Abstract

We study the effects of tax progressivity on stock returns in the US. Using the Local Projection method and the novel progressivity tax data from 1969 to 2016 provided by Borella et al. (2023). We show that a tax progressivity shock reduces stock market returns and the risk premium in the first year after the shock. When we examine industry-level portfolio returns, we find negative effects on the consumer and manufacturing industries but no impact on the health and high-tech industries. Our empirical findings are robust to a battery of robustness tests and are consistent with the stock market anticipating a negative impact of tax progressivity on future GDP growth.