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Tax the Rich!

U.S. markets are in for a bumpy ride as President Biden prepares to raise capital gains taxes for citizens who earn more than $1 million.

U.S. markets look like they’re in for a volatile time after a Bloomberg report indicated that President Biden will announce plans for a host of increased taxes on some of America’s richest citizens next week, including a big hike in capital gains tax (CGT).

Today’s Big Misser: Millionaires

U.S. markets look like they’re in for a volatile time after a Bloomberg report indicated that President Biden will announce plans for a host of increased taxes on some of America’s richest citizens next week, including a big hike in capital gains tax (CGT).

How does Biden’s new tax plan affect the market?

CGT is the tax you pay on any capital gains (a.k.a. profit) from the sale of an asset. This can apply to a whole host of things like property, land, art work, and — of course — stocks.

As is the case with all tax issues, they are entirely dependent on the jurisdiction you are a tax resident in. Currently in the U.S., the base rate of CGT is 20% for assets held longer than a year.

However, as part of funding Biden’s ‘American Families Plan’ — the latest economic package expected to be launched by the administration next week — Bloomberg has reported that the CGT could be raised to as much as 39.6% for people earning more than $1 million. Including an existing surcharge for Medicare, this could see the top rate of federal taxes for wealthy investors reach as much as 43.5%, which means that tax rates will effectively double for this group.

Ouch.

Of course, there are a couple of ways that this will affect all investors, even if you’re not a millionaire.

Firstly, we can expect to see a flood of money leaving the market over the next few days before any announcement. We already saw this in the second half of the trading day yesterday, with the S&P 500, the Dow Jones, and the Nasdaq all closing in the red.

In turn, some of the fastest-growing tech stocks of the past year or so will likely be hit hardest, with large investors taking their gains on those stocks with fat valuations and multiple-fold increases.

However, what’s important to remember is that these taxes — should they come in— will be used to reinvigorate an economy crippled by a pandemic and suffering some of the worst income inequality ever seen. For long-term investors, any short-term pain can be countenanced by the belief that a rising tide lifts all boats. 

Of course, the S&P 500 has risen close to 50% in the last year already too, so we won’t complain too much yet. 

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