The securities markets have been subject to large percentage daily swings over the last month. The shutdown of a large portion of the economy following the spread of the Covid-19 virus, Democrat primary voting prior to the withdrawal of Bernie Sanders and actions by the Fed, Congress and the Executive branch were precipitating factors, but chart theory, short selling and stop loss orders clearly played a significant role. In my article published on this website on June 3, 2019 I explained why the uptick rule should be reinstated. and margin buying should be more restricted . My blog is not widely followed and my suggestions have been ignored. They should be considered immediately as the markets remain vulnerable to permitted abuses.

The reinstatement and tightening of the up-tick rule is urgently needed. I recently heard on one of the tv talk shows that over $50 billion of securities were sold short during the first week of the recent decline. Every short sale in a declining market contributes to market volatility and a potential market collapse. Traders, like Leon Cooperman who recently suggested the reinstatement of the up-tick rule on CNBC, are aware of the deleterious effects of short selling in a declining market. The ridiculously stupid short selling rules, which the SEC adopted which the current SEC chairman believes are effective and support market liquidity, are on their face worthless. They do not come into play unless a security declines by 10% in a single day. In other words the rule does not become effective until the stock price of the security has already collapsed. Short selling on down-ticks is likely to have significantly contributed to or even been the material cause of the collapse. Furthermore, when the current rule kicks in after a 10% decline it prevents selling at the bid, but doesn’t prevent further abuse that extends the decline.

For example, suppose a $100 stock has declined below $90 in one day with a last sale at $89.60 is bid $89.55 and asked $89.60. The short seller can’t sell at the bid, but can lower the asked by offering to sell below the last sale price as long as the offer is not below $89.56. The short seller may have a large short position and may have sold a large number of shares at declining prices during the decline in price from $100 to $90. If he offers to sell a significant number of shares at $89.56 buyers for such number of shares have to buy at such price before the stock price can sell above that price. Other investors who are long the stock and aware of the price decline and the number of shares and offering price of the shares being offered by the short seller, may anticipate a decline and offer to sell at the bid. The net result is that the bid price is likely to quickly decline further allowing the short seller to lower his asking price. It is no wonder that many sophisticated traders and other investors most of whom are oblivious to the role of short selling but have observed rapid market declines, sell their shares.

I suggest that short selling should be prohibited when any of the major market averages have declined by 20% from the last high point. Such prohibition should continue until all leading averages have recovered at least 10%. from their low point but the short selling prohibition should be reinstated if any of such market average declines below its prior low point within 6 months.

If we get a vaccine or a cure we could have a quick recovery. But that’s unlikely in the next 3 months. I wrote an article in my blog about changing the bankruptcy laws to provide for forgiveness of many small business monthly expenses other than payroll
for 120 days. We must also get money to people
who have lost their income. Even though some companies are not being hurt or are prospering there is a real possibility of a depression. Congress may act too slowly or provide grossly inadequate relief. The stock market could collapse. I don’t know the number of jerks who are subject to margin liquidations if the market declines further. Good stocks are sold to raise cash. Short selling should have been banned. Even if restaurants reopen until we have a cure for the virus only people who are virus survivors will be safe. We must test millions of people before that will be a significant number. How much business will they do and how many of the laid off employees will be rehired? How many people will fly or ride the subway? How many planes will be needed?

I have some thoughts to consider. If there is a depression capitalism as we know it is not likely to survive. Many strong companies will survive but the government may wind up owning numerous businesses. Some strong restaurants will survive, but customers of small restaurants may have to put up funding to reopen their favorite bar or restaurant. I believe that americans are imaginative and will find ways to get the economy going. We will need a huge make work program . My idea for an interstate fresh water pipeline would be perfect. Workers can be kept apart until we have a vaccine. They would be working instead of getting welfare. The problem is that people in the cities are losing their jobs and would have to relocate to where the jobs are. Other make work projects will be needed to reverse the decline in many major industries.

Dear President Trump,

I applaud many of the provisions of the proposed House and Senate tax proposals, but, as discussed below, the reduction or elimination of important deductions will result in unfair tax increases for too many taxpayers and may adversely effect the solvency of high tax states and the growth of the US economy. I fear that the current proposals, if  modified and passed into law, may cause almost as much harm as good to our economy. You can encourage Congress to find better ways to raise offsetting revenue than by eliminating important deductions. This letter will suggest changes to improve the tax proposals by eliminating current loopholes that let many of our most successful individuals avoid paying hundreds of billions of taxes during their lifetimes. I know it is late in the process and that time is of the essence, but I expect there will be almost immediate approval of  the suggested changes. I believe that if the proposed changes are adopted at your suggestion they will be recognized as the major accomplishment of your presidency by making the tax code fairer and enable you to achieve your goals of greatly accelerating the growth of the economy and helping the middle class.

