Kingsmill's Investment Miscellanea: Friday, April 30 2021

Apr 30, 2021 | Joshua Kingsmill


Key Takeaways

  • Proposals to capital gains taxes in the U.S. shouldn’t come as a surprise
  • Tax rates and the stock market don’t have a historical link
  • What matters most is the economic backdrop when tax increases are implemented

I’m not going to pull out that tired old cliché about the only things in life are death and taxes, when talking about taxes (I guess I just did!) but this week, in the U.S. late last week there was news out of the U.S. that Biden is proposing an increase in capital gains taxes on stocks. While we don’t know all the details, and when it would pass, and whether it would be retro-active, or when it would begin, the markets had a jolt. The proposal is to increase capital gains from 39.6% from 20% for those earning $1 million or more (0.3% of U.S. taxpayers or roughly half a million households). According to Bloomberg, a 3.8% Obamacare tax on investment would then be added on top, which means those high income earners in the U.S. would pay a 43.4% federal rate on realized investment returns, with state taxes potentially putting the combined tax bill north of 50%.


Some have asked: “should I sell my U.S. stocks now, then buy them back later? Historically, this wouldn’t be a good strategy. Equities tended to experience some choppiness in the lead-up to the implementation of the capital gains tax hike, but weakness was by and large transitory:



By far, what matters most for investors, and the relative positive or negative performance of stocks in the broader economic environment. As we see above, there have been four long-term changes to capital-gains taxes in the last 50 years. Not surprisingly, the two that occurred during secular bull markets, in 2013 and 1987, had little long-term impacts. The two that took place during secular bear markets, in 1976 and 1969, saw more frequent cyclical bear markets following the tax hikes. The late-1960s through the 1970s was also a period of rising inflation and interest rates that tend to be negative for financial assets. For sure, in today’s environment, if one assumes Covid numbers will continue to decrease, and the vast majority of North American’s get fully vaccinated this year, we are certainly in a strong environment.


I think the take-away is that President Biden campaigned consistently on raising taxes for high income earners, so the recently outlined proposal by the Biden administration to hike the capital gains tax rate shouldn’t come as a complete shock. If the proposal to hike capital gains tax clears Congress, which remains uncertain at this point, recent experiences suggests that while such a hike could cause certain investors to sell some equity positions sitting on sizable gains, the potential downward pressure on equity markets from these selling flows would likely be short-lived as these sellers could reasonably be expected to eventually buy back positions to restore their equity allocation back to previous levels.


Depending on each of my client’s needs, perhaps on an individual basis we would consider selling if and when details are known. Generally however, timing the market on these kind of things is far more difficult. For most of us, who own good stocks, for a long-time, the potential “savings” from selling to have a lower capital gains bill, has to be weighed against the cost of this market timing, and the reduced number of shares that could be bought after gains are realized.


I had to look it up, as between the Master’s Golf Tournament a few weeks ago, and the Kentucky Derby: these are two “markers” of the start of Spring for me. As a side note, I’ve attended neither of them live, but they are both on my to-do list. One day I hope to post about my “live” predictions. Anyone reading this that ever wants to invite me to either or, feel free to drop me a note.


The Kentucky Derby is indeed on this year. I’m going with the Canadian: “Keepmeinmind” : (LINK) is my pick to win the 147th Derby, take that to the bank (I suggest not, actually, based on my track record).