Fisher Investments’ Founder, Ken Fisher, Debunks: “Stocks Love Lower Taxes”

Transcript

Ken Fisher:
It’s easier to see why you might prefer if takes were lower on you and why you might think that’s good for you and everybody else, and maybe it is, but that doesn’t mean it’s good for stocks.

Every month, if you've been following me doing these, I always do another short chapter. You know my chapters in this Debunkery book are maybe three, sometimes four pages long, with some charts often, where everybody thinks this, but I show you it's really not like that in the marketplace of stocks or bonds or capital markets. This month, I'd like to focus on Bunk #36, which is 'Stocks Love Lower Taxes."

It is easy to see why people believe that. You got an army of people in the world saying "lower taxes are good." You got very few people other than some politicians that really like the idea of higher taxes. Therefore, everybody's either neutral toward taxes, or they'd like lower taxes. And it's easier to see why you might prefer if taxes were lower on you and why you might think that's good for you and everybody else. And maybe it is, but that doesn't mean that it's good for stocks, because that's a different kind of a thing.

Stocks are always about expectations versus subsequent realities. The fact is, when we change a tax of any type, there's a long debate about it. It isn't done in a big hurry. It's done in a C-C-Congress, which sometimes could be thought of as the reverse of p-p-progress. And the fact is, that that all gets priced into stocks before it ever gets enacted. Therefore, it gets really difficult to disentangle what's the effect of this tax move. Now, let me just say, in a broad sense, when people tell you X causes Y in, let's say, the stock market, well, the first thing I always think of is do we have a lot of X's in history? Does that happen a lot, because we got a long history of daily stock prices going all the way back to very, very accurate, precisely accurate, all the way back to 1925. So if this thing, X, whatever X is, has happened pretty often, we ought to be able to see after X three months, six months, year, three years, five years, what happened to stocks. And is that different than when X didn't occur.

Now I'm going to give you the punchline real quick and hard, but then I'm going to go back and delve in a little more. I don't care whether you're talking about capital gains taxes up or down, straight personal income taxes up or down, corporate income taxes up or down. We have long histories of all these. You can measure precisely, and I talk about in several places of the book here. I mean, you can sit there and do them simply, you can look at them like charts. You know, here's this one, and here's this time and here's these other times. And this is what was done. And here's what happened to stocks. And how does that compare to long-term average stocks? And the answer is you can't find any tax moves of any type that show any consistent trend of subsequent reaction to the market after tax hikes and cuts of all federal. I mean, mind you, there are little minuscule types of taxes, and it's hard to really get a handle on them, particularly like state and local. But when we look at federal taxes, the main ones that people talk about, there's actually no subsequent measurable result that's different than normal. Why? Again, because I think these things are baked into stock pricing before we ever get to the point that they're actually enacted in law.

Now, you might want to think about these, as I talk about in Debunkery 36, a little bit differently. People think, because the example that I use in this is capital gains tax, with a great amount of detailing in that chapter, you might think, "Well, boy, you know, cutting capital gains tax, you know that should motivate stocks to go higher shouldn't it?" Think about that rationally. What is a capital gains tax? It's a tax on selling an appreciated stock. Now, politicians get this when it's not about their potential revenue. Now, when you tax something more, you get less of it. You want people to smoke less, hike the tax on smoking way up and you'll get somewhat less smoking. You want people to use less gasoline, tax it to death and they won't use it as much. Cut the tax, they'll use it more. What happens when you cut capital gains tax? You tend to get more selling. What does more selling do? It puts some downward pressure on stock prices.

Is it some motivation when you drop capital gains tax for people to think, "I can make more money on stocks now moving forward than I could have before?" Yeah. If they believe that the capital gains tax won't be hiked on them again in the future. You follow that? Let's say you buy the stock with the expectation that capital gains rate is going to be X, and you plan to hold it for five years, and you do hold it for five years. But then the capital gains rate at the end of the five years is higher. Well, it doesn't matter where you started, that higher disappointed you. The fact is, you don't know what will be done in Congress and the presidency to pass bills and sign into law future changes in tax rates. So, there's no clarity there.

The fact of the matter is, I revert back to my prior statement. We have a very long history of federal tax hikes and cuts of all types. We can measure them precisely on a subsequent short-term, intermediate and long-term effect after their implementation. And there's no evidence in the vernacular of Gertrude Stein that there's a there there at all in terms of stock market effect. I know you don't want to believe that. I know you want to believe, you know, "Tax hikes bad, tax cuts good." And that might be true in the main street real world. But in terms of stock prices, stock prices set expectations in advance and are priced in. And then that subsequent reality doesn't have much impact.

Thank you for listening to me. I hope this was educating for you. I hope you tune back in next month when I cover another piece of myth that people commonly believe and show you why it actually doesn't apply in capital markets. Thank you. I very much hope you enjoyed this video as part of my series on debunking common market myths. To watch more videos like this, click the link on the screen and make sure to subscribe to Fisher Investments' YouTube channel. Thanks so much for listening to me.