How Bipartisan Tax Reform Went Bye-Bye

A year ago the near-impossible task of tax reform seemed to gain a bit of traction. Then all politics broke loose.

"The saddest part," writes Dana Milbank, "is that it probably didn’t have to be this way. There is a bipartisan appetite for something very much like what Camp proposed — coupling lower tax rates with an end to tax loopholes and giveaways to the well-connected, all without reducing the progressivity of the tax code."

East Is East and West Is West. Art Is Art and Money is . . .

Image via Newyorker.com

Remember the case of the dropped million-dollar vase? The vase wasn't worth anything like a million. And dropping it was sort of the theme of the exhibition. Ben Mauk explains.

Takeaway: In an age when "even gallery employees cannot distinguish between art and garbage," contemporary art may not be the ideal alternative investment.

The Tax Reform Act of 2014

That's the working title of the Camp tax reform proposal, even though legislation has yet to be marked up.  A few highlights for high-income taxpayers gleaned from Tax Notes:

• The mortgage interest deduction is retained, but capped at $500,000 for new mortgages.  Seems fair.
• The deduction for state and local taxes is eliminated, because it is a tax subsidy to the big government states, at the expense of the small government states. Sounds great, very fair, even though I live in super-high tax Connecticut.
• The charitable deduction is retained, but only to the extent the donation exceeds 2% of AGI. I would repeal this deduction, but this is a good start.
• The special maximum tax rates for long term capital gains are eliminated, replaced by a 40% exclusion from income.  The 3.8% Obamacare surtax on net investment income is, according to JCT, not affected by this change.  Does that mean the exclusion is added back to AGI for high-income taxpayers for calculating that tax?
• There are two individual brackets, 10% and 25%, plus a 10% "surtax" that applies at the income levels that have a 39.6% tax rate now.  Why not just have a 35% bracket and be done with it? Because the definition of what's taxable for the surtax is different from "taxable income."
• In a far-reaching change, tax-free muni bond interest would be subject to the 10% surtax.  So, the implicit subsidy would be reduced, that tax benefit is capped at 25%.   President Obama has already proposed capping the benefit at 28%.  Still, there's going to be furious pushback on this one, because it will increase costs for new state and local borrowing. Which is the right result--maybe they'll do less of it.
• No changes at all to estate and gift taxes.

I like the Camp proposal more than I expected.  I hope that it's analogous to the Kemp-Roth Tax Act proposal that Carter rejected and Reagan campaigned for, which led to  the Economic Recovery Tax Act in 1981.  Because we really could use another economic recovery right now.

Are Women Investors More Timid?

Via Felix Salmon come these charts. Woman appear more risk averse when they're young. But women and men accept essentially the same risk level once they reach age 50 or build a net worth of $1 million or more.

Is Harvard Too Rich For Charity?

Kenneth C. Griffin, billionaire hedger, has pledged $150 million to Harvard, mostly for scholarships. Griffin's gift is the largest the university has ever received.

Does it make sense to give that kind of money to Harvard, an institution already half as rich as Warren Buffett?

No, opines this Bloomberg Businessweek columnist. He points out that Harvard's existing endowment could pay every student's tuition, room and board – about $60,000 – for many, many years.

Tuition, however, does not begin to measure what Harvard and other Ivy League schools spend on their students. According to these estimates, Harvard's annual expenditure per student exceeds what the average student pays by over $50,000. At Yale, over $95,000.

In a world where hardship and poverty remain widespread, donations to wealthy organizations inevitably draw criticism. (When I read that Harvard was naming its admissions office after Griffin, I thought they were kidding. Apparently not.)

Griffin Court, Chicago Art Institute

Previously, Griffin's most noted philanthropy was $19 million toward the magnificent new wing of The Chicago Art Institute. Some believe the money would have been better spent on efforts to reduce Chicago's murders and rampant drug addiction. Others assert that a splendid building, housing great art, enlightens and elevates the residents of the Second City more than another dozen anti-poverty programs. By most accounts, Chicago folks do like the new wing.

Tax Reform Breakthrough?

The Democrat heading the Senate Finance Committee has announced that the Congressional Budget Office is now willing to "actually score pro-growth tax reform as generating revenue."

The Republican heading the Ways and Means Committee has introduced a tax reform plan, three years in the making, that would reduce income tax rates to just two, 10% and 25%, for almost all taxpayers. The plan aspires to revenue neutrality.

