Debunkery: Learn It, Do It, and Profit From It—Seeing Through Wall Street's Money-Killing Myths

BUNK 36

STOCKS LOVE LOWER TAXES

Everybody loves lower taxes. Well, maybe not politicians. (But they’ve got mental problems.) Besides them, it’s hard to find anyone who cheers higher taxes. No—almost universally, folks fear higher taxes.

Folks particularly fear capital gains tax increases will nail stocks. As I write in 2010, folks fear the potential sunset of the Bush II-era cap gains tax cuts. Fact is: 10, 20, and 453 years from now, folks will fear higher cap gains taxes dinging stocks and pray for lower taxes. But in history, shocking as this may sound, a simple fact is there are no clear correlations between marginal shifts in tax rates and subsequent stock returns over any reasonably measurable time period. There are several reasons.

Cap Gains—A Tax on Selling?

It seems intuitive higher cap gains taxes should be a major negative, and stocks should love lower taxes. Hence we would expect a tight link between tax rates and subsequent stock returns. After all—cap gains are an actual tax on the sale of stocks! Except, if you think of it that way—everybody knows (except politicians, sometimes) that if you tax something more, you get less of it. (Politicians understand this perfectly if it’s something they don’t want you to do. People drink too much sugary soda? Tax it! We want to reduce gas usage? Tax it! However, why they can’t understand that when they tax income more, folks create less income and the government gets lower income tax revenue is beyond me. But I digress.) ...