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What The Trump Tax Reform Bill Means For The Markets

tax reform

What The Trump Tax Reform Bill Means For The Markets

President Donald Trump’s tax reform agenda has been moving markets since the first day he took office. While many Americans and other people from around the world were discussing the negative outcomes from the election of a populist president, the markets were starting a historical rally that continues to this day.

Tax reform is a complex process that could significantly affect many different Americans and American businesses in many different ways, so it can be difficult to understand the precise market impacts that Trump’s tax reform agenda will have. Fortunately there have been a number of past tax reforms whose impact on the markets we can examine.

Let’s take a quick look at the impact on the markets of past tax reforms to get a clearer image of what market effects Trump’s tax reforms might have.

Corporate Taxes

Corporate tax rates have been cut 10 times since 1927. Stocks have risen in the following year 60% of the time as a result, with an average increase of 11.3%. Contrast that result with the 13 corporate tax rate hikes in the same period, where the following years saw an increase in the stock market 69% of the time and with an average 12.5% increase.

So far the case for the impact of tax reform on the market does not look very strong. The impact of corporate tax cuts and hikes are more or less indistinguishable on the subsequent year’s stock market performance.

Personal Taxes

Personal income tax rates have been cut 15 times, and the subsequent year saw a stock market increase 66% of the time, averaging an 8% increase. That may sound promising, except that personal income tax hikes saw a stock market increase in the subsequent year 10 out of 13 times, averaging a whopping 15.7% annually.

The explanation for this effect is simply that personal income tax reform responds to the current economic climate, with tax cuts happening at troughs and tax hikes happening at peaks. This relationship between personal income tax and stock market returns shows that it is personal income tax reform adjusting to the current economic climate, and not the other way around.

Capital Gains

Theoretically it is capital gains taxes that should have the most significant impact on the stock market, as this is a direct form of taxation on stock market returns. Unfortunately the causal relationship is all but clear.

There have been 6 capital gains cuts, and stocks rose the next year 5 times, averaging a whopping 19.1%. However, stocks also rose the next year 8 out of the 9 times there was a capital gains tax hike, with an average of 12.1% return. Hardly an open-shut case of positive feedback between capital gains tax cuts and stock market increases.

The Final Results

Looking at the historical results of tax reform does not leave you with a lot of bullish sentiment. However, that does not mean that investors should turn bearish on Trump’s tax reform. If anything the historical analysis of the impact of tax reform on the stock market shows just how little importance tax reform actually has on the stock market and the economy as a whole.

The current bull market is more the product of strong global growth than anything else, and American tax reform will have little impact on this trend. While the stock market may surge and swoon around tax reform while it is dominating the headlines, it is unlikely to have a major impact on the stock market either way once the process is complete and the media focus turns to something else.

 

COVER IMAGE: NEW YORK – JUL 16, 2016: Donald Trump speaks during a press conference on July 16, 2016 in New York.