Capital Gains Explained

Good morning everyone and happy Friday!

Stocks are almost back up to yesterdays highs prior to the 1.2% slide that happened around 1PM. The reason for the slide was the Biden Administration’s proposed capital gains tax increase which is closer to a “double” than an “increase”. The stated reason for the capital gains tax increase is  to fund Biden’s antipoverty and education proposals that will be announced next week that come with a price tag around in the neighborhood of $1T. Let’s take a deeper dive into this new tax proposal and who will be effected. Like everything, this issue is split by party lines. Democrats argue that taxes on wealth creating assets should be taxed closer to work generated wealth while Republican’s argue that this will take away from the stock market and business investment and growth in general. Now, the important thing to remember that is not being communicated in news headlines is that the proposed increase will be applied to those making over $1M. The current top rate on wage earners is at 37%. Biden’s plan would raise this to 39.6%. Current top rate on capital gains is at 20%. Biden’s plan would level capital gains and regular wage earners and increase it to 39.6%. For the vast majority of American tax history, the capital gains tax has been lower than wage tax with Republican administrations like Bush’s decreasing capital gains taxes and Democratic administrations like Obama’s increasing it.

Biden’s administration claims that the argument against the increase is much more effective on paper than it is in practice. Meaning that explaining to someone how this will decrease business investment is an easy argument. However, in practice, 75% of those who will ever see this on their taxes are already in the top 1% of American earners and those people will not stop investing in the market and business development due to the 20% tax increase. The other argument is that the rest of America needs to, “stop subsidizing huge amounts of inherited wealth and start investing in the success of our workers, children, and families” as said by a Democratic Senator of MD. The reason that this is important is because inheritance of cash and illiquid assets like real estate is currently taxed as a capital gain when it switches hands. The reason that democrats are in a rush to get this proposal though in 2021 is because next year is Congressional Election year and typically, the majority party loses seats. While the majority of Republicans are against the bill to begin with, they think if it does pass, it should not go into effect for a couple of years to give the economy time to recover from the pandemic. We will keep you up to date as this progresses.

The mortgage market is down a little bit this morning after bouncing off our Fibonacci ceiling again today as it did yesterday. With more room to fall, we recommend locking in the recent gains.

Have an awesome weekend everyone!