1/2 THE TAXES WITH 2x THE RISK

originally written 1/6/03

the newly proposed and soon to be implemented tax package is getting lots of investors very excited. its being billed as a $600billion tax cut over 10 years with the 'centerpiece' of the plan being a sizable cut in taxes paid on dividends paid by corporations. many market bulls are touting this as a superb reason to buy stocks that pay dividends. and so nobody gets left out, even stocks that dont pay dividends are rallying as some believe the new tax code will inspire them to start paying a dividend...microsoft was 1st and probably wont be the last... there, everybodys happy.

now for the reality of the situation. first of all, the tax plan is just a proposal. i know, i know...bush has control of the congress so his plan will get passed without any problems. NOT! the democrats have a few cards in their hand that they have yet to play and tax plans are notoriously watered down and in most cases they come too late to help in the way they were intended to.

secondly, lets say the prez gets what he wants. will it stimulate the economy? only time will tell. the problem may come when the companies that do pay dividends need to cut them if business continues to struggle.

thirdly, lowering tax rates on dividends doesnt reduce the risks of investing in stocks. in fact, it creates a false sense of security and even some speculative frenzy as investors 'bet' on an outcome that may or may not happen. in addition it encourages companies to payout earnings instead on reinvesting them into the business. thus it favors value rather than growth investments.

fourthly, (i know that sounds silly) any incentive for businesses not to reinvest earnings to grow their business is a "dis-incentive" for growth...which is what stock values are based on. if a company choses to pay-out earnings rather than reinvest them in the business, well then the earnings are taxed and growth slows. the result is not good for future capital expenditures or business growth.

with this so called 'bold' proposal, the administration is embarking on a new economic strategy of targeting the stock market and in fact is talking up the equity markets by promising this 'new and improved' stimulus. his advisors have convinced mr bush, as if he wasnt aware, that the economy will be more important in the next election than the war. they may have something there. being that the war will be quick and painless(according to the same advisors), we will need something else to focus on and that will be our stock portfolios.

bold is a good word but its an inappropriate one for this particular plan. stupid, ill-concieved, and ridiculous are adjectives used by more intelligent commentators than myself, but i think they fit much better. if we need stimulus now, then stimulate us now. and there are many ways to do that, yet none of them are in the plan proposed by mr. bush. maybe he is working this backwards, propose crazy stuff, then let the dems change it to be more for the middle class and then take credit for being a centrist and a president for the masses. im not sure his tact but so far he seems to be headed the wrong way on the economic path to recovery.

have a grateful day!

larry