Washington: Capital Ideas

Does the old line "I'm from Washington, and I'm here to help you" make you pause and check you've still got your wallet? Well, in 2003, Washington may take the irony out of the joke. From tax cuts to corporate cleanup, the capital promises a busy year that could work in investors' favor.

The big show in 2003 will be economic stimulus. With his newly overhauled economic team, President George W. Bush is honing a package of tax cuts that could be worth $40 billion in 2003, rising to almost $300 billion over the next decade. The White House wants to speed up plans to shave the top tax rate from 38.6% in 2002 to 37.6%--or perhaps 35%--for 2003. It's also aiming to repeal the estate tax permanently, extend tax credits for research and development, and raise limits for tax-exempt contributions to 401(k) and individual retirement accounts.

Clearly, investors will benefit if Bush's "jobs and growth" agenda boosts the stock market. But the President has more direct aid in mind: He's likely to propose excluding some portion--perhaps 20%--of shareholders' dividend income from taxes. Eventually, Bush would like to repeal the individual tax on corporate payouts entirely. Those moves should please baby boomers, who increasingly favor stocks that pay dividends over those that reinvest profits but promise dazzling capital gains.

No amount of tax savings will draw back investors if they fear the equity markets are rigged. Companies are on notice to be more honest in 2003. Washington's watchdogs will deploy new powers to punish miscreants and fill gaps in financial audits.

Expect the Senate to confirm Wall Street veteran William H. Donaldson as Securities & Exchange Commission chairman soon after Congress resumes work in January. Even before, Donaldson will help the commission pick a new head for the Public Company Accounting Oversight Board--whose tumultuous birth cost outgoing SEC Chairman Harvey L. Pitt his job--so it can start policing auditors by late April. Investors should take comfort if the PCAOB insists on inspecting the Big Four accounting firms itself--rather than letting them review each other--and writes its own audit standards.

Will the crisis in corporate credibility end in 2003? Only 26% of investors surveyed by the Securities Industry Assn. believe that the Sarbanes-Oxley corporate reform act of 2002 will reduce fraud. With 2004 elections looming, overcoming that skepticism is a top priority for both Congress and the White House.

Mike McNamee with Howard Gleckman

— With assistance by Howard Gleckman

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