Tax expectations may speed stock sales

NEW YORK -- The tax man, in search of revenue, cometh to Wall Street.

With investors expecting the U.S. government to take a bigger chunk of stock-related profits no matter who wins the White House in November, the investment mantra, "buy low, sell high" may soon give way to "buy low and sell before taxes on capital gains and dividends rise."

That potential urge to sell before tax rates go up could act as a fresh headwind for stocks, which are already struggling under the weight of a slowing economy, depressed housing market and upheaval in credit markets.

"The deck appears to be stacked against investors on the tax front," notes Dan Clifton, head of policy research at Strategas Research Partners. Higher taxes on investments, he says, could result in lower stock prices and less demand for stocks as folks seek out more tax-friendly assets, such as municipal bonds.

An analysis by Strategas suggests that stocks will have a more difficult time moving higher in the face of rising tax burdens. In general, higher taxes make stock investing less profitable.

If the current 15% tax rate on both capital gains and dividends, which has been in force since President Bush pushed them through in 2003, are made permanent beyond the 2010 expiration date, the estimated fair value of the Standard & Poor's 500-stock index would be 1523, nearly 9% higher than Friday's close of 1398, says Strategas. In contrast, if Democrat Barack Obama wins and boosts the capital gains tax rate to 28% and dividends to pre-Bush levels of 39.6%, the fair value dips to 1375, or 1.6% below the market's current level.

There's a growing consensus on Wall Street that the next president will be so shackled by a massive budget deficit and campaign promises that the ability to cut taxes, or make current investor-friendly tax rates permanent, will be limited.

"Regardless of who wins, the probability is in 2009 or 2010, tax rates are going up," says Adrian Cronje of Wilmington Trust Wealth Advisory Services.