MauledAgain

It's Halloween. Even though April 15 gets all the attention, there's good reason to declare October 31 "National Tax Fright Day." I suppose one could dress up as a tax collector and go door to door giving the "trick or treat" option, but there's probably some statute criminalizing the impersonation of a federal revenue official. Anyhow, who wants to do that and end up getting tagged by the neighbors as the town eccentric.

Halloween and tax go together well. Think of the hallmarks of Halloween: fright, horror, monsters, goblins, cauldrons, skeletons, disguises, and witches. Think of the hallmarks of tax: fright, horror, monsters, goblins, cauldrons, skeletons, disguises, and witches. Don’t agree? Keep reading. It’s worth it. No trick, just a treat.

Tax and fright? Of course. Consider this on-line advertisement: "So, You got a letter from IRS. Tax Moms can help. Letters from IRS are scary. Tax Moms will answer your questions at no charge. Questioning answering Tax Mom is available at web site 24/7" Whew. I'm not sure which (AGH!) is scarier: the ad or the thought of someone being called Tax Mom.

Tax and horror? It deserves, and has, its own web site: Tax Horror Stories. Until he resigned from Congress when nominated to the SEC, former representative Christopher Cox maintained a web site of Internet Tax Horror Stories, as described in a wonderfully headlined article, House of Tax Horrors. Why is the idea of a Tax Amusement Park wandering around my head? Ticket takers dressed as tax lawyers, guides dressed as IRS agents, and a "fun house" of Tax Spectres.

Tax and monsters? Take a look at Monster Tax Hike in Massachusetts to see how easily the two words meet up.

Tax and goblins? Apparently in Ireland, October 31 is the deadline for filing 2004 income tax returns and 2004 capital gains tax returns, for paying the balance of 2004 taxes, and for paying preliminary 2005 taxes. No wonder that reporters choose headlines such as "Halloween Brings the Tax Goblins". I don't think they mean gobbling, but perhaps they do. After all, what's a "money-eating tax goblin"?

Tax and cauldrons? Indeed. About 12 weeks into a basic tax course students are introduced to section 1231, the one with the main hotchpot and the firepot. How else to graphically illustrate the point than with a cauldron? The term tax cauldron gets used to describe the entire tax system by this commentator, and in this global relocation warning about "jump[ing] out of the U.S. tax cauldron and into another country's tax fire."

Tax and skeletons? Words of caution are consistently offered to folks with "tax skeletons" in their closets, such as this advice to avoid taking certain deductions if those tax skeletons exist. It even found life in Daniel's Daily Tax Pulp Fiction, not as an opening line eligible for the Bulwer Lytoon Fiction Contest, but as a closing line that fits the horror film: "Ian began reflecting on the tax skeletons in his tax closet … his heart started racing at the thought of a lifestyle audit …"

Tax and disguises? Oh, my. The tax law is replete with disguises. Tax provisions often are masked by catchy titles, something I learned when I figured out that the amendments enacted by the Tax Reduction and Simplification Act of 1977 increased taxes for some taxpayers and surely did not simplify anything. This was the legislation that removed the standard deduction from the Code, replaced it with a "zero bracket amount" but then had to created an "unused zero bracket amount," affectionately know as UZBA by tax law students until Congress mercifully jettisoned an implemented theory gone bad and restored the standard deduction. So, tonight, when you can't figure out the kid's costume (happens sometimes), ask, "So are you dressed as an UZBA?" If the youngster goes fleeing while screaming, you'll know at least one of child's parents is a tax practitioner and they must have interesting dinner conversations. Not that the 1977 legislation was the first, last, or only tax disguise. The phaseout of itemized deductions and personal and dependency exemptions was a blatant maneuver to increase taxes without raising rates so that the public could be told that taxes had not been raised.

Tax and witches? Indeed. This is what inspired this Tax and Halloween post. Yesterday, thanks to an ABA-TAX message from Martin L. Bearg of New Jersey, I followed a link to this ABC News story, and learned that a Dutch court had upheld the right of Dutch witches to take a tax deduction for the cost of witchcraft schooling. The Dutch income tax, summarized here, contains an education deduction not unlike the one allowed under Regulations section 1.162-5 of the United States income tax. The deduction is allowable if the education is a requirement for a present or, unlike the U.S. income tax deduction, a future occupation, or if the study is intended to "upgrade" the taxpayer's "position in society in a financial or economic way," or if the eduction is to "maintain or improve [the taxpayer's] knowledge or capability in order to maintain [the taxpayer's] level of income in [the taxpayer's] present occupation." Thanks to the folks at the University of Liverpool Online Higher Education site, who spared me the experience of translating the Dutch income tax information from the Dutch Tax Authority's website, which is, of course, in Dutch. Now THAT would have been a bit of a nightmare.

Although the ABC News story was datelined October 30, the issue had been percolating for about a month. According to a News24 story, at the end of September a court had reached the same decision. The Tax Foundation, following a BBC News story, report this news at the end of September, and followed up two weeks later.

The News 24 story explained that the course lasts for one year and a day, and that "students are instructed in casting spells, magic, preparing potions, working with herbs, prophesying and divining." Upon completing the course, the students can hold themselves out as “qualified witches.” In mid-October, Bloomberg reported that the ruling has caused a huge surge in student enrollment in the only course in the Netherlands that certifies qualified witches. This story explained why the course lasts for one year and a day: it covers 13 full moons.

The decision has caused a stir in the Netherlands, or, as the ABC News story puts it, "a political fury." The political party holding the most seats in Parliament, the Christian Democratic Appeal, intends to address the issue. It questioned how a course for witches could be useful for employment purposes. Spells on the boss when it’s time for raises? Seriously, because the Dutch income tax allows a deduction if the education is a requirement for a present OR future occupation, certainly because one can earn money as a witch, the ruling is, to quote a tax expert from Leiden in the Netherlands, “logical.” In fact, the plaintiff in the case intends to teach in schools about the Middle Ages and witchcraft. She also is an actress who role-plays a witch at an old castle.

According to the woman who operates the school, previous students have included psychologists and accountants. I wonder if they were TAX accountants?

What better training? Goodness, even I have been likened to Professor Snape, he from the Harry Potter tales, which, coincidentally, have been attributed as the cause in the increase in interest in witchcraft. Goodness. No, folks, it’s only serendipitous that I wrote a book called "Better That 100 Witches Should Live." That’s a biography about a fellow acquitted of seditious libel charges after he castigated the Puritans of New England for conducting the witch trials and executions. Yeah, ok, so his name was Thomas Maule and he was my 7-great grandfather. He lived at a time when there was no such thing as an income tax.

So, yes, it is not unusual for someone to use the phrase "scary tax law". Nor am I the first to make the Halloween and Tax connection. Consider this news, also reported in a a Tax Foundation story, It seems that just in time for Halloween, the New Jersey sales tax is being removed from some candy bars and store-bought Halloween costumes. The change makes the New Jersey sales tax on these items similar to what is done in most other states.

But here’s the trick part of the treat: The sales tax exemption will apply to candies made with flour. Flour? In candy? I learned something. Flour is used in candies such as licorice, KitKats, and Nestle’s Crunch. But other candy, made without flour — think Hershey’s Chocolate bars — remains subject to the sales tax. The author of the a Tax Foundation story suggests, "Robert Frank of the New York Times told us yesterday that children learn best through story telling. Maybe the best way to teach children about poor tax policy is to tell them about the scary tax man who wishes to complicate their Halloween fun by taxing their snickers bars but not their twix bars."

I have a better idea. When I hand out the Reese’s Peanut Butter Cup 4-packs, which usually has the youngsters running back down to the street screaming, "He’s giving out big packs of Reese’s PBCs" (I kid you not, hee hee), I might add this year, "And I paid sales tax on these things." Perhaps that will blunt their excitement and lessen the alarm that usually registers in their parents’ minds as they wonder what sort of neighbor would dish out chocolate in such large doses.

Easy. A guy who thinks peanut butter, being a protein, and chocolate, which is medicinal, combine together to enhance the intellectual skills of those who devour those tasty treats. When those children grow up, they’ll need all the well-nourished brain cells they can muster to deal with what will be one horrific witches’ brew of a tax law.

Or at least they’ll learn to reach for a PBC when tax time stress begins to take over. And, no, this is no buzz. The makers of Reese’s PBCs haven’t compensated me to say anything nice. They don’t even know I’m saying anything at all. Let’s leave it that way. After all, if they tossed me a bone of a token stipend, I’d be required to pay tax on it. And to that, we can say, "Boo!"

The third of the famous three lies (only one of the other two of which, involving checks in the mail) came to mind as I read through some recent commentaries about tax reform proposals that involve government preparation of the taxpayer's return. The same concern that makes the third famous lie part of a joke that works hovered in my brain as I pondered this idea.

A commentary offered by the Office of Tax Policy Research at the University of Michigan's Ross School of Business on the President’s Tax Reform Panel Report notes that "under some reform proposals, including the national retail sales tax, individuals would never again have to file tax returns. Under another prominent proposal, no one with an income less than $100,000 would have to file. Some other proposals offer most taxpayers a no-return option, akin to the ReadyReturn program piloted in California last year. Even if most people will still have to file a return by April 15, the filing process could be greatly simplified."

What's a ReadyReturn? As explained by Joe Bankman in Simple Filing for Average Citizens: The California ReadyReturn, ReadyReturn refers to a concept that was the subject of an experiment by the California Franchise Tax Board (FTB) to prepare income tax returns for taxpayers whose only income is wages and interest. The FTB selected 50,000 taxpayers out of the many more who fall into that category, prepared their returns using the W-2 and 1099 forms that it had received from employers and interest payors, and mailed those returns to the taxpayers. Taxpayers could file the return, correct it, use it as a guide in doing their tax return in the traditional manner, give it to a preparer, or toss it.

Arguments in favor of ReadyReturn abound. It's easier. It requires less time for taxpayers. It saves taxpayers the cost of hiring a preparer. For example, some advocates equate it to receiving a tax bill in the mail. See, e.g., "What if IRS tax bill came in mail?". Others point out that it is a wonderful solution for helping the many taxpayers who cannot read.

Arguments opposing the ReadyReturn program are numerous. Before summarizing them, it's worth looking more closely at the arguments made in favor of ReadyReturn.

Although it appears to save the taxpayers time and money, that conclusion rests on the assumption that the ReadyReturn is correct. Any taxpayer who wishes to confirm that the return is correct must invest no less time or no less in preparer's fees than is invested in the absence of ReadyReturn to audit, in effect, the government-prepared return. The program shifts the burden to the taxpayer. Thus, the time and cost savings is a mirage.

Comparing the ReadyReturn program to something resembling the receipt of a tax bill, as happens with most real property tax systems, is misleading. When a property tax bill arrives, there are only two things to check. One is the assessment, and the other is the multiplication of the assessment by the tax rate. The assessment is made not on the bill but in a separate proceeding, and taxpayers have the opportunity to challenge. More important, they can learn what their neighbors' assessments and tax bills are, because those are a matter of public record. Even without going online or heading to the assessor's office to get the information, neighbors can learn much by chatting with each other. There is no equivalency in an income tax ReadyReturn. The government does not and would not issue a separate document with a determination of income, followed by a chance to appeal, and eventually capped with a tax bill. The assessment is buried in the ReadyReturn. No one knows how the billing process has impacted neighbors. A critical element in the "check and balance" present in the local property tax mechanism is and would be lacking.

