Bull Markets & Tax Increases

Bull Market Tax Increase

After hitting ten straight days of new Dow highs, I thought it would be interesting to compare how markets have performed through periods following tax increases. I quickly found that Bruce Bartlett broke down this concept in a January 2013 NYT article. It should be noted the chart’s below are based on inflation-adjusted (headline CPI) historical data.

Great Depression:

In 1932 Herbert Hoover enacted a large tax increase to stabilize federal finances devastated by the Great Depression, which began in 1929. Among other things, the 1932 tax increase raised the top federal income tax rate to 63 percent from 25 percent. But the Dow Jones industrial average increased sharply in 1933, rising 69 percent. (NYT)

Dow Historic Performance Tax Increases


The Dow remained flat for the next several years and then took a sharp jump beginning in 1935. Intriguingly, 1935 just happens to be the year Franklin D. Roosevelt rammed a big tax increase on the rich through Congress… The top federal income tax rate rose to 79 percent beginning in 1936, from 63 percent. Yet the Dow was up 48 percent in 1935 and another 25 percent in 1936. (NYT)

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The really big one came in 1942 and raised revenues by 70 percent, 5 percent of the gross domestic product. The Revenue Act of 1942 was the largest tax increase in American history… From early 1942 through the end of 1945, the Dow doubled, and a supply-sider would have lost out on one of the great bull markets in history. (NYT)

Dow Market Performance Tax Increases


Fast forward to 1982. Tefra passed the House and Senate on Aug. 19; the Dow closed at 838.57. By the end of the year, it was up to 1,075.70, an increase of 28 percent. The market continued to rise through 1983, closing at 1,258.64. (NYT)

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Bush Sr.:

Bush signed the 1990 budget deal on Nov. 5 of that year, and the Dow closed at 2,502.23. By the end of 1992, the Dow was up 32 percent. (NYT)

Dow Historic Market Performance Tax Increases


The 1993 legislation raised the top federal income tax rate to 39.6 percent from 31 percent – a huge destruction of incentives for the wealthy, according to Republican doctrine… But by the end of 1993, it was up to 3,754.09, and by the end of 1996 had risen to 6,448.26, a three-year increase of 72 percent. (NYT)

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American Taxpayer Relief Act of 2012:

On January 1, 2013, the Bush Tax Cuts expired. However, on January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012, which reinstated many of the tax cuts, effective retroactively to January 1st. The 2012 Act did not repeal the increase in the highest marginal income tax rate (from 35% to 39.6%) which had been imposed on January 1st as a result of the expiration of the Bush Tax Cuts. (Wiki)

The Dow has continued its jump following the latest round of tax increases, up 7.7% so far this year and (as of today) has held 10 consecutive days of new highs.

Dow Historic Performance Tax Increases


I wouldn’t say tax increases spur bull markets, but the historic evidence supporting performance (following increases) is shockingly similar. Check back next week as I plan to add more research on the concept.