White House defends plan to hike capital gains tax, saying it’ll only hit the richest 0.3%, report says

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President Joe Biden is planning to propose a sharp increase in capital gains tax, according to reports.

  • A White House official defended plans to hike capital gains tax, according to a report.
  • President Joe Biden is set to propose the tax rises to 39.6% for the richest Americans.
  • The official told the Financial Times that it would only affect the wealthiest 0.3% in the US.

A White House official has defended plans to propose a sharp rise in the top capital gains tax rate to 39.6%, saying the changes would only hit the richest 0.3% of Americans, according to a report.

A senior official in President Joe Biden’s White House told the Financial Times the wealthiest Americans had been growing disproportionately richer.

“Many, many of the returns at the very top are what they call above-market rates of return, rents and so on,” the official said. “Taxing the people who are doing extremely well in the economy is one way of asking somewhat more from that.”

Biden is set to propose a major increase in capital gains tax from the current 20% base level this week, according to various media outlets.

Biden’s plan would propose raising the top marginal income tax to 39.6% from 37% and bringing capital gains tax in line with that for those earning more than $1 million a year.

When combined with the 3.8% surtax on investment income put in place under Barack Obama, it would take the tax rate on the wealthiest investors to 43.4%.

Republicans and many investors have criticized the plan to dramatically raise the tax, arguing that it will reduce investment and damage the economy.

However, the Biden official told the FT: “This is consistent with what the President had said on the campaign trail, which was that we needed to fundamentally reform parts of the code that affect the very, very richest or very highest income Americans, in ways to make sure that it is fair and not rewarding wealth over work.”

Yet Democrats’ razor-thin majorities in the House and the Senate mean the top rate for capital gains tax could well only end up at around 28%, according to analysts at Goldman Sachs.

“A 28% rate looks most likely, in our view, as it is roughly halfway between the current rate and Biden’s likely proposal,” the analysts said.

“This is also the rate that President Reagan and a Democratic House settled on a few decades ago when raising the tax from 20%.”

The White House has been contacted for comment.

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Dow jumps 227 points as strong economic data outweighs Biden tax-hike worry

trader Gregory Rowe
NYSE trader Gregory Rowe works on the floor of the New York Stock Exchange at the end of the trading day.

US stocks closed higher on the last trading day of the week as strong economic data outweighed investors’ fears of the capital gains tax hike proposed by President Joe Biden that would nearly double the tax rate for wealthy Americans.

All three major stock indexes rose Friday propelled by the two popular gauges of business activity that swung even higher in preliminary April readings, according to analytics firm IHS Markit.

The services activity index leaped to 63.1 from 60.4 – the fastest expansion since data collection began in 2009. The firm’s manufacturing index rose to 60.6 from 59.1, which is also a record. Markit’s composite index soared to an all-time high of 62.2 from 59.7. Readings above 50 indicate sector growth, while those below 50 signal contraction.

Ryan Detrick, chief market strategist at LPL Financial, said he was surprised by the market’s reaction to Biden’s proposal. He said investors should have expected it when Biden won.

“Calmer heads are prevailing today with the broad rally at least,” he said in a note. “On the surface, you’d think higher taxes wouldn’t be a good thing, but that’s actually not reality. In fact, the past two times we had an increase in the capital gains tax stocks did really well for the next six months in 1987 and 2013.”

Friday’s gains are a sharp rebound from Thursday’s drop when the markets were spooked after the capital gains tax hike was announced.

“The knee-jerk reaction to yesterday’s news that the Biden administration was interested in almost doubling the capital gains rate was a small selloff in the market,” Chris Zaccarelli, CIO at Independent Advisor Alliance, said in a note. “If the tax increase was actually implemented – as compared to just proposed – the selloff would have been greater.”

Zaccarelli added that the monetary and fiscal stimulus in the system should outweigh concerns over tax policy. But he also acknowledged that the market is relatively expensive by most metrics at this point, which leaves it susceptible to pullbacks, especially when unexpected news arrives.

However, analysts at Goldman Sachs said that congress is likely to settle on a much more modest increase in capital gains tax than Biden would like with the eventual figure likely to land at around 28%.

In bond markets, the 10-year Treasury note rose 1.561% from 1.554% the day prior.

“Since the end of March, we’ve seen a retrenchment of that move as the stock and bond markets have unwound some of those moves,” Zaccarelli said.

Here’s where US indexes stood at the 4:00 p.m. ET open on Friday:

Inovio Pharmaceuticals shares slipped 26% after the US government said it will discontinue funding for a late-phase trial of the company’s COVID-19 vaccine candidate.

In cryptocurrencies, bitcoin slid below $50,000 with $260 billion wiped off the crypto market as Biden’s tax proposals crushed risk appetite. Bitcoin’s weakening momentum has helped contribute to a swift 24% decline from its record high of nearly $65,000 over the past week.

“It is clear that bitcoin is more sensitive to capital gains tax threats than most asset classes,” Jeffrey Halley, a senior market analyst at OANDA, said.

“Black Swan” author Nassim Taleb also doubled down on his view that bitcoin is a Ponzi scheme and a failed currency in a CNBC interview on Friday.

“There’s no connection between inflation and bitcoin,” Taleb told CNBC, adding that everyone knows bitcoin is “a Ponzi.”

Oil prices were steady Friday as Covid-19 concerns, especially in India, rose to new highs. West Texas Intermediate crude rose 1.22% to $62.18 per barrel. Brent crude, oil’s international benchmark, was also up by 1.13% to $66.14 per barrel.

Gold slipped by 0.97% to $1,776.51 per ounce on strong economic data.

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