The silliest argument is the benefit of the program to people who cannot read. If they cannot read, what will they do with a ReadyReturn? Is it simply a picture? When it comes to sighted people who cannot read, the problem is illiteracy, not the tax system. Isn't it an appropriate role for government and public schools to teach people how to read? Ought not we ask why that task is not being accomplished? I'd rather have a nation of literate people reading about and "seeing" the tax mess that the politicians have created than to have a nation of illiterate people "saved" by a government that does their tax and financial work for them. Can anyone spell Big Brother?

A variety of objections and concerns have been expressed with respect to ReadyReturn. Some could be resolved with modifications to the program. Others are far more serious.

What happens to taxpayers who move and thus do not receive their ready return? One solution proposed by the FTB is to take the system on-line. This shifts the burden back to taxpayers, all of whom would need to go online to find out if a ReadyReturn had been prepared for them. Yes, the FTB could send a postcard to the selected taxpayers, instructing them to go on-line, but those who have moved might not receive it. Think this is an insignificant problem? The IRS recently announced that it is looking for 84,000 taxpayers for whom it has a refund check. Oh, by the way, how is taking ReadyReturn on-line going to help those folks who can't read? Perhaps an audio file of some sort can be played?

What happens if the ReadyReturn is incorrect and the taxpayer simply accepts it because it is "from the government"? It is too easy to dupe people, and though it happens, governments ought not be doing so, whether intentionally or, as so often is the case, negligently. COULD the government be wrong? Mistakes by government employees in the area of taxation are legendary. According to this report, in a 2003 test of the IRS assistance system by the Treasury Inspector General, 30% of answers were incorrect, IRS employees incorrectly prepared 19 of 23 returns in a December 2003 survey of assistance sites around the country, and in a 2004 test, 38% of the answers provided by customer service representatives were inaccurate. Relying on people to read the ReadyReturn information (assuming that they can read) is no guarantee that they will do so. Will ReadyReturn become the "EXTAX" of taxation the way one politician's clever manipulation of absentee ballots has been peddled as an EZVOTE (which, incidentally, is a fiction)?

On the other side of the spectrum, what about taxpayers who deliberately or negligently accept the ReadyReturn even though it does not reflect additional income that the government does not know exists? After all, the government selects taxpayers for ReadyReturn because it assumes that a person with only wage and interest income in one year will be in the same position the following year. But certainly some not insignificant number of those taxpayers will start a business, or otherwise take in other types of income. Yes, instructions could be added to the ReadyReturn (as it inches closer to looking like the existing process), but will this matter to the folks who cannot read and who might be among those who are taking in cash income for which no W-2 or 1099 is issued? Of course, the underlying problem is not caused by ReadyReturn. But will ReadyReturn exacerbate it?

In "Reform and Modernization of the Tax Compliance Process, William J. Kambas notes that the ReadyReturn process poses question about how the government mines for tax data and the extent to which the confidentiality of taxpayer information would be compromised. He explains that this is not a reason to oppose the project, but requires careful scrutiny and insertion of data privacy protection safeguards. Government experience on this score is far from ideal. Do you remember this flap? Or the one about the IRS contracting taxpayer information out to a company whose databases had been compromised?

ReadyReturn does nothing to reduce the complexity of the income tax. What it does is to make the problem "go away" for some taxpayers, whose voices will be removed from the chorus of cries for income tax reform. William Kambas makes this "Chaos and confusion may be mitigated by hiding the complexity. If hiding complexity is the goal, the ReadyReturn program, as it stands now, may be the answer." Hide the complexity from enough people, and it no longer is an issue. So what? The so what is that behind the smokescreen, who knows what's going on? One opponent of ReadyReturn, who surely is not alone, sees it as something that will be required of more and more taxpayers, and that it will give the government an opportunity to hide tax increases. That might be pushing it a bit much, but democracy requires transparency in taxation. That is why I suggested that, instead, all taxpayers should be required to plow through, or pay someone to plow through for them while they watch, their tax return preparation, not as numbers being entered into a computer program, but with a running commentary from the preparer. For example, "The reason it is taking so long to put in all these numbers is that there are many, many steps to be computed. Notice that I am taking information from 12 different pieces of paper, and I asked you 25 questions." "OK, so why does the government need to know all of this?" "Because ......." This would permit them to see how dangerously convoluted the government revenue generator has become, and it is probably the only way that a strong chorus of cries for tax reform can be orchestrated. Yes, being required to watch a tax return being prepared may be cruel, but considering that taxpayers are among those who voted into office the people who created the mess, it's a deserved consequence. After all, we do too much "hide the problem" papering over in this country, be it energy shortages, military mistakes, international embarrassments, economic ignorance, or tax nonsense. Instead, it is better to remember that an educated citizenry is far more valuable to democracy than a pacified (or numbed) citizenry. Or perhaps it should be stated an educated electorate is far more valuable to democracy than a pacified electorate.

Yet another issue is conflict of interest. The government and the taxpayer are on opposite sides of the tax computation issue. If there is a question, for example, about an entry on a W-2 other than wages, will the ReadyReturn system resolve the issue in favor of the taxpayer? Will it disclose the issue to the taxpayer? Or will it resolve the matter applying the government's position on the issue? It has been suggested that the ReadyReturn process could be contracted out to a third party, but that would require taxpayer information being given by the government to a third party. Under current law, only with taxpayer permission could that be done. So one can contemplate a legislature reducing taxpayer privacy rights in this respect, or a system that sends a "request for disclosure" form to ReadyReturn participants, who, well, at least those who can read could stumble through the legalese and boiler-plate.

Speaking of interests, for-profit preparation companies oppose the idea. Recently, Intuit (probably in concert with other tax preparation companies) persuaded Congress or the staff to insert a clause in the IRS funding legislation that prohibits the IRS from adopting a federal equivalent of the ReadyReturn. This follows a similar successful effort in California, resulting in legislation holding the FTB's funding to last year's amount and requiring that the FTB not expand the program beyond last year's scope nor alter its format. The FTB had planned to expand ReadyReturn to approximately one million taxpayers, for roughly the same cost, by making it an on-line program.

For years, the IRS does arithmetic computations for taxpayers who choose to put their information on the return and leave the tax computation mechanics to the IRS. From what I understand, few taxpayers do so because return preparation software takes care of that issue. Many decades ago, I am told, taxpayers could go to an IRS office with their proverbial "shoebox" of bag of receipts and the IRS agent would assist in the return preparation. Those were the days when the tax law was much simpler, far fewer issues existed, far less money was at stake, and there was much less over which to disagree.

Though there is something "noble" about helping folks with simple returns escape the trauma, confusion, and agony of tax filing season, in the long run, ReadyReturn poses a great danger. Even ignoring the other problems, such as privacy protection, conflict of interest, mistakes, fraud, and logistical foul-ups, the major disadvantage to the ReadyReturn is that it will entice tens of millions of taxpayers into thinking that the federal income tax no longer is a problem in need of a solution. Why should the complexity of the Internal Revenue Code be a concern for taxpayers whose returns are relatively simple but yet a challenge for them to prepare? The answer is that the complexity of the Code has become a mask behind which hides the skewing of the revenue in favor of the wealthy and ultrawealthy. Consider the tens of millions of social security recipients whose benefits are taxable, not in full, but in an amount derived from a convoluted set of equations that appear to most folks as something out of a quantum physics textbook. Only by going through, or watching a prepare go through, these gymnastics might the person ask why, and then get the honest answer that the multi-tier mess in section 86 reflects the need to raise revenue to pay for someone else's tax break in the Code. Does anyone think Congress really wants taxpayers to know that? And even many of these taxpayers with so-called simple returns in California get dragged into complexity when one considers the various education deductions and credits, the child credit, the earned income tax credit, and the many other provisions targeted toward low-income taxpayers.

The "here, let us take care of it for you, don't worry, be happy" message of the ReadyReturn drowns out the "and you'll never feel a thing as we extract a wee bit more" part of the script. Why create tax zombies? There's enough of that already in a nation that so quickly seeks to be numbed. What's next? "Just let us tap into your bank account and we'll do EVERYBODY's return .... no more agony for the taxpayer"?

When tax compliance gets so complicated that the government must prepare the returns (even assuming they're better at doing so than are the taxpayers), the tax law surely has become not only too complicated but also inefficient and surely unjust. Government preparation of tax returns in an unnecessarily complicated system opens a door to government control beyond reasonableness. The ReadyReturn may in and of itself be not only harmless but helpful, but it's too close to "Big Brother finally took over."

I prefer to make the filing easier by simplifying the regulation. In other words, don't mask the complexity problem. Have courage. Fix it.

Today's TaxProfBlog news carries a report on a paper by Jonathan Gruber of MIT's Department of Economics. He has just released "Religious Market Structure, Religious Participation, and Outcomes: Is Religion Good for You?" on the National Bureau of Economic Research web site.

Prof. Gruber explored previous findings of "striking correlations between religion and various measures of well being" to determine which was the cause and which was the effect. One interesting and previously identified correlation is that "attending religious services weekly, rather than not at all, has the same effect on individuals' reported happiness as moving from the bottom to the top quartile of the income distribution." But, as Prof. Gruber sought to determine, does attending religious services make a person happier or are happier people more likely to attend religious services?

To solve "the problem of estimating the effects of religious participation on earnings and other economic measures," Gruber "draws on the fact that individuals are more likely to attend religious services if they live near others of their religion." He uses census data to "measure the effects of co-religionist density on economic outcomes such as education, income, employment, welfare participation, disability, marital status, and number of children." His results "suggest a 'very strong positive correlation' between religious market density, religious participation, and positive economic outcomes.'" He concludes that "People living in an area with a higher density of co-religionists have higher incomes, they are less likely to be high school dropouts, and more likely to have a college degree" and that "[l]iving in such an area also reduces the odds of receiving welfare, decreases the odds of being divorced, and increases the odds of being married." He demonstrates that "[d]oubling the rate of religious attendance raises household income by 9.1%, decreases welfare participation by 16% from baseline rates, decreases the odds of being divorced by 4%, and increases the odds of being married by 4.4%."

Finally, Gruber concludes "that being in an area with more co-religionists leads to better economic outcomes through the channel of increased religious participation." Although his paper does not explore how these results come to be, he suggests "four possibilities: that religious attendance increases the number of social interactions in a way peculiar to religious settings; that religious institutions provide financial and emotional 'insurance' that help people mitigate their losses when setbacks occur; that attendance at religious schools may be an advantage; and, finally, that religious faith may simply improve well-being directly by enabling the faithful to be 'less stressed out' by the problems of every day life."

Although Gruber's paper interests me for many reasons, including my theological and church service interests, my focus at the moment is the impact of religious service attendance on economic outcomes. For several decades, different Administrations of both parties and the Congress, no matter which party has been in control, has used the tax law in efforts to increase income, to decrease reliance on welfare, and to encourage behavior that is "good" for the economy. And now, it appears, attending religious services may have similar consequences.

