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Tax Policy - Neutral Effect on Market

I saw Warren Buffet on television last night, and as usual he was worth listening to. He said investors should expect the stock market to provide a total return of about six percent a year for the next 20 years. From price levels I agree with him. His belief in this low return explains why he has not been buying many stocks for the last several years, opting instead to put his money into privately held companies. Stocks are one of the highest risk investments you can make. Is all that risk worth six percent a year. I think Buffet has the right idea.

Somehow, our leaders in Washington managed to avert a stock market disaster by not completely eliminating the dividend tax. The tax has been reduced to 15% for the next few years. In February, I discussed how the total dismissal of the dividend tax would lead to massive abuse from large stock market funds. If there is no tax, then a stock trading at $100 a share today that will pay a three-dollar dividend tomorrow will be bought to the hilt by every fund with some excess cash. Then in the morning after they collect their three dollars, they will sell the stock at $97 a share. The funds will put the three-dollar dividend in their pockets tax free, and they also have a three-dollar loss on the stock they can carry. Nice work if you can get it.

President Bush called the elimination of the dividend tax the cornerstone of his tax cut proposal. I am glad the taxes were simply reduced and not cut, but his language demonstrates how important investors have become to politicians. The millions of new stockowners have been called the rise of the investor class. Most of these stockowners have not been making money lately, so they called Washington for help. Well, remember what President Reagan said about politicians in Washington. If it moves, tax it. If it keeps moving, regulate it. When it stops moving, subsidize it. The new tax package approved last week will not help the stock market, but it may help get some votes for Bush and his supporters. I guess the politicians would call that a job well done.

In the midst of all the loud talking about our tax policy was an actually intelligent idea that has come from a Congressman from Georgia. His name is Linder, and his ideas have the potential to bring about a revolution. He has proposed a total elimination of all income taxes on the corporate and individual level, replacing them with a flat 23% sales tax on consumer sales. I can't imagine what kind of power this would put into our economy. The IRS would have to close, and all of the time and money you spend dealing with the tax code would be yours again. Some companies spend more money preparing their taxes than they spend on the taxes themselves. The flat tax would free up a truckload of money as well as precious time. I love the idea, and I wish Congressman Linder luck on his crusade.

Tax policy is not an accurate predictor of what the stock market may or may nor do. They stock market was able to put on a powerful rally from 1974 until 1978 despite crushing tax levels. And Congress has been steadily cutting taxes for the last 10 years, during which the market has risen and fallen to no clear discernible pattern. I like lower taxes, but the evidence shows that tax policy has a neutral effect on the stock market.

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