Yes, I’ve noticed there’s a new tax bill. Some of you may be wondering why I haven’t been outlining for you all its ins and outs. What could be more topical or important to people like us? (Others of you have been following this space long enough to know there could be a nuclear war, and my column would probably be about ostrich meat or the latest genie joke.) Sure, if there were 2 million of you and you each paid me $180 a year, I’d gladly staff up to provide this kind of coverage (and change the name of this column to The Wall Street Journal).
But the fact is, I do have a few preliminary thoughts on the likely new law, even if they’re not yet the clever-ways-to-manipulate-it-to-your advantage variety. And I also have a genie joke.
Basically, the new bill is pretty good, I think, given political reality. It’s high point is clearly hiking the cigarette tax to fund better health care for kids. A perfect trade-off, because you want to tax the things you want to discourage, like smoking, not the things you want to encourage, like hard work and investing. And you certainly want to invest in the health of our future — our kids. The best thing about the tobacco tax (all-too-modest as the 15-cent-a-pack is) is that it’s at least semi-voluntary (you can quit), and that if the burden falls most heavily on the poor, so do the benefits: on the margin, low-income people are most likely either to quit or not to start in the first place because of the price of smokes. No one who earns $80,000 a year is going to quit (and no kid who has signing privileges on his dad’s Visa card is going to find a pack priced out of reach) because 20 cigarettes cost $3, or whatever. But to those at the minimum wage, the impact actually could make a difference, on the margin. For those who do thus decide to avoid the tax hike by quitting, they get two huge benefits: the health benefit, of course, but also a big boost in their disposable income. Because not only will they avoid this extra 15 cents a pack, they will also avoid the rest of the cost of the pack as well — perhaps $1,000 a year for a fairly light addiction, which is a heck of a raise to a guy earning $6 or $8 an hour.
So that part is a clear winner.
I also am happy to see capital gains were not indexed to inflation — a completely sensible notion in concept, but, as the Clinton administration argued, a really dumb idea because of the complexity of execution (not just in all the extra calculations we’d have to do, but also in trying to avoid game-playing with the other side of it: indexing interest deductions taken to finance the investments that produced the gains).
Did we need a capital gains tax cut just now to get the economy out of the doldrums? Clearly not. Or to encourage people to shun relatively safe interest- and dividend-paying investments in favor of riskier investments, like stocks? Clearly not that either. Choosing this specific time to provide that added incentive may prove as perverse as it would have been to raise the capital gains tax in the months following the crash of 1929.
In short, there would have been better ways to do this, and it might have been held in reserve for a time it more needed doing. (I’ve long argued for a targeted ZERO capital gains tax rate on all purchases of NEWLY-ISSUED securities, to encourage the formation of new capital and the financing of new projects and growth, but no additional tax break on the mere TRADING of existing securities. It also makes no sense to me to make people wait a year or five to get the benefit of a tax break — there are already huge incentives to holding for the long term, such as the avoidance of tax altogether until you sell, so why artificially obstruct the natural flow of capital based on where people think it will earn the best return? Especially in the context of my NEWLY-ISSUED distinction, eliminating the holding period would work very well.)
Still, I’m as human as the next guy (no — I am!), and so I’m delighted that MY vast fortune will swell as a result of the cut to 20% and 18%. And that I can sell my house with no tax (even though I could have already, so long as I bought another of equal or greater value within two years). And that when I sell my little South Beach apartment building (14 tiny units, not great shape, yours for $499,999), I will get to keep an extra $25,000. Hey, I’m not crazy.
But I also do worry about the impact on charities. With tax rates fairly high, the benefit in giving appreciated securities — which is really pretty painless — was so neat it almost made you forget you still were, after all, getting poorer not richer by "beating taxes" this way. Now, especially to those living in low- or no-tax states, the benefit with an 18% or 20% rate will be less . . . and the lure of actual cash will be stronger. Beating taxes is a lure. Pure, after-tax cash is a lure. You’re pulled one way, you’re pulled the other — I predict that, by sliding the fulcrum of this tug of war away from the satisfactions of generosity to the primal appeal of self-interest (me! me! me!), the tax bill will inadvertently cut into charitable giving a bit.
You could argue, of course, just the opposite — that by letting rich people be a little richer, they’ll have even more money available to give away. But my own instinct is that it won’t necessarily work this way.
Then again, the difference isn’t likely to be dramatic or, perhaps (given all the other variables you can’t control), even measurable.
I have some other musings on the tax bill, but we’re both getting carried away, distracted by tax loopholes, as usual, from our basic productive work. In your case: whatever it is you do for a living. In my case, writing for you the essence of this genie joke. (Forgive me if it hit your e-mailbox as it did mine.) The long form is a lot of fun and involves a lot of description of this 28-year-old golfer and his beautiful young wife. The short form is that they went to apologize to the owner of a golf-course-adjacent house whose window they just smashed with a terrible slice. "I’m not the owner," says the guy they encounter, "I’m a genie! In fact, until your golf ball smashed that window and then this vase, I had been trapped in here for 300 years!" Far from being angry, he offered them two wishes by way of gratitude, with the proviso that he then get one of his own. "I want to be a scratch golfer," said the man. "Poof, you’re a scratch golfer," said the genie. "I want ten million dollars," said the man. "Poof, you’ve got ten million dollars," said the genie. He then noted that he had been in that bottle for 300 years, without the company of a woman, let alone a woman as beautiful as the golfer’s wife, and so he made his wish, which involved spending the next hour with her. At the end of which, before they returned to the living room, he asked the wife: "How old is your husband?" "Twenty-eight." "And how long has he believed in this genie stuff?"
Enjoy your tax cut. Let’s hope it works largely as intended — as it may well — rather than spawn an industry of unproductive ways to convert ordinary income to capital gains, and overheat things that are already more than a little lukewarm warm.
Tomorrow: Sometimes Insurers Really Stink
Quote of the Day
Every debt is ultimately paid, if not by the debtor, then eventually by the creditor.~Jim Grant
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