NEW YORK -- Everybody knows that when income taxes go up, Americans'
take-home pay goes down. But investors might not know that when the
government raises taxes on stock profits, the market is likely to go
Ever since the so-called Bush tax cuts were passed in
2003, the government has levied a 15% tax rate on stock market profits,
known as capital gains, as well as stock dividends.
investor-friendly tax rates on winning stock trades could soon be going
up, depending on how the political winds blow in Washington. Reducing
the after-tax return on stocks could cause a headwind for Wall Street,
because it could make the market less attractive and put a dent in the
rally that has pushed stocks to their highest levels in almost five
1969, the capital gains tax has been raised three times. The two times
ates were increased without being part of a comprehensive tax-reform
plan from Congress, stocks were down sharply six months later, data from
Strategas Research Partners show. In 1986, when lawmakers increased
capital gains taxes but also slashed rates on income and business taxes,
the market was 22% higher six months later.
"We believe investors
should be asking about the impact of capital gains tax increases on
market performance," says Daniel Clifton, a policy analyst at Strategas.
Congress doesn't act to extend the Bush-era tax cuts, which expire at
year's end, the tax rate on capital gains will return to 20%, where it
was during Bill Clinton's presidency.
As part of his
deficit-cutting plan, President Obama said if re-elected he would boost
the tax on stock profits to 20% for those making more than $200,000
($250,000 for married couples), and tack on an additional 3.8%
investment tax to help pay for his health care plan. High-wage earners
would also see their dividends taxed at the higher income rate under
Mitt Romney, the Republican candidate for
president, wants to keep the current 15% rate permanent for capital
gains and dividends and eliminate the levy altogether for taxpayers
earning less than $200,000.
Any additional taxes on stock-related
income is a negative, warns Andrew Busch, a public policy strategist at
BMO Capital Markets. "Higher taxes takes the luster off stocks for
sure," says Busch, adding that it could also prompt investors to dump
stocks now while tax rates are low.