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U.S. Investors weigh proposed tax increases (part 1)

Wells Fargo Investment Institute - May 4, 2021

by Paul Christopher, CFA, Head of Global Market Strategy and Gary Schlossberg, Global Strategist

Key takeaways

  • The Biden administration has proposed significant new tax increases for corporations and individuals. In part I, we consider the possible impact of the intended tax hikes on individuals. Part II will consider the corporate tax proposals.
  • The president’s proposed $1.8 trillion fiscal package is designed to increase social spending, funded partially by increased taxes on upper-income groups.
  • Among the most contentious issues we anticipate in the upcoming tax debate are the likely increase in the capital gains rate, estate tax provisions, and a change in the $10,000 cap on state and local tax deductions.

What it may mean for investors

  • Investors may only have a few months to consult with tax and investment advisors on any possible changes to plans for bequests and other wealth transfers. However, we favor keeping long-term allocations focused on long-term economic fundamentals, not reallocating these portfolios for current tax proposals.

The fiscal trilogy’s third and final act?

President Joe Biden announced the third in a series of fiscal proposals Wednesday morning ahead of his speech before a joint session of Congress that evening. The $1.8 trillion American Families Plan (AFP) included $1 trillion in spending and $800 billion in tax credits over 10 years, centered on social spending and higher taxes on higher-income individuals. The AFP, combined with the American Rescue Plan and American Jobs Plan before it, is one of the most visible breaks with the low-tax, small-government philosophy guiding policy since the Reagan administration in the 1980s. The AFP’s tax provisions are not certain to pass as proposed, but we believe they deserve investor attention.

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