November 25, 2006
Investors suffer from overly "empowered" governments...
DEMOCRATIC SWEEP MAY SPELL TROUBLE, 'EH?
By: TERRY KEENAN
WOULD a landslide victory for the Democrats in Tuesday's midterm elections spell disaster for the U.S. stock market?
Well, that question has been the subject of a very partisan debate. If the Democrats sweep the House and Senate - sweeping in the specter of higher taxes along with them - the GOP argues it will crater the economy and the stock market. Meanwhile, the Democrats argue that the Clinton tax hikes and deficit reduction helped pave the way for the bull market of the late 1990s.
In a possible preview of what a repeal of the Bush tax cuts might mean for investors, the Toronto Stock Exchange careened lower after Finance Minister Jim Flaherty stunned investors with a change to the favorable tax laws covering Canada's income trusts.
Sound arcane? Perhaps, but those investment vehicles - especially in the red-hot energy sector - have been among Canada's fastest-growing exports. Because of their advantageous tax treatment, the trusts often paid out double-digit dividends, drawing thousands of U.S. dollars north of the border.
Now that Canada has broken its promise not to change the tax rules on the trusts, investors are bailing out of Canada in record numbers. As the folks at the Outstanding Investments newsletter put it this week: "If you do business in Canada, you are liable to confiscatory changes in tax policy at government whim - even if we promise no such changes beforehand."
Could it happen here? You bet. With Rep. Charles Rangel poised to rule the powerful Ways and Means Committee, investors are in the cross hairs.
Although Rangel has waffled a bit as Election Day approaches, the New York representative recently told a reporter that he couldn't think of a single Bush tax cut he'd be willing to extend.
When the Democrats took control of the Senate 1986 and cemented their majority in the House. It wasn't long before the capital gains tax rate was on its way up, and the crash of '87 soon followed.
To be sure, over-speculation, portfolio insurance and soaring interest rates all contributed to that Black Monday as well. Still, on Election Day 2006, it may pay to consider whether a vote for the Democrats is a vote for higher taxes and a lower stock market.
TERRY KEENAN is anchor of Cashin' In, an investing program that appears on Fox News Channel on Saturday mornings at 11:30. E-mail firstname.lastname@example.org.
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