S&P Stock Market Performance and Capital Gains Tax Increases
Many of our blog articles are inspired by conversations we have throughout the week. This article on the S&P 500 stock market performance and capital gains tax increases is no exception. The question we are being asked is, "what do you think is going to happen with the market if capital gains go up?" Our recent response has been, "let us do some research and circle back to you." Here is what we found:
Federal capital gains tax rates are currently near 70-year lows
The proposed bill (House Ways & Means Committee, September 13, 2021) increases the top capital gains rate from 20% to 25% on income above $400,000.
The previously proposed rate was 39.6% but kicked in at $1,000,000 of income.
Table 1 below provides a side-by-side of the recent proposal with current capital gains rates and income brackets.
With this background on where rates have been and what is being proposed, we look to address the question, "so what happens to the market when capital gains rates go up?" Table 2 below tells an interesting story. Although there is market anxiety leading up to the proposed capital gain tax change, which results in a negative average return, the six months following the tax increase, the market is favorable. Wait, what? Excuse me for a minute while I reexamine Table 2. Ok, yes, the market is actually up after a proposed tax increase on capital gains.
As we have learned from our 25 years advising clients, anything is possible, and history does not always repeat itself. Another lesson learned from experience is that the market does not care about our charts, nor does it give a rip about our attempt to explain what might be. It is nice to know that cap gains tax hikes do not always mean turbulent markets are ahead. In fact, the market has performed above the historical average when a cap gain tax hike is put in place—at least, that is the case for the six months following the increase.
