Last week we wrote that higher tax rates and advanced automation (AI/machine learning) are coming. Private Equity – especially long duration funds – will be a big winner should Biden win the Presidency as investors will work to shield assets from higher capital gains taxes.
The outline below was prepared by TaxFoundation.org. Click the image to expand or download.
Playing Into Private Equity’s Hands
We suspect that many investors will be troubled by the Biden tax plan to tax long-term capital gains and dividends at Biden’s ordinary income tax rate of 39.6 percent on income over $1 million. For comparison, long-term capital gains and qualified dividends are taxed at rates up to 20 percent today.
Higher capital gains taxes are likely to result in a mix shift away from volatile, publicly-traded assets into longer duration assets such as BlackRock’s Long Term Private Capital Fund led by André Bourbonnais where investment horizons are of longer duration than a prospective two-term Biden presidency. We are likely to see this mix shift – although not to the same degree – were Trump to win the Presidency given our expectation for a multi-year economic recovery combined with trade tension with China. We anticipate 1 percent GDP growth as the norm post COVID recovery. The U.S. economy is too saddled with debt to thrive. Comments from Trump, Treasury and the Federal Reserve suggest that more debt will be layered on to our weak economy perhaps as soon as the end of this month. We believe Trump and Biden administrations, especially the latter, paint a less than optimal backdrop for economic growth for the foreseeable future.