Markets got spooked this week as ‘administration leakers’ tipped Bloomberg News that President Biden has intent to raise federal taxes on capital gains to a max rate of 43.4%. The current rate max is 23.8%. So, if the leaked information is correct, the new rate approaches a near doubling. Feeling spooked was not unwarranted. According to the Wall Street Journal:

“The leakers told Bloomberg that Mr. Biden will tax capital gains for taxpayers who earn more than $1 million at the personal income tax rate, which he also wants to raise to 39.6% from 37%. Add the 3.8% ObamaCare tax on investment, and you get to 43.4%. And that’s merely the federal rate. Add 13.3% in California and 11.85% in New York (plus 3.88% in New York City), which also tax capital gains as regular income, and you are heading toward the 60% rate range.”

With this news hitting the street markets quickly sold off. The Whitehouse reacted quickly as Press Secretary Psaki came to explain:

“We’re still finalizing what the pay floors look like, the president’s calculation is that there is a need to modernize our infrastructure, invest in childcare and early childhood education, and he should propose a way to pay for it.”

“His view is that can be on the backs of the wealthiest Americans, as well as corporations and businesses, who can afford it, and that won’t have a negative impact,” she added. “There are alternative views, and there are proposals that don’t exist yet on how to pay for it. That will be part of the discussion.”

As we see it, the administration is certainly catering to the progressive wing of the Democrat party but this may well be more rhetoric than reality. The essence of Liberal Democracy is still defined by ideas that appeal to both parties: a) the power of government is limited by its citizens, b) fair and unrestricted access to electoral process and c) protection of personal property.

It is true that most American taxpayers agree that a system of progressive tax rates is more or less fair – people who have some money can pay more than those who have none. However, logically, there is a limit as how far the asymmetry can be pushed before becoming unacceptable.

Probably one of the biggest issues of capital gains taxation is the problem posed by the fact that so much of the tax levied would be on assets that have been held for years and, consequently, much of their ‘appreciation’ is an illusion with the majority of the change in value – the capital gain — simply reflecting inflation. Seems to us to be a no-brainer to conclude that no-one should be taxed for inflation.

Fortunately, there is a lot to be hashed out before we would even begin to recommend monkeying around with well thought out investment strategies that are currently in place.

Ron’s Market Minute – Update on the War on Wealth

I just can’t resist another comment on the tax proposal. We’re well into today’s market (Friday Morning 2 ½ hours before market close) and judging by the strong bounce-back from yesterday’s market response to Biden’s trial balloon- it was just that- a trial balloon. 

My initial comment was that it was an idiotic proposal if the administration would continue to hype the theme that the economy is still in crisis mode and desperately needs trillions more in aid. They can’t have it BOTH ways! Additionally, I see this proposal as DOA as I DO NOT believe that all 50 Dem Senators will vote for this. And one last word on this- The Tax Foundation estimates that over 10 years Biden’s proposal would lead to $123 Billion in LESS taxes as investors would likely sell ahead of the plan being enacted. As I said, the market appears to be seeing it pretty much the same as I do.

And on to the good news of the day. The CDC says that now over 80% of the 65+ year-olds have received at least one shot of the vaccine. That is the group that has accounted for over 80% of the deaths in the USA. Earlier this morning I noted that (remember we’re in earnings season) some 80% of the corporations that have announced Q1 earnings have beat their estimates, and the average earnings-beat is by 60%!!!! That is not a typo. Early estimates on Q1 GDP are in the range of +8% with estimates for the 2021 year in the range of 6%. Also, not a typo.  I have never seen GDP numbers look this strong. 

I note that hotel bookings, restaurant reservations and other travel-related numbers are all coming in way above expectations. Now, I won’t go so far as to say the problems with the virus are over and that the economy is healed- that will still be some time in the future. And once we’re into 2022 the jury is definitely out, BUT despite my minor misgivings about some of the defensive investments leading the market this week and last (Utilities, Real estate, Consumer Staples, Health Care) there is little doubt in my mind that this will MOST LIKELY turn out to be a very strong year for markets and investors. Hopefully there is too much strength in the economy, and even Washington’s goofs will not derail it.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
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Phoenix, AZ 85051
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