How Would Tax Reform Affect Financial Markets

The U.S. Congress is evaluating several proposals to reform the federal income tax system. Proponents of tax reform want to simplify tax preparation and stimulate economic growth by increasing the incentives for taxpayers to work, save, and invest.> While the primary objective of tax reform is a more productive economy, changing the tax laws would also affect financial markets. Several of the proposals would change the way interest expenses are deducted and change the way income from interest, dividends, and capital gains is taxed. These changes would affect interest rates and the prices of stocks.> Golob analyzes the effects of income tax reform on U.S. financial markets. He reaches three conclusions. First, most proposals would reduce interest rates in credit markets where interest income is currently taxable, including bank loans, Treasury securities, and corporate securities. Second, all proposals would increase interest rates in municipal credit markets where interest income is not currently taxable. And third, most proposals would increase stock prices. All three of these effects could be substantial.