We all knew it was coming. Tax increases. We just didn't know how far and wide it would stretch and who would be on the hook the most. Turns out the rumors were true: Target the wealthy and "well off" citizens to help pay for programs. While it takes a bite out of our wealth, we can understand the logic of tax policy.
Dependent on which side you are on, the political football is tossed around the room, as if it were the silver Lombardi Trophy. Money is the object and programs such as infrastructure and putting people back to work don't pay for themselves. I don't like to mix politics with market talk, but there is a direct correlation when taxes are raised vs. the performance of the stock market.
Investors are likely to turn away from stocks in the short run if the tax bite is too high. The capital gains tax rate of 20% was made permanent in 2012, extended by former President Barack Obama. That act stimulated investment by individuals to put more money into stocks. Last week, the gauntlet was thrown down by President Joe Biden, who is proposing an increase to 39.6% for capital gains. That is a massive increase, but is likely not to be the final number.
Again, we expected something like this to occur, but probably not such a bold number. President Biden is a professional politician, skilled at negotiating from a point of leverage. While nobody is going to be happy about paying more taxes, we all have to come to a reality about making improvements to our country and our lives, during a pandemic and beyond.
One thing is certain: Money will come out of the stock market and be put in other less-taxed places. That won't happen overnight. It'll take some time, but individuals, funds, banks and pensions will eventually re-allocate capital toward a better tax situation. This is not a dire warning to exit the stock market; liquidity is plentiful. But be aware the landscape will change.
