The Capital Gains Conundrum
What drives the randomness in returns in the stock market? A large part deals with how investors react to new information. Recently, investors in the United States have been going crazy due to the potential tax reforms as part of President Biden’s Build Back Better plan. In order to fund the multi-trillion dollar proposal over the course of numerous years, law makers are seeking to level the playing field with respect to the rich and wealthy.
Included in the proposed tax reform is increased taxation of corporations. As of 2019, “U.S. corporate tax collection is low across the board. Corporate taxes accounted for just 1% of U.S. GDP” (Hanauer). There has been widespread scrutiny of various corporations who have been able to avoid paying taxes in a completely legal manner given the current laws. With the corporate provisions potentially going into effect, these corporations will no longer be able to avoid the IRS and be forced to pay their fair share.
To answer the proposed question above, from the investor’s perspective, an increase in taxes lead to a decrease in profits. Ultimately, an increase in corporate tax rates is thought to result in decreased share prices. This is the answer why so many investors and clients of wealth management professionals are questioning their current financial position as it relates to their current and future tax liabilities. Additionally, individuals are concerned about potential increases in personal tax rates. Though this is not something a majority of U.S. citizens should be concerned about as “those who gain the most from our system, the richest 1%, pay 97% of the individual tax increases in this bill” (Hanauer).
The already existing randomness of stock price movements is being escalated by increased speculation over company valuations. It is a crazy time, both from the client and advisor perspective, to be in the wealth management industry as these tax reforms are getting closer to passing through legislation. With this being said, the flow of information through different media portals should be closely monitored for credibility in the next few months in order to not overreact to false information in addition to taking proactive steps to best position yourself for future tax changes.
Hanauer, Amy. “Even Scaled Back, Biden’s Tax Reforms Would Reshape Business.” Barron's, 19 Oct. 2021, https://www.barrons.com/articles/even-scaled-back-bidens-tax-reforms-would-reshape-business-51634589008?mod=hp_COMMENTARY_3.