NEW YORK – Investors and strategists said on Tuesday that the Bush administration's $670 billion stimulus package aimed at kick-starting U.S. growth was likely to trigger a stock market spurt, but that risks dogging the world's biggest economy may rein in the rally.
President Bush unveiled the economic plan, which calls for the elimination of taxes shareholders pay on dividends, accelerated tax cuts, immediate tax relief for married couples and families with children, and bigger incentives for businesses to invest in new equipment.
"Any fiscal stimulus will be positive in the short term, but there are still problems coming down the line," Stephen Docherty, head of global equities at Aberdeen Asset Management which oversees about $36 billion worldwide, said.
The White House says it will give 92 million taxpayers an average tax cut of $1,083 this year. Up to 35 million people who get income from dividends could benefit.
A White House fact sheet outlining the plan said Bush's Council of Economic Advisers projected the package will help the economy create 2.1 million jobs over the next three years.
Mark Vitner, an economist with Wachovia Corp. in Charlotte, N.C., said he strongly favored moving the proposed income-tax rate reductions forward, even if that means less tax money flowing into Treasury's coffers.
"I know there's going to be damage in the budget, but I favor reducing tax rates now mainly because the primary need is to sustain the recovery now," Vitner said.
Experts believe eliminating dividend taxes -- thus ending the effective double taxing of money that companies report as profits and shareholders receive as dividends -- will definitely perk up stock markets. Administration officials believe cutting dividend taxes could boost stock prices by 10 percent or more.
But some are perplexed by the plan's heavy reliance on the dividend tax elimination in a package that is supposed to jump-start a sputtering economy, given that taxpayers won't even see this relief until next year when they file their 2003 tax returns. The elimination of dividend taxes represents $364 billion over 10 years.
Mark Zandi, chief economist of Economy.com, said Bush's package will probably boost economic growth by 0.7 percentage point this year. But he said the spending cuts and tax increases states are being forced to enact to balance their budgets will probably trim 0.5 percentage point from growth, leaving a tiny 0.2 percentage point improvement for the economy as a whole from government actions.
"I think the timing of this package is especially good because it gives business people and consumers confidence," Zandi said.
However, many say domestic risks of ballooning budget and current account deficits, sagging consumer confidence and sickly business investment are compounded by a slowing European economy and fears of war with Iraq.
"The most likely scenario is that 2003 will start weakly and then get stronger," Zandi said. "But if the war in Iraq goes badly or if we have another terrorist attack, then we could be back in a recession pretty quickly."
Many mutual fund managers say the Dow Jones industrial average is already expensive at its present 8,745 level. Adding almost 900 points to the Dow would only make it less attractive.
Some analysts also wonder how much extra dividend firms will be able to pay if they start to show executive share options as expenses in their accounts -- ratings agency Moody's reckons it would have slashed aggregate net income by 16 percent on the Standard & Poor's 100 Composite firms in 2001.
Investors may buy dividend-paying stocks to benefit from the tax break, but with risks looming large over the economy, money managers are likely to pay for them by rotating out of those that don't deliver dividends rather than committing fresh funds.
The net effect could be marginal at best, some managers say.
Reuters and the Associated Press contributed to this report.
Get all the stories you need-to-know from the most powerful name in news delivered first thing every morning to your inbox