And thus arises a conundrum. If attendance at religious services is good for the economy and financial status of the citizenry, and if a good economy benefits the national interest, ought the nation, through government, be encouraging attendance at religious services? Well, even if it should, would such encouragement run afoul of the First Amendment? Surely a law mandating, or even encouraging, attendance at religious services would be struck down. What about the typical backhanded tax approach, such as a deduction or credit for attending religious services? No, that won't fly. Charitable contribution deductions already exist for taxpayers who make contributions to the religious institutions that they are attending, or perhaps are not attending, but that deduction is not limited to religious donations. That's why the charitable contribution deduction survives attacks based on the First Amendment, because the deduction encourages charity and other socially desirable activities without being limited to religious institutions.

But I'm going to make a prediction. Someone, somewhere, whether in all good faith seriousness or simply to make headlines that will play well with particular constituencies, will propose legislation to create a deduction or credit for attending religious services. Legal scholars, commentators, and others will buzz for a few days about the proposal, and it will then fade into the background as something else takes center stage.

Here's my take: the decision to attend, or not attend, religious services ought come from within. It ought not be mandated, dictated, or required by government. It can be the result of private invitation, but it should not be the consequence of literal or figurative arm-twisting by anyone. The irony in this position is that it reflects a particular theological perspective, namely, that compulsory attendance at religious services lacks the essential characteristic of free and willing worship. Even though many, perhaps most, theologies are in accord with that perspective, nonetheless it conflicts with certain traditions that take the opposite position. Does that mean the rationale for opposing a tax credit or tax deduction for attending religious services is invalid because it reflects a theological perspective? No, because there are non-theological reasons for opposing such a tax credit or deduction.

Now I'll wait to see how much coverage Prof. Gruber's paper receives in the mainstream press. And then I'll wait for the almost inevitable legislative proposal. Stay tuned.

Proposals to increase the gasoline tax are back in the news. They've been percolating through this blog for many months. I made the suggestion back in May of last year, long before anyone had met Katrina or Rita. I made it again in January of this year. I repeated my suggestion for increased taxes on the use of non-renewable energy in March of this year, and defended my position in two follow-up posts (here and here). I revisited the issue last month, and extended the discussion a few days later in a post responding to a criticism of my position.

The topic moved into the spotlight even earlier, as I argued against proposals to DECREASE the gasoline tax. I explained the silliness of these proposals in March of 2004 and I attacked a similarly ill-conceived plan in Hawaii to cap gasoline prices back in August of this year.

I suppose I could write a book. In the meantime, others have been keeping the gasoline tax increase proposal fires burning (oh, well, sorry). An editorial in Sunday's New York Times advocating an increase in the gasoline tax to encourage conservation and to wean the nation from dependence on foreign energy sources has generated an interesting set of reactions from subscribers to the Oil Drum web site. Many of these subscribers are expertised in the energy industry, or are close followers of energy policy issues, so it makes sense for a tax person to pay attention to their perspectives.

The Times editorial doesn't raise any new arguments. The ideas that energy conservation is a good thing and that dependence on foreign energy is not have been around for much longer than the most recent news panic about oil, gasoline, natural gas, and diesel shortages. What may be new is that some folks who had not been paying attention now are paying attention. What's not new is that most folks still don't get it.

Conservation with respect to non-renewable resources is good not only because of the limited supply of energy, but also because oil-based energy contributes to environmental degradation. Shipping American dollars abroad to purchase oil from the Middle East puts financial resources into terrorist pipelines. The impact of higher energy prices on the economy is just beginning to be felt, and it will become worse.

The principal argument in favor of a higher gasoline tax is that it would cause the same sort of "demand destruction" as did the higher gasoline costs that showed up in the aftermath of Katrina. The current federal gasoline tax, unchanged for the past 12 years, is a mere 18.4 cents per gallon. Yet raising this tax is nearly impossible from a political perspective. The gasoline tax is regressive, because it takes a proportionately higher percentage of lower income taxpayer's income than it takes from the income of the wealthy. One problem with this perspective is that the word "tax" triggers issues that aren't triggered by the word "toll" or the word "fee." Bridge and highway tolls are regressive, but they're not regressive taxes. They are user fees. Someone suggested that the difference between a tax and a user fee is that the latter purchases the payor a direct benefit whereas a tax doesn't necessarily return to the payor an equivalent benefit. I'm not certain I agree with that definition, except to the extent taxes are used as wealth transfer mechanisms. But, for the sake of argument, using that definition convinces me that the gasoline tax is a user fee and not a tax. Other arguments lead me to the same conclusion. Persons who burn gasoline, or any other petroleum derivative, impose costs on the maintenance of highways, the retention of clean air, the safety patrolling and emergency servicing of roads and highways, and other social costs. What I cannot answer at the moment is whether these costs are somewhat more than or much more than 18 cents per gallon.

One tough issue is how to mitigate the impact of higher gasoline user fees on the poor. Although not much is done with respect to highway and bridge tolls paid by the poor, there are models that can provide guidance on alternatives available to prevent increased gasoline user fees from shutting the poor out of participation in the economic market place. Some cities and states provide reduced price public transportation to low-income individuals. The earned income tax credit is designed in part to offset the "cost of having a job" that might deter people from entering the work force at an entry level pay scale. Some of the commentators on the Oil Drum site supported some sort of give-back to the economically distressed.

According to the Times editorial, and this appears correct, each one cent increase in the gasoline user fee would raise approximately one billion dollars. What should be done with this revenue? Making highways more energy efficient is one possibility, which hopefully would include the elimination of poorly designed and horribly programmed traffic signals that compel every vehicle to get zero miles per gallon often while waiting for non-existing traffic on the cross street. Rewarding people who purchase energy efficient vehicles, or manufacturers who design and build them is another possibility. Investing in a renewable energy source "Manhattan Project" to deal with the inevitable drying up of non-renewable energy sources is yet another possibility.

The editorial concludes: "Cheap gas is no longer compatible with a secure nation, a healthy environment or a healthy economy - if ever it was. The real question is whether we should continue paying the extra dollar or two per gallon in the form of profits to the Saudis and other producers, or in the form of taxes to the United States Treasury, where the money could be used to build true energy independence." Put in those terms, it shifts the burden of the argument to those who oppose gasoline (and, seriously, petroleum consumption) user fees.

An Oil Drum poster noted that the previous day an editorial in the New York Times had advocated subsidies for heating oil for the poor. How could that be consistent with a call for an increase in the gasoline tax? The answer, another commentator said, is that "without gas, people whine, moan, and generally stay inside all day" but "without heating oil, people die."

Some of the comments on the Oil Drum site were practical. The chances of such a proposal getting support from the current Administration and Congress are slim. Though true, the importance of that comment is not to render the discussion irrelevant but to refine (sorry) the proposal so that it can be made politically acceptable. One suggestion was to use at least some of the revenue to cut income taxes. Hmmm. I wonder if the Tax Reform Panel is tuned into this discussion. Well, I say I wonder. I don't. I know. It's not. Too bad. As for the Congress, one commentator pointed out that Senator Harry Reid, who, I must add, claims he wants to make America energy independent, is singing the "let's reduce the cost of gasoline" song and dance on his website, but he seems to forget the "that will make people use more gasoline" dance that goes with that song.

Someone pointed out that the standard argument against taxes seems to be "I can spend more wisely than the government; the government will just fritter money away or hand it to the rich." Other comments certainly support this position. The fear that government corruption and incompetence and the resulting lack of confidence in government stewardship over any revenues is evident in some of the posts. Another commentator claimed that it's not the politicians who are at fault but the people who have unrealistic expectations. In some respects that's true. There are people who think there exists an infinite supply of petroleum products, and there are many more, surely a majority, who don't know what "peak oil" is. That's like not knowing what wasps are. Eventually they get stung.

The commentator who suggested the standard argument against taxes then pointed out that failure to regulate one's self invites regulation by others, and the government is quick to step in when the market place fails. But, I ask, who is to determine when the market place has failed? Is the market place for operating systems working well because Bill Gates has made money or is it failing because Windows crashes and security lapses require the inefficient expenditure of huge amounts of time by the consumers in that market? The conundrum, as one poster noted, is that a free market does not necessarily support "fairness" unless one considers the outcome of a market to be per se fair, yet supporting government intervention in a market because the outcome does not meet some other definition of "fair" suggests that something is fundamentally wrong with the free market model. The gasoline user fee, however, is not, as this poster seemed to imply, a "fairness tax" designed to make the price of gasoline fair, but a charge for the imposition that gasoline use makes on public goods such as highways, bridges, and clean air. After all, governments intervene in markets because markets do not reflect the theoretical rational person contemplated by Adam Smith but the practical modern American consumer enticed by advertising and peer pressure to react with emotion "thanks to the dumbing down of our nation's school system." Gee, there's another person who's with me on that point.

One argument against increasing the gasoline tax, or at least against increasing it significantly, is that it would thoroughly disrupt the lives of the tens of millions of Americans who are locked into their suburban lifestyles, living far from work, or working on farms that are miles from the nearest town. The idea of "moving close to work" seems sensible until one considers the two-earner family with jobs that are tens or more of miles apart. But others claimed that some people live "out in the country" for reasons other than economic necessity, as they are not farmers but simply folks who prefer to live in wide open areas.

Another comment claimed that even a 50 cent per gallon increase would trigger a recession. My question is what happens if gasoline consumption continues to increase, perhaps fueled (sorry again) by efforts to lower gasoline prices. Will that not accelerate the impending recession caused by energy shortages? What happens if natural gas shortages force manufacturing plants to close or move abroad, as already is beginning to happen? What happens when diesel fuel is rationed, as already is beginning to happen, and the trucking industry cannot ship goods that need to be shipped? My answer is, yes, a recession.

Someone asked why bother increasing gasoline prices through a gasoline tax increase when it is apparent that gasoline prices will increase on their own because of supply problems. The answer, provided by another poster, is that an increase in the tax (or user fee) will focus consumer attention NOW on planning for higher prices in the future, to "capture some of the demand in our own economy instead of sending it to OPEC," and to reduce demand and create more time for development of alternatives and to decrease vulnerability to shortages. Well put by someone named "Engineer Poet."

Should an increase in user fees be phased in? Perhaps. As one commentator noted, a small annual increase would give people time to prepare and plan, replace vehicles, perhaps move, and perhaps organize support for more efficient mass transit.

Should there be exemptions for individuals who have no choice but to use petroleum-based fuel? How should such an exemption be defined? Does it matter if the person must consume gasoline or diesel in order to do a job, such as a traveling sales representative, or should it matter if someone is "stuck" by gasoline user fees because he or she decided to live in a suburban development far from the work place? Notice how a discussion of a tax (or user fee) triggers questions about why people live far from their work places? Is it the attraction of the open country (which, ironically, then fills quickly with more shopping malls and many more homes)? Is it the supposedly better school system? Is it the cheaper cost of homes that are further from the work place? If so, does this mean that finding a cheaper home and thus incurring lower monthly housing costs puts the person in a no-win situation because commuting costs gobble up the savings?

Someone presented a problem with a per gallon gasoline tax (or user fee). Revenues would decrease as vehicle fuel efficiency increased. So perhaps the user fee should be a percentage of the retail price?

