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Last month, a small Houston-based oil and gas company called Contango (MCF) hired Merrill Lynch to explore the possibility of selling the company. Patrick Gundlach, portfolio manager of the Marshall Small-Cap Growth Fund (MRSCX), which has a stake in Contango, wondered why, and asked the company's management. Was it the overwhelming interest in developing new sources for oil extraction? Was it the potential price that could be gotten in this market?



No, it was none of those reasons. According to Gundlach's recollection of the conversation, shared with The Outlook, it was because insiders with big stakes -- including Chairman and CEO Kenneth Peak, who has a 13% ownership position -- wanted to sell before any potential tax rate increase goes into effect with the next Presidential Administration.



While this is but one anecdote, there is increasing concern among investors about higher tax rates in the future. Would this concern be enough to make them act? Will investors move to sell stocks before any possible capital gains tax increase, and could this selling put downward pressure on the market?



Standard & Poor's Chief Investment Strategist Sam Stovall believes tax rates for capital gains, among other tax categories, are likely to move higher in the future.



"Keep in mind that the Bush tax cuts are programmed to expire in 2011 anyway," he says. "And a new President may bring higher taxes earlier."



Stovall also believes there may be some selling pressure in the market, as investors move to lock in some gains at the current capital gains tax rate of 15%.



"Tax avoidance is legal and encouraged, and if you can avoid paying a higher tax in the future by paying a lower tax now, you may well decide that's the right decision for you," he points out. "I think investors may turn to index funds instead of actively managed, high-turnover mutual funds. Index funds generally keep capital gains to a minimum."



He also believes there may be more debuts of tax-managed funds.



"The trend of more and more Americans investing in stocks is going to continue no matter what the capital gains tax rates are," predicts Stephen Goddard, portfolio manager of the AFBA Five Star Balanced Fund (AFSAX).



One hundred million Americans currently own stock. Between 1990 and 2000, stock ownership jumped by more than 50%, according to a study published by the Joint Economic Committee.



Politicians may want to take note that raising tax rates does not necessarily lead to higher tax revenues.



ABC News anchor Charles Gibson attempted to make this point when he moderated a debate between Democrat Presidential candidates Barack Obama and Hillary Clinton. In a question directed to Obama, Gibson asked, "In each instance when the [capital gains tax] rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28%, the revenues went down. History shows that when you drop the capital gains tax, the revenues go up. So why raise it at all?"



Obama's answer demonstrated he is a firm believer in the idea that past performance does not always guarantee future results. His response to Gibson was "Well, that might happen, or it might not."



Obama has not committed to a specific number, but has suggested in his most recent public comments that he does not think a capital gains tax rate of 20% is unreasonable.



On her Web site, Clinton promises middle-class tax relief and higher taxes for upper-income individuals, though she does not define "upper-income," and says nothing about the capital gains tax rate.



Republican Presidential candidate John McCain says he believes "low taxes on dividends and capital gains promote saving, channel investment dollars to innovative, high-value uses, and not wasteful financial planning." He has pledged to keep the current rates on dividends and capital gains.



Investors should consult with their financial advisers and tax professionals to make a decision that is best for their individual circumstances. If taxes are a concern, low-turnover, index exchange-traded funds may be an option.