Tax Rates and Market Performance: A Tale of Two Eras

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The 91% Era

The 1950s represent a fascinating paradox in American economic history. During this decade, the highest marginal tax rate reached an extraordinary 91% on income exceeding US$400,000 for married couples filing jointly, according to data from Stanford.

To put this in perspective, adjusting for inflation using the Consumer Price Index, that US$400,000 would equal approximately US$5.4 million in 2025 dollars. This meant that America's wealthiest citizens were nominally paying nine dollars in taxes for every ten dollars earned above this threshold — though effective rates were considerably lower due to various deductions and loopholes.

Despite these seemingly punitive tax rates on the wealthy, the stock market performed remarkably well during the 1950s. The Dow Jones Industrial Average rose from approximately 200 points at the beginning of 1950 to around 680 points by the end of 1959, representing a more than threefold increase in value over the decade. 

This bull market occurred alongside robust economic growth, with the U.S. GDP expanding at an average annual rate of 4% from 1950 to 1973, according to Statista's analysis, and the overall economy growing by 37% during the 1950s decade, as noted by Exploros. Unemployment remained low, averaging about 4.5% throughout the decade, with the economy maintaining relatively stable employment despite periodic recessions, as stated by analysis from the National Bureau of Economic Research.

The decade witnessed the dramatic emergence and expansion of the American middle class. By 1960, an estimated 60% of Americans enjoyed what the government defined as a middle-class standard of living, according to historian Eric Foner, as quoted in Crash Course U.S. History. The median American family had 30% more purchasing power at the end of the decade than at the beginning, noted an Exploros summary. This prosperity was fueled by the GI Bill, which provided veterans with access to education and housing, and massive suburban development projects like Levittown that made homeownership accessible to millions. This is reported by the National Museum of American History in its article City and Suburb. Homeownership rates also jumped from 43.6% in 1940 to nearly 62% by 1960, as stated by Lumen Learning. 

The economy of the 1950s was characterized by strong industrial production, the expansion of suburban America, and significant infrastructure investments, including the construction of the Interstate Highway System. The postwar economic expansion, also known as the "Golden Age of Capitalism," saw OECD members experience real GDP growth, averaging over 4% per year in the 1950s and nearly 5% in the 1960s, as shown in data from the Bureau of Economic Analysis. Corporate profits grew steadily, and many companies established themselves as blue-chip stalwarts that would dominate markets for decades to come. Importantly, while individual tax rates were high, corporate tax rates, though higher than today at around 52% as shown in data from the Tax Policy Center, still allowed for substantial business investment and expansion.

Today's Tax Landscape

Fast forward to 2025, and the tax landscape looks dramatically different. The current top marginal tax rate stands at 37%, applying to income above US$626,350 for single filers and US$751,600 for married couples filing jointly, according to NPR's analysis of the "Beautiful Bill" tax changes. This rate has been made permanent through recent legislation passed in July 2025.

The Trump administration's "One Big Beautiful Bill Act" (OBBBA) was signed into law on July 4, 2025, slashing taxes for the wealthy and corporations while deeply cutting funding for health care, food assistance, and other public services, as reported by the Institute on Taxation and Economic Policy (ITEP). The legislation includes several provisions benefiting wealthy Americans beyond just the top rate.

Key benefits include an increased exclusion for capital gains from the sale of qualified small business stock from US$10 million to US$15 million, as well as the extension of bonus depreciation, which allows businesses to immediately deduct 100% of the cost of qualifying assets — including private jets. Additionally, proposals are being discussed to further reduce the corporate tax rate to 20%, or even 15% for companies manufacturing domestically, according to analysis from S.D. Mayer.

These tax cuts come with a substantial fiscal cost. The Committee for a Responsible Federal Budget estimates that the complete package could reduce federal revenues by between US$5 trillion and US$11 trillion over ten years, potentially pushing debt to between 132% and 149% of GDP by 2035, compared to nearly 100% today. The Tax Foundation estimates OBBBA will increase budget deficits by US$3.0 trillion from 2025-2034 before adding interest costs, with interest adding another US$725 billion.

The Modern Bull Market: Stock Performance in the 2020s

The contemporary stock market has delivered exceptional returns in recent years. The S&P 500 gained more than 23% in 2024, with the Nasdaq up nearly 29% and the Magnificent 7 group of stocks surging nearly 67%, according to Charles Schwab's market analysis. The S&P 500 hit 57 new all-time highs during 2024 and closed with a gain of 25% including dividends, marking the second consecutive year of 20%+ gains, as shown in BOK Financial's market report.

