NCPA - National Center for Policy Analysis

After Taxes, Inflation Return On Stocks Stable

July 28, 1997

The stock market may be surging, but the return after inflation and taxes is not that impressive in the long run, according to Wharton School of Finance Professor Jeremy J. Siegel.

  • For the period 1801 - 1997, there is a remarkably stable 6.6 percent annual inflation-adjusted rate of return -- with the market just now catching up with a prolonged under-performance during the 1970s and 1980s.
  • Assuming a top marginal tax rate since the income tax was introduced in 1913, along with capital gains taxation, the stock market's growth rate since then has only been about 2.4 percent annually.
  • With the growth in taxes so massive this century, money was diverted from capital formation, Siegel contends, to government spending -- a less efficient employment of economic resources.
  • The market is still no more above its long-term growth trend now than it was for long periods -- for example, from the late 1950s through the 1970s.

Summing up: stocks can help beat inflation -- but watch out for those taxes.

Source: Peter Brimelow, "Stocks Versus Taxes and Inflation," Forbes, July 28, 1997.


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