Breaking down proposed Biden's capital gains tax hike

Rick Newman breaks down the details of a report that President Joe Biden was eyeing a proposal to increase the capital gains tax rate on wealthy individuals.

Video Transcript

MYLES UDLAND: During yesterday's trading session, we saw stocks sell off sharply on some headlines about new proposed capital gains taxes from the Biden administration that could see some Americans face a tax up to 43.4% at the federal level. Yahoo Finance's Rick Newman joins us now to talk us through some of the nuance-- a lot of the nuances, Rick, with this proposal. And of course, we should reiterate, this is the opening bid in the Biden administration trying to forge some change to the existing tax code.

RICK NEWMAN: That's right, and this is no surprise. I mean, Biden said this many times when he was campaigning for president. This was an essential part of his tax plan. So what he wants to do is raise the top income rate-- tax rate on income from 37, back to 39.6%. That's where it was before Trump lowered it in 2017. And then what he wants to do for people who earn more than a million dollars is their capital gains tax rate, instead of being 20%, which is the long-term capital gains rate, it would be equal to the income tax rate. So that means it would be 39.6%. And then you would slap the Obamacare fee on top of that. I think that's another 3.8%. So you get over 40%.

It's probably not going to end up there, Myles, as you alluded to. The financial industry does have some friends among Democrats. They include Chuck Schumer, who's the Senate majority leader. And they will probably not put it all the way up to 39.6%. Expect something like 28% or maybe 30%. But that said, I think we are going to see an increase in the capital gains tax rate because this actually is necessary to pay for a lot of the things Biden wants to do in his American Jobs Plan and the forthcoming American Family Plan.

JULIE HYMAN: Rick, I would quibble only with one thing, which is I would take the probably out of it. There ain't a chance that this is the actual number that's eventually going to be settled upon, just because of the dynamics of Congress right now, right? The other thing I would say-- and this is, as viewers of the program are well aware, an area of contention between Brian Sozzi and I-- in the past, when you've had rates going up, whether it be corporate tax rates or capital gains tax rates, it hasn't kept stocks from going up, right?

RICK NEWMAN: That's correct. So we saw a note out today from Brian Belski at BMO. He pointed out that in years when there has been an increase in things like the corporate tax rate or the capital gains tax rate, the S&P 500 has actually gone up. So you get millionaires like Sozzi, who are complaining they're going to have to pay a little bit more.

But I mean, what else are they going to do with their money? It's not as if, oh, the return on stocks is going to be a little bit lower, so rich people like Brian are just going to go out and buy CDs. I mean, I guess, you could make an argument that some of that money might go to overseas markets. But look, the United States is still the hottest market in the world. It generally is. So it's a little bit hard to see that it would have that much of, really, a hammering effect on investing.

MYLES UDLAND: All right, Brian Sozzi, you've had your name invoked now multiple times, this billionaire here on the program. I guess, Sozz, as you see--

RICK NEWMAN: Is it millionaire or billionaire, by the way?

MYLES UDLAND: Well, we're going to talk about that--

BRIAN SOZZI: I can't talk comment on that.

MYLES UDLAND: --offline. Talk about that-- so, obviously, Sozzi, you saw the reaction in the market yesterday, kind of a knee-jerk reaction. But as you think through, let's say, a standard corporate earnings report or a standard kind of investment outline, what do higher taxes, I guess, mean to you? Because I think that the notion that it's all fine and dandy is not quite something that you would agree with.

BRIAN SOZZI: It means lower stock prices, potentially. And I know everybody likes to look at the historical data. And yeah, stocks can go up, and taxes could go up at the same time. But the multiple-- you are more willing to pay-- you will likely have to pay a lower multiple on future earnings because in a higher tax environment. That's just what you learn in college. That's just how investing works. You're getting more money sucked-- more companies are getting more money sucked out of their bottom line. It's lower profits, so why am I going to pay even richer multiples to own that reduced cash flow stream?

