News Flash: it’s an election year. And, a remarkable one at that—a global pandemic persists, creating impacts within and outside our borders which must be addressed by future U.S. elected leaders and administrations. The possibility of a tax increase is top of mind, and with good reason. The federal budget deficit has exploded to levels not seen since WWII due to pandemic-related spending. Conventional wisdom posits the following scenario: large deficits lead to future tax burdens… those tax burdens will hamstring the economy… and investment returns will be hindered by a weakened economy. Are we all doomed by the conventional wisdom?
To consider this question, we (ok, really just Pete) researched personal tax rates, corporate tax rates, and capital gains tax rates going back to 1928, and then analyzed the S&P 500® returns relative to various tax rates. The findings were eye opening. Check out the frequency of tax rates north of 80%:
The data tells us that at a current tax rate of 37% for the highest bracket, rates are historically low… by a mile. So, what if you ONLY invested in the S&P 500® when the highest personal tax rate was 90% or higher? You’d have invested for 15 years between 1928-2019, and your compound annual return for those 15 years would have been 17%. In contrast, if you only invested in the S&P 500® when the highest marginal tax rate fell below 50%, your compound return over that 37-year time-period would have only been 7.71%. Remember, the average S&P 500® compound return from 1928 to 2019 was 9.9%. Beware of thinking 'this time is different.'
The point is: don’t make investment decisions based on news headlines or conventional wisdom on taxes. Taxes will go up, and taxes will go down. Our approach remains calculated and consistent. Focusing on your personal headlines, and controlling the things that can be controlled, ensures that your financial plan is always in line and executed with your needs and risk tolerance—regardless of who wins the election.
Disclosure: Services offered through 994 Group, a Registered Investment Adviser. This presentation is for education purposes only and does not constitute an investment recommendation. No advice may be rendered without a signed client service agreement. Investing involves risk and may result in loss of principal capital. Past performance is not indicative of future results. 994 Group does not offer legal or tax advice. Please consult your CPA or attorney regarding your individual circumstance.
Index definition: S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.
Sources: Irs.gov – historical tax rates, Finance.yahoo.com, S&P 500® returns 1928-2019
Services offered through 994 Group, a Registered Investment Adviser. This website is solely for informational purposes. Advisory or Financial Planning services are only offered to clients or prospective clients where 994 Group and its representatives are properly licensed or exempt from licensure. Past performance provides no guarantee of future returns. Investing involves risk and potential loss of principal capital. 994 Group is a DBA of MJR Financial LLC. No advice may be rendered by 994 Group unless a client service agreement is in place.
994 Group does not provide tax or legal advice. This material is prepared for informational purposes and is not intended to provide or be relied upon for tax or legal advice. Consult your tax or legal professional before guidance.
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