There is no evidence for any of the calamities that opponents argue would befall the economy and markets.
Wealthy Americans are greeting the possibility of a big capital gains tax increase on their investments with “anger, denial and grief,” according to a recent article from my Bloomberg News colleagues. “Over-taxing success is un-American,” Charlie Myers, chairman of Signum Global Advisors and a fundraiser for President Joe Biden, told the reporters. Others are also angry and grieving about Biden’s plan to raise the rate to 39.6% from 20%. “It felt like I was in some sort of weird daydream,” Jim Iuorio, an options trader, told Larry Kudlow on the Fox Business Network. “It’s just asinine. They know full well that not only will it not gain anymore tax receipts from it… it is such an economic negative.” All of this echoes long-standing whining that an increase in taxes paid when somebody sells appreciated securities or real estate will trigger financial and economic catastrophes. It is inevitable, the argument goes, that such hikes force a downturn in the prices of assets such as stocks, causes business investment to lag and actually reduces the government’s tax revenue. But these outcomes have greater traction in the imaginations of those predicting them than they do in the data. If critics of Biden’s proposed tax increase want to make an argument for holding on to an already outsized piece of the prosperity pie, they’ll need to do better than rely on voodoo. Let’s look at stock prices first, since it’s the least consequential item on the menu. As my Bloomberg Opinion colleague John Authers noted last week, there have been three recent, real-world opportunities to observe the impact of a capital gains tax hike — in 1987,1988 and 2013. In each case, equities (with the exception of momentum stocks) stumbled before the hikes were enacted but outperformed afterward. The stock market overall has been on a mammoth upward swing since 1987 despite seismic upheavals such as the 2008 financial crisis and the arrival of the Covid-19 pandemic last year.
