Federal Spending Plans Cause Equity Market Volatility

The markets opened higher on April 23, with the S&P and NASDAQ exceeding yesterday’s decline. The Dow Jones Industrial Average opened April 22 at 34,110 and ended the day at 34,137; the benchmark S&P 500 Index closed down 0.7%. As cited by many investment professionals, the markets’ reactions were largely due to a report that President Biden will propose increasing the capital gains tax rate on wealthy individuals. Also on April 22, the government’s initial unemployment claims report cited 547,000 individuals filed for first-time benefits, reflecting continuing improvement in jobs recovery.

April 22 turned out to be an active day, with Senate Republicans releasing a $568 billion, five-year infrastructure spending plan. (President Biden’s previously proposed infrastructure plan is $2.3 billion over an eight-year period.) The Republican plan allocates nearly $300 billion for roads and bridges, $65 billion for broadband internet, $61 billion for transit, and $44 billion for airports. Absent from the Republican plan are several of President Biden’s priorities including funding for electric vehicle charging stations, caregiver support, and  renovations to schools and public housing.

Regarding additional tax measures, the administration has recently discussed proposals that include raising the marginal income tax rate from 37% to 39.6% as well as doubling taxes on capital gains to 39.6% (as cited above) for people earning more than $1 million. As cited in the president’s campaign initiatives, individuals earning over $400,000 would pay more in federal income tax. This $400,000 amount was a pillar of then-candidate Biden’s 2020 campaign. The president is expected to announce his wish for the above tax increases in order to generate $1 trillion for major investments in childcare, universal pre-kindergarten education, and paid leave for workers.

As we cited on April 20, lawmakers are also discussing a potential increase in the corporate rate to help pay for the above spending proposals and possibly increasing the current corporate tax rate from 21% to 25%.