Last night's news of a potential deal between President Obama and Republicans in Congress regarding an extension of President Bush's tax cut package helped fuel a market rally which has sent the S&P 500 and the Russell 2000 small-cap index to 2-year highs. This news is very encouraging and is something I have written about before - the need to keep tax rates low to spur economic growth, create jobs and allow more money to flow throughout the economy by keeping it in the hands of individuals.
Today's market rally is a key sign of the importance of low tax rates to the market as it creates an incentive for investment, particularly low capital gains and dividends tax rates. After all, the investment incentive begins to lessen when you have to pay out more of your investment earnings in taxes. By keeping tax rates low on income that corporations pay out (dividends) and the capital gains you make on selling an asset, investors will have more reasons to provide much needed capital to businesses going forward.