In theory, tax reform could awaken from its coma.

Recognizing that government can be a beneficiary from pro-growth tax reform makes it possible for Mr. Obama to get more revenues without Republicans having to vote for a tax hike. This is the glue that makes a bipartisan deal possible. 

In practice – well, you try to design a revenue-neutral plan that cuts income tax rates to 10% and 25%. You're eliminating the deduction for mortgage interest? Lots of luck with that!

“The Talent To Prosper"

In Legacies Can Last For Centuries we linked to an interview with Gregory Clark. In his New York Times column Clark offers a fuller introduction to his views:

The fortunes of high-status families inexorably fall, and those of low-status families rise, toward the average — what social scientists call “regression to the mean” — but the process can take 10 to 15 generations (300 to 450 years), much longer than most social scientists have estimated in the past..

Why is membership in the upper and lower classes so lasting? High social status seems to depend on certain traits.

In modern meritocratic societies, success still depends on individual effort. Our findings suggest, however, that the compulsion to strive, the talent to prosper and the ability to overcome failure are strongly inherited.

"The talent to prosper." Interesting term. How would you define it? A penchant for thrift? A head for business? The ability to delay gratification? The good sense to follow the advice of a faithful trust officer?

The Times accompanied Clark's column with this spot-on illustration by Javier Jaén: the evolution of the Upper Crust.

Philip Seymour Hoffman's Unrevised Will

Photo: Wikimedia Commons

The actor didn't didn't intend to die of a drug overdose. Updating his will was probably the farthest thing from Philip Seymour Hoffman's mind.  Deborah Jacobs places blame on the lawyer who should have included boilerplate covering children born after the will was signed.

Because Hoffman wasn't married to the mother of his children, Jacobs points out, estate taxes will be heavy. Ordinary citizens may not see a problem. Most families can scrape by on $20 million after taxes.

The Girl Who Married a Trust Breaker

Mavis Gallant died today in Paris at age 91. Over the years she published one hundred fourteen short stories in The New Yorker. The magazine has put this tale, published in 1956, on public view.

Gallant's story of a fading old Brit and his young second wife, living precariously in Italy, evokes the end of empire. (1956, you'll remember, was the year Egypt nationalized the Suez Canal.)

"The joke of it is," the story begins, "there's nothing to leave. Nothing at all." Thus the young wife learns that the child she has borne the old Brit will have no inheritance.

It had not been Stella’s ambition to marry money. ••• [T]he trouble was that during their courtship Henry had seduced her with talk of money. He talked stocks, shares, and Rhodesian Electric. He talked South Africa, and how it was the only sound place left for investment in the world. He spoke of the family trust and of how he had broken it years before, and what a good life this had given him. Stella had turned to him her round kitten face, with the faintly stupid kitten eyes, and had listened entranced, picturing Henry with the trust in his hands, breaking it in two.

Beware Double Y-Axes

As we've warned you (Lies, Damned Lies … and Charts) sometimes seeing shouldn't be believing. Here The Atlantic zings the chart below for using double y-axes. Great way to make mountains out of mole hills.

Stock Trading: The Race to Zero

Between the NYSE data center in Mahwah, N.J., and the Nasdaq center 35 miles away, lasers are now deployed strategically atop office and apartment buildings. They're the first wave of a network patterned after U.S. Air Force aerial communications. As the WSJ explains, it's all about high-frequency trading:

It is the latest salvo in the "race to zero," traders' term for their efforts to whittle away the difference between the speed their orders travel at and the speed of light. Zero, the point at which that difference would disappear, has become a kind of holy grail to computerized traders, for whom nanoseconds—billionths of a second—can spell the difference between profit and loss in their algorithm-driven trades.

For a briefing on how high-frequency trading came to be, see the Deal Professor. Before 2007 stocks generally traded on The New York Stock Exchange or Nasdaq. Then the SEC changed the trading rules. Current result: 13 public stock exchanges and 45 "dark pools" where most trades for long-term investors are made.

 The race to zero must be lucrative, but couldn't grown men and their algorithms find more constructive work?

Wealth Trends From the Times

The New York Times' latest Wealth section offers more substance than most. A few gleanings:

The aging of inheritance. Seventy years ago Merrill Anderson published its first newsletter. Back then, estate planning articles assumed readers well might die before their children were grown. These days, The Times points out, the children may be ready to retire before they inherit from their parents. 

