What could Joe Biden’s latest proposal mean for the S&P/ASX 200 Index (ASX: XJO)? Bloomberg is reporting US President Joe Biden wants to practically double the top capital gains tax rate in the country from its current rate of 20% to 39.6%. With an additional 3.8% Obamacare surcharge, the top rate would be 43.4%.
New York and California residents who earn over US$1 million in capital gains could see rates as high as 52.2% and 56.7%, respectively.
The news sent US stocks tumbling overnight, Australian time. The S&P 500 Index (SP: .INX) ended the day 0.9% lower. The index was relatively stable in morning trade before seeing a precipitous fall in the afternoon after the tax news became public.
Many are sceptical the changes can pass the US Congress, even though Joe Biden’s Democrats control both chambers. A hedge fund manager told Reuters the index would have fallen 2,000 points if investors believed it could pass.
For owners of ASX 200 shares, capital gains are treated as taxable income in Australia. The exception to this is that for any shares owned for at least a year, the net gain is discounted by half for individuals and a third for self-managed super funds. There is no discount for companies. As well, shareholders may be entitled to a franking credit refund if they were paid any fully franked dividends, depending on individual circumstances.
What, if anything, does The President’s latest proposal, and the reaction to it from US investors, mean for the ASX 200?
Tax changes in the US and the ASX 200
Motley Fool Australia’s own chief investment officer, Scott Phillips, says there may be some pain for shareholders in the short term.
“I think it’s common for the ASX to follow US markets, almost slavishly,” Phillips said. “The old saying is when America sneezes, Australia catches a cold.”
Phillips also pointed out there are a few ASX 200 companies that have operations and investments in the US. As well, he says large US investors hold shares in Australia and may offload them with their US stock. When there are more shares being sold than bought, it brings down prices. In economics, this is called the law of supply and demand.
In the long-term, however, Scott Phillips says ASX shareholders should have little to worry about over last night’s US market sell-off.
“There is no real fundamental basis [for the capital gains tax changes] to impact Australian equity markets.”
“There is little chance of these changes having a long-term impact [on ASX 200 shares],” he added.
Mr Phillips did add that any changes to the corporate tax rate in the US could be “more impactful” to Australian shareholders than possible changes to US capital gains tax.
President Biden and Senate Democrats have raised the idea of increasing the corporate tax rate from its current 21%. The floated tax rate of anywhere between 25-28% would still be lower than the 35% corporate rate that was in place in 2017.
More generally, Phillip’s believes any changes to capital gains taxes shouldn’t be a hindrance to investing in shares.
“[Capital gains] is taxed on profits after they’re realised. You’re still going to make a profit. You may not like paying the tax, but it’s not going to stop people from investing.”