It seems nearly certain that the tax rate on capital gains will soon rise. But despite what conventional wisdom might say, that doesn’t mean equity valuations must fall.
“History shows no discernible correlation between equity valuations and changes to the capital-gains tax rate,” according to recent research.
A study by UBS Global Wealth Management indicates that earnings multiples on the S&P 500 can range anywhere from 8 to more than 20 regardless of whether taxes on capital gains taxes are at 15% or closer to 30%, Barron’s reports.
There is “no relationship between capital-gains taxes and market returns,” David Lefkowitz, head of Americas equities at UBS, wrote in the report.
That’s not to suggest that an increase in other taxes won’t hurt stocks. A higher corporate tax rate would, by definition, lower a company’s earnings. That inevitably has a negative effect on share prices. Cap-gains taxes, however, are not a reason to worry about the overall equity market.
President Joe Biden has proposed boosting capital-gains tax rates to 39 percent for investors earning more than $1 million a year, according to Forbes.
