Jack TenneyExtra Point

by Jack Tenney, Publisher

March 2019

Unintended consequences are things that happen because changes made for one reason caused changes that make the reasons for making the changes seem unreasonable.

Well, there is quite a bit of talk about raising the tax rates for wealthy or high-income people.

I went through the opposite experience when President Johnson signed legislation that dropped the top rate from 90 percent to 70 percent. The CPA firm I worked for had some very wealthy, high-earning clients who invested in oil-well exploration and development. Typically, the clients had to file for as many as 20 partnerships. I was the office expert of taping together 13-column worksheets to record and consolidate all the 1099s.

I was pretty busy doing this in 1964 and 1965, working on 1963 and 1964 tax returns for these financial services execs, dentists, and movie stars.

What these folks had in common were taxable incomes of more than $100,000 subject to the 90 percent rate.

For every $100,000 they invested, they could expect royalties of $6,000. They avoided $90,000 in federal taxes, as all expenses for exploring were deductible and around 25 percent of the royalties were excluded as amortization allowance. All told, their after-tax investment was $10,000 and the return was just a shade under $2,000. If they had been doing this for a number of years, as long as the wells kept producing they kept getting the exclusion.

Come 1966, most felt it was imprudent to invest three times net for the only slightly enhanced net return. One client told his secretary who told someone who told someone who told me, “Your president gave me a boat.”

Yacht sales boomed, oil exploration tanked.

The unintended consequence is that after a decade of not looking for oil we ran out.