How concerned investors should be about Biden’s tax proposals

Stocks and taxes: What’s going to happen? 

The Democrats’ control of Congress is shining a new spotlight on Biden’s tax proposals, particularly those that would affect stocks and bonds. 

While Biden has repeatedly said he would not raise taxes on Americans earning less than $400,000 a year, he has proposed:

1) raising the marginal income tax rate from 37% to 39.6% for those making more than $400,000;

2) raising corporate taxes from 21% to 28%, and a 15% minimum book tax;

3) taxing long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million.

Biden’s other proposals also have the potential to affect holders of stocks and bonds.

For example, he has proposed that those making over $400,000 should be subject to an additional 12.4% Social Security payroll tax, split evenly between employers and employees. 

He has also proposed a change in 401(k) plans, from the current system that allows all savers to take up to $19,500 in income-tax deductions each year to a flat refundable tax credit that would give low-income earners a bigger tax break up front, and higher income earners a smaller tax break.

What effect will these proposals have on stocks? Will some sectors be more affected than others? 

Savita Subramanian at Bank of America Securities estimates that the Biden tax plan would reduce S&P 500 earnings by 7% under the current plan, mostly stemming from higher corporate taxes. Growth-oriented sectors would be hit the hardest: