Axios Markets

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October 28, 2021

💰 Good morning, and welcome back to Markets!

🚨Situational awareness: The Q3 GDP suspense will be over this morning — the preliminary estimate comes out at 8:30 ET. Economists slashed forecasts throughout the quarter as the Delta variant's impact on business activity spread.

🦴 Stat of the day: The Shiba Inu meme coin, obviously. One coin is worth way less than a cent — but it surged 73% Wednesday and now has a market cap of over $50 billion. (Read more on the latest dog-themed cryptocurrency here.)

⏱ Today's newsletter is 1,134 words, a 4.5-minute read.

1 big thing: Why it's so hard to tax wealth

Illustration of a rubix cube made out of dollar bills

Illustration: Sarah Grillo/Axios

The wealth tax that wasn't a wealth tax isn't even a tax, now. The Democrats had a meticulously constructed 107-page proposal to pay for a large chunk of their spending plans with a tax on billionaires, but it died ignobly on Wednesday, the same day it was unveiled, Axios chief financial correspondent Felix Salmon writes.

Why it matters: The dream of a wealth tax will never die as it so neatly generates revenue by reducing inequality. But there are three main reasons why that dream is likely to remain just a dream for the foreseeable future.

1. The Constitution

Article I of the Constitution, Section 9, bars any "capitation, or other direct, tax" — unless such a tax is levied in direct proportion to the number of people who live in each state.

  • The Supreme Court ruled in 1895 that a federal income tax was therefore unconstitutional. The 16th Amendment, ratified in 1913, made income tax constitutional, but many scholars believe it doesn't cover a wealth tax.
  • An outright tax on wealth, as proposed by Sen. Elizabeth Warren (D-Mass.), would face a massive obstacle in the current Supreme Court.
  • The billionaire tax proposed this week didn't tax wealth directly — billionaires would owe nothing if their wealth was falling rather than rising. But it would still have faced a stiff legal challenge.

2. The billionaires

The world's richest person, Elon Musk, opposed the tax in public; it's reasonable to assume that the overwhelming majority of the 700 or so other billionaires affected by the bill opposed it in private.

  • Those billionaires, collectively, have enormous political power — and they also have the best legal advice that money can buy.
  • It's hard to tax illiquid wealth, but if you try to carve out exceptions for illiquid assets then the private-wealth industry will always try to find a way to turn liquid assets into illiquid ones, for tax purposes, or to create structures that otherwise seek to avoid the tax.
  • The billionaire-tax proposal attempted to close the loophole that allows the ultra-rich to borrow against their appreciated assets instead of selling them, thereby avoiding a taxable event. When one loophole closes, however, another tends to open.

3. Americans

The American Dream envisages accumulating wealth through hard work, while a wealth tax — almost explicitly Marxist, in the sense of "from each according to his ability" — cuts in the exact opposite direction.

  • Many Americans, including Sen. Joe Manchin (D-W.Va.), who killed the billionaire tax yesterday, see something unfair about singling out billionaires for extra taxation — especially when many of them dream of one day joining those ranks themselves.

The bottom line: A wealth tax, or even something like the billionaire tax that's wealth-tax adjacent, carries an unmistakable aroma of socialism. And America isn't (yet) a socialist country.

2. Catch up quick

President Biden plans to unveil a new framework for his social spending plan today, which he expects to obtain the support of Democrats. (Washington Post)

The Department of Justice is investigating Visa’s relationships with large fintech firms – like Square, Stripe and PayPal – as part of an antitrust probe. (WSJ)

The latest price surge to hit China is for vegetables, with spinach soaring 157% in four weeks and the government promising to crack down on veggie hoarding. Bad weather in growing regions has damaged crops, and high coal prices have made greenhouse farming more expensive. (Bloomberg)

Third Point, the hedge fund run by Daniel Loeb, has accumulated a stake in Royal Dutch Shell worth over $500 million and is urging the oil giant to split up. (WSJ)

3. Hertz's fight for relevance

A Hertz car rental counter in the Miami International Airport.

A Hertz car rental counter in the Miami International Airport. Photo: Joe Raedle/Getty Images

In the span of less than a week, Hertz has made three big strategic moves intended to keep the car rental giant from fading into oblivion, Axios' Joann Muller writes.

Why it matters: Hertz is gearing up to list its shares on the Nasdaq — which will mark its return to a stock exchange after last year's descent into bankruptcy (it currently trades over the counter).

  • But ride-hailing and other mobility innovations are rapidly changing the way people get from A to B, posing an existential threat to traditional car rental services.

State of play: "We want to become a critical and essential component of modern mobility and that whole ecosystem," Hertz's interim CEO Mark Fields tells Axios.

What's happening: In a rat-a-tat series of deals with leading mobility companies this week, Hertz's strategy is coming into focus.

  1. Tesla purchase. Hertz said Monday it would purchase 100,000 Tesla Model 3s by the end of 2o22 — by which time they'll comprise 20% of Hertz's fleet — as its first step in a shift toward electric vehicles (this news, of course, sent Tesla's market cap over the $1 trillion mark).
  2. Uber partnership. Two days later, Hertz said it would make up to 50,000 of those Teslas available exclusively to Uber drivers, ensuring it has rental customers for its EVs while also helping Uber achieve its own zero-emissions goals.
  3. Carvana deal. Also on Wednesday, Hertz struck a deal to utilize Carvana's used-car sales website and logistics network to unload 1- to 2-year-old vehicles from its rental fleet.

The bottom line: "We're disrupting ourselves, and as we do that, I think we’ll disrupt the industry," says Fields, who was formerly CEO of Ford Motor.

Go deeper.

4. Anchors weigh down SPACs

Reproduced from SPAC Research; Chart: Axios Visuals

Special purpose acquisition companies (SPACs) have increasingly turned to anchor investors to pull off IPOs — but it appears these backers tend to dump the stock soon after the offerings, Axios’ Kia Kokalitcheva writes.

Driving the news: Deals in which at least 75% of the capital came from anchors have underperformed those in which anchors made up less than 25%, according to SPAC Research.

Context: As we noted in September, one byproduct of a weakened demand for SPAC IPOs among investors has been the uptick in anchors, who make early commitments to buy large chunks of the IPO.

  • Sponsors often offer anchors more favorable terms, like the opportunity to receive founder shares.
  • The trend has some investors worried that it may be a sign of low-quality SPACs that need expensive sweeteners.

The bottom line: Anchors may be getting sweet deal terms, but it's not enough to hold on.

5. Companies are still loading up on equipment

Data: FRED; Chart: Axios Visuals
Data: FRED; Chart: Axios Visuals

The willingness of businesses to invest in themselves shows no sign of slowing.

Driving the news: Core capital goods orders rose 0.8% in September, beating economist expectations for growth of around 0.4%, government data out yesterday show.

Why it matters: It's a key measure of business spending on equipment, and strength here shows companies' willingness to invest in the future.

  • September's rise is the biggest monthly increase since June.

The bottom line: The latest release “is consistent with our view that business capex will be much stronger over the next few years than during the previous economic cycle, boosting productivity growth,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note.

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