Some commentators proposed alternatives. One suggested a "feebate program" which would rebate monies to manufacturers whose manufactured fleets exceeded standards and which would collect those monies from manufacturers who did not do so. What happens, I ask, if most or all manufacturers exceed the standards? Someone suggested that the administrative costs would cause the rebates to be less than the collections. Another reaction was that the rebates ought to go to the construction of renewable facilities. Another pointed out that as those who could afford to buy the more efficient vehicles did so, their older vehicles would be the ones purchased by the poor.

Another commentator proposed a road usage tax. Ah, the semantics. You mean road usage user fee, correct? The difference between a gasoline user fee and a road usage user fee is that the latter takes into account the weight of the vehicle and thus the damage or wear and tear it imposes on the highway infrastructure. Because fuel use, though, is roughly proportionate to ton-mile, the gasoline user fee would be easier to administer. This poster noted that the per-mile tax that has been proposed in Oregon is a step backwards because it ought to be a per-ton-mile tax. After all, the idea that all vehicles impose the same burden on public goods when they travel a mile defies logic. I discussed these proposals back in November of last year.

Another commentator suggested the implementation of "tradeable quotas." Everyone is entitled to purchase a certain amount of fuel (whether gasoline or all petroleum products wasn't specified). Those who want to use more fuel either can purchase unused quotas from those who don't use all their allocable untaxed fuel or can pay a high tax on the excess fuel that they consume. The government would regulate the process but not collect revenue, as the system would move funds from fuel users to fuel conservers. Yes, this poster admitted, this is close to rationing, but doing nothing is putting the nation into a de facto rationing system that afflicts the poor more than the wealthy. I like the general idea, but I think that even the allocated quotas should be defined in terms of taxed fuel, set at a rate lower than the much higher rate on excess fuel consumption.

Another commentator suggested that because volatility in the gasoline retail price market is bad for the economy, the tax (or user fee) ought to be a fixed per gallon amount reduced by a percentage of the pump price. Thus, the tax would be dampened somewhat as retail prices increased, yet the total pump price would not drop so low as to encourage a spike in consumption. This is an interesting example of using a tax, or a user fee, to regulate a market, because the tax or user fee would be changing even though the impact on public goods per gallon of gasoline consumption would not be changing in the same manner. For that reason, I don't favor the idea. If the retail price increases because of supply and demand shifts, then the true price of gasoline usage ought to reflect that increase, without some sort of user fee reduction to cushion the cost and thus bias the consumer's decision making.

Yet another commentator suggested a return to the subsidization of ethanol production. This triggered an amusing exchange. A critic characterized ethanol as a very bad idea, and claimed that making ethanol rather than feeding people was selfish. The proposal's advocate replied that we have more than enough food in this country, as evidenced by the fact we are the most obese population in the world, and that farmers are having a tough time selling in the global market because of subsidized exports from the EU and cheap food from other countries. In response, another commentator claimed that what keeps American farmers from being competitive is high energy costs, which include, by the way, fertilizer and pesticides (which are made from and using non-renewable fuel). I learned that 13% of the corn crop is used to create enough ethanol to replace 1% of the nation's gasoline consumption.

So, the next commentator saluted biodiesel, but then described the adverse impact of modern agriculture on the environment, suggesting that solving one problem creates another. And, as expected, and as I've predicted, someone asked if there was a "peak water" website, because water supply would be the next natural resource crisis after peak oil. I disagree. I still think water will trigger a world war before oil does.

Still another poster claimed that the government should "help fund" the massive infrastructure projects that are beyond the ability of the private sector to risk, such as nuclear, biomass, oil shale, and mass transit. Again, it would be the tax law, I am certain, that already serves, and would continue to serve, as the vehicle for this government support. We're talking credits and deductions, such as those already in the tax law that I reviewed in March and to which a few more have since been added.

Finally, support was expressed for increasing the gas guzzler tax before increasing the gasoline tax. Support also was expressed for eliminating the "truck" tax break that treats SUVs and other vehicles as trucks.

What a mess. Ultimately, the question is whether the Congress, encouraged by the American public, takes control of this situation before this situation takes control of us. What a scary thought. What's even scarier is that most Americans don't realize the scope of the energy problem, don't understand the economic and political contexts in which the energy problem exists, surely don't comprehend the challenges of using the tax law or even user fees to deal with the problem, and who find planning for the future too difficult if the future means any time after the end of the next weekend.

As I asserted last month, "All of this will require leadership. It will be a factor in the 2006 and 2008 elections. I continue to scan the potential candidates and I continue to feed my pessimism."

The fallout from the Tax Reform Panel's proposals continues. In an ope-ed piece in yesterday's Washington Post, David Brunori explains why chopping the mortgage interest deduction is a good idea. David is vice president of Tax Analysts and a research professor of public policy at George Washington University. He knows taxes. Although sometimes I agree with David's analyses, this time I happen to disagree with the argument that he makes in defense of the Tax Reform Panel's idea.

As I pointed out in Friday's post, the problem with the Panel's approach is a combination of timidity and bias. The Panel goes half-way, in a half-hearted attempt to put some simplification paint on top of the special-interest group complexity rust of the Code. The Panel is biased, because it protects the tax breaks of most importance to the wealthy and ultra-wealthy, while taking its shots at the middle and upper middle class. In some respects, its pro-wealthy bias accounts for its half-heartedness.

David views the proposal as one that will impose financial strain on people who own homes with three-car garages, mega-kitchens, and grand entryways, and that it will make ownership of vacation homes financially more difficult. But the assumption that the "hit" from the proposal would fall on folks owning vacation homes in Rehoboth, Delaware, misses the point I made in Friday's post, namely, that the ultra-wealthy will lose far less of a tax benefit than will the middle class taxpayer who owns a far from over-imposing mansion or estate home. Likewise, the Panel's proposal will disadvantage the owner of a modest vacation home in a not-so-fancy resort far more than it will have any serious impact on the millionaires who jet from one resort to another as the planet's orbit around the sun changes the seasons.

David points out that the proposal will have the effect of removing any tax subsidy for home equity mortgages used for such purposes as college tuition for children. Now, who borrows to send children to college? The very rich? Nah, they just write a check from the petty cash fund. The very poor or the poor? No, they qualify for grants. The lower middle class? Some, though grants and other financial aid is available most of the time. It's the middle class and the upper middle class who borrow for tuition, because they have become the whipping posts of the new political order. The new political order, of course, is just another variation on the typical political order, by which the wealthy and ultra wealthy pit the poor against the middle class, buying the votes of the former in an effort to set back the latter from inching closer to the turf of the wealthy.

David is correct that the proposal to trim the mortgage interest deduction is "gutsy." It's also foolish. Telling the difference between gutsy and foolish is tough, because sometimes the two blur. Check in with the participants on MTV's Jackass series for an explanation.

David makes a great case for repealing the deduction. On this point, he and I agree. But the Tax Reform Panel isn't proposing repeal. Its plan is to trim the deduction, in a manner that afflicts the upper middle class the most, and the middle class almost as much, but that does little to the wealthy and ultra wealthy. Although it might make sense to praise a movement in the direction of repeal, it is deceptive to take a crooked half-step as does the Panel's approach.

It's when David lists the reasons for limiting the deduction that he takes the praise that's owed to a truly courageous, or gutsy, move, namely, repealing ALL benefits that skew the tax code in favor of the wealthy, and directs it to the window dressing from the Tax Reform Panel that is nothing more than a repetition of the bad tax policy that has afflicted tax legislation for the past decade and a half.

David argues that the "federal government needs the money." This is true. The question isn't whether the government needs money, as I pointed out in a recent post. The question is who should finance the federal government. The current policy, which is that the wealthy need to retain their funds so they can play games with the acquisition and sale of other people's labor and ideas, while the rest of the country foots the bill, is one that holds fast through the Tax Reform Panel's recommendations.

David then argues that trimming the mortgage interest deduction permits reform of the alternative minimum tax, keeping it from afflicting middle class taxpayers as it will if nothing is done. The problem with this argument is that it undercuts the first. If the revenue from cutting the home mortgage interest deduction is used for alternative minimum tax relief, then it's not going to be available for hurricane relief or to reduce the deficit. Because the wealthy know how to avoid the alternative minimum tax, and get assistance from Congress in doing so through provisions such as excessively low rates on capital gains, interest, and if the Panel is persuasive, domestic dividends, the middle class and upper middle class will end up financing the wealthy and ultra wealthy at least as much, if not more, than they currently do. To quote David:

Because of its lack of transparency, the AMT is a bad way to raise revenue. It is also politically very unpopular. The tax reform panel wants to see it repealed. Short of raising rates, which the president has vowed to oppose, there is no way to raise the money needed to reduce AMT burdens other than by trimming the mortgage deduction.

But that's just not so. There's PILES of revenue available if the snake-oil idea that capital gains and dividends are somehow "different" and less deserving of taxation at the same rates that apply to wages and the business income of sole proprietors and small businesses is relegated to the trash heap of bad tax ideas.

David also argues that "reducing the home mortgage interest deduction would shift the burden of paying for our government needs to those best able to pay." Again, what the panel proposes shifts the burden to the middle and upper middle class, who clearly are not "those best able to pay." Those best able to pay are proving, by being able to pay for the lobbying that generates tax code provisions favorable to the rich.

David hints at this by claiming that the rich who have high mortgage debt would balance the tax increase from the curtailment of the mortgage deduction with a tax savings from alternative minimum tax relief, and that when "the deficit eventually falls, the wealthy would recoup their losses with additional tax cuts." The problem may be in defining "rich." Why? Because the truly rich are NOT saddled with high mortgage debt. They may have other debt, designed to leverage big-time investments or contrived as part of structuring tax shelter deals, but these folks don't finance their children's education with home mortgage debt, because they are drowning in cash.

In arguing that the proposal would affect very few taxpayers, David states, "The wonderful thing about the progressive income tax is that it can be manipulated to raise revenue while protecting lower- and middle-income citizens quite easily." But let's face it. No one is protecting the middle class. OK, maybe a few members of Congress, here and there, try. The tax law favors the wealthy. Underneath the nominal higher rates on higher income that appear to make the income tax progressive, sit a variety of realities that shift the burden disproportionately ontothe middle class. Think of the bubble effects, the phaseouts, the tax breaks available to the poor and wealthy but not the middle class (such as earned income tax credits, and low rates on capital gains).

David state, "There is simply no tax policy justification for allowing large home mortgage interest deductions." But the point is that "There is simply no tax policy justification for allowing ANY home mortgage interest deductions." That's where David and I disagree. Just do it. Eliminate the deduction (and a bunch of others). Stop with the fiddle and dance, the pretensive finesse, and the manipulation. I suspect David is willing to take what he can get. I'm saying that no loaf often is better than half a loaf if the full loaf isn't available.

To make my point, David explains, "really smart people since the time of Adam Smith have warned against using the tax laws to distort markets. Perhaps it is time we listened." I agree. Take this argument to its logical end. Don't stop halfway. Repeal the deductions that have nothing to do with the generation of income.

Thus, David's conclusion that "In the end, the panel did the right thing by making these proposals." I disagree. The Panel chickened out. It held back, rather than going for the decisive blow against tax inequity and tax inefficiency. A huge disappointment.

A week ago yesterday, I commented on the many vacancies in the Treasury Department among positions affecting the development of tax policy and taxpayer guidance. I noted the disadvantages of continued delay, particularly after one candidate withdrew from the nomination process for that very reason.

