Joe Biden’s tax plan is already taking a toll on the wealthy — and he hasn’t even proposed it yet.
On Thursday, the White House leaked word of its impending proposal for nearly doubling the capital gains tax for investors who earn more than $1 million a year. Biden proposed this exact policy — which increases the rate on long-term capital gains from 20 percent to 39.6 percent — in July 2019. He never disavowed the proposal at any point during his campaign. In fact, Biden has touted his intention to equalize the taxation of labor and investment income ad nauseam in recent months (typically accompanied by variations on the platitude, “We have to start rewarding work, not wealth”). Meanwhile, it’s been clear for weeks that the president could scarcely afford to forgo his proposed tax hikes on wealthy individuals, if he wished to realize his own ambitions for new spending and quell Joe Manchin’s fears of high deficits.
Nevertheless, reports that Biden actually intended to pass his campaign platform shaved 300 points off the Dow Thursday afternoon.
Typically, the business press presumes that markets are forward-looking, and that investors have already priced in any obvious policy risk facing the values of their portfolios. Few policies are more germane to investors than the rate they need to pay on their passive income. And yet, a significant percentage of market participants were apparently blindsided by Biden’s reported plans.
One explanation for Thursday’s sharp movement: In the COVID-19 era, investment has been heavily concentrated in a small number of growth stocks that have flourished during the pandemic. This means that many speculators are currently sitting on handsome capital gains, and therefore have an incentive to cash out before Uncle Sam doubles his share of their profits.
If enacted, Biden’s capital gains tax would yield about $370 billion in revenue over a decade. America’s long-suffering, hardly working millionaires would be hit the hardest: At present, high-earning investors pay a lower rate on their incomes than many middle-class workers; once Biden’s plan takes effect, Americans earning more than $1 million per annum will pay a 52.22 percent rate on their capital income if they live in New York State, and 56.7 percent in California.
And the one percent’s woes wouldn’t end there. Beyond his capital gains tax hike, Biden’s impending American Family Plan would also (reportedly) raise the top marginal income tax rate from 37 to 39.6 percent, end the tax break enjoyed by wealthy heirs who sell assets they inherit, and ramp up Internal Revenue Service enforcement on superrich tax evaders.
Biden plans to use the resulting revenue to finance a $1.5 trillion investment in universal prekindergarten, child-care subsidies, a national paid-leave program, and tuition-free community college.
Wall Street’s bulls reassured each other Thursday that Biden’s capital gains tax would not actually make it into law. “I think these are also trial balloons and sort of laying the stake out for future negotiations,” Doug Sandler of RiverFront Investment Group told CNBC’s Power Lunch. “If I want to get something done, the first thing I’m going to do is come with a really extreme request and then I’m going to negotiate back from that. That’s just the way politics work.”
Sandler may well be right. But congressional Democrats will need to turn over the super-wealthy’s every figurative couch cushion in order to fund Biden’s priorities, appease the party’s deficit hawks, and avoid a rebellion from its increasingly large and self-confident progressive wing. Someone’s goose is going to get cooked. And there are few more unsympathetic constituencies in American politics than people who earn $1 million a year without doing an hour’s labor.