De-Hyping the State of the Union

Fisher Investments  |

On Tuesday evening, President Obama said 6,766 words to Americans. He told stories, shared stats, made claims, proposed policies and aimed to inspire – typical State of the Union. Headlines now debate whether his tax proposals are good, bad or neutral for investors and the economy. Overwhelmed? Confused? Overjoyed? Freaked out? Don’t be – Gridlock means Obama’s proposals are likely nonstarters. Investors can probably tune out the noise.

Politics are touchy, so here’s a disclaimer: This column aims to analyze Obama’s address solely for potential market impact, without ideology. Political bias is blinding – dangerous in investing – and we favor neither party. We prefer the Sgt. Joe Friday approach (“Just the facts, ma’am”).

Untangling the Markets from Sociology

Thus, let’s set aside the “why” behind Obama’s tax and spending proposals. It’s largely sociology. We aren’t sociologists, and markets don’t move on sociology. Many folks have strong opinions on issues like income inequality, education, childcare and labor relations, but markets largely ignore this. Stocks are callous and above the fray. Boring, but true.

So. Just the facts! Here is how the President proposed changing the tax code:

  • Ending the cost-basis step-up on inherited investment accounts with embedded gains over $100,000 (or $200,000 for joint filers)
  • Raising the dividend and capital gains tax rate to 28% for high-income investors
  • Applying a 0.07% tax on large banks’ liabilities (this would apply to banks with assets over $50 billion)
  • Expanding childcare tax credits to $3,000-per-child for most families
  • Creating a $500 tax credit for families with two working spouses

These proposals are probably DOA. That’s precisely the term Senate Banking Committee chair Richard Shelby (R-AL) used to describe the bank levy. Congressional Republicans oppose the other tax increases, too. Perhaps this is a starting point for compromise, but perhaps not.

If you are cheering or jeering after those last four sentences, that’s normal. But for investors, getting emotional is counterproductive. Yes, these proposals would create some winners and losers. Prospect theory tells us the losers would hate them more than the winners would love them. But none of these proposals is inherently good or bad for stocks. History shows stocks have no set relationship with tax changes. Sometimes stocks rise when taxes rise. Sometimes they fall. Sometimes stocks fall following tax cuts. Sometimes they rise. All we know – all we need to know – is that stocks have done fine with the current tax code.

Taxes stir emotions, but they’re only one variable influencing economic growth, corporate profitability, investors’ decisions and market returns. If a tax change is inherently negative (which one could argue is a matter of opinion), other positive factors could offset it. If a tax change is wildly positive (also often a matter of opinion), other negative factors could swamp. Also, markets are global! US tax changes don’t really influence returns abroad, and American stocks are only about half of global market cap.

The Illusion of Statistics

Studies abound arguing over whether certain tax policies are good or bad for growth. Take those with a grain of salt. Consider: One study cited in support of hiking dividend taxes asserts the 2003 dividend tax cut didn’t impact corporate investment or employee compensation. Some claim this means hiking capital gains taxes won’t impact business investment, either.

The study seems thorough and data-packed. Persuasive! However, this study—like most attempts to prove anything in economics—lacks a counterfactual. It used S-corporations, which pay non-taxable dividends, as a control group, and found their “investment behavior was extremely similar” to C-corporations, which pay taxable dividends. However, it looked only at tiny companies, ignoring about 90% of corporate America. It couldn’t have a proper control group of S- and C-corporations during the same time period without the dividend tax cut. That’s the only real way to isolate taxes’ impact! Without it, too many variables are ignored. We’ll never know if business investment and wages would have been higher or lower if former President George W. Bush hadn’t cut dividend taxes. We can’t know whether taxes or economic conditions were a larger influence on businesses’ behavior.

Many studies suffer the same flaw. Some are even influenced by their authors’ or funders’ biases. As Darrell Huff’s How to Lie With Statistics reminds us, data can be manipulated to support any claim. Hence supporters and opponents of the same tax proposal can support their claims with empirical studies. The cases for and against Tax Change A can look equally convincing, numerically! Which one is more “right”? Most folks are naturally inclined to accept whichever one confirms their biases and reject the one that doesn’t. This is a behavioral error and can lead to dangerous investing decisions if you act on it. 

That’s why we suggest tuning it all out. It isn’t worth getting hung up on things that probably won’t happen. If you wish they’d become law, sorry. If you’re happy they’re DOA, be happy. Meanwhile, stocks should enjoy the status quo. No change means no uncertainty, no angst, no winners and losers. That’s groovy for stocks.  

By Elisabeth Dellinger, Fisher Investments

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:



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