INVESTING: If Congress reneges on tax cuts, stocks would suffer

Did you know there is a possibility Congress won’t make the tax cuts of a few years ago permanent? There must be a lot of other big events to talk about (like some stray buckshot out of the vice president’s gun) because this news was not even near the front page. But it’s hard to imagine we would do something voluntarily that could do more damage to our stock market.

I have been writing for a while that, as time goes on, the indicators I rely on demonstrate the risks in the stock market are beginning to outweigh the rewards. Normal profit-taking seems to be evolving into more concentrated liquidation, with the selling side of the ledger rising to a two-year high.

Even though it is tough to predict how much the major averages will fall in the next bear market, I previously was not expecting anything resembling the last bear market. Maybe the S&P 500 falls a little more than 20 percent, then we get on with our lives. But let Congress raise taxes, and a race to the bottom could be on.

I am relying on history as well as the current environment to make this call. That markets react favorably to lower taxes is such an obvious point that it does not need to be covered here, but there are other reasons raising taxes now would be disastrous.

One is the time and trouble many public companies have gone to in the last three years to better accommodate the 15-percent tax rate on dividends. Encouraging companies that no longer possess rapid growth rates to return cash to shareholders is a great thing. Changing the law only a few years after it was improved has the potential to cause heavy selling in stocks.

In case Congress hasn’t noticed, global competition for investments is fierce. This paper reported last week on a group of businessmen who are considering major investments in India because they feel the risk/reward ratio is in some cases better than it is here.

Dell computer announced recently that it will hire another 10,000 people in India, bringing its total employment there to 15,000. It’s getting easier every day to move money and invest almost anywhere in the world. One thing investors seek is high growth. And higher taxes deliver the opposite. It is within our legislative ability to keep investors interested in America. I hope the competition gives us the political will to do it.

There is still another reason why higher taxes can bring our stock market down. When rates are burdensome, people go to great lengths to avoid paying them. When investors have money in the stock market, it is easy to track. It is much more difficult to keep track of gold, precious stones, offshore accounts and the like. Internal Revenue Service compliance will rapidly decline. People will move money out of the stock market and into places where they think they can avoid paying taxes.

Congress doesn’t move lightning fast. The weakening stock market and rising interestrate environment are perhaps foreshadowing an economic slowdown. By the time the politicians get serious about changing our tax code, maybe they will be able to see for themselves that our economy simply won’t handle that kind of disruption. One thing is for sure, though. I will definitely not put my faith in those in Washington staying ahead of the curve.