Tax Reform and Advertising

     

For most of my 36 years in the investment and insurance business it was my practice to send out little desk top calendars to my clients during the holiday season. As my financial planning practice grew the number of calendars increased to the point where I was sending out more than 500. The calendars were practically my only form of advertising.

Before the advent of the internet and cell phones, the calendars were a way to keep my name and contact information before my clients throughout the upcoming year. I suppose some clients just tossed them but many seemed to love them and even claimed they anxiously awaited the arrival of their calendars each year. Some even wanted more than one.

I was a self-employed financial advisor who had to pay for the calendars and the ever increasing postage out of my own pocket. However, the cost of the calendars and the postage was considered a legitimate business expense that could be deducted from my business income before taxes. Actually, the cost was lumped together with other business expenses like office rent, staffing costs, travel costs, and utility bills and then subtracted from my total income for income tax purposes.

So, if the calendars cost $1000 and I was in a 35% tax bracket, they would reduce my income tax bill by $350. If I was only in a 15% bracket, the calendars would only have reduced my tax bill by $150. From another perspective we could say that the calendars cost me $650 and that the rest was paid by the Federal government. Of course, the government never actually pays anything. Taxpayers actually subsidized my advertising.

This little example should give some insight into the potential impact that tax reform might have on the incredible amount of advertising that we are subjected to in the world of the media. It is impossible to open your computer or look at your phone without being subject to a barrage of ads. Every so-called “news” headline is just a come-on to view an ad and increase ad revenues. Even though we pay a subscription fee to watch TV on cable, a large percentage of what we see will be commercials.  

The ultimate is reached every year during professional football’s annual Super Bowl when advertisers will spend millions for a half-minute commercial. In last year’s game a 30 second commercial cost $5 Million dollars just for ad time. That expense does not include what must have been the incredible cost of making the commercial.

However, just like my calendars, the cost of these ads is a legitimate business expense. If a car or beer company wants to pay $5 Million for a Super Bowl ad, it can deduct that cost from its corporate income before paying corporate income taxes. If a corporation is in a 35% tax bracket, it will save $1.75 Million in taxes, a huge subsidy from taxpayers. Not only do we have to watch these ads as they pop up on our screens, we have to pay part of the cost.

Tax reform that reduces the corporate tax rate to 20% will actually reduce the subsidy paid by taxpayers for advertising and other business expenses. Former GE CEO Jeff Immelt always took an extra corporate jet with him on his travels just in case. I suspect that the expenses of both jets were considered legitimate business expenses by GE accountants.

Most large corporations have huge accounting and tax planning staffs that work hard to find expenses to offset income. Reducing the corporate income tax will not only make American businesses more competitive with the rest of the world, but it will also make them warier of foolish spending practices that are designed to just provide tax write-offs.

I don’t like to make predictions, but I will predict that if the corporate tax rate is reduced to 20%, there will be a major shake-up in the world of advertising, especially in the case of ad giants like Goggle and Facebook.

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Football in America 2017

The National Football League (NFL) is taking much heat this season because of the protests of some of its black athletes during the playing of the National anthem, the Star Spangled Banner. Rather than stand during the anthem as most players and fans do, these athletes are dropping to one knee in protest against injustice and racism in America.

These protests have drawn a lot of criticism in print and online. More importantly, TV ratings, the lifeblood of the NFL, are down significantly. Viewers are tuning out and some are vowing never to watch again. Sponsors who shell out big bucks to advertise are obviously also taking notice. Some commentators even question whether the NFL can survive.

Personally, I do not object to the protests. I’m not a big NFL fan and rarely watch the games on TV mainly because they have become almost unwatchable because of the constant commercial interruptions. Nevertheless, one of the great things about the USA is that people have a right to protest.

Of course, even if the NFL cannot force its employees to desist, it also has the right to pan away from the protesting athletes and not give them center stage on its broadcasts. For a long time now, it has been squeamish about keeping the cameras on players who drop to their knees and make the sign of the cross after scoring a touchdown. In fact, most the media refuse to cover the annual Right to Life march on Washington every January even though almost a million show up to protest the Supreme Court’s Roe v. Wade decision on abortion.

While I think that the athletes have a right to protest, it does seem ironic that these modern day gladiators feel downtrodden. They all make more money than most of us will ever dream of. Most wear gold chains, drive fancy cars, and seem to attract beautiful women.

Even before they turned pro, they were pampered, fed, and lionized all through high school and college. I know that they were not paid while in college but they did have an opportunity to get a free education. That education was worth in excess of $60000 per year tax-free.  In addition, they lived in special dorms, ate special meals in special dining halls, and got to travel all over the country.

This year at Thanksgiving it would be really fitting if all these protesting athletes got down on both knees and gave thanks for all they owe to living in the USA. The United States has been around for only 228 years but there is no guarantee that it will be around forever.

Shortly after the Nation’s founding, it was engaged in the War of 1812, a war that seems insignificant now but people at the time thought that the very existence of the new nation was at stake. Enemy ships had entered Baltimore harbor and were bombarding Fort Mc Henry. The stubborn resistance of the men in the fort led Francis Scott Key to pen the lyrics of what would become our National anthem.

