aswathdamodaran.blogspot.com · 2021-05-11 · 1850d

Investor Taxes and Stock Prices: Threading the Needle

This article analyzes how personal taxes on investment income (dividends and capital gains) affect stock valuations and required returns. The author examines the Biden Administration's proposal to increase capital gains tax rates for high-income investors and estimates that a 30% increase in these rates would reduce stock market valuations by approximately 7.09%, while also discussing broader implications for corporate finance behavior and tax code complexity.

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Metrics in this report

Current Capital Gains Tax Rate (Historical Context)

23.80%percent

United States federal rate in May 2021

Current Dividend Tax Rate (Historical Context)

23.80%percent

United States federal rate in May 2021

Estimated Top 0.3% Wealth Share of Stocks

30%percent

estimate

High-income earners targeted by Biden capital gains tax proposal

Implied Equity Risk Premium

5.73%percent

S&P 500 at 4201.62 on May 7, 2021, pre-personal tax basis

Post-Personal Tax Expected Return

5.01%percent

S&P 500 aggregate market at current tax rates (23.80% on dividends and capital gains), May 2021

Proposed Capital Gains Tax Rate (Biden Plan)

39.60%percent

For individuals earning >$1M in investment income (effectively 43.4% with health care add-on)

Tax-Exempt Investor Ownership of Equities

37%percent

Pension funds and similar tax-exempt entities

Top 1% Wealth Share of Stocks

51.8%percent

United States wealth distribution