Legal Developments

It’s just over a year until the 2020 elections, and tax reform proposals are on the platforms of candidates and being promoted.  Trump is arguing for a middle-class tax cut, while Bernie Sanders and Elizabeth Warren desire to address wealth inequality with an annual wealth tax.  A wealth tax is similar to a property tax, which all Florida residents who own real property are familiar. Both Warren’s and Sanders’ proposals are similar, with Warren’s starting at 2% of every dollar of household wealth over $50 million and Sanders at 1% of every dollar over $32 million.  Higher rates apply to larger amounts of wealth.  Most countries that imposed such a tax, ended them after a short time.  These systems proved to bring in less revenue than thought and were expensive to enforce.  Valuing assets annually is an expensive and involved process.  Even liberal economist and former Treasury Secretary, Lawrence Summers, has lambasted their proposals as possibly unconstitutional and ineffective.  Should a Democrat win, we guess that instead of an annual wealth tax, our present estate tax system will be used more expansively.

Economic Observations

The probability of another Fed rate cut at their October 30th meeting is high, notwithstanding a reversal of quantitative tightening on the short end of interest rates with the Fed buying Treasury bills to provide liquidity.  They argue it isn’t the reversal of their tightening and balance sheet reduction, because it is on the short end and aimed at a historic role in providing liquidity to the banking repo markets, which recently spiked.    Quantitative tightening has kept our interest rates high and strengthened the dollar, while Trump argues interest rates and the dollar are too high.  Lower rates and a lower dollar would continue to fuel the rise of the equity markets, as would continued progress on ending the trade war with China.  With foreign investment in U.S. growth stocks high, some advisors are advocating a rotation from growth stocks into value, before a reversal occurs.