By Brian Levitt, Global Market Strategist
History suggests a potential increase in the capital gains tax rate might not have as big an impact on the stock market as many assume.
I’ve been on my soapbox lately demonstrating that history suggests that elections do not mean nearly as much for equity markets as many investors suspect. Case in point, the average annual return on the US equity market, as represented by the S&P 500 Index, has been 10.1% since 1957.1 Per the rule of 72, that’s a doubling of one’s investments roughly every 7.1 years across the terms of 12 different US presidents. For more potential fodder to ease election concerns, please refer to “2020 US Presidential Election: 10 Truths No Matter Who Wins.”
The first question I inevitably receive as I conclude my presentation and come down from my platform (and by that I mean the same chair I have been sitting in for the past seven months) is, “But what if the capital gains tax is increased?” Joe Biden has proposed increasing the top tax rate for capital gains for the highest earners to 39.6% from 23.8%.2 Inherent in that question is a concern that investors will dump their equity positions prior to the end of the year to lock in the lower capital gains rate, thereby driving markets meaningfully lower.
I make the following five points to respond to that ever-present question:
1. Yes, it is true that the two previous hikes in capital gains taxes (the Tax Reform of 1986 and the American Taxpayer Relief Act of 2012) led to an increase in stock selling. For example, the total capital gains realized in 1986 climbed by over 7% of US gross domestic product, up from 3.9% the prior year.3 The increase in total