Meet the Team

Capital Market Impact Weekly market commentary

Concerns rise over tax increase proposals

May 12, 2021

capital gains tax changes have had varied impacts on stock returns chart

The S&P 500® Index has rallied 25% since Election Day, in part due to the aggressive fiscal spending ambitions of the Biden Administration. This strong gain places the past six-month period into the top 3% of all such periods of performance on record.

While debates around the $4.1 trillion infrastructure and social programs continue, recent attention is focusing on how to fund this spending. The Biden Administration is considering several revenue-raising options such as higher corporate taxes, a minimum corporate tax and increased collection of taxes owed. Higher taxes on wealthy individuals is also in the mix, including potentially raising the maximum capital gains tax from the current 20% to 39.6% on individuals with incomes over $1 million.

A survey by Nationwide Retirement Institute of advisors and financial professionals between March and May this year indicates a high level of concern about tax policy. Of the 200 respondents, 32% noted that taxes are the most important macro issue impacting client portfolios. Other concerns (e.g., the federal deficit, the pandemic, government gridlock, inflation) pale in comparison.

In periods of stress and uncertainty, investors tend to want to “do something”. In this case, do something could mean selling to front-run changes to the tax structure. This reaction could be disruptive for both portfolios and the broader market. But history shows little correlation between changes in the capital gains rate and market returns. In an analysis by the Tax Foundation, there have been 22 changes to the maximum capital gains tax rate since 1954. In those years when capital gains tax rates changed, the correlation with stock gains was almost indiscernible at 0.004. If the Biden Administration wants to get sizable infrastructure and social spending packages through Congress, it will likely include raising taxes. But making emotional decisions in portfolios based on tax changes may harm long-term returns.

Review relevant client material from Nationwide

Disclaimers

  • This information is general in nature and is not intended to be tax, legal, accounting or other professional advice.

    The information provided is based on current laws, which are subject to change at any time, and has not been endorsed by any government agency.

    Neither Nationwide nor its representatives give legal or tax advice. Please have your clients consult with their attorney or tax advisor for answers to their specific tax questions.

    This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition or particular needs of any specific person. Investors should discuss their specific situation with their financial professional.

    Except where otherwise indicated, the views and opinions expressed are those of Nationwide as of the date noted, are subject to change at any time and may not come to pass.

    Past performance does not guarantee future results. Current performance may be lower or higher than the past performance shown.

    S&P 500® Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries; gives a broad look at the U.S. equities market and those companies’ stock price performance.

    Nationwide Funds are distributed by Nationwide Fund Distributors LLC (NFD), member FINRA, Columbus, Ohio.

    Nationwide Investment Services Corporation (NISC), member FINRA, Columbus, Ohio.

    Nationwide, the Nationwide N and Eagle and Nationwide is on your side are service marks of Nationwide Mutual Insurance Company.

    © 2021 Nationwide

NFN-1168AO