Yesterday, the Treasury announced three new appointments in the Office of Tax Policy. Treasury named a Tax Legislative Counsel (Michael J. Desmond), an International Tax Counsel (Harry J. "Hal" Hicks III), and a Senior Advisor to the Assistant Secretary for Tax Policy (Robert H. Dilworth). Good news. It's a start. There remain five of the seven vacancies that were noted in last week's post:

• Assistant Secretary of the Treasury for Tax Policy
  
• Deputy Assistant Secretary of the Treasury for Tax Policy
  
• Benefits Tax Counsel
  
• Assistant Secretary for International Affairs
  
• Assistant Secretary for Public Affairs

At a pace of three appointments a week, the vacancies ought to be filled by mid-November. That, however, is unlikely, because several positions require Congressional action.

In his Philadelphia Inquirer column this morning, Andy Cassel asks a question which I am going to try to answer. But, first, here's the background for the question.

After reviewing the unsurprising reaction to the recent proposals floated by the Tax Reform Panel, though without specifically mentioning mine, Andy focuses on the proposal to reduce the cap on the amount of mortgage loans on which the interest would be deductible and the proposal to convert the deduction into a credit equal to 15% of the interest on the first $x of the mortgage, where $x is an amount that varies by county. Presently, the various $x amounts fall between $200,000 and $300,000.

According to Andy, this is the "bottom line: Owners of low- and moderate-priced homes would either get a bigger tax break or see no change. But owners of deluxe houses with jumbo mortgages would lose much of their current subsidy." He quotes the Tax Policy Center for the proposition that the taxpayers most likely to scream about this proposal are not "all American taxpayers" but "just the rich ones" and that 83% of the tax savings from the mortgage interest deduction benefits people whose income is in the top 20%.

Andy notes that "most Americans get little or no government help paying for their houses, outside of programs such as Section 8 for the very poor. But those with incomes above six figures receive tax benefits that can average $7,000 or $8,000 a year." He also points out that if the mortgage interest deduction is reduced, it paves the way for another proposal, namely, reducing the top tax rate and lower taxes on already lower-taxed capital gains.

Lastly, he notes that the ultimate impact would be on real estate, because a reduced mortgage interest benefit many people will refrain from borrowing huge amounts to purchase houses and will be less likely to bid up the price for luxury housing. The effect would be a slower increase in housing prices. This brings Andy to his question:

And that's why home builders and real estate agents are leading the charge to save the mortgage-interest deduction. In any market where the government props up prices, it's mainly sellers and brokers who benefit, while buyers pay extra. Shrinking the deduction would remove that prop and simply let the housing market function on its own. Anyone want to explain to me why that's a bad thing?

So here goes.

It's a bad thing so long as the hundreds of other tax breaks that the Tax Reform Panel does not address are left in place and if the additional proposed reduction of taxes on the wealthy, in the form of a zero tax on dividend income, further reductions in the tax on capital gains, and the reduction of tax on investment interest are implemented. The mortgage interest deduction is not the only unwarranted subsidy in the tax law, but removing it while turning a blind eye to the others skews the marketplace. The tax law currently props up McMansion purchases, exurban sprawl and the resulting energy waste, and inflated vacation home markets, but the tax law also props up an inefficient energy exploration and production industry, the construction of shopping mall after shopping mall and excess commercial and office building capacity, a variety of supposedly beneficial and favored social behavior, and a long list of other special interest group favorites. What happens if the reduced demand for home mortgages causes banks to lend their money to shopping mall developers or the builders of unnecessary commercial and office building space?

Let me step back. I'm no fan of a complexity-riddled tax law that reflects Congressional payback to the special interests that purchase their advantages rather than earning them in the marketplace. I'm all for repealing outright the mortgage interest subsidy and all other subsidies, leaving as deductions the cost of generating income. THAT would be true tax reform. The proposal is bad because it targets one group in the hope that the status quo advocates will be able to use that maneuver as ammunition to deprecate tax reform advocates as "having gotten what they wanted and coming back for more." That's why it's so important for tax reform advocates to resist these half-hearted gestures, because it distracts the country from the core issues.

It's also important to understand that the proposal is not an elimination of the mortgage interests subsidy but a curtailment that affects the upper middle class more than it affects the wealthy. Consider five homeowner named Low, Low Middle, Upper Middle, High, and Very High. Low owns a modest home, with a mortgage of $120,000, paying annual interest of $6,000. Low Middle owns a somewhat larger home, with a mortgage of $180,000, paying annual interest of $9,000. Upper Middle has two personas, one owns a typical McMansion, with a mortgage of $350,000, paying annual interest of $17,500 and the other owns a modest home in California with the same mortgage and annual interest. High owns an estate home, with a mortgage of $800,000, paying annual interest of $40,000. Very High owns a mansion, with a mortgage of $3,000,000, paying annual interest of $150,000.

Under current law, with the mortgage interest cap set at loans of $1,000,000 (leaving aside the $100,000 home equity wrinkle), all of these taxpayers except Very High deduct all of their interest (putting aside any other deduction limitations). Very High deducts only $50,000, reflecting 1/3 of the interest, because the $1,000,000 cap is 1/3 of the $3,000,000 mortgage. Assuming that Low is in a 15% marginal bracket, Low's $6,000 mortgage interest deduction saves Low $900 in taxes. Assuming that Low Middle is in a 25% marginal bracket, Low Middle's $9,000 mortgage interest deduction saves Low Middle $2,250 in taxes. Assuming that Upper Middle is in a 28% marginal bracket, Upper Middle's $17,500 mortgage interest deduction saves Upper Middle $4,900 in taxes. Assuming that High is in a 33% marginal bracket, High's $40,000 mortgage interest deduction saves High $13,200 in taxes. Assuming that Very High is in a 35% marginal bracket, Very High's $50,000 mortgage interest deduction saves Very High $17,500 in taxes.

Under the proposal, assuming that all five taxpayers live in the same county, assuming that $x is $250,000 for that county, and assuming that the interest on $250,000 would be $12,500, Low would be entitled to a credit (i.e., tax savings) of $900 (15% of $6,000), leaving Low's tax situation unchanged. Low Middle would be entitled to a credit (i.e., tax savings) of $1,350 (15% of $9,000), leaving Low Middle with increased tax liability of $900 ($2,250 minus $1,350). Upper Middle would be entitled to a credit (i.e., tax savings) of $2,625 (15% of $17,500), but limited to $1,875 (15% of $250,000), leaving Upper Middle with increased tax liability of $3,025 ($4,900 minus $1,875). High would be entitled to a credit (i.e., tax savings) of $6,000 (15% of $40,000), but limited to $1,875 (15% of $250,000), leaving High with increased tax liability of $11,325 ($13,200 minus $1,875). Very High would be entitled to a credit (i.e., tax savings) of $7,500 (15% of $50,000), but limited to $1,875 (15% of $250,000), leaving Very High with increased tax liability of $15,625 ($17,500 minus $1,875).

Low's mortgage interest tax subsidy is unaffected by the proposal. Low Middle's mortgage interest tax subsidy is reduced by 40% ($900/$2,250). Upper Middle's mortgage interest tax subsidy is reduced by 61% ($3,025/$4,900). High's mortgage interest tax subsidy is reduced by 86% ($11,325/$13,200). Very High's mortgage interest tax subsidy is reduced by 89% ($15,625/$17,500). Looks good, right? Yes, because the conversion to a 15% credit is cutting the tax subsidy to 15% of the allowable mortgage interest. Forced to accept either a mortgage interest subsidy in the form of a credit or in the form of a deduction, I'd go for the credit, for this reason. But the issue is the reduction of the cap. What does this do?

Working backwards, it pretty much tells Low that Low can still take into account all of Low's $6,000 annual interest. It tells Low Middle that Low Middle can still take into account all of Low Middle's $9,000 annual interest (though the conversion to a credit will increase Low Middle's tax liability). It tells Upper Middle that Upper Middle can take into account only $12,500 of Upper Middle's $17,500 annual interest, thus taking 28% ($5,000/$17,500) of Upper Middle's mortgage interest out of the equation. It tells High that High can take into account only $12,500 of High's $40,000 annual interest, thus taking 69% ($27,500/$40,000) of High's mortgage interest out of the equation. It tells Very High that Very High can take into account only $12,500 of the $50,000 mortgage interest that High took into account before the proposal, thus taking 75% ($37,500/$50,000) of Upper Middle's mortgage interest out of the equation. Still looks good?

Wait, there's more. For Upper Middle, 28% of Upper Middle's mortgage interest ($5,000/$17,500) is taken out of the tax subsidy picture by the proposal. For High, 69% of High's mortgage interest ($27,500/$40,000) is taken out of the tax subsidy picture by the proposal. For Very High, 25% of Very High's mortgage interest ($37,500/$150,000) is taken out of the tax subsidy picture by the proposal. What do we have here? Why, it's the same "bubble" effect that is generated by the various phase-outs, that is, another instance where the tax burden or the pain of a tax subsidy or deduction suppression hits the upper middle class far more than it hits the very wealthy.

Now let's add two fistfuls of salt into the wound. First, for the very wealthy (let's call the person Absurdly High) who purchase with cash and do not incur mortgages, the proposal does nothing whatsoever. Second, it is Very High and Absurdly High who will rake in the tax savings from the proposed zero tax on domestic dividends, the further reduction of taxes on capital gains, and the reduction of taxes on investment interest. Before someone tells me that Low will escape taxes on savings account interest, I will reply in advance that the $30 or $40 tax reduction that Low or Low Middle obtains from that reduction is less than the crumbs from the table thrown to the dogs when compared to the succulent feast of tax savings enjoyed by High, Very High, and Absurdly High.

So when Andy suggests that "The ironic part is that upper-income people end up paying most of the taxes anyway. So to some extent, they are actually subsidizing themselves," I disagree. The lows, low middles, and upper middles are subsidizing the highs, very highs, and absurdly highs. Such as it has been throughout history, except this time it's the upper middles who are hit hardest. Why? They pose the greatest threat to the high, very high, and absurdly high crowd, because they are the closest to breaking through that economic ceiling.

Andy is correct that a tax subsidy for mortgage interest impedes the ability of the housing market to function as a free market. Releasing the housing market while not releasing other markets will kick the inter-market economic balance out of kilter. ALL government subsidies that interfere with markets must be removed, or replaced by direct grants that let the voters know who is getting what from whom. Any social behavior regulation of which can be justified, such as laws against bank robbery, ought not be the topic of a tax law provision. For example, yes, it's "nice" to give tax credits to people who adopt children, but people ought to adopt children because they want and love the child, not because they're being paid to do so. If the argument is that children are expensive (and they are), then the income tax law ought not tax people whose incomes fall below the poverty level (or a higher percentage thereof) for the appropriate family size. The argument that "they want children and without a tax law subsidy they can't afford to do so" should not carry any more weight than "I want to own a baseball team and without a tax law subsidy can't afford to do so," and before someone argues that adopting a child is "nicer" or "more important" than acquiring a baseball team, I'll hasten to note that the economic benefits flowing from a well-run baseball team (I live near Philadelphia if you need a clue here) can enable dozens or hundreds of families to afford to have children (through whatever means, including adoption).

