that would be if all the new Biden tax hikes were introduced as proposals for biden-led package, not a comprehensive package deferred by Congress.
A third reason investors aren't worried about the Biden tax hikes is that they would not necessarily change the incentive for investors to buy stocks.While the tax hike would, in effect, lower returns for wealthy American investors, only about 30% of publicly owned stock is held by taxable entities, such as individuals subject to the capital gains tax.And less than that of investing is owned by investors with earnings of $1 million or more.The rest is held by foreign investors or organized by institutions such as retirement plans and life insurance companies. None of them would be subject to Biden's new capital gains tax hike.So the portion of the tax subject to the higher capital gains tax would be small.
Some investors may sell before the lower taxes went into effect, to lock in the gains at a higher rate.Some analysts think that this would trigger a market correction.But Leonard Burman of the Tax Policy Center argues that any price drop would be a buy-for all other stock market investors, who would gobble up shares immediately at a temporary discount, ending any selloffs.And if the capital gains tax rate is higher, another argument goes that it gives more incentive to put people into the market to hold onto their investment or investments as they do.
There's a fourth factor which is unrelated to Biden, which is the Federal Reserve.The Fed's ease of money policies have probably less done stock more than anything else, an enormous reason for the astonishing 83% decline since the market bottomed last year.The Fed says it will keep the party going at least until 2022 and then gradually tighten up?The Fed isn't doing this for Biden, but the Fed backstop probably gives Biden more margin for error.
None of this guarantees the stocks will get a correction or even stay positive for the rest of the year.It strongly suggests there won't be a plunging stock market screaming at Biden to stop raising taxes.Others might scream, but without approval by the market.
Rick Newman is the author of four books including Rebounders: How Winners Pivot From Setback to Success. Follow him on twitter @rickjnewman.None We now know Biden's reelection plan.
All the smart tax that we don't have is obsolete.
None It's Biden's turn to repeal and replace the Trump tax plan.
Nones is a better way to raise minimum wage?
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