Behind the continued bull market was solid economic growth, falling inflation, Federal Reserve interest-rate cuts, and healthy corporate earnings, with the artificial intelligence boom sparking a second straight year of outsize gains for Big Tech stocks, as noted by Fidelity's 2024 market report. Individual standout performers included Nvidia Corp. (NVDA:NASDAQ), which surged 171% for the year and contributed 22% of the S&P 500's gains, as shown by RBC Wealth Management.

Looking ahead to 2025, S&P 500 earnings are expected to grow 15% year-over-year, with this continued expansion of earnings growth serving as a key catalyst for bullish strategists, according to Josh Schafer and Allie Canal in a Yahoo Finance market analysis. The Federal Reserve has implemented rate cuts in 2025, bringing the federal funds rate to 3.75%-4.00% as of October, with expectations for continued easing, reported in a U.S. Bank market outlook.

Market Concentration and Valuation Concerns

However, the current market structure raises important questions. By the end of 2024, the 10 largest stocks within the S&P 500 had grown to a 39% weight within the index — a record high. You can read about it here in an article by Charles Schwab.

According to Charles Schwab, for the full year 2024, only 19% of stocks within the S&P 500 outperformed the index itself. This concentration is significantly higher than historical norms, suggesting that market gains could have been narrowly driven.

Valuation, as measured by the price/earnings ratio for the S&P 500, is about 30% higher than the 30-year average, representing a potential risk for 2025, according to Broadway Bank's Investment Management Newsletter.

The Pre-Trump Era: Obama's Tax Increases and Market Performance

Before examining the impact of Trump's Big Beautiful Bill, it's crucial to understand the tax and market environment that immediately preceded it. During the Obama administration (2009-2017), tax policy moved in the opposite direction from what is seen today, with rates increasing for high earners while the stock market delivered exceptional returns.

Under President Obama, the top marginal tax rate was restored to 39.6% on income above US$415,050 for single filers and US$466,950 for married couples, up from the 35% rate under President Bush, as seen in the Tax Foundation 2016 brackets.

According to CNN Money's analysis, the average federal tax rate paid by the top 1% of households increased by more than six percentage points to 33.8% under Obama. Additional taxes on the wealthy included a 0.9% Medicare tax on wages over US$200,000 and a new 3.8% Medicare tax on investment income.

Capital gains taxes also increased significantly. The long-term capital gains rate for high-income households rose to 20%, and when combined with the 3.8% Medicare surtax, wealthy investors faced a 23.8% federal rate on investment income — with some proposals calling for rates as high as 28%, as shown in a Tax Foundation analysis.

Despite these tax increases — or perhaps proving that tax rates and market performance aren't directly correlated — the stock market thrived under Obama. The S&P 500 delivered annualized gains of about 12% from 2009 to 2016, not counting dividends, making it the second-longest bull market in history, according to Vice President at BackBay Communications and Money Magazine contributor Paul J. Jim. Starting from the March 2009 bottom, the S&P 500 nearly tripled during Obama's presidency, generating total returns of 235% including reinvested dividends, according to Jim's reporting.

By the end of Obama's first term in 2012, the S&P 500 had already gained 13.41%, with financials surging more than 26% for the year, as noted by CNBC. CNBC News separately reported that consumer discretionary stocks performed best during Obama's tenure, climbing 21%, with companies like Netflix Inc. (NFLX:NASDAQ) rising 1,900% and Priceline.com up 1,900% from January 2009 to July 2016.

Post-Big Beautiful Bill: Lower Taxes, Continued Gains, But Different Distribution

The transition from Obama's higher-tax environment to Trump's Big Beautiful Bill represents one of the most dramatic tax policy reversals in modern American history. The contrast is particularly striking when comparing market performance and who benefits from the gains.

During Trump's first term (2017-2021), before the Big Beautiful Bill, the S&P 500 rose approximately 67% from inauguration to the end of his term, compared to 83% at the same point in Obama's presidency. You can see this through a chart on CNN Business. This comparison is notable because Obama inherited a market near its Great Recession lows, while Trump took office with stocks already at elevated levels after years of gains, as reviewed by Timothy Sykes. 

