Email Newsletter #11
The New Tax-law is effective this year and it will eventually cause changes in behavior that I think many people are not yet aware of. To be sure, the new law has already begun to change consumers and alter the items they spend their capital on. But I don’t think the full effects have filtered in yet and once this tax-year is reported and paid for, I think we will see a drastic behavioral change next year.
As many of you know the Knight’s are boat owners. Currently, we are permitted to deduct the interest paid on the boat loan from our income since the boat is considered a second or let’s say vacation home. It is one of the incentives Congress gave to us over the years to buy a bigger boat and to borrow the money to pay for it. Beginning on January 1, 2018, the ability to deduct the mortgage interest on vacation homes (and boats) disappears with the new law. (Thankfully this grandfather is grandfathered in.)
For example, if you are in the 35% income-tax bracket and you pay $10,000 in loan interest on the boat the IRS (& the State) allow you to deduct that $10,000 from your earnings—saving upwards of $3,500 in income taxes. That will continue for us since we are “grandfathered in,” but the minute we sell this boat or trade it in for a new one, we would lose the deduction. (We have 3,500 reasons to keep the boat we already own.)
Anecdotally, we boaters (and boat-brokers) have already noticed sales of larger boats are slowing. And Sea Ray and Regal brands have virtually stopped producing larger yachts and will focus their future energy and capital on building small boats. I predict the middle-market of large yachts will dry up even more so next year.
The same goes for vacation homes–think Ocean City Condo’s, or Florida winter homes, or even motor-homes. Moreover, with the State and Local tax deductions limited to just $10,000 (including property taxes) and mortgage interest rates rising, new home-starts and mortgage applications are already slowing.[i] Again, if you already own the second home or vacation home you are grandfathered in—but don’t sell out to move into something different—you’ll lose your deduction.
Today there are fewer Government incentives to buy these luxury items than I’ve seen in my lifetime. I am not complaining; I genuinely believe the Government has no business incenting people to overspend their resources. Boats, vacation homes, and even motorhomes are expensive luxury items that drain precious resources from things that are probably much more important to society’s general welfare and the Country’s productivity.
Additionally, like college tuition, when prices are subsidized by the Government, miraculously, the price of that item promptly takes up the slack and increases to more than account for the subsidy. Prices go up when demand goes up. The more Government gives to students in the form of low-interest rate student loans, tax deductibility of student loan payments etc, the more colleges charge for tuition. Demand for college degrees rise, and tuition prices follow (in your mind’s eye insert your supply and demand chart here.) Same as electric cars, solar panels, boats, vacation homes—prices are artificially inflated to an amount the consumer is willing to pay when the consumer factors in the subsidy.
Take away the subsidy and we will quickly observe a re-pricing to market-based amounts. Prices should be based on sound economic principles, i.e., supply and demand. Besides, American’s building extravagant boxes to live in; large yachts that stay docked at the pier; time, money and effort pursuing worthless college degrees; and vacation homes sitting empty most of the year is a tremendous waste of our Country’s capital.
This misapplication of valuable capital started and was encouraged through incentives that more than likely emanated from a lobbyist(s) who were able to get their special interest tax-break included in the tax code. Crony capitalism restrains the invisible hand of the free-market and Country suffers in the end. A tax code that is less complicated and taxes things equally without special interest loopholes creates fewer unintended consequences. In the end, free markets punish excessive luxury—the Government should not push its citizens toward it.
Thanks for reading, MK
Hieronymous Bosch’s The Seven Deadly Sins and the Four Last Things.
[i] https://www.cnbc.com/2018/07/17/us-housing-starts-june-2018.html
