Market Democratization Will Suffer with the Biden Tax Plan

According to the Tax Policy Center, “High marginal taxes can discourage work, saving, investment, and innovation. Specific tax preferences can affect the allocation of economic resources.” That’s the first line of their answer to, “How do taxes affect the economy?”

For those gearing up for a political rant, put your sword back in the sheath. I’m going to try very hard to look at this objectively. The Biden administration is going to raise taxes. We all knew that on Election Day. Corporate taxes could go from 21% to 28%. That was expected.

The capital gains tax proposal hits a little harder. Biden proposed raising it to 39.6% for anyone earning over $1 million. The current base is 20%. That might cause some damage. According to JP Morgan, it could result in a 4% decline in earnings per share for the S&P 500.

Robbing from the Rich is Not Democratization

There’s a common belief among the Facebook masses that taking from the wealthy will somehow improve the plight of the poor and suffering. That’s not how it works. It doesn’t bring back the middle class either. If the wealthy stop spending, everyone suffers.

High taxes can discourage work, saving, investment, and innovation. Think about that from a corporate perspective. Where’s the incentive to invest when you’re going to lose 40% if you break $1 million? If that bill passes, we’ll see HNW investments decline.

Take money off the table, share prices plummet, and the incentive for newbies to enter the stock market is removed. Robinhood signed a record number of new subscribers in 2020 because everyone was making money. That won’t happen when taxes start going up.

There’s more to it than that, of course. The tax increases are supposed to support new infrastructure projects, which means more jobs. That could be a boost, particularly in the renewable energy sector. The book is still out on whether it will work or not.

Stocks to Watch if Infrastructure Bill Passes

Senate debate on the infrastructure bill continues, with pleas of “bi-partisan support” and accusations of “socialist agenda” dominating national news headlines. Ignore all the noise and look at the parts of the bill that are most likely to be included in the final version.

Road and bridge construction is a given. Politically, it’s the best way to impact the masses and we obviously need improvements to both. Check out Caterpillar (CAT). It’s in the buy zone right now and should be one of the big winners in a national infrastructure push.

Another likely winner in this scenario is United States Steel (X). If they are not in your portfolio already, they should be. Share prices are up 225.7% in the past year and they delivered a 62% increase in earnings last quarter. Q1 results will be out on April 29th.

If you’re looking for a broader investment vehicle, buy a few hundred shares of the iShares US Infrastructure ETF (IFRA). It opened just north of $35 this morning, is up 21.43% YTD, and is expected to spike when the infrastructure bill passes. I bought in last week.

Investing in Solutions to the Clean Water Crisis

Hurricane Laura, which hit the gulf coast of Louisiana on August 29, 2020, caused $19 billion in damages and left millions of people without drinkable water. To prevent that in the future, $50 billion of the infrastructure bill is earmarked for clean water resources.

Clean drinking water, once abundant and available for free at local springs and streams, is now a valuable and tradable commodity. American Water Works (AWK) is already in position to capitalize on this need. They currently service 15 million people in 46 states.

I also like California Water Service Group (CWT) and Primo Water Group (PRMW). CWT provides drinking water and wastewater services. PRMW does bottled water and dispensers. Both should be good long-term investments, regardless of what’s in the infrastructure bill.

Since clean water is a global need not limited to the United States, I’m also going to recommend Xylem Inc (XYL) in this group. They’re more of a water technology company, but they are also a public utility, and more than half of their business is outside the US.

Putting Politics Aside to Keep the Market Moving

Personally, I’m not a fan of high taxes and big government. That should tell you which side of the political fence I’m on. Despite that, I’m trying to put aside my opinions of the Biden tax proposals and develop investment strategies that will work in the new environment.

Next week, I’m going to write about tax deferred investment options and how to best use those to weather the storm that’s coming. One of the benefits of democracy is that leadership changes every few years. Tax changes are never permanent.

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About the Author

Market Democratization Will Suffer with the Biden Tax Plan

Kevin Flynn

Kevin D. Flynn is a former financial professional and founder of AdvisorScale Financial Writing. He lives in Leominster, Massachusetts with his wife Evelyn, two cats, and nine wonderful grandchildren.