Obama’s capital gains tax increases might add additional pressure on US equities markets

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New York Stock Exchange

New York Stock Exchange, Wall Street

Let’s face it-the Dow’s recent record-setting streaks only impact a relatively tiny portion of the US’ population. Indeed, while middle class household median income has slumped for the better part of half a decade, the hyper-rich, we’re not talking about run-of-the-mill rich here, have been posting solid gains. In fact, the divide between the rich, households making $120,000 to $250,000 per year and the hyper-rich is growing with each new stock market record. While the rest of the population languishes in economic uncertainty, a fraction of the top 1% continues to reap the benefits of the markets’ forward, albeit choppy, progress. You need to keep this background in mind when digesting Obama’s proposed capital gains tax increases.

While it is obviously a moonshot, considering the Republican majority in both houses of Congress, Obama’s proposal is a restatement of faith among liberal Democrats about the social benefits of ‘making the rich pay their fair share’. This time, the benefit is ‘free’ community college. The proposal aims to impose an additional tax on households making $500,000 or more. This boosts their capital gains tax liability from the current 23.8% to 24.2%. Seems reasonable, right? Well, if you factor in the 3.8% Medicare surtax he plans to slap on top of this figure, the overall proposed tax rate for the hyper-rich is 28%. This can create additional pressure on US equities markets since the increased tax liability can act as a brake on risk taking and investment. Can the US economy really afford such a disincentive at a time when the US is the only bright spot in an otherwise gloomy global financial landscape? Also, given the uneven nature of the US recovery, can the US economy weather further weakening in investment inflows? Assuming the Republicans don’t buckle under Speaker John Boehner’s watch, we can thankfully lay these questions aside… for now.

 

Jacob Maslow is our Editor, and has extensive experience with writing about global financial matters. He also runs a successful SEO consulting business, Mekomi Marketing