Unchanged over the years is the behavior of those receiving sudden wealth. Some feel a sense of stewardship; others don't. Some find it hard to break sentimental ties to an inherited home or large block of stock. 

The proliferation of family foundations. "There are now over 40,000 family foundations in the United States, making grants totaling more than $21.3 billion a year," The Times reports, "up from about 3,200 family foundations doling out $6.8 billion in 2001…" Few are big-league foundations; sixty percent have assets of less than $1 million.

The absurdity of top incomes. In 2012, "the average household in the bottom 90 percent of the income distribution earned about $30,997. For the average household in the top 1 percent, the figure is $1,264,065…." As for the top 0.1 percent, well, look at the chart.

Late in the article, The Times acknowledges that really high incomes seldom persist. Most one-percenters can't maintain their privileged position for five years.

What Tax Cheats Cost Us

Charles Kenny at BloombergBusinessweek:

[C]lose to 15 percent of federal taxes owed…are never paid—about $385 billion a year. If that $385 billion were collected, it could fund universal pre-K for 4-year-olds, double the size of both theEarned Income Tax Credit and the U.S. Air Force budget, and reduce the deficit by more than a quarter—all at the same time.

Family Legacies Can Last For Centuries

Samuel Pepys

"Shirtsleeves to shirtsleeves in three generations" doesn't tell the whole story. In The Son Also Rises Gregory Clark asserts that family prosperity – using multiple measures including education, occupation and access to wealth – can last for three or four centuries.

One poster child for Clark's theory: Samuel Pepys, seventeenth-century British navy bureaucrat and author of the best diary* I ever read.

Pepys has always been a rare surname, flirting with extinction. In 1880 there were only thirty-seven Pepyses in England, and by 2002 they were down to eighteen. Seventeenth-century parish records of baptisms and marriages suggest there were only about forty Pepyses living art one time even then. The Pepyses emerged from obscurity in 1496 when one of them enrolled at Cambridge University, and they have prospered ever since. Since 1496, at least fifty-eight Pepyses have enrolled at Oxford or Cambridge, most recently in 1995. For an every surname of this population size, the expected number of enrollees would be two or three.

In Clark's view money isn't everything. Even if one generation drifts from wealth to "shirtsleeves" – deserting family for social work in Africa or beachcombing in the Caribbean – the next is likely to return to prosperity, perhaps helped through college by a doting grandmother.

Or by a trust fund left by grandfather.

* The Pepys diary online is annotated with links that help London in the 1600s come alive for the modern reader. I keep meaning to reread the diary. If you haven't, you should.

Wealth Managers, Beware of Hackers

“The Nigerian prince email swindle, in which a supposed royal offers riches in exchange for a bank account number, is to today’s phishing scams what a Brother word processor from the 1980s is to a MacBook.”

Paul Sullivan in The New Hork Times warns that bad people have become highly skilled at draining money from the accounts of wealth managers' clients.

A security executive at a trust company told of a hacker who got creative in trying to fool the firm. The executive, who requested anonymity, said the firm received an email from a client’s account asking that $137,000 be wired to Italy to buy some art. He said this client was part of a large family that traveled frequently, so the request was not odd on its face. But he said the family had put a procedure in place in which no wires went out without a call being made to the person requesting the money.

 One security tip for investors that hadn't occurred to me: Don't keep documents bearing your signature in your email.

Harold Simmons' 44-Page All-To-Wife Will

Why Harold Simmons' widow– sole beneficiary and executor of his will – wanted the will and probate proceedings kept secret isn't apparent now that a redacted version of the will has been made public.

Simmons had already provided for his daughters. Most of the 44-page will deals with how the estate was to be used for charitable purposes (no politics, Simmons instructed) in the event his wife predeceased him.

Can a Fallen Real Estate Prince Rise Again?

Heir to a real estate dynasty, Kent Swig married well, lived well  and amassed billions, buying up buildings in New York's financial district after the 9/11 terrorist attacks depressed prices. Then came the real estate bust and the Great Recession. The New York Times details Swig's rise and fall in With Fortune Fading, a 1% Divorce.

His boom-to-bust story may have a second act.. Swig has avoided bankruptcy and managed to pay down some debt. One reason: "his ability to access Swig family trusts that are protected from creditors." 

Sometimes asset protection trusts really do make a difference.