Leon C. LaBrecque, JD, CPA, CFP®, CFA
“We will have a recession someday, maybe soon. I’m worried we’ve created a budget Golem. It starts friendly and cooperative, and then turns into a monster. And like the Golem, it can only be controlled by Truth.”
When I was a kid, I loved horror movies. There was a silent movie from 1920 that was about the Golem. It caught my attention. A Golem is an anthropomorphic being (a monster) made of clay and brought to life with a magic incantation. It is activated by its creator with a medallion or inscription of the Hebrew ‘emet’ (truth) and killed by taking away the Hebrew letter aleph to make ‘met’ (death). In one Golem story, Rabbi Belazel of Prague created a Golem in the 16th Century to defend the Jewish community from attacks. The rabbi would let the Golem rest on the Sabbath, but one time he forgot to de-activate him and the Golem went out of control and rampaged. The rabbi eventually removed a secret key and the Golem fell to pieces. The pieces are allegedly in the attic of a synagogue in Prague, and by a cool Indiana Jones-style twist, a Nazi officer tried to reactivate the Golem and died in the process (I’m imagining a ‘Raiders of the Lost Ark’ scene).
What does this have to do with money? As most readers know, I think the new tax bill is stimulative to the economy. But the deeper I dig, I see things that will work out in the short run and may not be so good later. Here are some examples:
- Losses were formerly deductible, but now they can only be carried forward and then only 80% can offset income. Go look at most tech companies, from Twitter to Facebook to even the mighty Amazon and you’ll see that they had huge periods of losses. We will have a recession again and companies will lose money, and the modification of the Net Operating Loss might put another nail in the lid.
- There is a new ‘excess loss’ deduction elimination. This stops a company currently losing money from deducting the losses from income. Again, at the innovation phase, companies lose money, and this may have an effect of slowing the start-up process.
- Interest is now limited in deduction to 30% of adjusted taxable income. I can’t help but wonder what happens to companies like Ryder, who leveraged personal property rentals (real estate rental is excluded from the rule, wonder why?), as well as businesses who want to expand. This creates a new conundrum for companies that expand, borrow money to buy equipment (reducing income), and then can’t deduct the interest or the excess losses. This will be a sticky slope.
- On the same topic, the new law provides for full expensing of business personal property, including (surprise, wonder why?) leasehold improvements. The full-write off (or 100% bonus depreciation) does begin to expire in five years, so a significant amount of capital will be consumed in acquisition of business assets. I understand the demand for over-the–road trucks is at an all-time high, and other manufacturers are ramping up production as well. Buy all the equipment now and then don’t? What happens in five years?
These are examples from tax reform passed in late 2017. The latest budget from the President, in early 2018, adds $984 billion to the deficit. The congressional two-year plan (also early 2018) boosted spending by $300 billion. You know, a hundred billion here and a hundred billion there add up to real money someday. We will have a recession someday, maybe soon. I’m worried we’ve created a budget Golem. It starts friendly and cooperative, and then turns into a monster. And like the Golem, it can only be controlled by Truth.
PS: This is what a Golem might look like: