Famous Owner? Bigger Bucks!

Three factors are said to determine the value of real estate: location, location, location.

When art and collectibles are auctioned off, the prices they fetch also reflect three factors: provenance, provenance, provenance.

This BMW Z8, for example. At an upcoming auction it might sell for $200,000. But because its first owner was Steve Jobs, it may fetch as much as $400,000. (If Steve had been more of a car buff. expectations might be even higher.)

Paul Newman drove race cars. His wife gave him a Rolex Daytona. How much did that provenance add to the value of the watch? A lot. This month the coveted chronometer sold at auction for $17.8 million.

Tax Reform‘s Fierce Foe

Alarmed by talk of lost deductions for mortgage interest and state and local taxes in the Republican tax bill, the National Association of Home Builders flexed its lobbying muscle to promote a homeownership tax credit. No luck, apparently, but give the builders full credit for chutzpah.

Homebuilders don't like the current effort at tax reform any better than they liked the 1986 version. They blame the '86 act, explains Damian Paletta, for discouraging real estate investment and thus triggering the savings and loan crisis.

There were numerous causes of the savings and loan crisis, but the home builders aren’t the only ones that think the 1986 tax law is a precipitating factor. During congressional testimony in 1991, then-real estate developer Donald Trump made the same argument. He called the 1986 tax law an “absolute catastrophe.” 

"It has taken all the incentive away from investing in real estate," Trump complained. Nevertheless, he soldiered on for another twelve years before launching his career on reality TV.

Even Dogs Diversify

A guy we know received this birthday card from his financial adviser.

The Sound of Trial Balloons Popping

Every Congress has to learn the lesson: Cutting income tax rates is easy; expanding the tax base is difficult. Every tax break has beneficiaries who claim they can't live without it.

Legislators seeking ways to limit the cost of President Trump's tax plan  realize that citizens regard deductions for mortgage interest and charitable gifts as inalienable rights.

Could SALT, the deduction for state and local taxes, be a candidate for elimination? Nope. Republicans from high-tax states wouldn't hear of it.

Next trial balloon: a suggestion that the annual limit for contributions to 401(k) plans be cut from $18,000 to $2,400. Pop! After widespread criticism, that idea has suffered death by tweet.

Back in the Reagan years, cutting tax rates was relatively quick and easy.  Cutting rates and broadening the tax base in the 1986 tax reform act was not.

At Last! Family Farms Worth Taxing

Opponents of the federal estate tax habitually warn that it imperils family farms. But they've hemmed and hawed when asked for examples. Now some family-owned farms actually may be large enough for death tax. Two thirds of our national agricultural output, the WSJ($) reports, comes from super-sized farms with annual sales of $l million or more.

Example described in the article: a Kansas farm that stretches for over 30 miles and encompasses more than 30,000 acres.

Guardianship

I have routinely written in my trust articles how a living trust avoids the need for guardianship, in the event of incompetency.

This article from the New Yorker puts that idea in a whole new light.

Was Tulip Mania Fake News?

For generations, economists and financial writers have illustrated the folly of investment bubbles by referencing the 17th-century  tulip mania. As colorfully described by Charles Mackay in Extraordinary Popular Delusions and the Madness of Crowds, Amsterdam went nuts over "broken tulips," bidding astronomical prices for virus-inflected bulbs that produced exotic blooms.

But we may have to find another financial frenzy with which to scare investors. There was no tulip fever, Smithsonian asserts. Prices for "hot" bulbs did soar and eventually crash, but trading was largely limited to urban upward strivers, eager to obtain the exotic status symbol of the day. Mackay fell for tall tales told by Dutch moralists dramatizing the evils of trying to get rich quick.

For the moment, looks like we'll have to settle for the millennial dot-com bubble to illustrate the dangers of irrational investor exuberance. But have patience – bitcoin mania may have legs.

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Like to learn more? Peter M. Barber's Famous First Bubbles can be read online here. YouTube offers numerous treatments of tulip mania – this two-parter will tell you more than you may want to know.

No sir, Reagan did not need years for tax reform

From Tax Notes:

Trump alluded to former President Ronald Reagan’s long journey to pass tax reform, noting that he has been in office for only about nine months. “I would like very much to see it be done this year. . . . If we get it done, that’s a great achievement. But don’t forget, it took years for the Reagan administration to get taxes done,” 

This is not accurate.

