JPMorgan’s Kolanovic: Democratic Tax Tactics Will Spark 15% Stock Plunge

Thursday, 26 Jul 2012 07:45 AM

By Dan Weil

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Democratic tax proposals on Capitol Hill would hurt the stock market, while proposals from Republicans would boost it, says Mark Kolanovic, global head of equity derivatives for JPMorgan Chase.

If Democrats achieve their goals of increasing the top personal income tax rate to 40 percent from 35 percent and the top dividend tax rate to 20 percent from 15 percent, stocks would drop 7 to 15 percent, he predicts in a report obtained by MarketWatch.

If instead Republicans’ proposal to cut the top corporate income tax rate to as low as 25 percent from 35 percent currently succeeds, stocks would gain 7 to 14 percent, Kolanovic forecasts.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

He formulated his estimations by looking at income tax and corporate tax rates of OECD countries and seeing how they affect stock market returns.

The basic rule is that higher taxes, especially for high-income earners, mean lower returns, Kolanovic says.

Increasing capital gains taxes also depresses stocks, but not by as much as tax hikes on ordinary income, he says. For every one percentage point increase in capital gains taxes, stock returns slide about 0.2 percent.

Assuming Kolanovic is right, it’s very difficult for investors to decide how to act.

It’s still completely up in the air whether a Democratic proposal on taxes, a Republican proposal, a mixture of them, or nothing at all will pass Congress after the election. It’s highly unlikely Congress will act before November.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did


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