US investors and companies have welcomed the reduction in dividend tax, approved by the US Congress last week, even though it fell short of their hopes for abolition of the tax.
Investors' representatives said reducing the tax on corporate dividends from 38.5 per cent to 15 per cent would benefit investors and boost the stock market.
As a result, corporate lobbyists said, the cost of capital would come down, encouraging companies to approve investment plans that might otherwise have been rejected.
John Dillon, chief executive of International Paper and chairman of the Business Roundtable, the influential corporate lobby group, said in a statement that the reduction would "help to jumpstart the economy".
But enthusiasm for the amended dividend tax measure was tempered by the fact that the tax had not been eliminated altogether, as President George W. Bush had originally proposed.
Many corporate and investor lobby groups had supported the proposal on the principle that money should not be taxed twice.
John Collins, a spokesman for the Investment Company Institute, which represents the mutual fund industry, said: "This will make it more attractive to invest."
Ken Janke, chairman of the National Association of Investors Corporation, which advises investment clubs, said: "This is going to free up money for investing, it is going to mean more money for retirees, and reassure new investors in the stock market that stocks are worth buying."
But he warned that it would not compensate for the huge losses investors had suffered through a three-year bear market. "There might be a slight boost in demand for dividend-paying stocks, so it may be a stimulus [in that sense] but a robust stock market will be needed to restore confidence for investors," he said.
Sectors that expect to benefit from increased investor interest include the utilities, which traditionally pay high dividends. Goldman Sachs upgraded its view on the sector to "attractive" from "neutral" on Friday.
Richard Reiten, chairman of NW Natural, an Oregon energy utility, and head of the American Gas Association, said in a statement that increased investment would "provide an invaluable assist to natural gas utilities as they face the challenge of building new pipelines and infrastructure".
Campbell Harvey, finance professor at Duke University's Fuqua School of Business, said there was little risk that the tax would be raised when the current measure expires in 2009. "[The US] is moving more towards the global norm: to go against that would be difficult," he said.
It is still unclear, however, how quickly the effect of the tax will feed through to the economy. John Castellani, the Business Roundtable's president, said members of the association had already indicated that the tax reduction would have "an impact on decisions this year and certainly next".
But a Duke University survey - conducted in February with Financial Executives International, an association of top corporate executives - indicated that most companies that already paid dividends would not increase the payout if the tax was eliminated.
Only a handful of non-dividend companies said they were likely to start paying dividends.