US stocks fell Thursday afternoon after a Bloomberg report said the Biden administration is considering doubling the capital gains tax rate. While this law may take months to make its way through the legal system, some experts are speculating that the tax may be retroactive.
Tax would apply to one-time gains
Individuals that earn $1 million or more in a year from a one-time asset sale would be unfairly subject to the new tax rate. According to CNBC’s Robert Frank, entrepreneurs who spent decades building a business and then sells it in 2022 for $2 million to fund their retirement would be subject to the larger tax bill.
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The same holds true for someone who bought a home in the 1960s and it is now worth more than $1 million. As such, the new tax would certainly impact people outside of Wall Street and corporate America.
Cramer: aspiring millionaires will hate the tax the most
The notion of a higher tax on people earning more than $1 million is a new hardship for aspiring millionaires, CNBC’s Jim Cramer said. Aspirational millionaires and hard workers are the ones that are the most “furious” with the change.
The actual percentage of Americans who would be impacted by the tax today stands at around 0.3%, or fewer than 500,000 people. Most of these people are able to brush off the higher tax as merely the cost of doing business.
“That’s who I’m focused on — the people who want to be millionaires,” Cramer said.
Retroactive taxes has happened before
Investors rushing to sell their holdings ahead of a tax hike might be disappointed to find out the tax could be retroactive. Such was the case during the Clinton administration when the Tax Reform Act of 1993 when new taxes on individuals and businesses were retroactively raised.
“I suppose if the current administration is desperate enough they would backdate it to January,” Slatestone Wealth Management Chief Market Strategist Kenny Polcari said on Fox Business. “I think there would be a revolution if they tried to raise taxes that much in passing and then they try to backdate it. I think it would be ugly.”
Biden made it “very clear” when he was running for president that he is in favor of higher taxes on wealthier Americans. But the size and scope of the potential tax increase to north of 40% was a surprise.
The final tax rate would likely fall somewhere in between 20% and 40% as both sides of the political aisle will “haggle over it,” Polcari said. This would also give Democrats and Republicans the opportunity to proclaim “a little bit of victory.”
Famed economist El-Erian: Bigger issues to talk about
There are bigger issues for stock investors to study than an increase in the capital gains tax, notable economist and Cambridge President Mohamed El-Erian separately told Fox Business. Specifically, the market has become conditioned to “expect a lot from the [U Federal Reserve].”
So far, the US central bank made it clear it would continue providing support for US markets. By contrast, the Bank of Canada said Thursday it will scale back bond purchases a year earlier than expected.
“This is what we should be doing,” he said in reference to the US central bank. “We also have financial imbalances, but that’s not what the Fed is going to do.”