One of the big discussions lately has been about how higher taxes will potentially impact the stock market. We’ve known since President Biden won the presidency and the Democrats secured control of the House and Senate that higher taxes are coming, likely in the form of higher corporate taxes and higher capital gains tax on the wealthy — though probably not until 2022. It is worth noting though that stocks have not been fazed by all the higher taxes talk, as we just saw the best first 100 days for stocks under a new president since Franklin D. Roosevelt.
With proposals for the $1.8 trillion American Families Plan (AFP) and $2 trillion plus infrastructure bill known as the American Jobs Plan, higher taxes are needed to help finance the new spending. These initial numbers from the Democrats are starting points for negotiations. Let’s be clear though, with a 50/50 Senate (Vice President Kamala Harris breaks ties) and a historically slim Democrat majority in the House, we think the final numbers will likely come in less than $3 trillion combined.
Higher capital gains taxes on the wealthy are one way to pay for things. The AFP proposes to increase the top tax rate on ordinary income to 39.6 percent from 37 percent, and capital gains and dividend tax rates for those who earn more than $1 million to a maximum of 43.4 percent, up from the current 23.8 percent. Fun stat, only 0.32 percent of the population makes more than $1 million a year, so the truth is this will not impact the other 99.68 percent of the population.
President Biden is also pushing for a corporate tax rate of 28 percent, up from the current rate of 21 percent. When looking back in history at how stocks performed after increases in corporate taxes and capital gains taxes, it is clear there is very little correlation. In fact, if the economy is on a firm footing, stocks do just fine. Given the strong economic outlook this year, we believe history could repeat once again.