After three years of stock market famine, waves of corporate scandals and government investigations, the federal tax bill now moving through Congress could be a badly needed shot in the arm for Wall Street. The compromise $318 billion tax cut, which Congress is expected to approve Friday, would help the securities industry by encouraging wealthy investors to start putting money back into the stock market, analysts say. In reducing both the tax on corporate dividends and long-term capital gains to 15%, experts say it should coax some investors from the sidelines. And any revival in the retail market is good news for Wall Street, because it translates into additional brokerage commissions and a renewed appetite for initial public offerings. But not all Wall Street firms will benefit equally from the tax cuts, which slashes the tax on dividends from about 39% to 15% and trims the long-term capital gains tax from 20% to 15%. The firms standing to gain the most are big brokerages that cater to wealthy investors who tend to own more conservative investments for longer than a year. That means firms like Merrill Lynch ( MER), Morgan Stanley ( MWD) and Charles Schwab ( SCH) will be the big beneficiaries of Washington's tax-cutting largess. On the other hand, the cuts will mean little to the hyperactive investors who are the main clientele of online brokerages like E*Trade ( ET) and Ameritrade ( AMTD). They tend to favor non-dividend-paying companies and are often in and out of trades in hours, never mind years. "My gut feeling is it will not have as big of an impact for an E*Trade or an Ameritrade as for a Schwab or a Merrill, which have bigger accounts and more buy-and-hold investors," said Richard Repetto, a brokerage analyst with Putnam Lovell Securities. Additionally, many investors also will not benefit from the Wall Street-targeted tax cuts.
David Wyss, a Standard & Poor's economist, said investors who own most of their stocks through either a mutual fund or a 401(k) retirement plan won't see reductions in either the dividend cut or capital gains rate. That's because the tax breaks Congress is voting on will apply only to investors who own individual stocks outside of a 401(k). And Wyss estimates that only 22% of U.S. citizens fall into that category. "It's not going to help the daytrader. It's not got going to help mutual fund holders and makes it less attractive to have stock in a 401(k)," said Wyss. "This mostly benefits people who own stock directly." Analysts said the more important part of the tax bill from an investment point of view is probably the lower capital gains tax. That tax, which applies to the sale of investments held by a person for more than year, will reward buy-and-hold investors and should encourage investors to move money out of bonds and into stocks. "The reduction of the capital gains rate creates a significant incentive to invest long term in the equities market," said Ken Weissenberg, a tax partner with the New York accounting firm Berdon. The new law also could result in a rush of stock selling and portfolio repositioning by wealthy investors, especially if lawmakers enact a six-year sunset provision on the dividend and capital gains tax cuts. Experts say that's been the reaction to past capital gains reductions, as investors often fear politicians may move to raise taxes after the next election cycle. "Whenever they've cut it in the past, many people have harvested capital gains," said Louis Stanasolovich, a financial planner and president of Legend Financial Advisors. "They've sold stocks and then repositioned." Of course, investors with families will benefit from other provisions in the massive tax bill. Among other things, the measure would give a tax break to married couples, increase the tax credit for children and grant $20 billion in aid to fiscally strapped states.