Tax reform aids nesting Over the next five years or so, tax reform will nudge 300,000 young married couples out of their rented apartments and into their own homes.
The tax law, which went into effect a year ago, makes home ownership look more and more like a bargain when compared with renting a comparable place, according to Patric Hendershott, a finance professor at Ohio State University.
Over the next few years, Dr. Hendershott predicts, the cost of owning will stay about the same, but rents will increase 10 to 15 percent.
Here's why: Lower tax rates mean that deductions for mortgages will be worth less, making ownership more expensive on an after-tax basis, thus less attractive. But offsetting this are lower tax rates that let people keep more of their after-tax income - money that can be invested in home ownership, one of the few tax deductions left. That's especially true for families with less than $50,000 in income, who saw their rates drop the most under tax reform and are less likely to own their homes already.
At the same time, rents will rise by up to 15 percent, Hendershott figures. The tax breaks that owners of rental housing enjoyed under the old law - accelerated depreciation, for example - aren't as generous now. So owners will have to raise rents to cover their costs or remain profitable.
Home ownership is affected by other factors, of course. As baby-boomers grow older and wealthier, and as their children grow and families settle in one spot, they will buy homes. ``The aging of the population alone will raise home ownership by three percentage points,'' or some 3 million homes over the next 15 years, Hendershott says.
But reform chips nest eggs
Tax changes in 1986 took a $25 billion tax burden off the shoulders of individuals and plunked it onto corporations. At least, that's what government tax experts figured when they put together the law.
But they figured wrong, according to Harvard University economists Martin Feldstein and Lawrence Lindsey. Since the vast majority of major corporations are owned by people (stockholders), corporate taxes are ultimately paid by individuals. A company might cushion the drop in after-tax profits by lowering dividends, for example. Or stockholders could see the value of their stocks rise more slowly, thus cutting into capital gains.
To see how much of a boon the 1986 law really is for individuals, Dr. Feldstein and Dr. Lindsey factored in taxes paid indirectly through the corporate tax rate as well as the direct personal taxes. The upshot: Lower-income taxpayers, who are supposed to see their taxes fall the most (proportionally) when tax reform is fully phased in, will effectively receive a smaller tax cut than expected. For example, economists predict that someone with an income between $10,000 and $20,000 would see his tax bill drop by $70 in 1988. But because higher corporate taxes will reduce the income to pension funds and mutual funds, that person would really only gain $40.
Meanwhile, wealthy individuals - who are already paying substantially higher taxes under tax reform than before - will end up paying the IRS even more than expected because of the indirect corporate taxes. For example, a household making between $100,000 and $200,000 will likely see its tax bill rise by $3,335 in 1988, not the $2,440 the government estimated.
The biggest surprise, says Lindsey, is the effect on the elderly, who are more likely to own stock than young people. People over 65 with incomes above $10,000 a year will see their taxes jump 8 to 17 percent, he says.
Cashing in on the summit
For enterprising companies, the Reagan-Gorbachev summit last month was more than a photo opportunity. It was a marketing opportunity.
Take Parker Pen. A few days after the Soviet leader went home, a full-page ad appeared in several newspapers. ``The pen is mightier than the sword'' were the words above a photo of the two leaders signing the agreement on nuclear weapons. Below, in smaller type: ``The historic document is signed. The pen is Parker.''
A much smaller company hopes the summit will be a launching pad to success. Just a month after five entrepreneurs from Tulsa, Okla., came out with their first board game, called World Affairs, they managed to get it to Mr. Gorbachev and Mr. Reagan, or at least in the near vicinity.
Apparently Sen. David Boren (D) of Oklahoma pulled some strings to get it to the Soviets. (``I'm a good constituent,'' explains Clifton Taubert, a partner at Kolojay Games.)
The idea is to deal with hazards of world events (assassination attempts, embassy bombings, etc.) while pursuing a cogent foreign policy (like flagging other countries' oil tankers).
But the final aim is very much capitalist: The winner is the one who amasses the largest personal fortune.