Who’s Afraid of the Big Bad Tax Hike?

big bad wolf with little red riding hood, Sheaff Brock reviews potential tax hikes

Who’s Afraid of the Big Bad Tax Hike?

“Tax increases may not be the obstacle that many investors expect,” according to Fidelity Viewpoints. Other economic factors may play a more important role, especially when sizable federal spending serves as an offset. Sheaff Brock Managing Director Dave Gilreath tends to agree. “The global economy is a good policeman of tax rates,” Gilreath says, with money flowing to where ‘it’s treated best.” If tax rates in the U.S. are judged to be “too high,” capital will flow to other countries.

In fact, as the chart below illustrates, a review of the past 70 years shows a strong correlation in timing; substantial increases in government spending on social welfare programs served to offset the negative impact of tax hikes.

market returns after tax hikes, tax rate increase, Sheaff Brock reviews S&P 500

Source: Haver/FMR

Gilreath reminds investors that, during the four capital gains tax hikes in the last half century, the S&P initially reacted by falling around 3% in the months leading up to the law’s passage. Once the tax increase had passed into law, though, the S&P went on to gain an average of 15% in the ensuing half year.

While the Biden administration has made no secret of its intention to effect tax hikes, the targets have been corporations and individuals making more than $400,000 annually. As Fidelity emphasizes, it remains unclear just how much of this tax-raising agenda can progress from proposal to law.

Meanwhile, “residents of Affluentville” (with personal wealth averaging $3-10 million) are worried, Lynnley Browning points out in Financial Planning Magazine. Even if the capital gains rate were to be almost doubled (as Biden is proposing), things aren’t going to be that way forever. Furthermore, clients can “blunt or eliminate a tax sting by carefully timing when they cash out their paper profits.”

UBS Chief Investment Officer of the Americas Solita Marcelli comes at the issue of proposed tax hikes from a different angle: “You can manage your tax burden today and in the future,” he observes, “by investing more of your wealth into tax-deferred accounts.”

Reacting to fear invoked from listening to news and commentary about impending tax hikes can be very punishing to any investment portfolio, Dave Gilreath continues to remind investors. As history appears to demonstrate, corrections caused by headlines—or by tax hikes—are often relatively short-lived.

Share this post