Note that I haven't lobbied for that baseball acquisition provision for myself. Why? I don't have the money to buy the subsidy. Here's what's ironic. The subsidies chiefly go to those who have the money to lobby for them, with a few crumbs tossed in the direction of the poor and very poor so that the gluttons don't feel too guilty about their gorging.

So, going a wee bit down a road camouflaged to look like a path to tax reform is far more dangerous than doing nothing. If the Congress and the Administration lack the courage or desire to go all the way down the tax reform path, then at least they ought not make things worse. The Tax Reform Panel's mortgage proposal is a half-baked, half-hearted, window dressing palliative. That is why it is a bad thing.

Well, the press has released enough news about the Tax Reform Panel's upcoming report to trigger reactions not only from tax pundits but also from political commentators. Of course I'm going to join in. I will try to bring a different perspective to the analysis that does the rest of the tax blog world. For example, Dan Shaviro has shared some predictions on the political viability of the proposal, along with a short commentary on each of the major components. Joe Kristan sees "business as usual" in his initial reaction to the plan. Vic Fleischer thinks that the plan could fly, if particular political forces think past their traditional positions and array themselves in a tax reform alignment.

From my perspective, the question is whether the Tax Reform Panel has lived up to its charge.

When the President established the panel in early January of this year, it was, to quote from the Panel's web site, to "advise on options to reform the tax code to make it simpler, fairer, and more pro-growth to benefit all Americans." The policy options, as a group, were to be revenue neutral. More specifically, the options were to meet these three goals:

simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws;

share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and

promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.

How can anyone take issue with these goals? Simplification, reduction of compliance burdens, job creation, and all those other lofty ideals. So let's see how the Panel fared.

The panel's suggestions consist of these proposals:

* Cut back, but do not eliminate, the exclusion from gross income of employer payments for employee health insurance premiums and health care.
* Widen and simplify tax-free savings plans.
* Increase and index for inflation the limit on gain excluded from gross income because it arises from sale of a principal residence.

* Eliminate the deduction of state and local taxes by individuals.
* Make the charitable contribution deduction allowable in computing adjusted gross income, but only for contributions exceeding 1% of income.
* Reduce the home mortgage interest deduction limitation from interest on the first $1,000,000 of mortgage loans to interest on the first $x of mortgage interest, where $x is the maximum amount that can be insured by federal mortgage insurance programs, an amount that varies by county. In the Philadelphia area, $x is approximately $235,000.
* Permit all individuals to deduct health insurance premiums.

* Eliminate the alternative minimum tax.
* Reduce the number of tax brackets from 6 to 4, with the top rate at 33% rather than 35%.
* Reduce the tax rate on interest income to match the rates currently applicable to dividends and capital gains.
* Reduce the tax rate on domestic dividends to zero.

* Enact a simplified family credit that expands the existing child credit.
* Replace some deductions with credits.
* Replace the personal and dependency exemptions with credits.
* Create a refundable savings credit for low-income taxpayers.

In general, one does not need a detailed analysis of these provisions to evaluate the package. Those who want more detail should take a look at Dan Shaviro's helpful summary.

So here I go:

Simplification

1. This is not simplification, aside from elimination of the alternative minimum tax and elimination of the deduction for state and local taxes by individuals. However, this deduction is one of less complicated provisions in the code, or at least it was until the sales tax deduction was restored, so its repeal isn't quite cleaning up the tax code mess.

2. Reducing the limitation on mortgage interest deductions is more complicated because of the tie-in to the variable mortgage insurance limit.

3. Changing a full exclusion for employer-provided health care to a limited exclusion necessarily adds complexity.

4. Shifting the charitable contribution deduction from an itemized deduction to one allowable in computing gross income adds complexity.

5. Expanding the deduction for health insurance may or may not be complicated, depending on how it is drafted. My guess? It will be complicated.

6. Reducing the number of tax brackets doesn't do anything with respect to simplification.

7. Reducing the tax rate on interest income adds complexity because it will be necessary to define interest income that qualifies for the reduced rate. The definition will not be one sentence.

8. Eliminating the tax on domestic dividends also adds complexity because, again, it will be necessary to define domestic dividends qualifying for this zero tax treatment.

9. Guaranteed, simplification of the family credit will not be simple.

10. Replacing deductions with credits in and of itself does not affect the complexity built into the definitions and requirements for the deduction or credit benefit.

11. If the refundable savings credit is anything like the parade of other credits recently added to the Code, it will not be a victory for simplification.

12. And what about the complicated, inconsistent, bewildering array of provisions affecting education of which the panel made a big deal a few months ago?

Score: F, and I wish there were an F- grade.

Reduction of the Cost and Burden of Compliance

1. Let's see. OK, the alternative minimum tax form disappears, so that's a plus. And the 2 minutes required to compute the deduction for state and local taxes gets added back to the lives of tax return preparers and to the lives of taxpayers who would be digging around for the check or receipt. That's a tiny plus.

2. Employers will need more time and money to figure out how much gross income must be reported to employees on the W-2 on account of employer-provided health plans, and there will be one more line on the return for that.

3. New and enlarged forms for the savings credit, tax-free savings plans, and the family credit adds to the cost and burden of compliance.

4. A deduction for health insurance premiums means more record-keeping and another line on the return.

5. Figuring out what is interest and what is a domestic dividend takes time, records must be kept, Schedule B must be modified to separate one kind from another, so it grows. Pages of special rules meshing these proposals with pass-through entities will do nothing but complicate tax planning and compliance for partnerships, S corporations, trusts, REITs, etc.

If all of this happens, there will be more forms, and more lines on existing forms, despite the removal of the alternative minimum tax form from the inventory.

Score: F.

Share the Burdens and Benefits of the Federal Tax Structure in an Appropriately Progressive Manner

Do any of these proposals heighten progressivity?

Yes, these appear to have that impact:

Cutting back the exclusion for employer-provided health care, eliminating the deduction of state and local taxes, reducing the home mortgage interest deduction cap, creating a refundable savings credit for low-income taxpayers, converting deductions to credits.

Do any of these proposals reduce progressivity?

Yes, these have that impact:

Eliminating the alternative minimum tax, reducing the top rate and the number of tax brackets, reducing the tax rate on interest, eliminating the tax on domestic dividends.

Putting these together, it's more likely to decrease than increase progressivity. So the challenge is to define the word "appropriately" in the phrase "appropriately progressive manner." Considering that I consider lower rates for dividends and capital gains to be inappropriate, more of the same also is inappropriate.

Score: D

Recognizing the Importance of Homeownership and Charity in American Society

The proposals do not eliminate the deduction for mortgage interest, and by turning it into a credit, the panel suggests something that, at least in theory, will make home acquisition economically easier for those most under-represented in the housing market, namely, low-income taxpayers. Adjusting the exclusion amount for home sales helps, but perhaps the amount should not be so high?

Making charitable contribution deductions available to taxpayers who do not itemize deductions might encourage more charitable giving, but will it? Most taxpayers who do not itemize are low-income taxpayers, and those taxpayers might not be in the best position to increase their charitable giving. And why not make the charitable contribution deduction a credit?

It would have been nice to see a wholesale re-write of the charitable contribution deduction. It is a forest of tangled threads, a contraption with which almost every Congress has tinkered, and a trap for the unwary.

Score: C

Promoting Long-Run Economic Growth and Job Creation

When was the last time a tax bill was not tagged as promoting economic growth and job creation? When was the last time a tax bill in fact triggered economic growth and job creation? Get out the tea leaves, the cards, the crystal balls, and the palms of your hand. This one will be debated until debating the proposals is moot, and then the debate will morph into more law review articles and commentary.

Score: Incomplete

Better Encouraging Work Effort, Saving, and Investment

Now, seriously, who is going to undertake or increase work effort because taxes on capital gains, dividends, and interest are lower? Or because the top rate would be 33%? Or because there would be 4 rather than 6 tax brackets? Or because a portion of employer-provided health insurance would be taxed? Or because deductions become credits? I don't see it.

Yes, those with money to spare might be tempted to invest rather than consume. Eliminating the tax on domestic dividends and reducing the tax on interest might have that effect. The problem at the moment is that most Americans don't have money to spare. Some could, if they cut back consumption, but is cutting back consumption the answer? Wouldn't that make the economic status of those producing the consumed goods and services a bit less pleasant?

Score: D

Strengthening the Competitiveness of the United States in the Global Marketplace

Perhaps what is contemplated is the following. The proposals will encourage investment, and that investment will be plowed into domestic production, creating domestic jobs. Consumption would be discouraged, and somehow that means China sells less stuff here, so that China acquires fewer American dollars. In the meantime, the new domestic production has Chinese citizens falling over one another trying to buy American products. Something like that.

Well, guess what? The Chinese prefer to either pirate the American product, counterfeit the American product, or purchase the source of the raw materials used by Americans to create product. Guess what? Even if the rest of the world wanted American-produced stuff that it currently isn't purchasing, where will Americans find the labor force to create it? The tool and die industry is withered, for every petroleum engineer coming out of college there are 100 lawyers coming out of American law schools, the number of American students majoring in science and engineering has dropped almost off the face of the earth, and energy costs threaten to make the entire economy go under.

Score: F

What Would I Do?

I'd make taxes as much of a non-factor in business and personal economic and social decision-making. I would repeal most exclusions and deductions, retaining deductions for the cost of generating income. I would eliminate depreciation on property that typically does not depreciate, such as buildings. I would index adjusted basis for inflation. I would include unrealized appreciation in the final return, and eliminate the estate tax. I would provide a flat exemption equal to a percentage (100% or higher) of poverty-level income. I would create more, not fewer, tax brackets, so that there would be less incentive to manipulate taxable income from one bracket to the next. I would require that any attempted use of the tax law to encourage or discourage specific non-economic behavior be proposed as a credit, and be advertised to all citizens in full-page newspapers, and through radio, television, cable and internet messages, with the words, "Senators A and B and Representatives C, D, and E propose to give credits of $x to people who do (or don't do) y, and this credit will require increasing the taxes of other taxpayers by $z," limiting the passage of such legislation to instances where there was overwhelming support. I might be persuaded to tack on a referendum arrangement. You get the picture. No more tax games because the tax playing field gets closed. The panel wants to mow the grass a little shorter. Ho hum.

And So?

The bottom line? I'm not impressed. That's no surprise. I saw this coming. On January 12 of this year, days after the panel was appointed, I wrote, "So back we come to tax reform. I hold out little hope." On April 25 I pointed out that it would have been "far less expensive, and far less time consuming" had the Tax Reform Panel "Simply ... Read My Books" after the panel concluded that there were "too many deductions [and] credits" in the code. As I predicted, "It's time for change. It probably won't happen." And just last week, when the first of the proposals began to see the light of day in the press, I wrote:

With this sort of work product, the panel should refund to the taxpayers the public funds it has wasted. Charged with reform, this panel seems dedicated to window dressing that masks maintenance of the status quo for their friends and financial backers. America is being short-changed.

The rest of the proposals don't change my opinion.

