"Already written into law for 2013 are big changes including the expiration of the Bush tax cuts and the payroll tax cut and the new Medicare tax on investment income, not to mention the impact of the increasingly costly annual fix to the alternative minimum tax," Kleintop writes in a new report to clients.
The changes to tax policy are likely to fall somewhere between the major proposals from congressional Democrats and Republicans, and they're probably going to be far-reaching. However, despite the scale of the changes, LPL doesn't expect major direct impacts on either stocks or bonds.
In the past, tax changes have actually had minimal effects on stock market performance, Kleintop says. Partly that's because historically income tax changes have not had much measurable effect on earnings growth.
"In fact, the growth rate of earnings from the peak of one business cycle to the next has consistently been about 7 percent over the six major earnings cycles spanning the past 50 years," writes Kleintop. That's despite average top marginal income tax rates ranging from 91 percent at the beginning of the period to the current 35 percent, as well as corporate tax rates ranging from 52.8 percent to 34 percent over the last five decades.
As for the bond market, historically changes in income tax rates that apply to interest income appear to have had little, if any, direct impact on government bond yields. "Yields rose with inflation in the 1970s and fell as inflation fears receded over the vast majority of the last 30 years regardless of tax code changes or their impact on the deficit," Kleintop says.
Most important for investors are the big policy questions, as they'll have greater implications than any changes to the tax code. Says Kleintop: "The far bigger impact is an indirect one determined by the magnitude and direction of overall fiscal policy taken (or not taken) in 2013 to put the United States back on a path to financial stability."