I know it's wonky, it's geeky. That's just the bare mechanics of it. And I know the historical data may say otherwise. But I think companies are going to have to raise prices. Even more, that has a consumer impact. It's a whole spiral, Julie. Why own stocks-- why own this many stocks if you're going to get taxed at a 43.4% capital gains--

JULIE HYMAN: I'll tel you why.

BRIAN SOZZI: --tax rate?

JULIE HYMAN: I'll tell you why.

BRIAN SOZZI: Tell them.

JULIE HYMAN: TINA, that's why. TINA. There Is No Alternative. As to Rick's point, where else are you going to put your money where you're going to get the same level--

BRIAN SOZZI: Real estate.

JULIE HYMAN: --of returns? In this current environment and probably even the environment for the next several years, if you are rich, you want, if you're anybody, you want to maximize your returns. You're not going to maximize them in other places, right? And so, yes, you're going to pay those multiples. We see it every day. We see what people are willing to pay in order to get returns.

RICK NEWMAN: Hey, guys, I got to get out of here in a second so I can sell all my stocks before the market opens. But I'll just point out one counterargument here is, think about the big Biden stimulus plan. That goosed stocks. And the theory and underlying theory here is that this infrastructure spending that Biden wants to do, this is supposed to improve economic growth and improve productivity, which, if it happens, is good for the economy. So if you can increase GDP and increase productivity in the economy, in theory, that would counteract the negative effect on stocks and perhaps zero it out and perhaps be generally positive for the economy.

BRIAN SOZZI: Here comes the sell-off.

RICK NEWMAN: Nobody respond to my economic argument?

MYLES UDLAND: I would just say that as, you know, everyone likes to debate MMT-- do we do it, are we not doing it-- the Biden approach here-- and I know some of this is a pay for-- you know, Rick, a classic kind of we're taxing this so that the government can afford to do that. The MMT approach prescribes taxing the wealthy merely as a way to keep a lid on inflation and, Sozzi, I think, as you mentioned, on things like real estate, other areas that the wealthy might move into as a result of being taxed on their investments at a higher rate.

And so, I think between climate policy, which is a very, very shallow Green New Deal-- I mean, it look pretty much just like it-- and this kind of tax policy, we are seeing-- and Rick, you and I talked about this, really, for the last year-- we are seeing some of the-- what you would consider further left-wing proposals in the Democratic Party really form the backbone of what the Biden administration is pursuing on the fiscal level and beyond.

BRIAN SOZZI: Oh, Myles agrees with me.

RICK NEWMAN: You know, I guess that's true. I mean, you--

BRIAN SOZZI: Next segment, let's keep moving.

RICK NEWMAN: You could say that what Bernie Sanders and AOC have done is shift the Overton window, which you like to talk about, Myles--

MYLES UDLAND: Yes.

RICK NEWMAN: --but, you know, where we're going to probably end up here is actually going to be quite similar to what Obama wanted to do. I mean, he wanted a 28% corporate tax rate. And this was sort of before Bernie Sanders became a presidential candidate. And we saw this aggressive progressive movement. So I think-- and you have to keep in mind, before we had COVID, we had massive federal deficits, which means there wasn't enough taxation. I mean, you can argue what's the right level of deficits, but we were getting more than we were paying for, for a long time. So, where do we make up the difference? And we know this has been coming for some time. We're going to have to pay for this at some point. And when you do have to pay for it, it's the people who have the money who are going to end up paying for it. That's just inevitable.

MYLES UDLAND: Well, and if-- look, I mean, we don't need to do the whole pay for thing now. But if you are indeed going to pursue a policy in which you would pay for it, you cannot almost definitially raise interest rates because then the burden becomes more expensive systematically over time. So anyway, leave that there. Great conversation. I know we're going to be talking more about taxes here in the US a lot going forward. Rick Newman, thanks so much for jumping on. Have a great weekend.