President’s Economic Stimulus Plan Calls For Abolition of Dividend Tax
From Wall Street’s perspective, the centerpiece of President Bush’s proposed economic stimulus plan is the exemption of dividends from federal personal income tax. The abolition of taxes on individual investors’ dividends –a more ambitious proposal than expected—comes with an estimated $364 billion cost to the U.S. Treasury over 10 years. This price tag represents more than half the $674 billion total in spending and tax cuts outlined in the Bush Plan announced on January 7.
By eliminating taxes on corporate dividends—the so-called “double taxation” on corporate income— the Administration hopes to boost savings, spur investments and provide a much-needed boost to the stock market—measures needed to pave the way for growth and economic recovery. More than half of all Americans have investments in the stock markets, either as individual investors, or via their pension funds. Plan proponents believe that eliminating the dividend tax will spur demand for stocks leading to increased consumer confidence and continued economic recovery. Supporters believe in its current form that passage of the tax proposal will buoy Wall Street lifting the Dow Jones and the Nasdaq Composite Index to provide a 10% stock market lift. Critics of the President’s plan argue that the potential impact of the dividend tax abolition is overstated, noting that the predominately well-to-do beneficiaries of the tax proposal traditionally do not spend extra income from the government. Opponents predict the proposal would provide only a transitory boost to the market.
Possible Effect on Investment Strategies
In an immediate response to the news of the President’s plan, stock prices of companies that pay dividends to investors immediately saw a broad rally on Wall Street in early January. Looking ahead however, some experts do not expect money managers to make any major shifts in their buying strategy in favor of dividend-paying stocks.
But others are more bullish believing that, if the Bush proposal is passed, stocks paying dividends will outperform non-dividend paying stocks in 2003 as investors respond to the tax break incentive. Many note that wary individual investors, jaded by three years of market declines, were already looking for steady sources of income prior to the Bush plan and were increasingly favoring dividend-yielding stocks. Traditionally, corporations in the energy, utility and tobacco sectors have topped the list of dividend-paying companies.
Other Wall Street pundits ponder the possibility of stockholder pressure for dividend payouts on companies with large cash reserves. Many cash-rich companies, including leaders in the technology sector, have traditionally chosen to fund business expansion rather than pay out dividends. Passage of the Bush plan, in its present form, may spur some of these large corporations to re-examine their position on dividends.
Other stock market experts continue to assess other more far reaching consequences of the dividend tax exemption proposal underscoring the implications for companies with an affinity for corporate tax shelters. The new proposals would mean little, or no, dividend tax exemption for their shareholders, forcing these companies to choose between cutting their own tax bills or those of their stockholders.
Tough Fight Ahead Predicted
Whatever their take on the President’s economic stimulus plan, proponents and critics agree on one thing—that the proposed tax plan will receive tough scrutiny on Capitol Hill. In the light of a ballooning federal deficit, predicted to exceed $200 billion this fiscal year and $300 billion next year, and the possibility of a costly war with Iraq, the White House is expected to face challenges in selling the current tax package in the Senate. The Administration believes that Bush’s strong job approval ratings combined with the soft economy will ensure passage of a tax-reform package in the spring. It remains to be seen what degree of modifications and changes might be required for the Senate to approve the Bush tax plan.