An increase in the tax rate on investment income would have little overall impact on the US stock market. I have drawn this conclusion from numerous academic studies and interviews with tax experts.
This conclusion contradicts an emerging illustration that if President Joe Biden proposes an increase in capital gains tax and it becomes law, “There will be some sort of sell-off in the stock markets as some wealthy investors benefit from lower prices before they rise. "
However, this presentation is not supported by an analysis of previous changes in withholding tax rates. I couldn't find a significant correlation between the rise in these rates and stock market performance.
Take a look at the table below which shows the S&P 500
Total return since 1954 when capital gains tax was raised. I haven't found a pattern that is significant at the 95% confidence level that statisticians often use to determine if a pattern is real.
None of this is intended to deny that capital gains taxes can have a major impact on investor behavior. However, according to Andrew Belnap, professor of accounting at the University of Texas at Austin, these effects could be largely offset market-wide. In an interview, he summarized these opposing effects as follows:
An increase in the tax rate on investment income will be bearish in that it increases the return required for investors to invest in stocks. When other things are the same, prices need to go down.
In contrast, a capital gains tax hike will be bullish in that it will cause more investors to hold than sell to avoid the tax.
Even if these two effects do not exactly offset each other, their net impact remains small for several reasons. For one, most stocks in the US are held in accounts that are exempt from capital gains tax. Leonard E. Burman, Professor of Public Administration and International Affairs at Syracuse University, reports that the percentage of US publicly traded stocks held in taxable accounts has increased from more than 80% to below 25% over the past 50 years. has decreased.
Another reason not to expect a significant overall impact from a higher capital gains tax, according to Belnap: It's not certain whether a proposed increase will become law. Even if it does, there is a clear possibility that it will be reversed if control of Congress returns to the Republican Party. Given this uncertainty, investors who would otherwise change their behavior due to an impending capital gains tax hike may choose to just sit tight instead.
The final result? The relationship between changes in the capital gains tax rate and the stock market is complex. However, a proposed increase is unlikely to result in a sell-off of the market that many believe will occur. That is not to say that the market will not decline significantly in the coming weeks and months. If so, then it is for reasons other than taxes on capital gains.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings track investment newsletters that pay a flat fee for testing. He can be reached at firstname.lastname@example.org
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