Fisher Investments UK Reviews Tax Rate Changes

Based on Fisher Investments UK’s reviews of financial and political commentary, tax rate changes receive widespread attention for their alleged impact on equities – especially recently, with upcoming US and UK elections fanning talk of big tax policy shifts. However, we have found tax rate changes and equities don’t have a pre-set relationship.

Fisher Investments UK finds the conventional thinking is tax cuts boost equities whilst tax hikes hinder them. Income tax rate cuts, the theory goes, free up disposable income – driving individual investment and spending, thus boosting economies and equities. Meanwhile, the theory posits tax rate hikes do the opposite – directing more personal income to governments, stymieing consumption and investment.

We have observed similar thinking regarding corporate tax rate changes: cuts, allegedly, benefit firms by preserving post-tax money for reinvestment, research and other growth opportunities whilst boosting earnings. Some economists Fisher Investments UK follows argue these benefit workers, too, by allowing corporations to raise employee pay – whilst consumers supposedly benefit from companies’ not offsetting higher tax bills with higher prices. Meanwhile, hikes supposedly hamper firms by reducing post-tax money and adding compliance costs.

We don’t dismiss higher taxes’ impact on individuals and businesses – and we agree lower taxes mean more post-tax money whilst higher taxes mean less. However, we have observed limited impact on equities. First, we have found tax cuts and hikes are long discussed – with implementation often taking months or years. Hence, in our view, they lack surprise power – which Fisher Investments UK finds moves equities most.

Moreover, firms and individuals can adjust spending and investment plans before tax changes take effect. We find equities reflect this – preemptively incorporating such changes into share prices (pre-pricing). In Fisher Investments UK’s experience, tax rate changes are often watered down from initial proposals, as myriad interests and viewpoints lead to compromises. This can mean tax rises not being as steep as initially outlined – bringing relief – or cuts being smaller than proposed, theoretically a disappointment. Also, regardless of what passes, we have found firms and individuals can offset or avoid tax changes via fully legal means.

Fisher Investments UK’s reviews of market history support our view. Consider the US for its long data history: since 1927, America’s S&P 500 averages 0.0% (flat) price returns in US dollars in the 12 months after personal income tax rate cuts take effect, whilst averaging 16.8% returns after income tax hikes.[i] These data directly contradict conventional thinking we have observed. Similarly, since 1927, S&P 500 price returns one year after corporate tax cuts take effect average 3.2 – whilst averaging 11.1% a year after corporate tax hikes.[ii]

Now, we don’t think these data show conventional thinking’s reverse is true (i.e., that tax cuts hurt equities whilst hikes boost them). In Fisher Investments UK’s review, myriad other factors impact equities’ returns, which we will detail. However, we think these data help refute the (misperceived, in our view) common theory.

Corporate tax rate changes in Japan and the UK do, too, in our view. In Japan, late former Prime Minister Shinzo Abe’s economic reform plan (Abenomics) received widespread attention amongst financial analysts we follow, partly due to Abe’s commitment to corporate tax cuts. However, despite Abe cutting corporate tax rates below 30% during his 2012 – 2020 tenure, Japanese equities’ 124.5% rise in that span trailed world equities’ 155.7% returns in yen.[iii]

Closer to home, financial commentators Fisher Investments UK reviews saw Britain’s corporate tax rate hikes – announced in October 2022 – as likely hurting UK equities, after former Prime Minister Liz Truss reversed course on an earlier announcement to the contrary. Yet the MSCI United Kingdom Index rose 16.0% in the 12 months from the corporate hikes’ announcement – leading world equities’ 12.3% rise in pounds.[iv] Earlier and conversely, the UK’s decade of corporate tax rate cuts, from 30% in 2007 to 19% by 2017, didn’t boost UK equities.[v] In that span, UK equities rose just 72.4% – about half world equities’ 140.5% rise in pounds.[vi]

In Fisher Investments UK’s review, investors benefit by understanding tax rate changes alone aren’t likely to dictate market or economic cycles. Yes, we have found tax policy chatter can impact sentiment and investor expectations in the shorter term – particularly ahead of elections, like recently, as candidates attempt to garner attention and votes. This uncertainty can delay investments as people and businesses wait to see how taxes will change. But we have found clarity regularly emerges as speculative talk fades and investors move on.

In our view, taxes are just one small variable impacting individual and corporate cash flows – alongside myriad other factors, including revenues, capital investments, interest costs and operations. Hence, we think taxes’ cyclical impact is limited – more part of the economic backdrop than an economic or equity market driver. Whilst we think monitoring tax changes is important, Fisher Investments UK’s reviews of market history find they aren’t huge swing factors for equities – positively or negatively – despite conventional thinking.