My prediction is that the combination of the erosion of the Administration's political capital and the power of the vested interests will combine to do one of two things. Either the proposal will collect dust somewhere, probably in the Congress, or the subset of Republicans who are anti-tax will join forces with certain vested interests to enact what the powerful want, namely, reduced or no taxes on investment income, modification of the alternative minimum tax so that it applies to the middle class but not the wealthy, and reduction of the top rate, in exchange for a refundable credit of some sort directed to low-income families. In other words, more of the same, at least so long as the same chefs are working in the tax kitchen.

A long-time reader sent me a tip for this story. It seems Deborah Combs of Loveland, Ohio, did not pay $1.16 in local income tax that she owed to the city of Loveland. Apparently she also had not filed city income tax returns for five years. Although it is unclear from the story if the city communicated with her in an attempt to collect, though her reference to how much the city had "spent in stamps" suggest that it had, the city obtained an arrest warrant and had her arrested. The tax amount of $1.16 is small, but according to the report she also faces "hundreds of dollars" in fines, though at the moment she does not owe any fines because none have been imposed.

So she's arrested for not paying $1.16 in taxes. The city manager, though, argued that it's a matter of principle and not quantity. "We have laws. The laws have to be complied with. At what cost do you stop enforcing the law?" That's a question that police and prosecutors answer every day as they exercise police discretion and prosecutorial discretion.

Curious, I began digging around, using google, to see if there was more to the story. Searches turned up dozens of websites with the same story, picked up from the same news distributor. Even most Ohio-area news web sites carried the same release. But on the web site of the Dayton Daily News, more information appears.

Combs faces up to 18 months in jail and $4,000 in fines, far more than "hundreds of dollars." She has been ill and out of work. So she concluded she did not owe taxes. The $1.16 relates to tax year 2003, apparently before she became ill.

Her trial is set for October 20 in Mayor's Court. If she was recuperating from her illness, this might just set her back.

There's no indication Ms Combs poses a threat to anyone. Clearly the city is sending a message. But what's the message?

Perhaps it is this: "Don't forget. If we're willing to arrest someone who owes $1.16, what do you think we will do when we discover YOU owe hundreds or thousands of dollars?"

Somehow, I think it would be cheaper in this instance to levy on her property. If the goal is to send a message, of any sort, it would be cheaper to rent space on a billboard. It's not as though the unpaid tax and the fines will cover the cost to the city of the trial.

Hopefully we'll get news of what happens when she goes to court.

Readers of this blog know that I've been touting Andrew Mitchell's tax charts because they are useful, visual, and well-done. My previous postings are numerous: here, here, here, here, and here.

Andrew has announced there now exists a Tax Charts by Topic access point. And of course the main tax charts entry page continues to provide an entry.

I suppose this email from one of my readers, a former student, will persuade tax students, faculty, and practitioners who appreciate visualization that Andrew's efforts are well worth a visit:

After reading your blog yesterday, I was checking out Andrew Mitchell's website. I had never looked at it before. Well, it didn't take me long to realize this was a great resource. My learning is always enhanced through visual representations of transactions. I forwarded the site to my M&A partner and he loved it. He forwarded it to the other M&A associates and recommended that they save it as good resource. See how you continue to help me along even when I am not in your class - thanks!

Indeed, the whole point of this blog is to help people. Oh, OK, and to give me a space in which to express myself. Which often, though not always, helps people.

Anyhow, quoting Andrew, here is the list of tax chart topics:

• 1. A Reorganizations
  
• 2. B Reorganizations
  
• 3. C Reorganizations
  
• 4. D Reorganizations
  
• 5. F Reorganizations
  
• 6. Triangular Reorganizations
  
• 7. Spin-Offs
  
• 8. Continuity of Interest
  
• 9. Section 351 Exchanges
  
• 10. Section 338 Elections
  
• 11. Pre-Sale Distributions
  
• 12. Liquidations
  
• 13. Redemptions
  
• 14. Entity Classification
  
• 15. Form vs. Substance
  
• 16. International

Yesterday a member of the ABA-TAX listserve raised a question about the proper, or at least appropriate and effective, response to clients who fail to provide tax return preparation information in a timely fashion, and yet who expect the return to be finished and ready for signature almost instantaneously so that the filing deadline can be met. Understandably, clients who approach their responsibilities in this manner are frustrating. Because the tax law has no monopoly on such clients, it is interesting, and perhaps useful, to consider whether the suggestions proposed for dealing with tardy tax clients work with tardy clients in other areas of the law.

For many tax practitioners, it seems that it's the same people who wait until the last minute to get their information to their tax return preparer. The issue popped up at this time of the year because October 15 is the deadline for taxpayers who have obtained a two-month extension to tack onto the automatic four-month extension of the April 15 due date to August 15. Although sometimes there are extenuating circumstances such as disasters, deaths, illness, or another person's failure to provide a K-1 or similar information, in most instances these clients fit the stereotype of disorganized, procrastinating, and unfocused.

The stories would be legends were they not so common. A taxpayer who not only has an individual return to file but also has a corporation and limited liability company whose returns are past due, calls a tax return preparer on October 13 and asks her to "file something so we can deal with it later." Another practitioner had a client who he had been "nagging" for three days to bring in his information. At 2 in the afternoon of the due date, he faxes some information to the practitioner, and while the fax continues to print the incoming data, the client calls the practitioner and announces, "I just faxed the info you needed. I am on my way to pick up my returns."

One practitioner has proposed a plan under which clients receive letters explaining that if they fail to provide all information required to complete the return by a specified date, a surcharge will be added to the fee. If the information does not arrive by the specified date and arrives by a later date, the surcharge is doubled. The same practitioner explained that rather than using a surcharge, she simply raised her fees. The consensus of other respondents is that premium fees are applied to clients who create time-pressured situations by their procrastination. One practitioner suggested taking a retainer. Perhaps this would work as an incentive for these clients. Another practitioner explained that in addition to using surcharges, his firm also imposes rush fees if the information arrives very late.

Considering that in the experience of the practitioner proposing surcharges, these clients also are the ones who are slowest to pay their bills, the impact of this approach may not be as effective as desired. Another practitioner noted that the procrastinators are disorganized but not necessarily late in paying fees. Yet another practitioner explained that until the fee is paid the return is not released to the client, a practice that is fully explained in the engagement letter. This practitioner compares leaving with a completed return without paying to shoplifting.

The practitioner who raised the question noted that if surcharges cause clients to go elsewhere, so be it. Another practitioner informed the group that the process of making September 30 the drop dead date for October 15 returns caused the loss of only one client, a grouch whom they were not unhappy to see go. Yet another practitioner who uses surcharges explained that the clients paid, and that most clients do not incur the surcharges two years in a row. So perhaps the attempt, as another practitioner phrases it, to wean clients from their expectation of 24-hour service is working. In response, still another practitioner explained that she perhaps had not raised her fees enough for late clients because "even [her] brother" brought in his information at the last minute, but at least she got dinner, Godiva chocolates, wine and flowers as "kiss-up gifts." Well, I suppose we make allowances for family!!!

What does appear to happen, though, at least with some clients, is that they "throw temper tantrums" when they show up on October 14 with their boxes and bags of paper and expect that the return will be done in time. Clients have been known to be abusive with receptionists, secretaries, and the preparers. To me, this is a clue that if people have a history of getting their own way, through bullying or parents giving in to tantrums, they will continue to do so until someone stands up to them.

But does this work with other clients? The primary determinant is the existence of a deadline. What happens if a young married couple stop by for a will, but never follow up with the necessary information? My guess is that unless the attorney reminds the clients of the need for the information, the will won't be completed. If the attorney is otherwise busy, these clients' planning may fade into the background. But suppose there is a deadline? What does a criminal defense attorney do if the accused isn't cooperative? At what point does the attorney jettison the client, and is that even a possibility in most situations? Ultimately, the attorney will explain to the court that he or she does not have the required information. It might mean a client does not make bail. But it could be worse.

Rather than launching into another commentary on how folks come to be disorganized procrastinators who expect the rest of the world to serve at their beck and call, I hasten to add that sometimes it works in reverse. Sometimes it is the client who is frustrated by a practitioner who does not get back to the client, fails to get pleadings or other documents filed on time, lets tasks slide, or misses statutes of limitation expirations. And before this becomes an invitation to jump all over the legal profession, or tax practitioners, this phenomenon of the unresponsive professional extends to contractors, medical personnel, civic organization organizers, and a long litany of either overworked or under-organized business entrepreneurs.

Unfortunately, because too many students leave the K-12 systems bereft of organization skills, respect for the calendar and clock, and consideration for others, it's left to the rest of the educational system to try to pound the point home. Yet, at least from the vantage point I have teaching in a graduate and post-graduate school, the rest of the system also fails. What are students to think when deadlines are waived? They learn that the world revolves around them, when in fact, in practice, it does not. Whether it is medical school, business school, or some other institution doing the teaching, it is important to remember that some of the clients who are late with their tax information are at the same time complaining about the fact that the plumber hasn't yet returned a phone call from the previous week.

I wonder how much of the procrastination and disorganization is a subconscious rebellion against the fast pace of life today. If life today is so much more hectic, pressure-packed, and overwhelming than it was, say, one hundred years ago, why is that? Too much to do and too few people willing to do it? Or is the notion that life has become more frenetic simply an illusion? Yes, our great great grandparents did not face daily commutes of 2 hours a day, but on the other hand they rarely left their villages, had to deal with perpetual illness and medical emergencies, needed months to cross the continent, expended hours making meals rather than grabbing "fast" food, and probably complained that life had become too complicated, too demanding, and too busy when compared with the lives of their great great grandparents.

So perhaps, even if there are societal overtones, it is a question of individuals' personalities. Some people can get to appointments on time, some can't. Some people can organize things, whether thoughts, paper, or digital files, with little effort, while others simply stare at the piles. It's not a congenital defect. People can learn how to organize. They can become disciplined with respect to day and time so as to minimize the inconvenience they impose on others. But these remedies require education, from every direction, be it parents, schools, places of worship, or legal authorities. What gets in the way are those who see these remedial efforts as unjustified intrusions on an individual's "freedom" to behave however he or she sees fit. At least with respect to tax return preparation, this is one instance where the forces of a "free" market might accomplish what formal education cannot or will not do, and that is to break people of bad habits.

Yes, there are many reasons I no longer have clients other than those with whom I relate vicariously through my communication of advice to practitioners. The behaviors described by the folks on the ABA-TAX listserve are among those reasons. I salute the practitioners who shared their experiences and coping devices, for they demonstrated creativity and again permitted me to engage in vicarious practice.

Although there are other types of tax shelters, one of the more common arrangements is an investment in a partnership which borrows money, uses the loan proceeds to acquire assets, claims depreciation deductions, and passes those deductions out to the partners. Assuming either additional facts that make the passive loss limitations not apply or assuming that the partner can make use of passive losses, the arrangement usually is "sold" with promises of immediate tax-savings benefits. Because under section 752 the partner is treated as having a share of the liability (and even a limited partner can have a share of a nonrecourse liability) and thus acquires additional adjusted basis in the partnership interest these sorts of shelters will pass out more deductions than the amount invested by the partner. This is why this sort of tax shelter is more attractive than a straight-up charitable contribution (even assuming that the charitable contribution limitations don't apply).

