Jewish World Review Dec. 11, 2002 / 6 Teves, 5763

David R. Kotok

David R. Kotok
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The Fed, The New Bush Folks, The Policy


http://www.NewsAndOpinion.com | "No change in rates" said the Fed. Yawn!

Let's move to the musical chairs.

"We're changing our names but not our stripes" said the commercial years ago when "Esso" gave way to Exxon. Older readers may remember Tony the Tiger climbing up the sign pole to replace one banner with another.

Such is the message from the Bush administration as it changes the personalities of some of its economic team. Rotation among a President's senior people is quite normal after midterm elections; it was expected by many observers. Market impact is negligible.

More important is the evolution of Bush's policy and that remains intact. If anything, policy is becoming more growth oriented. For the five stimulative forces at work see "Five Easing Pieces," linked below.

Number three in that essay is about tax cuts. Momentum is growing. Some relief from double taxation of dividends is coming. Democrats will sign onto this one which will give President Bush more than the 60 votes he needs in the Senate. Expanded 401k and IRA limits are coming. Capital gains tax reductions are more problematic.

A big issue is whether or not there will be relief on the Alternative Minimum Tax. AMT is a vicious tax and is altering investor and business behavior. Those, who can, are leaving states like New Jersey (where high state income and property taxes trigger AMT status) for low tax states in order to avoid this tax. At Cumberland we have seen such decisions made by some of our clients.

AMT has not been indexed to inflation. Its insidious nature is hidden from most taxpayers. Their accountants test for it and rightfully charge the clients for the calculation service. They do not have to prepare forms if the regular tax is higher than the AMT so the client does not always understand the exposure.

Once it was designed to catch a few hundred high income folks who were not paying regular taxes. Now, this AMT monster catches millions and the number grows each year. Many get no warning the first year they are into AMT. Suddenly, they find their private activity tax-free bond becomes taxable. Suddenly, they see that their state and local real estate and income taxes are not deductible. They find themselves in the worst of all tax worlds and then have to spend the next few years scrambling to get out.

The President and the Congress could give a massive boost to the economy by repealing this tax. But that will only happen if there is an outpouring of political pressure.

Readers are invited to ask their accountants if they are close to the AMT thresholds. Those who have already crossed this threshold know they have a problem. Cumberland clients should tell us since this tax is an item we must consider in managing a portfolio.

Readers are also invited to tell their congressman that they want this tax repealed. At a minimum it should be indexed to inflation and the limits raised to adjust for the years of congressional neglect. Call your congressman and leave a message; he or she is reachable through the U.S. Capitol switch board, 202-224-3121. It takes two minutes.

The tax code is about to change. Investor's political activism may improve it.



JWR contributor David R. Kotok is President and Chief Investment Officer of Cumberland Advisors, Inc. His articles and financial market comments have appeared in The New York Times, The Wall Street Journal, Barron's, The Bond Buyer and numerous other publications. He can be seen on CNN, CNNfn and CNBC. Comment by clicking here.

Up

12/05/02: Five easing pieces
11/26/02: Lessons Learned at The Philadelphia Fed and an update to our strategic outlook
11/22/02: What happens when you mix politics and municipal bonds
11/20/02: Secular vs. Cyclical Bull and Bear Markets
11/14/02: Please stop bashing the ECB!
11/08/02: Fed may have taken themselves out of debate but they've added to uncertainty by surprising the markets
11/07/02: The election and the Fed: Both validate stimulus
10/31/02: Welcome to the world of an enlarged and open Europe

© 2002, David R. Kotok