• Democratic presidential nominee Joe Biden’s plan to increase the capital gains tax could lead to a large-scale sell-off of stocks, according to economic analyses.
• Biden has proposed increasing the top tax rate for capital gains for the highest earners to 39.6% from 23.8%, the largest real increase in capital gains rates in history.
• Yet economists say the stock market as a whole wouldn’t necessarily fall just because of the tax increase.

…A research paper by Tim Dowd, a senior economist at the U.S. Congress Joint Committee on Taxation, and Robert McClelland, a senior fellow at the Urban-Brookings Tax Policy Center, found that the two previous hikes in capital gains taxes lead to a wave of selling.

In 1986, as part of the Reagan tax plan, the top rate for capital gains jumped from 20% in 1986 to 28% in 1987. In the months before the increase, capital gains realizations — or sales of stocks and other assets — surged by 60%. In 2012, as part of the fiscal cliff negotiations, the top rate went from 15% to 23.8%. Again, in the months leading before the change, capital gains realizations and sales jumped, by 40%.

Dowd and McClelland say that just ahead of a tax increase, investors sell stocks or other assets that have gained value before the higher tax rate becomes effective.

A sell-off adversely effects working Americans with 401k accounts. The rich can easily move assets around to avoid the tax. Workers with 401k accounts pay penalties if they sell stocks in those accounts before retirement age. Those accounts also lose value in a stock market sell-off.

If the Democrats want to be considered the party of the working man, they need to re-evaluate this idea.