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Wall Street on Tax Plan: ‘It Will Incentivize Selling This Year’

President Joe Biden will propose almost doubling the capital gains tax rate to 39.6% for those earning $1 million or more, an increase from the current base rate of 20%.

(Bloomberg) -- President Joe Biden’s likely proposal to nearly double the tax on capital gains lopped a quick 30 points of the S&P 500. Wall Street traders, predictably focused on the policy’s implications for investing, said it was too soon to panic, but that prospects of a higher levy on stock profits could foment near-term selling as investors look to skirt a higher rate.

The benchmark index for U.S. equities slid from about 4,180 to 4,150 in the minutes after Bloomberg reported Biden will propose almost doubling the capital gains tax rate to 39.6% for those earning $1 million or more, an increase from the current base rate of 20%.

Here’s how Wall Street investment advisers reacted:

Chris O’Keefe, managing director at Logan Capital Management

The first impact would be people deciding they are either going to take their gains now to try to get ahead of it. You could see people pull forward their gains to this year. It would potentially reduce the flow of capital because people would be less willing to take gains and move onto something else. People would be less willing to trade if they had to pay a tax that high.

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance

It will incentivize selling this year before it does anything else. In the years to come, it will probably discourage selling, to some extent, but may also discourage buying as well as people look at other things to do with their money. The higher the taxes, the less people are likely to participate in activities that cost them tax.

Dan Suzuki, Richard Bernstein Advisors LLC’s deputy chief investment officer

It’s more aggressive than what people were expecting. I would personally fade the reaction though. Seems very unlikely that it will pass in its current state, so it would be heavily diluted.

Sameer Samana, Wells Fargo Investment Institute’s senior global market strategist

If this is the start of less market-friendly policies, it could make the gains from here a lot choppier. We worry less about an increase in corporate tax rates and more about capital gains taxes/changes in stepped up basis. Those latter two have a much more chilling and direct effect on how people invest.

Max Gokhman, head of asset allocation at Pacific Life Fund Advisors

I don’t think anyone is truly surprised that Biden is unveiling a cap gains tax, but what few people expected is that he’d do it so soon and in this magnitude. Unless it’s effective retroactively for 2021, it’s likely to be a 2022 rule -- in that case you will see at least marginal selling this year. And while retail investors get a lot of press right now for being a dominant force in day-to-day volume, the reality is that most stocks held by individuals are held by the wealthiest ones.

Kim Forrest, chief investment officer of Bokeh Capital Partners

Prices are set by the balance of buyers and sellers so if you have more incentive to be a more active trader to reduce taxes, that’s going to put limits on how high stocks can go because there will be more sellers. And that’s the market mechanism on any given day. I’m not saying that ultimately but you’re artificially creating sales.

Chris Grisanti, chief equity strategist at MAI Capital Management

The devil will be in the details -- will it be retroactive to January 1 of this year and then you wouldn’t need to sell right away? Will it be the beginning of next year? That all begs the question, will it get passed? With taxes especially there’s a lot of horse trading before the final deal. 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.

--With assistance from Vildana Hajric and Kamaron Leach.

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