Reagan "got taxes done" with the Economic Recovery Tax Act in 1981,  enacted in the first year of his Presidency.  That law slashed the top income tax rate from 70% to 50%.  How did that happen?  Reagan made it a priority right out of the gate, he didn't defer all legislative action until after the August recess.  As the Republican Congress did.

I am generally a Trump supporter, but this comment makes me wonder if the President has any idea what he is talking about.

Oh, I suppose Trump might be referring to the 1986 bipartisan tax reform, the law that briefly brought the top rate down to 28%.  That was an historic achievement, and the country would be well served by simply re-enacting that legislation, word for word.

But it was ERTA '81 that ignited the stock market and the economy in the 1980s. The boom was well under way by the 1984 election, which was two years before the 1986 tax bill.

Trump needs to get this done.  Republicans need to stop dithering.

Dartmouth 14.6, Yale 11.3 – But Not Exactly

Dartmouth's football team beat Yale, 28-27. Dartmouth's endowment has won more convincingly. For the fiscal year ending last June, Dartmouth achieved an investment return of 14.6%. Yale lagged at 11.3%.

In reality, there's less to all those numbers than meets the eye. Yale's one-point football loss resulted from an erroneous out-of-bounds

 ruling on an end-zone catch that video showed to have been a touchdown. As for the endowment returns, their precision is partly the result of accounting fiction, as Yale School of Management's Roger Ibbotson has pointed out:

"When you have private equity and venture capital assets that are not priced every day, it is difficult to know exactly what the real performance is. I don’t really like ranking the endowments annually because there’s such a significant measurement error."

Long term, the investment performance of Yale's endowment remains remarkable: an average of 12.1% per annum over the last 20 years.  The endowment's domestic equities returned 12.2%,  trouncing the benchmark return of 7.5%. Makes you wonder why David Swensen allocates only 4% of Yale's endowment to shares in U.S. companies.

“Death Cleaning”

From the WSJ ($), here's an idea executors and heirs should applaud:

If your family doesn’t want your stuff when you’re alive, they sure won’t want it when you’re dead. 

That’s the blunt assessment of yet another self-help author from abroad who is trying to get Americans, who have an addiction to collecting and storage units, to clean up their acts.

The latest volley in the decluttering business comes from Stockholm, where 80-ish artist Margareta Magnusson has just published a slim yet sage volume, “The Gentle Art of Swedish Death Cleaning.” The book will be published in America in January.

In Sweden, it seems, custom requires senior citizens to declutter before they pass on. Splendid idea, but wicked difficult to execute. Although your obedient blogger knows he's reached decluttering age, progress comes hard. Soon as you get rid of some stuff, more stuff shows up.

Out in our garage, we still store containers of miscellaneous nails, miscellaneous screws and miscellaneous odd bits of metal that my thrifty father figured might come in handy some day.

Throw them out? How can I? They might come in handy.

A death tax cloud over family businesses clears

The IRS has promised to revoke the Section 2704 valuation rules, proposed last year, after getting 28,000 negative comments on them.

The rules were projected to raise taxes on family business by $18 billion over ten years, a massive and targeted tax increase.  Why them?  Why was that a good idea?  Why single out family business for punishment?

That revenue projection was from the Obama administration, so I'd take it with a grain of salt. I can't imagine that valuation adjustments to family businesses come to over $3 billion every year (roughly the amount needed to generate $1.8 billion in annual tax savings). Still, it was an obviously terrible idea, one that galvanized small business owners around the country.

When Deficits Meant Tax Hikes, Not Cuts

From half a century ago, August, 1967, comes this Life magazine editorial. 

"The case for a tax increase…is a persuasive one." Although the U.S. had run deficits in nine of the previous 10 years, "the sheer size of the one now confronting the nation is fearsome."

Current deficits run bigger, in terms of GDP, than they did half a century ago. Can you imagine our president or any member of Congress proposing a tax increase? 

Life also mentions the need to restrain high inflation? How high? Three percent, a level today's fiscal engineers seek to promote.

You're right, Dorothy. We're not in the 20th century any more.