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If Biden raises capital, raises taxes on millionaires, some new investors see a ‘buying opportunity’

Alex Zagorski will be on the lookout for stock-market bargains if President Joe Biden adopts a reported plan to double the effective capital gains tax rate for people making at least $ 1 million a year.

Biden is said to have a plan Follow campaign commitments apply a capital increase rate of 39.6% for millionaires and above. Along with the pre-existing 3.8% tax rate associated with the Affordable Care Act, that would be the 43.4% tax rate. The rate of return on investment securities is currently 20% for those with the highest income.

If history is any guide – and if Biden can even come up with the idea through Congress – then there will be a stock market sell-off of some form as some rich investors Take advantage of lower rates before they climb.

And Zagorski, a 27-year-old mechanical engineer from Detroit, Mich. With years of investment experience, will be there waiting. “My view on investing is very long term,” he told MarketWatch. “I see something like this as an opportunity to buy and hold.”

My view of investing is very long term. I see something like this as an opportunity to buy and hold. ”

– Alex Zagorski, a 27-year-old investor

Martin Sanchez, another relatively new investor, who began buying shares individually in 2018, also agreed. Winston Salem, 27, a NC resident, who works in technology, said: “I think there’s a buying opportunity for the younger generation if we see a big sell-off.

If Sanchez sees the opening, he could buy some shares in web security-focused companies, giving him the opportunity to split his stock, which is heavier in stocks like Disney.
+ 0.39%

and Tesla
+ 0.39%
Sanchez is closely monitoring Biden’s tax proposals.

There are many unanswered questions about the possibility of raising capital interest rates. Will Biden include the idea in the “American Family Plan” he is expected to announce on Wednesday? How many other tax increases would that plan include targeting the rich? Will it pass Congress?

But another question is: What does this potential tax increase mean for a new generation of retail investors?

Newer investors have gone through a slump and bull market in 2020, and have weathered the meme stock-trading craze that has led companies like GameStop.
+ 3.37%

on the stock price rollercoaster. Do they gain from estimates $ 178 billion in the sale can happen before the rate increase?

“There are some who might call it” Oh, here’s my chance to get on board, “said James Angel, a professor at the McDonough School of Business at Georgetown University.

“There are some people who might consider it, ‘Oh, here’s my chance to get on the train.’ ”

James Angel, associate professor at the McDonough School of Business at Georgetown University

But like so many other things based on potential rate hikes, there are big questions left open about how new investors – and investors in general – will react. “Does it create opportunities? Well, maybe, “said Angel. “But you have to look carefully at each one.”

Real, stock prices may have little to do with the tax environment, an investor note said Friday. Mark Haefele, Investment Manager for Global Assets at UBS, writes: “Ultimately, other factors such as economic growth prospects, monetary policy and interest rates are much stronger drivers for with profits and stock market valuations.

‘People will expect people to start selling at a discount’

When President Ronald Reagan signed Tax Reform Act of 1986, He lowered the top income tax rate from 50% to 28%.

The President of the Republican Party also changed his tax code to treat long-term capital gains as ordinary income, instead of preferential interest rates on capital. That has increased interest rates to 28% for wealthy households.

According to researchers at the Tax Joint Committee of the Nonpartisan US Congress, and the Center for Tax Policy, a consulting organization saw a 60% increase in sales across all capital assets. .

Before the change in 2013 – bringing long-term capital gains from 15% to 20% and taxable Net investment income of 3.8% – there was a 40% increase in “realized” capital the researchers saidThis means that investors are selling their holdings.

History is repeatable, one of the authors told MarketWatch.

“Sure, everyone is expecting people to start selling,” said Robert McClelland, a senior fellow at the Center for Tax Policy. “How much, I don’t know.”

But McClelland notes that it’s important to remember that many stock market buyers are foreign investors and retirement accounts, including 401 (k) plans or retirement plans, rather than investors. Private individuals operate through broker accounts.

Foreign investors own about 40% of the equity in the stock market and retirement accounts own about 30%, according to estimate last year from McClelland’s Tax Policy Center colleagues. Taxable accounts, like brokerage accounts, own 25% more equity in the stock market.

Another thing to remember is that if rich people sell, it hardly means they’re leaving. David Haas, owner of Cereus Financial Advisors in Franklin Lakes, NJ, said: “I’m still going to buy for my clients,“ In other words, selling doesn’t mean getting out of the market. I would sell the client’s profit and buy something similar to stay in the market. The problem is to get a profit, not stop investing ”.

When markets released news on Thursday about Biden possibly raising taxes, they ended the day with a downside note. By Friday, they bounced back, with the Dow Jones Industrial Index
+ 0.10%

finished 228 points higher, up 0.7% and the S&P 500
+ 0.26%

Completion by 1.1% higher.

Zagorski says he could profit from any future sell-off, but that hasn’t cleared his personal concerns about a rate hike. With any rate increase, in his view, “you are just taking money away from the people who are going to invest in the market.”

But in the future, buying opportunities may not be clear. Some inexperienced retail investors may not be able to determine whether stock sales and the potential for a discount are related to a tax strategy – and that could drive them to sell, he said.

“When you see the top guys doing things, you instinctively imitate them, even if it’s not in your favor,” he said.



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