Will the election impact what happens with my taxes and the stock market?

By Dan Moisand

Emotions can run high in an election year

Dear Dan,

I'm worried that if Harris wins in November, she will raise taxes. That can't be good for stocks. How much of a hit will the market take if tax rates go up?

Florida voter

Dear Florida voter,

While there is no shortage of strong opinions about it, no one knows if an increase in tax rates would cause the market to take "a hit," let alone how big that hit would be.

Regardless of who wins the presidency, the president does not create tax law. That is up to Congress. Regardless of who wins the presidency, if Congress does not act, tax rates are scheduled to rise in 2026 when many aspects of our tax system are slated to revert to what they were in 2016.

Read: Republican or Democrat doesn't matter. Presidential elections boost stocks.

Today, it is difficult to gauge to what extent Congress will intervene because a third of the Senate seats and all the seats in the House of Representatives won't be decided until November. Congress could be sympathetic, antagonistic or something in between to whomever moves into the White House come Inauguration Day.

Let's look past all the uncertainty of who gets elected to the various positions and just zoom in on the idea that higher tax rates will cause a market hit. This is a common narrative. The premise is if tax rates are higher, there is less money available for individuals to spend, save or invest and less money for corporations to innovate, employ, or compete.

Read more on the economy and politics

There is some truth here. The more we, or the corporations we own through our stockholdings, pay the government, the less economic activity we can undertake. Nonetheless, tax increases have not necessarily ended up causing big problems for investors.

There have been times when tax rates have risen and the market performance in the near term was not good. But there have also been times when rates rose, and markets did well.

In 2013, the tax cuts implemented under George W. Bush's administration expired, triggering a tax increase for those making over $400,000. There was no crash. In fact, the total return of S&P 500 SPX was positive every year until 2018 when it lost 4.38%.

Dimensional Funds researchers looked at market returns and tax burden scores from the Heritage Economic Freedom Index. They found no discernible connection between tax burden scores and average returns. Further, they looked at changes in tax policy, including the imposition of higher corporate taxes and found market returns have been positive on average regardless of a country's change in tax burden.

A tax increase would have an effect on the economy and that certainly could affect the markets adversely. However, I would caution against betting your life savings on pundit prognostications especially in an election year when emotions can run high. If you are a properly diversified, long-term investor who exercises discipline and patience, history is highly likely to repeat, and you should come out fine even if taxes rise and the market takes a hit.

If you have a question for Dan, please email him with "MarketWatch Q&A" on the subject line. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.

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-Dan Moisand

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09-04-24 0516ET

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