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Why Biden’s Plan to Raise Taxes for Rich Investors Isn’t Hurting Stocks

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“Most Democrats appear to be on board to reduce the differential between the capital gains tax rate and ordinary income, but there is resistance to treating the rates as the same,” wrote analysts at Beacon Policy Advisors, a policy advisory firm. “This means that there is likely to be a middle ground to increase the capital recovery rate for top earners to, say, 28 percent.”

Updated

May 5, 2021, 10:31 p.m. ET

If stocks continued to climb, it would be broadly in line with the previous periods when capital gains taxes were raised.

In 2013, when the tax on Americans with the highest incomes rose from 15 percent to its current 23.8 percent, the S&P 500 rose nearly 30 percent. It’s been the best year for stocks in two decades. And after the maximum rate had risen from 20 percent to 28 percent at the end of 1986, the market continued to grow by almost 40 percent through most of 1987.

Stocks finally suffered the worst one-day collapse ever on Black Monday in October 1987, but that crash had little to do with taxation and the markets ended the year a little higher. In 1991, a small increase in the capital gains rate for those with the highest incomes to 28.9 percent coincided with a 26 percent increase in the S&P 500. The main driver of this profit had nothing to do with taxes; It was the beginning of a recession.

Similarly, investors seem to be focused on evidence that the economy is on the verge of breakneck growth. That surge is fueled by a flow of federal government spending, rock-bottom interest rates, and more Covid-19 vaccinations. In the first three months of the year, the economy grew by 6.4 percent on an annual basis. At this rate, 2021 would be the best year of growth since 1984.

Economic growth and corporate profits tend to increase together. The earnings reports of listed companies are already showing signs of an additional upswing in the economy.

Tech giants like Tesla, Microsoft, Amazon, Apple and Google’s parent company Alphabet reported first-quarter earnings that exceeded analysts’ expectations.

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Robert Dunfee