Tax Policy Affects Stock Ownership

It appears inevitable that marginal tax rates in the U.S. must be increased in the future in order to deal with the ballooning deficit.  One might wonder then how tax policy affects ownership of stocks.  The answer, according to a study posted at VOXeu.org, is that higher tax rates on capital tend to drive investors into tax-advantaged accounts.  Thus, increasing the capital gains tax will likely have a negligible effect on government income and will also drive much of that 30 percent of direct stock ownership out of equities.

The study points out that “households owned more than 90% of the US stock market right after World War II compared to less than 30% in 2006.”  The biggest reason for the change in stock ownership structure is tax-advantaged retirement accounts, especially pension plans.  In order to reduce the amount of tax they owe, investors tend to put pre-tax savings into retirement accounts so that the amounts are not taxed until a future time when withdrawn in retirement.

The study concludes, “the proliferation of financial intermediaries in the stock market is the likely consequence of tax policy. Stock prices would have been much lower without the dynamic tax clientele shift that we have observed. Ownership structure also matters to current and future debates on capital income taxation. Capital income is concentrated in the wealthiest fraction of the population, which is therefore a natural target group for tax policy changes. However, as ownership shares have migrated from wealthy households to untaxed private pension plans, further manipulation of capital income taxation of stocks is increasingly less relevant.”

Please click on the following link to read the study: Stock Ownership and Tax Policy