The market dynamics shifted significantly with the 2017 Tax Cuts and Jobs Act, followed by the 2025 Big Beautiful Bill. While Obama's era saw a broad-based recovery with the middle class rebuilding wealth lost in the financial crisis, the current tax structure concentrates benefits at the top. According to Fortune's analysis, when comparing the first three years of each presidency through May 31, the S&P 500 grew 56.4% under Obama versus a lower rate under Trump.

What's particularly revealing is that Obama achieved superior market returns while raising taxes on the wealthy, challenging the supply-side argument that lower taxes are necessary for market growth. The Federal Reserve's role was crucial in both periods — maintaining near-zero interest rates throughout most of Obama's tenure and providing similar support during market stress under Trump, per the previously mentioned article by Paul J. Jim.

What About Biden's Tax Reform?

President Biden did not make direct changes to the Tax Cuts and Jobs Act, but he proposed adjustments aimed at rolling back parts of the law, especially provisions that benefit high earners and large businesses. The core of Trump's TCJA provisions, however, has remained unchanged, as reported by SmartAsset. This is the crucial distinction: while Biden proposed tax increases on corporations and high earners during his presidency, he was unable to pass these measures through Congress, which remained divided and then became Republican-controlled.

President Biden reportedly would have liked to raise the corporate rate from 21 to 28%, and Biden's plan would have bumped up high-income earners from 37% to 39.6%, as shown by PBS. However, these proposals remained in the budgeting phase rather than becoming enacted policy.

Comparing the Eras: What the Numbers Tell Us

The contrast between these three periods of change — the 1950s, the Obama era, and the post-Big Beautiful Bill era — challenges conventional wisdom about the relationship between tax rates and market performance. The 1950s demonstrated that high marginal tax rates on wealthy individuals (91%) didn't impede strong stock market returns or economic growth, as reported by the American Enterprise Institute. The Obama years showed that even moderate tax increases on the wealthy (to 39.6%) coincided with exceptional market performance. And now, the Big Beautiful Bill era suggests that dramatic tax cuts might not necessarily produce proportionally better market returns.

Today's market, while delivering impressive nominal returns, operates in a fundamentally different context. 2025's tax reforms would shift the tax burden toward middle-income households, with the median family of four, making about US$110,000, experiencing an approximate US$3,000 tax increase, while higher-income tax filers would receive tax cuts, according to the Center for American Progress analysis.

Who Benefits from Current Tax Policy?

The proposed corporate tax cuts would amount to a US$24 billion tax cut for the Fortune 100, including US$1.3 billion to the five largest oil companies, US$1.6 billion to the five largest drug makers, and US$2.1 billion to the five largest Wall Street banks, as stated by the Center for American Progress.

According to ITEP's analysis, the effects of President Trump's tariff policies alone offset most of the tax cuts for the bottom 80% of Americans, with the bottom 40% facing costs from tariffs that exceed their tax cuts under the legislation.

Investment Implications: Sectors and Stocks to Watch

As we transition into an era of continued low taxes for corporations and high-net-worth individuals, certain sectors and companies stand positioned to benefit disproportionately from these policies. Morningstar's 2025 outlook highlights technology stocks like Microsoft Corp. (MSFT:NASDAQ) and STMicroelectronics NV (STM:NYSE) as top picks, along with financials like Marketaxess Holdings Inc (MKTX:NASDAQ) and PayPal Holdings Inc. (PYPL:NASDAQ).

Technology giants remain obvious beneficiaries in Morningstar's eyes, not just from AI trends but also from the favorable tax treatment of their massive capital expenditures and R&D investments. Financial institutions could see enhanced profitability from both lower corporate rates and increased market activity driven by wealth concentration. Industrial companies like Caterpillar and Huntington Ingalls are favored picks that could benefit from immediate expensing provisions. Healthcare giants navigating this landscape can use corporate tax savings to fund continued consolidation and R&D in an industry facing demographic tailwinds.

The intersection of tax policy and market performance remains as relevant today as it was seven decades ago. The evidence from three distinct eras — the 91% rates of the 1950s, Obama's 39.6% top rate, and today's 37% rate with extensive apertures — suggests that lower taxes on the wealthy don't automatically translate to superior market performance.

In fact, the opposite may be true: both the 1950s and Obama years delivered exceptional returns while maintaining higher tax rates on top earners. This historical perspective challenges the fundamental assumptions underlying the Big Beautiful Bill. It raises important questions about whether current tax policy optimizes either market performance or broader economic prosperity, considerations that investors must carefully weigh when positioning their portfolios for the years ahead.