- The Washington Times - Wednesday, May 28, 2003

The tax-cut package that President Bush signed yesterday should provide some extra oomph to the economy and the stock market, although it appears designed primarily to flood voters’ pockets with extra cash just before the 2004 elections, analysts say.

“There is an enormous amount of stimulus being thrown at the economy, with most of it hitting next year, and I think the market will benefit from that,” said Edward Yardeni, chief investment strategist with Prudential Securities.

He noted that consumers will get most of their tax cuts — $88 billion — next year, with about $31 billion from lower tax rates and bigger child credits arriving in peoples’ paychecks and mailboxes this year. The lion’s share of the plan’s investment incentives also are scheduled for next year.

“Pardon me if I’m wrong, but that is politically convenient to have such a large amount of the tax stimulus to occur next year,” he said.

Mr. Yardeni was one of Wall Street’s most enthusiastic supporters of President Bush’s original proposal to eliminate taxes on dividends. But he had little to say about the more modest proposal that emerged from Congress, which lowers the tax on dividends as well as capital gains to 15 percent for most stockholders and 5 percent for low-income stockholders.

The plan was politely applauded on Wall Street when it passed last week, with the stock market posting moderate gains on the prospects for better economic growth and profits.

“The relief provided to the double taxation of dividends is better than nothing, but it does not involve the same degree of reform as President Bush’s original proposal,” said Mickey Levy, chief economist with Banc of America Securities.

“For most stockholders, this cuts by more than half the individual tax burdens on dividends and significantly increases after-tax equity returns. … All else equal, it should provide a modest boost to stock valuations,” he said.

The biggest drawback in the plan is the withdrawal of most of the tax cuts after two to five years, giving investors and consumers little reason to make long-range spending plans and, thereby, significantly limiting the economic benefit, economists said.

“The sun-setting of selected provisions in the legislation in order to limit its total estimated size for the purposes of political compromise creates undesired uncertainty,” Mr. Levy said, adding that the plan is “small” in comparison to the country’s $10 trillion-a-year economic output.

Still, he expects a “positive economic impact” from the temporary dividend relief and increase in disposable incomes, though the economic gains will be offset in part by spending cuts and tax increases being imposed by state and local governments.

Gary Thayer, chief economist with A.G. Edwards, called the plan’s boost to consumer purchasing power and generous deductions for business equipment investments “a major step toward stimulating the economy.”

He noted that the credit markets have been largely unconcerned about the increase in the budget deficit expected under the plan, with interest rates mostly unchanged since the plan was passed last week.

Some on Wall Street are entirely unimpressed with the tax cuts. Goldman Sachs & Co. economists estimate it will do little more than keep the economy from slowing further this year, and will not spur creation of 1 million jobs, as had been predicted by the administration.

“These changes neither simplify the tax code nor have a chance of stimulating the economy or individual investor behavior,” said Kim N. Wallace, analyst with Lehman Brothers.

“What ails the economy is a lack of demand that this bill does not seriously address, and what is needed to restore confidence in markets will not come from a Washington tax cut,” he said.

Mr. Wallace called the bill’s $10 billion of capital investment incentives “paltry” and noted that “almost nothing” — $17 billion — “was devoted to reducing the ravages of the alternative minimum tax on all taxpayers, especially middle-income Americans.”

In fact, he said, the tax plan will push an additional 1 million middle-class taxpayers into the ranks of those paying the 20 percent alternative minimum tax.

Mr. Wallace attributed the favorable stock market reaction last week to anticipation that the tax plan will help to get Mr. Bush re-elected.

The loudest applause is coming from Republican-leaning economists and think tanks, which see the tax bill as a first step toward enacting long-sought tax cuts and reforms affecting entrepreneurs and investors.

“This tax cut will help enormously to rebuild wealth after a disastrous three-year stock market plunge that destroyed roughly $10.5 trillion of corporate wealth and $6 trillion of household wealth,” said Lawrence Kudlow of Kudlow & Co.

“Liberal critics will argue correctly that ‘rich people’ are the biggest beneficiaries,” he said. “But rich people, if treated kindly, are government’s best friend. With new tax incentives their investments are the seed corn of new businesses and new job creation.”


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