Inheritance REDUCES Inequality?

As great wealth spreads from generation to generation, it provides more and more people with smaller and smaller inheritances.  Maybe, The Times (London) suggests, inheritance actually reduces inequality.  Not likely, but there's some interesting Swedish research.

Death Taxes on Life Support

Estates of the newly deceased have long been a tax target. Augustus, the first Roman emperor, imposed the vicesima hereditatium or "20th of inheritance" in 6 AD. 

Have death taxes finally run their course?

Could be, according to The Economist. Australia, Canada, Russia, India, Norway and Sweden are among the countries that have abolished their death duties.

Although the US Congress seems unlikely to abolish the federal estate tax this year, the exemption might be raised high enough to eliminate tax for families that are not at least entry-level rich.

Happy Thanksgiving

We borrowed this image of a Currier and Ives print,  G. H. Durrie's "Home for Thanksgiving," from a Yale Art Gallery post. Durrie was a Connecticut artist, born in Hartford in 1820. He died in New Haven, where he had a home on Temple Street, in 1863. That year Currier and Ives published two of his winter scenes. They became popular (nothing like death to enhance an artist's career) and Currier and Ives reproduced six more Durrie paintings.  "Home for Thanksgiving," issued 150 years ago, was the last.

The Ivies push back

Apparently, Harvard thinks a 1.4% tax is too much for it to pay.

It's because they understand the "camel's nose" phenomenon.

I'd much prefer we simply end "nonprofit" status for everyone, and ditch the charitable deduction to boot.  But it's a start.

The Incredible Shrinking Stock Market

In 1996, writes Jason Thomas of the Carlyle Group in his WSJ($) op-ed, there were 7,322 domestic companies listed on U.S. stock exchanges. Today there are only 3,671. The Wilshire 5000 is down to around 3,500 companies.

Easy access to venture, growth and private-equity capital means that companies no longer need to pursue an initial public offering to fund growth or access liquidity. Increases in regulations, shareholder lawsuits and activist demands have also diminished the appeal of a public listing. Over the past two decades, the number of annual IPOs has fallen sharply, to 128 in 2016 from 845 in 1996.

Successful new companies prefer to stay private to avoid hassle. Thanks to eased rules, they can acquire plenty of capital and hundreds of direct or indirect shareholders without going public.

The trend away from IPOs has benefited private market players at the expense of everyday investors. With companies like Uber, Airbnb and other successful startups delaying their IPOs for so long, there is little prospect for public returns on a scale similar to those enjoyed by Amazon’s early stockholders.

Yesterday’s growth stocks have migrated to private portfolios. As a result, stock pickers have slimmer pickings. Investors in index funds face leaner returns. "Today," Thomas asserts, "it isn’t possible to assemble a portfolio with the same makeup as the stock market of 1997 without exposure to private markets."

Another drawback, not mentioned by Thomas: Investing in nonpublic stocks through private equity partnerships or hedge funds is way more expensive than buying an index fund. Private investors face high fees and must hand over a share of the profits.

The world of everyday investing is in transition. Over the next decade or two the changes are likely to be drastic. Now if we just had 20-20 foresight….

Related post: The Stock Market is Disappearing Before Our Eyes.

Art Appreciation

Approximate sales prices for a damaged, heavily restored painting now considered to be the work of Leonardo da Vinci:

1958

$125

2005

$10,000

2013

$80,000,000

2014

$127,500,000

2017

$450,000,000

Sources: Washington Post, The Wall Street Journal, The New York Times

Harvard Will Invest the Yale Way

In a move Jim Gust has frequently deplored, some years ago Harvard laid off its endowment's "overpaid" investment whiz. The endowment's returns have suffered. Now Harvard has decided to try the Yale model: a small in-house staff overseeing the efforts of carefully selected outside investment managers. (The system works great when the selecting is done by Yale's David Swensen.)

Take a second look at the Yale Daily News article linked above. Strikes me as pretty professional. Better than I'm likely to read in our local paper.

Who's Jinghi Cui, the student journalist? Glad you asked. She's a Yale soph who graduated from the Experimental High School attached to Beijing University. You pronounce her name JING-ee SOO-ee.

Here's another example of her reporting, this time on the pension burdens borne by Yale and other universities. Does any large private or public employer not have a pension problem?

Fun and Taxes

The tax legislation being hurried through Congress is serious business. Still, haste sometimes makes humor.

