The higher the taxes on investment returns, the higher the rate of return investors will require for their investments and the less they will pay for a given investment. A natural extension of this concept is that if the tax rate on investment returns increases, the value of those investments in the economy will decrease. In the context of the stock market, moving from lower investment tax rates to higher investment tax rates will lead to a drop in market values, all other things equal.
Equity Discount Rate:
Candidate Investment Tax Rates Base Rate Risk Premium Tax Premium Equity Discount Rate A (Rep.) 15% 4% 0 0.7% 4.7% B (Dem.) 35% 4% 0 2.2% 6.2%
[A Democratic proposal] to increase in investor tax rates will increase the equity discount rate by more than 30%. To put this into perspective, let us value a hypothetical company that is expected to generate $100 a year of cash flow into perpetuity. Under these circumstances, the values of this company under the policies of Republican and Democrat Candidates are $2127 and $1613, respectively. (Please note that these calculations did not require a premium for inflation or risk. Incorporating these factors into the discount rate, only serves to increase the final return demanded by investors and further reduce market values and economic growth.)
Tuesday, January 29, 2008
If Democrats raise taxes on investments, ...
From Real Clear Markets
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...or just the expectation of the plan's implementation would lower the market value.
ReplyDeleteTax is really killer for us, as we don’t really want more of it. I believe investment is already risky enough and to add more pressure, it just kills the thing. I am lucky that I work in Forex trading, so there I am not required to pay anything extra especially with OctaFX broker, as they got sensational swap free account that saves a lot of money to help me do trading well without having to face any difficulty at all.
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