AM Notes: Biden Tax & PMI Friday

 Breaking News: President Biden is expected to propose higher taxes on the rich to fund child care, education and paid leave, people familiar with the plan said. https://t.co/pqLWOQFkSB— The New York Times (@nytimes) April 22, 2021 

 *BIDEN TO PROPOSE HIGHER TAXES ON RICH TO FUND CHILD CARE: NYT— *Walter Bloomberg (@DeItaone) April 22, 2021 

 BIDEN WILL PROPOSE RAISING MARGINAL INCOME TAX RATE TO 39.6% FROM 37% - SOURCES

BIDEN WILL ALSO PROPOSE NEARLY DOUBLING TAXES ON CAPITAL GAINS TO 39.6% FOR PEOPLE EARNING MORE THAN $1 MILLION - SOURCES— *Walter Bloomberg (@DeItaone) April 22, 2021 

“I want to change the paradigm,”

“We start to reward work, not just wealth.”

 Top all-in capital gains tax rates under Biden's proposal:

New York, NY: 58.176%

Portland, OR: 57.3%

California: 56.7%— Jared Walczak (@JaredWalczak) April 22, 2021 

Goldman Sachs expects Biden will be able to raise the capital gains tax rate for the highest earners, but not as high as he proposed.

The risk is that such a tax hike could rattle the stock market, forcing some investors to sell before the tax hits.

In the past, such tax hikes have corresponded with lower stock prices, momentum reversals and less investing in the stock market, Goldman Sachs said.

"However, all of those patterns were short-lived and reversed following the hikes. We expect that any selling triggered by capital gains hikes late in 2021 would be similarly short-lived,"

Goldman Sachs wrote. - CNN - March 2021

A 28% rate looks most likely, in our view, as it is roughly halfway between the current rate and Biden's (proposal)

There is also some reason for apprehension about the end of the year.

The CGT hike is going to happen in some form, and it will weigh on the market then.

If the strong economic data don’t show signs of slowing, that could be about the time that the Fed develops cold feet about overheating and starts to tighten monetary policy.

So there are reasons to be nervous about the last few months of this year — even if there wasn’t much reason to sell off on a Thursday afternoon in April...

 This is a good idea.

However we need real policy (such as banning selling) to ensure that markets stay up. https://t.co/LW8VcKkUHT— David Belle (@davidbelle_) March 14, 2021 

"Such a high rate will likely result in a situation where those sitting on substantial gains will choose to hold those assets far longer than otherwise. A 2010 paper from the Congressional Research Service describes behavioural responses to changes in capital gains tax rates as a "lock-in effect," imposing "efficiency losses because investors may be encouraged to hold suboptimal portfolios."

This means that investors will hold onto a stock for tax reasons, rather than selling it and buying a better one, which leads to market inefficiencies."

Biden's Capital Gains Tax Plan Fixes Nothing - BBG October 2020

"When taxes are at 39 percent, you're not going to sell your winners. You're going to stay in those positions longer than you otherwise would have. That means there's less capital flowing from those companies to the next new idea. That's heartbreaking. Part of the reason that the U.S. economy works so damn well is that we move our capital as a nation to the next new idea continuously... It's the mobility of the capital in our system that makes that happen." - Citadel's Ken Griffin 

Australia’s private sector started the second quarter on a strong footing, with growth of output accelerating for the second time in a row to the steepest on record as sales were boosted by improved market confidence due to a reduction in the negative impact of COVID-19.

“The stronger growth momentum filtered through to the labour market, with April data showing the fastest increase in private sector jobs since the survey started five years ago.

Firms reportedly hired extra staff due to an intensification of capacity pressures, demand strength and optimism towards the outlook.

The overall degree of business sentiment improved from March's seven-month low and was above its average.

“Ongoing supply-chain disruptions continued to exert upward pressure on inflation. The flash results highlighted the steepest increases in both input costs and selling charges since the inception of the survey.”

“The Japanese private sector economy returned to expansion territory for the first time since January 2020, with flash PMI survey data signalling a fractional increase in business activity in April.

The improvement in demand conditions was underpinned by growth in new business for the first time in 15 months, as well as a renewed expansion in export sales, which rose at the quickest pace since February 2018.

Moreover, employment levels improved for the third month in a row, albeit at a softer pace. “That said, the boost in private sector activity was led by the manufacturing sector, as the larger services sector saw business activity deteriorate for the fifteenth month running.

“While some Japanese private sector businesses noted that a resurgence in COVID-19 cases could dampen prospects in the second quarter of the year, firms remained optimistic that overall business activity would improve in the coming 12 months.

That said, there is concern the impact of the pandemic will be prolonged further.”

Things are getting better, supply chains are still screwed, and pandemic risks havent passed yet...