Wall Street tumbles after report Biden wants to increase taxes on wealthy investors

Stocks turned lower on Thursday (US time) following a report saying President Biden will propose a hefty tax increase on the gains wealthy individuals reap from investments.

Investors who earn $US1 million ($1.3 million) or more would have to pay a 39.6 per cent tax rate on any capital gains, nearly double the current rate for Americans in that income bracket, according to the report by Bloomberg. A separate surtax on investment income could boost the overall federal tax rate for wealthy investors as high as 43.3 per cent, the report said, citing unnamed people familiar with the proposal.

In late trade, the S&P 500 was down 0.9 per cent, having shed an earlier gain. The Dow Jones fell 0.9 per cent while the Nasdaq was 0.9 per cent lower. It sets up the Australian sharemarket to fall at the open, with futures at 5.01am AEST pointing to a fall of 9 points, or 0.1 per cent at the open.

The selling was widespread, with every sector in the S&P 500 lower. Technology stocks, banks and companies that rely on consumer spending, accounted for much of the decline. Treasury yields held steady.

“The things that the market is going to react to are the unknowns,” said Andrew Mies, chief investment officer of 6Meridian. “The knowns are the economy is good and improving, earnings are good and vaccinations are going pretty well in the United States. The things the market doesn’t know are tax policy, both at the corporate and individual level, and what the Fed is going to do in the next 12 to 18 months.”

Stocks have rallied in recent weeks amid a string of encouraging reports on hiring, retail sales and other economic data. COVID-19 vaccinations and massive support from the US government and Federal Reserve are fueling expectations for solid corporate profit growth as more businesses reopen after being forced to close or operate on a limited basis due to the pandemic.

The last round of stimulus from the government helped lift retail sales, and investors now have to weigh other proposals in Washington, including a proposed $US2.3 trillion infrastructure package that Biden has called for spending over eight years, and potential tax proposals.

Washington aside, investors are focusing on earnings as the bulk of companies in the S&P 500 spend the next few weeks reporting their financial results. Wall Street is hoping to get a better sense of just how much companies in various sectors are benefiting from the economic recovery. They are also listening for clues on prospects for the recovery to continue as vaccine distribution rolls on and people try to return to some semblance of normal.