We usually only sing the first verse but I reproduce it as well as the fourth and concluding verse below.

O say can you see by the dawn's early light
  What so proudly we hailed at the twilight's last gleaming?

Whose broad stripes and bright stars through the perilous fight
 O'er the ramparts we watched, were so gallantly streaming.

O say does that star-spangled banner yet wave
O'er the land of the free and the home of the brave?

 And the rocket's red glare, the bombs bursting in air
 Gave proof through the night that our flag was still there

  

O thus be it ever, when freemen shall stand
Between their loved home and the war's desolation!
Blest with victory and peace, may the heav'n rescued land
Praise the Power that hath made and preserved us a nation
Then conquer we must, when our cause it is just,
And this be our motto — "In God is our trust"
And the star-spangled banner in triumph shall wave
O'er the land of the free and the home of the brave!

If there ever comes a time when that star-spangled banner does not wave, then protests of any kind will not be allowed. When people kneel in other parts of the world today, it is only to be driven into slavery or even have their heads cut off.

I don’t want to end on a sour note. Yesterday, Yale won the Ivy League title with a resounding victory over arch-rival Harvard. The newspaper report indicated that the Yale program had made a remarkable turnaround since the hiring of head coach Tony Reno in 2012. It was remarkable not only because of the victory but also because of the way that Reno and his staff did it. Reno said

“he and his staff worked hard since he arrived to change the culture of the program through a set of core values which went beyond football, starting with accountability. From always being on time, to putting others first, to cleaning the space around one’s locker and making sure hotel rooms were cleaner than when the players arrived. But most importantly, believing in each other.

After the game one of the Yale seniors told the coach that he would forever be indebted to him. “He taught me how to live life, how to sacrifice. I thanked him for all he did for me, and not just me, but everyone on Team 145.”

Boola, Boola to Yale, its coach and its team!

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Tax Deductions

    

Many do not understand the rationale behind some of the proposals in the new Republican tax reform bill. In particular, let’s look at two of the most significant changes: the removal of the deduction for interest paid on home mortgages, and the removal of the deduction for state and local income and property taxes.

Proponents of the reform argue that the removal of the deductions is a matter of fairness and simplicity. One commentator argued that only 5% of taxpayer’s actually use the deductions, and that the rest of the taxpayers just use the “standard” deduction which will be doubled in the proposed plan. In addition, residents of states that do not have a state income tax derive no benefit from the deduction of state income taxes.

Also, these tax deductions are worth a lot more to high income taxpayers than to the majority of the population. A $10000 tax deduction saves a taxpayer in the 35% bracket about $3500, but a taxpayer in the 15% bracket only saves $1500. These deductions mainly benefit the upper middle classes.

But those living in wealthy states like California, New York, and Connecticut are up in arms at the reform proposals. Even though these are “blue” states that usually vote Democratic, their leaders seem not to care that the deductions benefit the well-to-do more than anyone else. Politicians from these states are the most strident critics of income inequality, but they now find themselves supporting tax deductions that primarily benefit their upper middle class constituents.

New home builders, realtors, and others complain that the elimination of the mortgage interest deduction will depress the housing market. Here’s the reasoning. When most people decide to purchase a home, they have to consider what they can afford to pay every month. Most of the bill will be made up of the mortgage payment and the real estate tax that is usually paid by the bank that handles the mortgage.

So, if a potential homeowner with a $100000 annual income can pay 24% of that income ($24000 per year) for housing cost, he could either pay a rent of $2000 per month, or a mortgage payment of $2000 per month. But since the great part of the mortgage payment is currently tax deductible, his after tax cost will be less that $2000 per month. What he saves in taxes could theoretically be spent on home improvement, a car payment, or whatever.

But he could also say that because the mortgage payment is deductible, he could afford a more expensive home to begin with. This is one of the reasons why we see smaller, older homes being knocked down all over, and replaced by mega-mansions. On my own street an old eighteenth century farmhouse with a vacant building lot was recently knocked down and replaced by two very large five bedroom homes that both went on the market for around $900000. One was bought by a single man who apparently moved to Connecticut because his property taxes in New York’s Westchester county were too high.

It is true then that the deductibility of home mortgage interest and property taxes have inflated the cost of homes. But while that has benefited higher income earners, it has also priced many members of the middle class out of the market for new homes. For most people, the increase in the standard deduction, as well as the lower tax rate will offset the loss of the tax deductions.

For example, under the current system a single taxpayer reaches the 25% tax bracket on income over $37950. Under the proposed plan, the 25% bracket is reached on income over $45000. The numbers are doubled for a married couple filing jointly. Again, for most people the increase in the standard deduction to $12000 or $24000 will further obviate the need to itemize deductions on the tax return and make the filing process so much simpler.

Ironically, the elimination of the home interest and local tax deductions will have no impact on the very wealthy. Under the current system these deductions have already been phased out for those making over $400000 per year.

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