The opening salvo in the tax debate has been fired. The salvo concluded on Thursday with a proposal suggesting a top tax rate on income of 40.8% and 23.8 on capital gains for those making over $1 million dollars a year. This follows a proposal to raise the corporate tax rate to 28% from 21%. So the cards are on the table for all to see. Based on the rhetoric and media preceding these proposals one would have expected the market to go completely into the tank. Well it did, kind of, if you can call it that.

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Thursday, April 22, we had a brief 1.4% decline (a swing from positive to negative on the index) in the S&P 500 when the proposal was issued. This was followed on Friday with 1.09% gain in the index, up 45 points on the day. At one point we were up almost 60 points registering  a new all-time, intra-day high in the S&P 500. What a lot of pundits and media had feared would be a major problem for stocks appears not to be (at least for now). As of this moment (with all cards face up) it did not even make a ripple. The market’s reaction was “meh.”

Oh yes, I said it was Friday, recently a day where we have seen weaker markets as traders take money off the table, always fearful of unsettling news (positive or negative) hitting the market while it is closed over the weekend. From my perspective this was a pretty startling performance versus what I had expected it might be and a good omen for what I continue to believe is a secular bull market.

“Is this all there is?”

Has the Biden administration hit us with their best shot? My guess is that it is and that it is a great positive. The game is that you go in with a high number from which you can negotiate down. Nonetheless, as this process continues there will be lots of ink, video and bytes expended on reasons why this issue should be at the top of the list of things to worry about. Don’t let ’em scare you out of your stocks. At worst this will be an offset to the nearly $5 trillion  worth of stimulus we will have received in the past 12 months. There is no way they take it all.

But what about those crazy Dems?

There is a propensity on the part of the media to ascribe monolithic tendencies to both parties. When it comes to dropping free money on everyone, this works with Democrats. When it comes to taking money away, well, it is a different story. The Republicans will definitely vote ‘nay’ but most Democrats do not hail from districts where the majority wants to have their taxes raised, not even Alexandria Ocasio-Cortez.

I live in the Kansas 3rd Congressional district. My rep is Sharice Davids, a two-term, Native American, Cornell Law grad, mixed martial arts fighting Democrat. She replaced Republican, Kevin Yoder in 2018. Kansas is a red state but the 3rd district has turned purple. She spends a lot of time on constituent service in her district to keep it that way. Davids, along with other moderate Dems, will write any new tax law because if you lose those (purple) seats, you lose your majority. AOC is in a safe seat. She may have a lot to say about tax policy but her rhetoric will have little effect on the outcome.

My take: Tax increases are coming but the market is not buying them as being draconian. Ergo, the market says ‘meh’. Don’t let the media and pundits scare you out of our secular bull market. 

What  are your thoughts?