1. THE PROPOSED LIMITATION OR ELIMINATION OF THE HOME INTEREST AND PROPERTY TAX DEDUCTION. I consider the elimination or reduction of deductions for home mortgage interest and property taxes to be the most unjustifiable change. By allowing depreciation of rental properties and not private homes, the tax code currently favors renting over home ownership. The proposed changes compound the unfairness. Prior to the collapse in home values caused in large part by improvident or fraudulent lending practices, owning a home was a major source of wealth accumulation by the middle class as one’s home mortgage was repaid over time and the home value rose due to inflation. Young families today are beginning to rediscover the wonderful benefits of home ownership and the economy has benefitted. The reduction of the tax benefits for home ownership will make it much more difficult financially to purchase and meet the monthly costs of owning a home. It will also significantly reduce the equity value of current homeowners and cause great harm to the home building, maintenance and improvement industries and lead to reduced funding for public school education. It will result in the loss of millions of middle class jobs. We must find a better way to pay for the tax reductions contained in the current proposals even if it means raising the corporate rate to 21% or 22%. Property taxes and interest on mortgages up to at least $1,000,000 should remain deductible.

2. RAISING THE ESTATE TAX CREDIT OR ELIMINATING THE ESTATE TAX. Raising the Estate Tax Credit as proposed or even to eliminate the Federal Estate Tax on estates of spouses with aggregate estates of up to $25 million or $50 million is a good idea to protect family businesses and farmers. But, eliminating the Federal Estate Tax is likely to be political suicide for Republicans. You will be endlessly criticized for giving an enormous and unjustifiable benefit to our richest taxpayers, including you. The richest people in our country are among the most under-taxed. Their aggregate income and wealth that is growing by hundreds of billions of dollars per year is in the form of unrealized capital gains that are not taxed for valid reasons. Our wealthiest people, many of whom will probably be worth well over $100 billion at the time of their death, also avoid federal gift or estate taxation by making large charitable gifts or by creating charitable foundations. We should either deny the charitable deduction for estates or otherwise taxable gifts or provide for a capital gains tax to be payable at death or at designated dates (such as every three or  five years after the change is passed) or by individuals at the time they make charitable gifts of appreciated property. We could provide for such tax to be payable in kind or over a period of years. The assets paid to the government in kind could be non voting while held by the government and be redeemable or sold over time. The rate of tax should be open for discussion, but the amount of the tax should be very significant and allow for most of the deductions being targeted for elimination to be retained. Just think of the US government as one of the largest shareholders of Berkshire Hathaway, Microsoft or Amazon. I do not think Warren Buffett, Bill Gates or Jeff Bezos will object. Tax deductible contributions will be reduced, but mainly be reducing the size of charitable gifts by an amount equal to the current tax underpayments. Eliminating the estate tax might also reduce charitable gifts.

3. REDUCING THE TAX ON PASS-THROUGH ENTITIES. This is also a questionable change favoring the rich. C Corporations pay a tax on net income (after deducting salaries paid that are taxed at individual tax rates) and stockholders pay a SECOND tax on dividends paid. Pass through entities avoid double taxation and they do not need the added benefit of lesser rates. If a C Corporation is more favorable, a Subchapter S Corporation or LLC can convert to a C Corporation.

4. TAXING THE CARRIED INTEREST. After years of discussion your wall street advisers left taxing of the carried interest out of the tax proposal. The amount recovered may not be great, but closing a loop-hole is important for tax fairness. It should have been included with appropriate relief for illiquid positions, such as permitting payment of the tax over time or in kind.

5. THE ELIMINATION OF THE SALT DEDUCTIONS. States with high income tax rates are already losing high income taxpayers to no income tax states. Some of them currently face insolvency. The elimination of SALT deductions causes a sudden change that is unfair to people who relied on the SALT deductions and bought homes and created business in high tax states. As discussed above, most, if not all, of the lost revenues from the rate reductions could be recovered by fairly taxing the unrealized gains of the super-rich and by properly taxing carried interests and pass-through entities. Limiting the SALT deductions to an amount such as 5% of taxable income may be needed to offset a portion of the proposed reduced tax revenues, and such limit should be phased in if possible and the middle class exemptions should be enlarged.

6. ENCOURAGE WAGE INCREASES BY OFFERING A FIRST YEAR TAX CREDIT FOR WAGE INCREASES OF LOWER PAID EMPLOYEES. We are permitting corporations to bring back trillions of dollars of funds parked overseas. Some of it will be spent on capital investments, but most of it will be used for dividends and stock buy-backs unless we encourage middle class wage increases. We could generate much higher GDP growth by giving employers a first year tax credit for wage increases to employees except for the top 10% of wage earners. Such credit would be lost if the wage increases were not continued during the next year. Including such a tax credit may prove to be revenue positive over ten years since it will grow the economy and increase individual incomes.

Sincerely,

Stephen Feinberg

Kudos for the Kudlow, Moore, Laffer and Forbes “Three Easy Pieces” tax proposal. However, the depreciation change is unnecessary and unrealistic and the tax rate is probably better at 20% or even 22%. I suggest a 4th piece, namely a 100% tax credit for the 1st year of all wage increases except for increases to the top 20%. Otherwise expect most of the earnings growth from tax savings to go to dividend increases, stock redemptions and increased compensation for executives as has been the main use of earnings growth in recent years.