By Brett Arends
Nervous people keep asking me what the Biden administration’s tax and spending plans are going to mean for their 401(k) plans and other retirement accounts.
That’s especially true after Wednesday’s package of proposals, including tax hikes on corporations and those earning over $1 million a year.
The answer? Relax, Max. Maybe these measures and other spending plans will hit the stock market, the bond market, and the U.S. dollar. But if so, there is no sign of it — not yet, anyway. One obvious reason: The markets question how much of his plan Joe Biden can get through Congress.
Don’t listen to me. (What do I know? Nothing.) Listen to your 401(k).
The typical assets in retirement accounts were little changed following the president’s speech. The SPDR S&P 500 /zigman2/quotes/209901640/composite SPY -0.10% , iShares Core S&P Mid-Cap ETF /zigman2/quotes/201678715/composite IJH +0.17% and iShares Core S&P Small-Cap ETF /zigman2/quotes/208653303/composite IJR +0.06% , representing broad-based indexes of large, medium and small US company stocks, were all up or down about a fraction of 1% Thursday morning. Leading U.S. bond funds, such as iShares Core U.S. Aggregate Bond ETF /zigman2/quotes/200660887/composite AGG +0.19% and Vanguard Total Bond Market /zigman2/quotes/203732548/composite BND +0.21% were down one quarter of 1%. The Vanguard Real Estate ETF /zigman2/quotes/202931846/composite VNQ +0.47% was up three quarters of a percent.
If there’s a panic here it is incredibly well hidden. Actually, supposed “panic” investments performed worst. The SPDR Gold Shares Trust /zigman2/quotes/200593176/composite GLD +0.61% fell nearly a percentage point along with the gold market. The Pimco 15+ YEAR US TIPS fund /zigman2/quotes/208968406/composite LTPZ +0.63% , which owns very long-term inflation-protected U.S. Treasury bonds, fell over half a percent. The Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF /zigman2/quotes/208971340/composite ZROZ +1.55% , which owns the longest-term U.S. Treasury bonds, fell more than 1%.
So far this year, among the most popular 401(k) stock mutual funds, Dodge & Cox Stock /zigman2/quotes/202530840/realtime DODGX +0.32% is up 22%, Vanguard Primecap /zigman2/quotes/204022030/realtime VPMCX -0.21% 13%, the Fidelity 500 fund /zigman2/quotes/203467656/realtime FXAIX -0.10% and other S&P 500 funds about 12%, Fidelity’s Contra Fund /zigman2/quotes/202430342/realtime FCNTX -0.70% 10% and American Funds’ Growth Fund of America /zigman2/quotes/208876675/realtime AGTHX -0.30% 9%. The balanced stock-and-bond Vanguard Wellington fund /zigman2/quotes/209909148/realtime VWELX -0.04% is up 8% and Vanguard Balanced Index Fund /zigman2/quotes/208139840/realtime VBINX -0.04% 6%. Supposedly safe-haven funds are actually down, although that partly just represents a reaction to last year’s panic. Vanguard Total Bond Market Index fund /zigman2/quotes/210422528/realtime VBTLX +0.18% is off 3% and the SPDR Gold Trust 7%. Vanguard Inflation-Protected Securities Fund /zigman2/quotes/204162186/realtime VAIPX +0.17% is level for the year.
Caroline Bruckner, professor of tax and accounting at the American University in Washington, D.C., says plenty of tax advisers are urging clients to make pre-emptive moves in response to the proposals. But she questions how much of Biden’s tax changes are likely to pass, especially with the Senate evenly split between the two parties.
“There (are) a lot of advisers who are looking to cash in on potential legislative changes,” she tells me. Advisers are “cashing in on potential changes rather than actual changes. What I see is a disconnect between what’s actually happening on Capitol Hill and what tax advisers are assuming could happen. These are two radically different things.”
OK. But what if some, most or all of it does pass?
For most investors, the biggest potential risk surely lies in President Biden’s proposal to raise taxes on corporate income. “We’re going to reform corporate taxes,” he said, “so they pay their fair share and help pay for the public investments their businesses will benefit from as well.
Higher taxes on corporate profits, naturally, means immediate lower after-tax earnings. But by how much? And what is the effect on growth? Donald Trump and the Republican Congress slashed corporate taxes at the end of 2017. According to S&P Global, from late 2017 to late 2019 the average tax rate paid by S&P 500 companies plunged from 24% to 18%, and per-share earnings jumped 25%. (That was helped by stock buybacks, which reduced the number of shares.) But U.S. government accounts reckon after-tax U.S. company profits rose a more modest 7%.
The president wants to raise taxes on those earning more than $1 million a year, doubling their capital-gains tax rates to 39.6% and hiking their inheritance taxes.
Yes, as the president pointed out this is a relatively small number of people. But as Willy Sutton said about the banks, that’s where the money is.
If you’re rich and you own a ton of stock — especially highflying stock like Apple /zigman2/quotes/202934861/composite AAPL -0.53% , Amazon /zigman2/quotes/210331248/composite AMZN -2.90% , Google /zigman2/quotes/205453964/composite GOOG -2.91% or Tesla /zigman2/quotes/203558040/composite TSLA +1.75% — in a taxable account, you suddenly have an enormous incentive to sell that stock.
Phil Orlando, chief equity market strategist at money manager Federated Hermes, fears that aggressive hikes in corporate taxes could bring back some of the problems seen several years ago, when the U.S. had some of the highest marginal corporate tax rates in the developed world. Among the problems, or effects, were so-called “corporate inversions” where U.S. companies spent overseas profits buying overseas companies rather than repatriate them.
Financial planner and accountant Leon LaBrecque, head of the Michigan Association of CPAs on Tax Law Changes, predicts compromise on Capitol Hill and thinks Biden’s tax hikes will be watered down. He says capital-gains tax rates on high incomes of maybe 30% and a corporate tax rate of 25% would be “palatable” to the markets, and dent S&P 500 earnings by around 4%.
Meanwhile the economy is going through a dramatic recovery, and the Federal Reserve is pumping money into the system. And I sometimes think the stock and bond markets make up the fourth branch of the U.S. government. If the Biden administration’s proposals were to cause a dramatic plunge in everyone’s 401(k), you’d expect those proposals to be scaled back. So if there is something to worry about, it isn’t obvious yet.