The $1.9-trillion COVID-19 stimulus act could prompt the first federal tax hike since 1993, with reports emerging about preparations underway for a potential increase in corporate and individual tax rates for higher earners.

According to White House aides cited by Bloomberg, the planned increases would include a corporate tax rate hike from 21% to 28% and a tax rate hike for individuals earning more than $400,000, as well as a larger estate tax and higher capital gains tax for individuals who earn $1 million or more. 

The ultimate goal is to raise around $2.1 trillion over the next 10 years to help fund not only the stimulus, but also an ambitious new infrastructure plan and ballooning debt.

Independent analysis by the Tax Foundation, cited by Bloomberg, estimated that the top 1% earners would see an approximately 11.3% reduction in their after-tax income in 2021 based on the initial Biden proposal, while the top 5% would see a 1.3% reduction. 

Trump’s 2017 tax law benefitted corporations and the wealthy, reducing the corporate tax from 35% to 21%, and Biden’s sets out to undo this to some extent.

Prior to this, the last tax hikes in the United States came in 1993, under the Clinton Administration.

"The president remains committed to his pledge from the campaign that nobody making under $400,000 a year will have their taxes increased," White House press secretary Jen Psaki Monday told reporters Monday. "His priority and focus has always been on people paying their fair share and also focusing on corporations that may not be paying their fair share either."

In other words, echoing Elizabeth Warren’s words, Pskaki said her view is that “middle-class families are paying more than their fair share and those at the top are not doing their part”. 

According to the World Inequality Database, from 1979 to 2019, the wealthiest 1% of Americans saw their share of pre-tax income jump from 11% to 19%, while their share of wealth overall rose from 23% to 35%. 

While there is no new tax package yet, and this is still early days, some fear the tax hikes could clamp down on Wall Street’s endlessly bullish outlook due to sentiments that an increase in corporate taxes would hit out at stock valuations. 

The market, however, has had plenty of time to consider what everyone has been quite sure since last year would be a tax hike under Biden. It remained bullish nonetheless. 

The DOW has gained over 7% this year, and the S&P 500 has gained 5%. 

For now, the market seems to be holding steady on news that Biden is still “undecided” on this. 

On the campaign trail, there was a lot of talk about higher corporate taxes and capital gains, but not a “wealth tax”.

By Michael Kern for Safehaven.com