We all knew it was coming: new taxes. We didn’t know how far and wide it would stretch and who would be on the hook until last week when the Biden administration announced an increase in the corporate tax rate and the individual rate for high earners, including capital gains.
While it’s never fun to pay more in taxes, there is logic to the proposals. The tax increases will help fund the long-term US economic recovery. Critical infrastructure and job training programs don’t pay for themselves.
I don’t like to mix politics with market talk, but there is a direct correlation between raising taxes and poor stock market performance.
What new taxes mean for the stock market
Investors are likely to turn away from stocks in the short run if the tax bite is too high. The current capital gains tax rate of 20% was made permanent in 2012, which stimulated investment in the stock market. Last week, President Biden proposed an increase to 39.6%. That is a massive increase, but it’s not likely to be the final number.
Again, we expected something like this to occur but his bold proposal caught a lot of people by surprise. While nobody is going to be happy about paying higher taxes, it’s only fair that the wealthier among us chip in. This is not frivolous spending. Instead, it’s intended to improve our country and our lives, during the pandemic and beyond.
One thing is certain: Investors will pull money out of the stock market and move it into assets with a lower tax burden. This won’t happen overnight but eventually individuals, funds, banks and pensions will re-allocate their capital.
This is not a dire warning to race for the exits! The stock market remains in a long-term bull trend, and liquidity is plentiful. Just be aware the landscape will change and plan accordingly.