Investing.com: Will Capital Gains Tax Hikes Burst the Stock Bubble?

Article by Gary Gordon in Investing.com

The United States government raised taxes to finance the debt that accrued in World War I and World War II. Today, we are not engaged in a military intervention of monumental magnitude. However, the public debt-to-GDP is greater now than at any other point in American history.

Consequently, both the White House and Congress are looking at proposals to pay for everything from pandemic stimulus checks, corporate bailouts, and infrastructure projects. Indeed, if leaders keep campaign promises, taxes will go up significantly.

US Marginal Tax Bracket Vs Government Debt

The stock market went from positive territory to negative territory on a report that the White House is looking to raise capital gains taxes on the wealthiest investors. 

The idea that tax hikes will only affect the wealthy, however, is flawed. The wealthiest among us own the most stock. The more shares that they sell, the more pressure on prices to move lower. The lower that prices move, the larger the threat of “leveraged long” investors needing to cover their margin debt accounts.

In recent history, margin debt peaks have been associated with rapid stock price unwinding. The 50%-plus stock market losses in 2000 as well as 2008 occurred alongside margin debt reversals.

What’s more, the comparisons to the start of previous market downtrends are coming fast and .....

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