04232021 :: Friday finance

A partial digest

Philip Valenta, MSF


Friday was day 94 of the Biden-Harris administration. There is a proposal to raise capital gains taxes a significant amount to the highest the rate has been post WWII, but only for a very small percent of wealthier individuals. Raising the top marginal income tax rate is being floated, as well. Traditional financial markets didn’t take long to shake it off, though. Crypto has been another story, which may say something about who owns a good chunk of it.

While on the topic, a brief review of the history of capital gains taxes is in order. The record reveals that capital gains taxes were raised 10 times since 1950. Almost every year it happened, the percentage annual average price return for the S&P 500 was positive. In years where it was the only type of tax raised among a group of three including personal and corporate taxes, the S&P 500 even saw bumper returns of 16% and 19%, in 1972 and 1976, respectively.

Source: Fidelity

The key is to always understand what else is co-occurring in that moment. Frequently, there is additional fiscal spending that may be helping to boost returns, just as there is now (not to mention what else is on the table with future infrastructure and so on). “There is never ‘one thing’ for the market.”¹ Hence, we would not expect all market action to be reduced to the single driver of a capital gains tax increase.

Besides, it is not clear where the real capital gains tax rate will end up when all is said and done.

Will there be unintended consequences? That’s nearly a given; there pretty much always are. But where else is the money of those most impacted going to go if not to make more money? Will those people really give up entirely on seeking capital gains in the United States because they may pay more in taxes? Doubtful. They will attempt to find some other way around the hike, if history is any judge, but the investing will most likely continue.

Quick Wrap:

  • FXHedge deleted the completely unverifiable post that caused commotion last weekend in the crypto space. Big surprise.
  • Yields have fallen and stayed down.
  • The DXY took a dive for the week.
  • Crude finished slightly down.