TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 9, 2013

Bartlett: Tax Increases Often Lead to Bull Markets

New York Times:  Tax Increases and Bull Markets, by  Bruce Bartlett:

[T]he stock market rose sharply after the passage of the tax deal,  which raised the top income tax rate and the rate on capital gains and dividends. This is the opposite of what should have happened according to Republican doctrine, which holds that the tiniest increase in tax rates, especially on the rich, is economically devastating. That got me thinking about the impact of other tax increases in history.

A little research showed that sharp increases in the stock market have often followed big tax increases. ... I have long suspected that when tax rates are low they make it too easy for investors to get an adequate after-tax return. When rates rise, they must work harder for a higher before-tax return to compensate for the higher taxes. This pushes money into growth sectors.

I’m not prepared to predict that the great bull market of the 2010s began on Jan. 2. But I do know that anyone who thinks tax increases never precede a bull market is wrong. History proves that.

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Wow! Any thought that the relief was palpable that tax rates did not go up significantly on dividends and long-term capital gains? Could you hear the cheers that tax rates on the "rich" are now permanent and can not be used as leverage in the future when they "expire?" Is it possible that future disallowed deductions during debt ceiling discussions are insignificant to those "rich" already subject to significant Pease disallowance of itemized deductions?

Posted by: DLN | Jan 9, 2013 11:30:34 AM

"When rates rise, they must work harder for a higher before-tax return to compensate for the higher taxes"

The mentality of every policy-whip wielding government overseer and Pharaonic Keynesian currency debaucher.

Imagine if we had a leadership class in this nation that was skilled in *anything* other than the oh-so-self-impressed manipulation of other human beings.

*Any* skill of use in objective reality.

People like these are the first on their knees when the revolution comes, since all they respect or recognize is their own transient power.

Posted by: cas127 | Jan 9, 2013 11:49:23 AM

OK Bruce, let's raise taxes every month so that the stock market will just keep going up!

Posted by: unimpressed | Jan 9, 2013 12:56:59 PM

What next? A Bartlett treatise entitled, "A Random Walk Around U.S. Tax Policy"? (Apologies to Prof. Malkiel.)

Posted by: Jake | Jan 9, 2013 1:04:43 PM

Bartlett knows something about bull.

Posted by: Woody | Jan 10, 2013 12:16:06 PM