The SBA and mortmain

mortmain

(MOHRT-mayn)
1. The perpetual ownership of property by institutions such as churches.
2. The often stifling influence of the past on the present and the living.

from Latin mortua manus (dead hand).

Imagine a B-movie scene of a dead hand stretching out of a grave and you have the picture of the word mortmain. The idea behind mortmain is of a dead hand reaching beyond to hold a property in perpetuity. By extension, the word describes the past dictating the present in an oppressive manner.

Unlike the passing of an asset to a child on the death of a parent, institutions such as churches hold property forever. Over time, through donations, etc., they can acquire a large amount of real estate which cannot be distributed or revert to the crown. Also, in such cases there is a loss of revenue from inheritance tax. The English King Edward I passed the Statutes of Mortmain in 1279 and again in 1290 to limit such holding of property in perpetuity without royal authorization.
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TIP OF THE WEEK

Congress wants the estate tax to pay the mortmain that memory levies on human beings.

In case you haven't heard, Senators Lincoln (D-AR) and Kyl (R-AZ) are at it again. Back in April 2009 they teamed up on Senate Amendment 873, which called for a $5 million federal estate tax exemption and 35% estate tax rate and passed in the Senate by a 51-48 vote. But nothing came of this or any of the other measures that were introduced in 2009 and so on January 1 the federal estate tax was officially repealed. There has been no federal estate tax since then.

Late on Tuesday Lincoln and Kyl teamed up once again to introduce a proposal that calls for an amendment to H.R. 5297, commonly referred to as the Small Business Lending Bill.

This is the bill that will increase the maximum size of SBA 7(a) and 504 loans from $2 million to $5 million. As amended by the Senate, this legislation would also provide a commensurate increase in the statutory maximum guaranteed portion of SBA 7(a) loans along with elimination of borrower fees on 7(a) and 504 loans through December 31, 2010.

Senators Lincoln and Kyl want to add their measure, phasing in a top rate of 35 percent, with a per-person exemption of $5 million, to the small business legislation. The House passed an estate tax bill that would set a top rate of 45 percent, with no tax being owed for an individual with an estate worth less than $3.5 million.

The issue could derail the Small Business Lending Bill because some Democrats say it would add substantially to the massive federal deficit, while benefiting a small number of multimillionaires. Congress goes on summer vacation on August 9 and won’t return until September 13.
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Indices:
PRIME RATE= 3.25%
SBA LIBOR Base Rate July 2010 = 3.35%
SBA Fixed Base Rate July 2010 = 5.88%
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504 Debenture Rate for July
The debenture rate is 3.80% but note rate is 3.86% and effective yield is only 5.213%.
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AHEAD OF THE YIELD CURVE

Global warming might actually be a good thing.

Last month was the eighth- warmest June in 116 years, according to the National Climatic Data Center. The corpulent masses needed their air conditioning and industrial production in the U.S. rose in June as higher temperatures across the nation led to increased utility use.

Utility output rose 2.7 percent, while production at manufacturers declined 0.4 percent. Overall output at factories, mines and utilities increased 0.1 percent last month after a 1.3 percent gain in May, figures from the Federal Reserve showed.

The Fed’s report showed U.S. capacity utilization, which measures the amount of a plant that is in use, held at 74.1 percent last month

Here is what capacity utilization rates have done:

1997- 83.6

1998- 83.0

1999- 82.4

2000- 82.6

2001- 77.4

2002- 75.6

2003- 74.6

2004-79.2

2005- 80.7

2006- 82.4

2007- 81.5

2008- 79.9

2009- 69.9

2010- 73.2

What does all this mean?

Talk of the Federal Reserve raising rates is premature.

One of the Federal Reserve’s favorite gauges of inflationary pressure is the capacity utilization rate. The Federal Reserve watches capacity utilization rates to see if production constraints are threatening to cause inflationary pressures. Bottlenecks or shortages often lead to inflationary pressures that would drive prices even higher. Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

Without the boost from utilities, industrial production would have definitely slumped, the first time since August. The August capacity level of 69.9 was the lowest on records dating back to 1967.

While the capacity utilization rate is 5.9 percentage points above the rate from a year earlier it is still 6.5 percentage points below its average from 1972 to 2009.

We still have a long ways to go.

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OFF BASE

The debate over an estate tax is doing more than killing legislation on SBA loans.

It made the Yankees kill George Steinbrenner.

Think about it.

When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death's door to stay alive until January 1 so they could spare their heirs a 45% tax hit. Now the estate tax will come roaring back in 2011. Not only will the top rate jump to 55%, but the exemption will shrink from $3.5 million per individual in 2009 to just $1 million in 2011, potentially affecting eight times as many taxpayers.

The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.

By dying last week, the billionaire and long-time New York Yankees owner's wealth avoids the federal estate tax, likely saving his heirs enough money to field an entire team of Alex Rodriguez.

Forbes magazine has estimated Steinbrenner's estate at $1.1 billion. The federal estate tax in 2009 was 45 percent, with the $3.5 million per-person exemption. If he had died last year, his estate could thus have faced federal taxes of almost $500 million, depending on how the estate was structured.

The Steinbrenners therefore are expected to avoid what happened to the family of Chicago Cubs owner P.K. Wrigley after he died in 1977. The family was forced to sell the Cubs to the Tribune Co. four years later to pay the taxes on Wrigley's estate.

This is not crazy people talk but actually Nobel Prize winning thinking.

In 2001 two economists won the prize in economics for their conclusions that people find a way to postpone their deaths if that would qualify them for a lower rate on the inheritance tax. I actually have a copy of that work "Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity," National Bureau of Economic Research Working Paper No. W8158, March 2001.
Death elasticity.