The media pundits were proven wrong in the aftermath of the election, as the predicted market decline did not materialize.  The stock market’s positive reaction to the election is not out of the ordinary and is not necessarily surprising in light of efficient market theory.  The Efficient Market Hypothesis (EMH), first proposed by Nobel Prize winner Eugene Fama, states that stock and bond prices reflect all available information at any point in time – and new information (e.g., the outcome of a presidential election) is very rapidly incorporated into market prices.  New information about the outcome of the election was quickly priced into aggregate market prices by the buying and selling of stocks, consistent with efficient market theory.

Specifically, U.S. stocks were “re-priced” by market participants who foresaw a new political and economic environment characterized by lower corporate and individual tax rates and less regulation.  Those who attempted to “time the market” by selling portions of their stock portfolio prior to the election were likely left on the sidelines as the market moved upward post-election.  Of course, we do not know what the future will hold, and we do not claim to know where the market or economy will go from here.  But, this election season provided a valuable lesson in the potential pitfalls of trying to outguess the stock market.

• The number of income tax brackets may be reduced.  There are currently seven income tax brackets in the U.S. tax system (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%).  The President-elect and the House GOP have proposed simplifying to just three brackets (12%, 25%, and 33%).  The House GOP has not, however, outlined where the income thresholds might fall for each new bracket.
• Standard deductions and personal exemptions would be consolidated, while itemized deductions would be eliminated or capped.  While some taxpayers may fall into a higher tax bracket under the new condensed brackets, the President-elect’s plan is to raise the standard deduction to $30,000 for a married couple (up from $12,600) and $15,000 for single filers (up from $6,300).  This would give those who do not itemize their deductions a significant boost.  However, the per-person exemption (currently $4,050) may be eliminated entirely, which could potentially hurt larger families.  In addition, there may be a cap on itemized deductions ($200,000 for married couples and $100,000 for single filers).  The House GOP has a drastically different proposal in which all but the mortgage interest and charitable gifting deductions would be eliminated.  Like the President-elect’s proposal, the House GOP proposal would combine the standard deduction and personal exemption into one, but with lower amounts than the President-elect’s plan:  $12,000 for individuals and $24,000 for married couples.

• Estate taxes may be repealed.  The new presidential administration has proposed repealing the estate tax entirely and replacing it with a capital gains tax (when assets are sold) on the amount of the estate over $10,000,000.  Currently, the estate tax only affects those with estates over the estate tax exemption amount, which is $5,490,000 for single people and $10,980,000 for married couples.  The House GOP has also vowed to repeal estate taxes, but the details have not been specified regarding any type of replacement tax.
• The corporate tax rate may become more competitive with other countries.  Currently, the U.S. has the third-highest marginal corporate tax rate in the world.  In an effort to make American businesses more globally competitive, the current proposals would lower the corporate tax rate from 35% to 15% (President-elect) or 20% (House GOP), bringing the rate more in-line with the worldwide average of 22.5%.  The House GOP has also proposed a maximum 25% tax rate for small businesses organized as sole proprietorships or pass-through entities.
• Corporate profits may be repatriated.  Under the new administration’s plan, corporations holding profits offshore would be able to bring those profits back to the U.S. for a one-time tax of 10%.  Companies like Apple, Microsoft, General Electric, Pfizer, and IBM have a combined $400+ billion in cash parked overseas, so a considerable amount of cash and tax revenue could return to the U.S. if this proposal is enacted.
• The 3.8% Medicare surtax on net investment income and the Alternative Minimum Tax (AMT) may be eliminated.  This is included in both proposals.
• Taxes on capital gains and investment income.  Under the new administration’s proposal, the long-term capital gains tax (currently 0%, 15% or 20%, depending on the income tax bracket) would stay in place and would correspond directly to the proposed three-bracket system (i.e., those in the new 12% income tax bracket would pay 0%; those in the 25% income tax bracket would pay 15%; and those in the 33% income tax bracket would pay 20%).  Under the House GOP proposal, the current long-term capital gains rates would be repealed and individuals would be able to exclude up to 50% of investment income (capital gains, qualified dividends, and interest income) with the remainder taxed at the new ordinary income tax rates – essentially giving way to rates of 6%, 12.5%, and 16.5% on investment income, depending on the taxpayer’s income tax bracket.