Biden announces 43% cap gains tax - thoughts?

https://www.bloomberg.com/news/articles/2021-04-22/biden-to-propose-capital-gains-tax-as-high-as-43-4-for-wealthy?sref=jkvKfAah

Just saw this. I haven't read the fine details (assuming there are any yet) and 43% would only apply to those >=$1m - but surely this has big implications for PE carry/gains etc? Would be pretty painful giving almost half that away (I'm in PE myself but on a few hundred $k with very limited carry currently, so won't fall into this bracket for a while if ever).

Posting in off topic to see what your guys' thoughts were on not just PE guys but the overall economy etc. Personally I expected capital gains to go up, but 40%+ seems very much on the high side?

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Comments (59)

Most Helpful
Apr 22, 2021 - 2:25pm

I made a post about it a month ago and not many seemed to care. Attaching the post below

I think it makes active public equities investors far more attractive on a relative basis and passive/private investing much worse. Imagine future comp in these subsectors of investing will follow the attractiveness of the strategies from an allocator perspective.

"Bidens tax plan looks like it will 100% go through after them passing this COVID bill. In it is the provision to raise cap gains tax on long term capital gains to that of short term for >1M income. It seems like this is a very big deal in terms of future post tax returns for PE/VC/Index investing and thus capital flows. Obviously many of the investors in these funds are tax exempt but ~50% is still likely from taxed investors.

Tax rate goes from 23.4->43%

This will then lead to a decrease in AUM in these sectors and cause negative future capital flows as allocators pivot around these taxes, leading to lower compensation for these sectors and higher taxes on carry comp in some situations? Seems like it is a bigger deal to me than how most have been thinking about it.

Am curious about what others think. I imagine the impact on personal taxes matter, but the bigger impact is the change in how allocators view these asset classes?"

  • Associate 1 in IB - Restr
Apr 22, 2021 - 2:35pm

It sucks. It will decentivize investment domestically which is counterintuitive to generating tax revenue. That is mostly applicable to larger market participants however, and normal people will just get crushed when it comes to creating long-term wealth. Not to mention NYC and state tax are already such a drag on building any sort of wealth base. Singapore/HK/Miami/Texas just keep looking better and better. 

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  • Analyst 2 in IB - Gen
Apr 22, 2021 - 3:55pm

He may as well have said, "I am upset because this affects me or might potentially affect me" than that bs about normal people, lmao! Imagine not having the awareness to realize that a decade+ of interventionist Fed policy crushed normal/poor people in the first place and absent of  a potential increase in capital gains tax. 

Apr 22, 2021 - 10:16pm

Unlikely it "disincentivizes" investment because investment is still preferable to the alternative. Euro countries (the most likely alternative for PE) have tons of taxes and are already way less efficient. Developing countries are a totally different animal and it is unlikely a firm with competencies in the domestic market would switch to emerging markets. 

Apr 22, 2021 - 4:20pm

I don't understand how with a 50-50 Senate and a 6-person majority (out of 435 members) in the House, the Democrats can completely re-shape public policy in America, from trillions in new spending to adding a state to doubling the capital gains tax rate. It boggles the mind. 

Array

Apr 22, 2021 - 4:36pm

What is the alternative? Vote against party lines and have every piece of yours and your family's life savaged by the media? I imagine it probably makes it tough for some of them to sleep at night... but at the end of the day they are humans, so it's either protect their own or go against the grain and risk their cushy lifestyle being abruptly taken away. 

Apr 22, 2021 - 5:01pm

I've just never seen such lockstep agreement. Pelosi has whipped her razor-thin majority into virtually total unanimity the likes of which I've never seen. Even Schumer has 49 of 50 in total lockstep agreement on almost all pieces of public policy, with the lone exception being Joe Manchin of WV and even he is with them 85% of the time. It's stunning. We aren't talking about small policy disagreements--we're talking about doubling tax rates, adding permanent entitlements under the guise of Covid relief, and changing the balance of the U.S. Senate by up-ending more than 2 centuries of tradition. This kind of change historically would have required solid majorities. 

And they aren't finished. They are going for a federal takeover of election laws, 20+ million person amnesty, and abolishing the electoral college. With a razor-thin majority, they are seeking a total takeover of the United States. It's breathtaking. 

