What happened?

US stocks dropped briefly last week after news broke that US President Joe Biden is looking to almost double capital gains tax rate for the rich (those earning $1 million or more) to 39.6% from the current base rate of 20%. The increase would equalize the tax rate between wage and capital gains (Current capital gain tax is 23.8%- 20% base rate + 3.8% net investment income tax   vs current highest wage tax bracket of 37%). 

The proposal has not been officially announced but according to reports, President Biden is likely to release the details in a joint address to Congress on April 28, along with details of the American Familes plan. 

Any hike in taxes however would have to go through US Congress, where Democrats currently hold a narrow majority. 

Putting into perspective 

Source: JPM Cross-Asset

If passed, the capital gain tax will be the highest tax rate paid on investment gains (mostly by wealthiest Americans), where the rate has not been higher than 33.8% since World War II.

What others are saying

UBS: Only 25% of US equities are owned by US taxable investors, with the remaining held by those not subjected to the capital gains levies. Expect a buy on dip by investors who are not affected which may lend support to share prices. 

Goldman Sachs: Past capital gains tax hikes have resulted in some short term declines in equity prices. However, the trend of selling and falling stock prices are usually short-lived, reversing in subsequent quarters. 

Source: Goldman Sachs

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