Happy Thoughts

Good morning.

I write more about our newest family member on my other blog CORE Beliefs but Kubae and I are so excited to welcome Ginger into our home!  We picked her up Saturday from the Southwest Washington Humane Society.

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Here are my two wonderful young ladies.  Yes, Ginger has her own pink bed, pink walking harness, pink extending leash and collar and even a pink car seat.  She is a corgi-terrier mix, 6 months old and hates being separated from her “mommy”.

No, she does not sleep in her bed.  It is funny, when we put her little bed on top of the chest, I told Kubae that our little sweetheart was going to jump into our bed within 5 minutes.  No sooner did we turn out the lights than we heard her little paws on the foot rail and a soft plop as she hit the mattress.  She curled right up between us!  The good news is she sleeps through the night.

Moving on.

You have no doubt heard the various predictions about the tax reform bill that is currently in committee.  You have probably even formed an opinion as to the effectiveness of this effort at tax reform.  Sadly, your opinion is likely based upon your political disposition instead of really getting to understand what is being done.

When you hear that tax reform never pays for itself, be careful.  I think the evidence is there that within a short time span the tax law does not spur sufficient growth to “pay for itself”.  But I think there is a case that, over a generation, the tax cuts can be effectively stimulative.  The bigger issue is if the pain and suffering are worth the wait.

The 1986 tax act was a major rewrite of the tax code.  It did not really “pay for itself” in the first 5 or 10 years.  I believe, however, that when we look at today’s tax receipts, federal spending and redistribution, we notice that our tax receipts are substantially higher than what they were in 1985.

More importantly, it changed certain behaviors by changing the incentives.  Passive activities were no longer sought after for their generous tax breaks – unless one could find a passive investment that spun off income.  Requiring social security numbers and birthdates for dependents de-incentivized the deduction of, shall we say, dubious dependents.  Yes, I have heard that it created a far more complex tax code – I wouldn’t know for certain because in 1986 I was playing Marine – but I think overall it led to an economic improvement that has enhanced our lives and general prosperity.

As you measure the economic impact of the current tax reform measures, keep in mind that part of what we want to change is how certain behaviors are incentivized.  One code section that comes to mind is section 121.  IRC 121 is the home sale exclusion rules which state that if you own and live in your home 2 of 5 years, the gain can be excluded.  I believe it was enacted in 1999 (or thereabout).

This was a huge benefit to home owners over prior law.  The prior law required you to buy a home of equal or greater value than the home you sold.  Unless you were over 55.

With this change, you could now sell your home and rent until you found the right property.  If you moved from a high cost of living area to a much lower one, you would not have to fear being taxed because your new home was less in value, even if larger.  It provided opportunity – that is, an incentive, to consider moving every few years instead of every decade.

Yes, as with all changes like this, there were lots of attempts to structure transactions to get the benefit without technical compliance.  And there is a link between IRC 121 and the huge run-up in home values in the early 2000’s but I think, overall, that this “reform” served the economy better than under the old law.

Now, congress wants to update IRC 121 and incentivize people to live in their homes longer by requiring 5 years of 8 owning and living in the home.  It remains to be seen if this is a positive or negative incentive – especially with an economy that possibly is going to require citizens to relocate for new job opportunities.   But the point is, it might take more than 5 or 10 years to determine if a change helped or hurt the economy.  And if, after 10 years, congress sees that it is perhaps not working as intended, I would hope they would try to correct it by having a fair and open debate.  Ahh to be a dreamer.

As you read the opinions of your favorite pundits and listen to your talking tax heads, keep in mind that things change constantly.  So, have a happy thought and don’t get wrapped up in the minutia of their debate.  Updating the tax code is a good thing, although I do agree it could have been handled a little more maturely by everyone involved.

 

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