Reinventing the bubble that killed the 1986 tax reform
Back in '86, last-minute tinkering increased the nominal top income-tax rate from 28% to 33%. But it was just a "bubble" – for the highest incomes, the rate dropped back to 28%. Without this silliness, the '86 reforms might have survived longer.

So what did House Republicans just come up with? A new bubble that would raise the current top tax rate of 39.6% to 45% before dropping back to 39.6%. (Members of Congress will do anything for a laugh.)

Before-tax loss, after-tax gain
Senate Republicans propose delaying the 20% corporate tax rate for a year while allowing immediate deductions of some business expense from income taxable at 35%. Professor Dan Shaviro of New York University Law School gave the NY Times an example of the fun possibilities:

Normally no one would invest $100 to earn only $90 back. But under the Senate plan, where some business expenses could be immediately deducted at a 35 percent rate, you would get $35 back in 2018. So your actual cost is $65. By the time your $90 earnings are paid in 2019, though, the tax rate would be 20 percent. That would cost you $18 in taxes, and leave $72 in your wallet. So even though your investment lost $10, you are still coming out ahead: with $72 on a net investment of $65.)

Best new tax acronym

"To reduce their home tax bill, " the Times reports, "companies like Google and Pfizer, for instance, often relocate patents and copyrights in tax havens and then sell use of that intellectual property back to their American subsidiaries at eye-popping prices." This Global Intangible Low-Tax Income is known as GILTI.

The tax bill will seek to cut off GILTI, but the restrictions could prompt companies to move more research and manufacturing off shore.

This Year 50 to 80 Family Farms or Businesses Face Estate Tax

Most owners of family farms or businesses needn't worry about federal estate tax. Most, but not all.

The Center on Budget and Policy Priorities estimates that 50 estates consisting mostly of a farm or business will pay the death tax this year. Data from the Tax Policy Center suggest the number is 80.

Repeal of the estate tax would make life easier for those 50 to 80 families. But repeal would also allow more than 5,000 other wealthy families to retain their diversified wealth tax free.

At the moment, chances of repeal have dimmed. The House version of the tax bill leaves the federal estate tax in place for seven years, albeit with a doubled exemption. The Senate version deletes the delayed repeal.

If It Smells Like a Tulip . . .

This year…

The value of Bitcoin has increased by more than 600 percent.

One hundred hedge funds have been set up to invest exclusively in Bitcoin.

And as of the end of last month, nearly a third of Bill Miller's hedge fund was said to be invested in Bitcoin.

Nathaniel Popper of the Times provides a lucid introduction to this year's steaming hot investment.

“You could get a possible run on the bank if one large investor withdraws and that causes the price to tank," says one trader. But that appears to be a minority worry. Almost everybody frets about a possible collapse of stock prices. Almost nobody, aside from grumps like JPMorganChase's Jamie Dimon, seems to think that Bitcoin will wilt in the heat of irrational exuberance.

The Agonies of Wealth

Why can't I be sure I won't go broke?
Why can't my money buy love?
Why doesn't my money boost my self esteem?
Is everyone after my money?

The average member of Tiger 21 has over $87 million in investable assets. (It takes a minimum of $10 million to join.) Yet the Tiger 21 member mentioned in this NY Times story finds wealth a source of anxieties and insecurity.

Many Times readers, including your obedient blogger, find it hard to sympathize with the burdens of life as an UHNWI.

Wealth managers, on the other hand, welcome the new-business opportunities offered by traumatized Gilded Agers. Wealth worries also help support groups such as Tiger 21 and (minimum wealth $30 million) the Institute for Private Investors.

$300 million per year

That is how much will be raised by the scant 1.4% tax on the net investment income of private university endowments.  So if it were 14%, as it should be, it would raise $3 billion per year.  Real money.

However, this estimate is probably high, for two reasons.  First, the tax has already been watered down--initially, it applied to endowments of $100,000 per student and more, but now it applies only to endowments of $250,000 and up.  So Harvard and Yale still pay, but many schools have been let off the hook.

More important, what is "net investment income"?  It's not the same as total return.  I'm sure the endowments will adjust their investment strategies for maximum tax avoidance.

I don't like tax bubbles

The new tax legislation has one, for those earning $1 million and more in a single year.

Why I support the tax reform bill

I've been arguing for this for years:

Some endowments will be taxed.

The tax rate is too low, but the camel's nose would get into the ten.