Opinion: Why Raising the Capital Gains Tax Rate Wouldn’t Plunge Stocks

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Raising the tax rate on capital gains would have little overall impact on the US stock market – that’s the conclusion I drew from numerous academic studies and interviews with tax experts. This conclusion runs counter to an emerging narrative that, if President Joe Biden proposes an increase in capital gains tax and it becomes law, “there is going to be a sell-off in the stock market in some way to measure. some wealthy investors to take advantage of the rates before they go up. ”

However, this narrative is not supported by an analysis of past changes in capital gains tax rates. I couldn’t find any significant correlation between increases in those rates and the performance of the stock market. Take a look at the table below, which shows the S&P 500’s SPX, + 0.18% of total return since 1954, when capital gains tax was raised. I did not find any pattern that is significant at the 95% confidence level that statisticians often use to determine whether a pattern is genuine.

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None of this is to deny that capital gains taxes can have a major impact on investor behavior. But across the market, those impacts could be largely offset, according to Andrew Belnap, a professor of accounting at the University of Texas at Austin. In an interview, he summarized these offsetting effects as follows: An increase in the tax rate on capital gains will be bearish to the extent that the rate of return required by investors to invest in stocks increases. All other things being equal, that means prices must go down. Conversely, an increase in capital gains tax will be bullish to the extent that it induces more investors to hold rather than sell, in order to avoid incurring the tax. Even if these two effects are not precisely compensated for, their net impact will remain small, for a number of reasons. One is that 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 stocks that are publicly traded and held in taxable accounts has fallen to less than 25% from more than 80% in the last 50 years. Another reason not to expect a significant overall impact from a higher capital gains tax, according to Belnap: It’s not certain that any proposed increase will become law. Even if it does, there is a clear possibility that it will be reversed each time control of Congress returns to the Republican Party. Given this uncertainty, he said, investors who would otherwise alter their behavior due to an impending capital gains tax hike may decide to just sit still. The bottom line? The relationship between changes in the capital gains tax rate and the stock market is complex. But any proposed increase is unlikely to trigger the market sell-off that many believe will occur. That is not to say that the market will not decline significantly in the coming weeks and months. If you do, it will be for reasons other than capital gains taxes. Mark Hulbert is a regular contributor to MarketWatch. Your Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com More: Some new investors see a ‘buying opportunity’ if Biden raises capital gains taxes on America’s millionaires. Also read: No, Biden won’t come for his burgers while pushing the climate change agenda