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Biden shocked markets this week with a proposal to nearly double the capital gains tax. Here’s what the move could mean for high-flying tech stocks, according to 5 experts.

biden-shocked-markets-this-week-with-a-proposal-to-nearly-double-the-capital-gains-tax-here’s-what-the-move-could-mean-for-high-flying-tech-stocks,-according-to-5-experts.
President Joe Biden

AP Photo/Evan Vucci, File

  • President Biden this week proposed raising the capital gains tax rate to as high as 43.4% for wealthy Americans.
  • The tax hike comes as a part of Biden’s second infrastructure bill, the “American Families Plan.”
  • Experts say the plan is unlikely to pass into law with the proposed rate, but if it does, it could clip the wings of the high-growth tech sector.
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President Biden shocked the markets this week with a proposal to nearly double the capital gains tax for wealthy Americans.

Biden proposed a 39.6% capital gains tax rate for Americans who earn $1 million or more, sources familiar with the matter told Bloomberg.

The 39.6% tax would be tacked onto the 3.8% Obamacare tax, making capital gains rates as high as 43.4% for top earners.

Biden plans to officially announce his tax plans next week as a way to pay for his second infrastructure spending package, the “American Families Plan.”

The plan will focus on childcare and education programs, spending a reported $1 trillion on “care infrastructure,” but the method in which Biden is set to pay for the plan could hurt markets and especially high-flying tech stocks.

Here’s what 5 experts had to say about what rising capital gains tax rates could mean for investors:

1. “Restrictive US tax policy has never been a positive for capital formation, labor expansion, or capital investment. Unless other Central Banks mandate a similar policy that is enforceable (the Janet Yellen plan), corporations will always seek out lower-cost, tax-efficient jurisdictions.”

“What’s different in this cycle are the Digital Transformation macros such as 5G, Cloud, semiconductor innovation, and the adoption of AI. Corporations may have some more flexibility in offsetting higher corporate rates by “re-platforming” to next-generation technologies and post-Covid hybrid work and collaboration approaches.”

“The potential real impact to Technology share prices may not be higher taxes but runaway inflation which will lead eventually to materially higher rates and deficit levels. Higher rates and lower multiples are the real risk in certain sectors of Technology.” – Ted Mortonson, Baird technology desk sector strategist.

2. “I think it’s another potential negative in terms of putting some selling pressure on individual investors who are generally overweight some of the stocks with the biggest gains in tech, mega-cap tech. I think that’s another area where we could see some anticipatory selling ahead of this potential hike in capital gains.”

“We do some work every year looking at the most crowded stocks by individuals, institutional managers, and hedge funds, and what we’re finding is that they are all kind of converged into that same subset of mega-cap tech leadership that we’ve seen just crush it over the last ten years, so if we do see this demonstrable rise in capital gains rates…it really puts some pressure on those holdings.” Savita Subramanian, managing director, head of US equity and quantitative strategy at Bank of America Merrill Lynch, per CNBC.

3. “The Street views a meteor hitting earth as having a better chance than this tax plan getting through and passing Congress, which speaks to why stocks are taking this in stride. Clearly, the tax rates are going up, but for now, it’s containable in the Street’s view.” – Dan Ives, managing director, equity research at Wedbush Securities

4. “There’s a lot of capital gains built into those names, and we think they would be the ones who are most likely to take it on the chin. Over the last few weeks, the market has shown itself to be out of breath. And this is one more reason for investors to take some profit.”– Steve Chiavarone, portfolio manager and equity strategist at Federated Hermes, per Reuters

5. “The devil will be in the details. Will it be retroactive to Jan. 1 of this year, and then you wouldn’t need to sell right away? Will it be at the beginning of next year? That all begs the question, will it get passed? There are a lot of moving parts. One thing investors can be sure of is that taxes are going up, and we have to at least partially pay for all the money we’ve been spending on stimulus.”– Chris Grisanti, chief equity strategist at MAI Capital Management, per Bloomberg.

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