Array

Apr 22, 2021 - 11:06pm

Polarizatin strenghtens party discipline and Republicans are a joke at contrasting the liberal agenda. Seriously, if they ever won a battle, it was unimportant.

Never discuss with idiots, first they drag you at their level, then they beat you with experience.

  • Associate 3 in PE - LBOs
Apr 22, 2021 - 4:37pm

Kinda sucks, especially now that I'm in a role where I'm getting carry and this becomes a real prospect on the medium-term horizon. That said, I don't buy that taxes materially disincentivize investment at these levels... it's all marginal, that's like saying that you'd rather take a lower-paying job so you can avoid paying taxes. It'll probably cause some changes around the edges as tax-exempt strategies become more appealing and strategies that realize capital gains converge with those that result in ordinary income, but I'm still going to invest where I think returns are highest on a risk-adjusted basis

Apr 22, 2021 - 5:18pm

Of course it disincentivizes investment at these levels. Why do you think there has been such a movement of rich people out of high-tax states? Why do you think capital flows into lower taxed first-world countries? It may not disincentivize all investment (obviously), but it only has to make a material difference to the public on the investment margins--delays to new construction or preventing an amazing new business from capital formation. A simple drag of 0.5% on GDP growth makes the difference to the opportunities for millions of people, and tens of millions into the future. 

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Apr 22, 2021 - 5:24pm

Memberberries

Of course it disincentivizes investment at these levels. Why do you think there has been such a movement of rich people out of high-tax states? Why do you think capital flows into lower taxed first-world countries? It may not disincentivize all investment (obviously), but it only has to make a material difference to the public on the investment margins--delays to new construction or preventing an amazing new business from capital formation. A simple drag of 0.5% on GDP growth makes the difference to the opportunities for millions of people, and tens of millions into the future. 

I cannot believe there are people in the Year of our Lord 2021 that still believe in supply-side and trickle-down economics. Breathtaking.

you didn't make good choices; you had good choices

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  • Intern in PE - Other
Apr 22, 2021 - 7:14pm

Throw away the fact that it's just rich people being taxed. In what society should we make anybody surrender over 40% of anything. You're telling me that if I work 5 days a week, 2 of those days are for the government? I know it's capital gains, but my point still stands. Taxes are way too high across the board, and the government has over-promised BS entitlements.

Apr 22, 2021 - 10:19pm

Pizz

Lots of trickle-downers on WSO i see....

Honest question: why not raise the tax rate to 100%? You have expressed in many threads that higher taxes don't threaten economic viability so why not raise the marginal rate to 100%? It's an intellectual exercise. Pursue the answer and come back and discuss it.

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  • Associate 2 in PE - Other
Apr 22, 2021 - 11:06pm

This is a straw man and a gross oversimplification... I don't love taxes (far from it), but if you were in corporate strategy and said "imagine raising prices to $1Bn and tell me how many we'd sell" as an argument for lowering prices you'd be laughed out of the room.

Sounds like there's some history between you two that I won't come between, but I'm guessing their thought is that we're at a low enough spot on the curve that raising taxes will increase revenue. I'm not going to argue if that's the case or not, just asking for some intellectual honesty here

  • Analyst 1 in AM - Equities
Apr 22, 2021 - 9:09pm

The IRS can suck my dick!!! 

They are never gonna get to me like they did Capone!!

Apr 22, 2021 - 11:06pm

Yankee Doodle

I'm surprised Biden did this. It's open secret the people he surrounded himself with are in the pockets of Blackstone, BlackRock, and Citi.

Their capital is highly mobile. Plus, they've already made their money. Capital gains taxes are a direct assault not on old money but on capital formation and the potential new money that comes with it. Leftists often forget that there are two forms of capitalists--the guy with the money and the guy without the money who organizes the business. The capitalist with the money is annoyed by higher levels of taxation but can strategically redeploy; the capitalist without the money has to raise capital for his business with a much higher cost of capital. Execs at Blackrock, Citi, et al are already filthy rich and highly mobile with their capital. 

Array

Apr 22, 2021 - 11:06pm

This is definitely going to reward active tax planning, investment in tax deferred instruments (IRAs, 401ks etc.), and just good old real estate. 

Be excellent to each other, and party on, dudes.
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