The fiscal well-being of the federal government now greatly hinges on a booming stock market. This reliance is troubling in light of what would happen if asset prices were to decline. Policymakers are acutely aware of their dependence on rising asset values, which have become critical for sustaining federal revenue amidst a growing deficit.
Over the last three years, the federal government has used any number of tricks to prop up the stock market. Low interest rates and quantitative easing are straddling the economic landscape as the new normal. These practices are intended to attract capital and boost asset valuations. These provisions significantly improve the attractiveness of investing thus benefiting the government in return in the form of tax revenues from capital gains.
This is all to underscore the importance of capital gains taxes. In 2021, capital gains taxes jumped to an incredible 8.8% of the Gross Domestic Product (GDP). In fact, they accounted for nearly 15% of the FY21 total tax revenue. This revenue stream is critical lifeblood needed to fund regular government operations and services. It almost exclusively targets the wealthiest Americans, who disproportionately benefit from capital gains. The top 1% of earners owns approximately half of all U.S. stocks, while the top 10% holds over 90%, highlighting the concentration of wealth and its impact on government funding.
The U.S. federal government is just as addicted to the stock market. This reliance is more than a bad economic observation. It reveals a deeper fiscal approach. The larger effect of this is that as federal deficits deepen, the federal government turns more and more to appreciating asset values as a way to support itself. The financial markets have effectively turned into a tax pipeline, significantly contributing to federal revenues even as they benefit the wealthiest individuals through preferential tax rates on long-term capital gains.
Giving a break on capital gains tax rates primarily helps higher-income individuals. Consequently, they lower total tax collections by an average of $345 billion per year. This powerful dynamic is an equity issue and a long-term disaster waiting to happen if we continue to depend on such a highly concentrated revenue source. Asset prices are climbing, which is leaving the Administration to defend these markets. They go so far as to employ secretive measures, like the so-called “Plunge Protection Team,” to prop up prices whenever extreme volatility occurs.
The ramifications of this financial dependency are deep. If the stock market begins to crash it would immediately set off a tailspin of cascading effects. This would hurt federal revenues and their ability to fund other things. Policymakers recognize that market stability is of the utmost importance. A crash would severely cripple the government’s ability to pay for important services and programs.
The deeply rooted, symbiotic relationship between the U.S. government and financial markets deserves a necessary and defiant dialogue on fiscal responsibility and economic justice. Every time the price increases, inequality gets worse. Meanwhile, those who benefit from the increase in asset values get their benefit, and it compounds many times over. Yet the system as it stands seems designed to deepen these disparities, all while putting enormous stakes on policymakers to shore up confidence in markets.