Friday 23 April 2021 7:32 am

Biden's proposal to double capital gains tax turns fragile rebound on its head

Any economic recovery became a lot harder after last night’s selloff in US markets on reports that President Biden was looking to increase the rate of capital gains tax to 39.6 per cent for those Americans earning $1m a year or more, up from the current rate of 20 per cent, with some wealthier individuals seeing their rates go up to 43.4 per cent.

“This had the effect of turning what was already a fragile rebound, completely on its head, pushing US stocks back to their lows of the week, with the Nasdaq leading the losses,” commented Michael Hewson, chief Market Analyst at CMC Markets UK.

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Unlikely to pass

“While one could argue that the prospect of higher taxes is never welcome, and a doubling of a key tax rate even more so, the likelihood of anything of this nature passing through an evenly split Congress, lies somewhere between slim and none, however in these highly uncertainty times it doesn’t take much to spook a little bit of profit taking, in what has already been a very choppy week,” Hewson said.

“The reality is taxes may rise but certainly not by as much being touted,” he added.

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Uncertainty levels about rising infections in India and Japan delaying a global recovery had already seen markets start the week on the back foot, so it didn’t need much of a nudge for markets to turn tail, Hewson continued.

Guerrilla war

Last night’s reports are likely to be the opening salvo of a guerrilla war campaign between Democrats and Republicans on how to pay for the huge fiscal stimulus plan that has only just been unleashed as recently as a month ago.

“For the Democrats to then go ahead and torpedo the effects of that with a raft of tax hikes would be moronic in the extreme. This story is likely to run for quite a while yet,” Hewson said.

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