How do stocks do after capital gains hikes? Meh


Interesting tax comment (and charts) from MKM’s Mike Darda:

Although we believe tax rates affect incentives, it is very difficult to divine either market performance or cyclical fluctuations by assessing tax rate changes alone. In other words, the stance of monetary policy, and thus the overall disposition of financial conditions, seems to overwhelm the cyclical (demand-side) implications of tax rate changes.

The public’s tolerance for different levels of taxation will also vary over time (especially during wartime), thus there is probably not a fixed cutoff point at which tax rates become self-defeating (although there surely is some point at which they do).

Nonetheless, as the table below shows, there seems to be a tendency for equity markets to rise more the year before tax rates go up than after the hikes set in, although the data show fairly high returns across our small sample (meaning tax rate rises were overwhelmed by other forces).

We note that the income tax revenue share of GDP has tended to fluctuate much less than the level of top tax rates. This suggests—and most budget experts would agree—that simply returning top tax rates to high levels will not solve our fiscal or budgetary challenges. Broadening the tax base and reforming the major entitlement programs will have to be the centerpiece of any lasting fiscal compromise, in our view



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