Beyond Bulls & Bears


Quick Thoughts: How Might the Markets React to Changes in Personal Taxes?

Can President Joe Biden muster the votes to raise personal income and capital gains taxes, and if he can, will stocks tumble? Our Chief Market Strategist Stephen Dover discusses.

Whether driven by the politics of fairness or the need to address budget shortfalls, taxes are back in our discussions globally. Can US President Joe Biden muster the votes to raise personal income and capital gains taxes, and if he can, will stocks tumble?

  • President Biden got off to a fast and popular start in his first 100 days. Higher taxes, both to fund infrastructure spending plans and to promote fairness, are more likely.
  • For the broad contours of markets—US and global—raising the US capital gains tax rate is unlikely to have a large market-wide impact. Higher capital gains taxes are likely to have bigger impacts on sectors and individual stocks, (e.g., the FAANGs1) rather than on the market as a whole.
  • Some investors will attempt to tax optimize. They may be contemplating sales already and are likely to bring them forward. Some may “earnings optimize,” choosing to avoid the threshold by deferring other compensation to stay below the US$1 million per year earnings threshold for higher tax rates.
  • Higher taxes are not a forgone conclusion. Moderate Democrats and Independents may balk, and others may split the caucus over restoration of state and local tax deductions (SALT).
  • Higher capital gains tax rates may not produce much immediate selling. Wealthy Americans generally have access to liquidity or can borrow against appreciated assets.
  • There are a few final questions to consider: Will higher US taxes on capital harm US productive investment? Will they push business investment abroad? Higher taxes on capital do deter its formation. But as John Maynard Keynes pointed out long ago, the key driver of business investment is “animal spirits,” not the cost of capital.

If the economy performs, business will invest. As for shifting capital abroad, there is little evidence that changes in personal tax rates, as opposed to corporate tax rates, leads to a global reallocation of capital. For additional investment lenses to view the impacts of taxes, policies, and other economic factors globally, read  “America’s U-Turn” by Francis Scotland, Director of Global Macro Research, Brandywine Global; Dr. Sonal Desai’s “On My Mind – A Tale of Two Recoveries;” and Western Asset’s “Second Quarter 2021 Global Outlook.”


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1. FAANG represents the stocks of five US technology companies: Facebook, Amazon, Apple, Netflix, and Alphabet (Google).

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