Investor Taxes and Stock Prices: Threading the Needle!

In my last post, I looked at the Biden Administration's proposal to increase corporate taxes, to provide funding for an infrastructure bill, and concluded that while there is room for raising corporate taxes, it would be more efficient and fairer to do so by reducing the tax credits and deductions in the code, than by raising the tax rate. In the weeks since, the administration has come up with its follow-up  proposal, this one funded by increases in individual taxes, primarily on the wealthy. While one part of the proposal, reversing the 2017 tax cuts for those in the highest tax brackets from 39.6% to 37%, was anticipated, the other one, almost doubling the capital gains tax rate for those making more than a million dollars in investment income, was a surprise. While supporters of the increase point to the fact that only a very small portion of individuals will be affected by the change, those individuals, through their wealth, own a significance percentage of financial assets, and how they react to the change, assuming it happens, will determine whether their pain will become all of ours. In this post, I will start by looking at investment income and how it is taxed today, compare it to how it was taxed in the past, and finally look at how individual investor taxes play out in stock prices. 

The Taxation of Investment Income

In much of the world, income from investments (interest, dividends) is treated differently than earned income (salary, wages), (Read more...)