ABC News reported this evening that gun sales had jumped significantly since Tuesday's election, because many people think that the new administration and/or Congress will seek to limit gun sales.
This led me to wonder whether some significant part of the recent gyrations in the stock market might be a function of an expectation that the new administration will raise capital gains taxes from the current low rates. If it is true that there are significant unrealized capital gains in non-retirement accounts, and not a whole lot of cash in retirement accounts, there may be far more sellers than buyers.
You might open this post in another window:Those Shareholders who are being wiped out ... who are they? - or, "How's it trickling?" and also take a look at Wealth Concentration Tables from 2004 SCF: 50-40-5-4-1
If we look at holdings of Stocks (line 08), Non-Money-Market Mutual Funds (line 09) and Retirement Assets (Line 10), by wealth quantile, here's what we see for 2004: (trillions of dollars)
.................. Stocks ....... NMMMF ..... Retirement Assets ... Ret Assets as Pct of Holdings
Bottom 50% . 21 ............ 23 .......... 226 .................84%
Next 40% ..... 382 ............ 564 ......... 2,587 ................. 73%
Next 5% ...... 375 ............ 332 ......... 1,321 ................. 65%
Next 4% ...... 1,045 ............ 1,016 ........ 1,701 ................. 45%
Top 1% ....... 1,888 ........... 1,169 ......... 917 ................. 23%
Total ..........3,711 ........... 3,101 ......... 6,752 ................. 50%
The folks who have holdings of individual stocks and non-money market mutual funds in retirement accounts don't have enough to buy up all that those who hold their stocks and mutual funds in non-retirement accounts might choose to sell before anticipated increases in capital gains taxes. They certainly don't have enough cash sitting around to buy up the stock that the top 5%, or even just the top 1%, might put up for sale if they were concerned about a change in tax laws. [For an estimate of holdings of unrealized capital gains, see "Capital gains and wealth" in the SCF study Currents & Undercurrents: Changes in the Distribution of Wealth, 1989-2004, particularly for the top 1%.]
Capital gains are taxed at a maximum of 15%, and the next president may raise that to 20%, a 33% increase, for SOME taxpayers. Some sources say that the rate might be as high as 25% -- a 67% increase. Might that be enough to cause some who hold stocks and mutual funds in non-retirement accounts to choose to sell? Possibly.
Keep in mind, however, that many kinds of capital don't appreciate. Buildings depreciate. Cars depreciate. Machines depreciate -- even with the best of maintenance. What appreciates? Something that isn't "capital": the classical economists called it LAND. Not just sites, but also natural resources and many other things not of human production. And through our laws on residential property appreciation and 1031 exchanges, we exempt much of the appreciation in land from taxation. To our detriment. But that's another story.
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