But eventually the shelter "burns out." Over time, depreciation deductions diminish and then terminate, while revenue usually increases. At some point, the partnership is passing out net income rather than net deductions. Sometimes this is not a problem, because the partner may have need of passive income and if the income is passive the shelter continues to serve a tax-savings purpose. Often, though, the partner does not want the net income, has no need of passive income, and wants out. The partner's adjusted basis is low, or even zero, because of the deductions. And the capital account probably is negative.

So what's a tax shelter partner to do?

1. The partner could sell the interest to a new partner who does want income, passive or otherwise. But because of the low or zero adjusted basis, the selling partner will be compelled to recognize gain. The deficit capital account will pass to the new partner. In some states, a transfer tax may apply to the sale. It's easy to understand why this option isn't popular.

2. The partner could seek a liquidating distribution from the partnership. In most instances, the partnership agreement does not allow for this transaction and it is unlikely that the partnership or other partners would agree. No matter, for if they did, the same problem would exist, namely, a distribution to a partner with low or no adjusted basis in the partnership interest. There would be gain. Another option gets rejected.

3. The partner could make a gift of the partnership interest. Because the donee takes the donor partner's adjusted basis, this simply passes the problem along to a natural object of one's bounty. If that person happens to have need of the income, in both an economic and tax sense, there might be some sense in doing this. However, the gift tax looms if the value of the partnership interest exceeds the annual exclusion, and though the unified credit may be available to negate a tax, its use has long-term adverse consequences on future estate planning. Additionally, many partnership agreements and federal and state securities laws stand in the way of many such gift transfers, because the donee does not satisfy the requirements for transfers of private placements or other restrictions.

4. If the interest is donated to a charity, which pretty much eliminates the gift tax problem, there would be gain to the extent that the partner's share of the partnership liability exceeds the partner's adjusted basis in the partnership interest. Because the partner's adjusted basis is low, or even zero, the likelihood of gain is high. Some charities would reject the gift because of state law or charter restraints. Others would reject it because it would open the door to unrelated business taxable income. So this is an option that is very limited.

5. Once upon a time, domestic relations lawyers who understood why the basic tax course is a prerequisite for practicing domestic relations law advised divorcing clients to pass the burned out tax shelter interest to the other spouse. Aside from interesting ethical questions, which arise if the other spouse is not represented, this maneuver became obsolete once the rest of the domestic relations bar caught on and fended off the attempt to leave the recipient spouse with a ton of gain that exceeded the cash outlay of the interest.

6. The classic advice was to hold the partnership interest until death. Then the step-up in basis that occurs at death in effect would "wipe out" the gain. That's true in theory. But because of the intricacies of partnership taxation, the heirs' high adjusted basis does nothing to help negate the impact of tax income that the heirs, as partners, must report, even if there are no or few distributions. One way of dealing with this discrepancy between the partnership's inside operations and the heirs' outside adjusted bases is the section 754 election. However, that election requires consent of the partnership (other than when it is required in situations that do not apply to these sorts of tax shelters). Where is the guarantee that the partnership, or, technically, the other partners, will agree? Often, they will not agree. Although I suggest to my students that when dealing with a business partnership (or LLC treated as a partnership), they put a provision in the partnership requiring that the election be made the first time the issue arises, because at the outset everyone is neutral in terms of what event may take place to set up the possibility, it is far less likely that an investor in a marketed tax shelter partnership will be in a position to bargain for such a provision. A tax shelter partnership agreement that is well-crafted from the promoter-general-partner's perspective surely also contains language that prevents the limited partner investor, or the heirs, from dissolving the partnership.

So, perhaps the answer is that sometimes the price must be paid. All those tax-reducing deductions reported by the investing partner generated savings. Eventually, offsetting gain must be reported. Even so, from the perspective of time value of money, deductions in one year offset by income in a later year is a good deal unless the applicable rate in the later year is so high that it offsets the interest factor. If the delay is five, ten, or more years, it would take a huge increase in rates to offset the time value of the tax savings.

What is troubling is the reaction of taxpayers who throw fits about the income, though they (or their decedent) basked in the joy of the deductions. What the taxpayers want is a deduction for nothing. When cleared of the subchapter K partnership taxation haze, the request is equivalent to a claim for a charitable contribution deduction when nothing was transferred to a charity. The latter is easy to see as an outrage, but the former, masked by the complexities of partnership taxation, isn't so easily understood as indefensible. Even when told that the income would be taxed at low capital gains rates, as sometimes would be the case, even though the deductions reduced ordinary income, taxpayers balk.

Yet I do understand how taxpayers get to this point. The person marketing the tax shelter talks up the tax-savings, and brushes aside as "no big deal" or as "far in the future" the issue of the eventual income and gain that will be taxed. Oh, it's there in the fine print, but how many taxpayers read the fine print? Very few. How many take the deal to a tax advisor who reads the fine print and explains it to their client? Some. But afflicted with the short-term vision so prevalent in today's culture, most taxpayers will not, no, cannot, juxtapose the immediate benefit with the long-term consequence. In this respect, tax shelter investing isn't all that different from many other activities in which individuals, institutions, and governments play to the short-term at the expense of the long-term. The problem is that today's future becomes tomorrow's today. The future is now, and the piper asks to be paid.

So pay. Ultimately, there just isn't something for nothing.

Shortly before 11 this morning, I questioned the wisdom of leaving five tax policy positions in Treasury vacant and criticized the slowness of the confirmation process that caused one nominee to withdraw.

Later in the day, Treasury announced that it had appointed a Deputy Assistant Secretary for Financial Institutions Policy. It then announced that it had appointed a Legislative Affairs Deputy Assistant Secretary for Banking and Finance.

Interesting timing.

The tax positions remain vacant.

It seems that the tax world clock ticks at a faster rate than do those marking time for many, if not most, other areas of life. The Bankruptcy Code gets amended every several decades, the copyright statutes gets a major change several times a century, the law of future interest changes in a big way once every several centuries, and yet the Internal Revenue Code is amended multiple times each year, with major changes coming every year or two. The IRS cranks out administrative material, in the form of regulations, revenue rulings, private letter rulings, revenue procedures, announcements, news releases, and a flood of at least four dozen other types of issuances, at a pace that compels Tax Notes, BNA Daily Reports, and other commercial tax reporters to publish sizeable daily updates.

Law faculty who teach tax and seek to publish in that area face a tough decision, because the student-edited school-affiliated law reviews usually are months or years behind, and can cause an accepted tax article to become obsolete while it crawls through the editing and publication process even though publication in those law reviews is, for many tenure reviewers, the hallmark of "scholarship." In contrast, the tax journals that take a realistic approach to keeping readers current can crank out an article in a matter of weeks, but yet are held in some disregard by certain academics who view them as somewhat inferior. Perhaps it's because there are no third-year law review students doing the editing? And how long does it take to edit an article? The answer is "not very." What happens in most law reviews is that the article sits in a series of "waiting to be examined" piles for much of the time.

This lack of any sense of urgency also afflicts many bureaucracies, including government processes. And although the foot-dragging usually afflicts an individual person or entity, sometimes, as in the case of Katrina, it affects large groups of people, almost always to their detriment. And occasionally, it affects the entire nation, even if it doesn't quite get the headline in the mainstream media.

About six days ago, the mainstream media barely picked up on Philip Morrison's withdrawal as a nominee for the post of assistant secretary of the Treasury for tax policy. This MSNBC report was the only one I could find, and it simply announced the withdrawal in three short paragraphs at the end of another story. It noted that the reason Morrison withdrew was that the process was taking too long, and that the Treasury would be without someone in its top tax position when the tax reform panel's recommendations are issued.

Three days ago, BNA issued a far more comprehensive report on the story, in which it not only reported the withdrawal, but also put the story against a much larger backdrop. Morrison, who was nominated on May 26, explained that he had cleared FBI investigation, IRS review, and Office of Government Ethics requirements before he was nominated and that four months was too long a time to hold things in abeyance. Morrison will turn his full attention back to his tax practice at Deloitte Tax. A spokesperson for the Senate Finance Committee, which needed to issue a report before the full Senate could consider the nomination, explained that the question was on the agenda for an Oct. 18 hearing and that the committee "reject[s] the claim that the nomination process took too long" without giving any further explanations on account of alleged "confidentiality constraints."

The BNA report also noted that, according to a Treasury official, the nomination had "boosted morale" at Treasury and "might help Treasury recruit new workers." In his remarks this official characterized the nomination as giving the Treasury's tax policy division "stability." The BNA reporter, putting together other information, then summed up the report by pointing out that ALL of the following positions in Treasury are vacant:

• Assistant Secretary of the Treasury for Tax Policy
  
• Deputy Assistant Secretary of the Treasury for Tax Policy
  
• Tax Legislative Counsel
  
• International Tax Counsel
  
• Benefits Tax Counsel
  
• Assistant Secretary for International Affairs
  
• Assistant Secretary for Public Affairs

Whoa!! So who's minding the store? According to the BNA report, Eric Solomon serves as Acting Deputy Assistant Secretary of the Treasury for Tax Policy while also fulfilling his responsibilities as Deputy Assistant Secretary for Regulatory Affairs. I must admit that until I read this BNA report I was unaware of this problem. I am confident that few, and I mean very few, Americans know that one officer is piloting a tax policy ship that calls for a much larger crew.

Something is very wrong with this picture. Actually, I think some things are very wrong. There are two very serious issues, one that may be somewhat more momentary and one that is systemic and far more dangerous.

The first problem is that one person is trying to do the work of two people while five, count them, FIVE senior tax positions of leadership with responsibilities for guidance, approval, review, and management sit unfilled. The people who hold these offices are the people who bring the views of the executive branch to bear on the development of tax law. Often, even if the same political party controls the White House and one or both houses of Congress, the Treasury serves as a counter-weight and devil's advocate to the proposals of the legislature and its staff. Treasury usually brings a collective "tax practice with taxpayer clients" experience when it visits the Hill that for many years has been in short supply on the east end of Pennsylvania Avenue. With no intent to comment on the efforts of the overworked Eric Solomon, who according to the BNA report has earned genuine praise for holding down the fort while his superiors leave him unreinforced, the nation and its taxpayers are not being well served when this sort of vacuum exists.

There are all sorts of reasons for this problem. One may be that it's difficult to find willing appointees, but, hey, if they need a list, I have one. Another might be that those who do accept and get confirmed discover that Administration tax politics permeate the Department to the point of making the position one of total frustration, and so they resign, so on second thought let me rethink that list. Yet another may be totally unavoidable circumstances such as health or family issues. And now it appears that still another reason is the adverse consequences of sitting around waiting for the nomination process to get going.

And thus the second problem, which is the slow pace of the nomination process. Unquestionably, the need to do thorough background checks means that some amount of time must elapse before a person can be confirmed. However, according to Morrison, he already had his background clearances by the time he was nominated. So what's going on? My guess is that it's the endless recesses and home visits that keeps Congress and its staff from getting to their duties, while nominations sit on desks or in computers much the way tax articles cool their heels on the desks or in the computers of student law review editors. Like those law reviews, Congressional Committee staffs are afflicted with a high rate of turnover, which often causes a "start over" mode to kick in. That, coupled with another shared characteristic, namely, learning on the job, contributes to the slogging pace with which tasks are accomplished.

Yet when the Administration and the Congress really do want to move a nomination or a piece of legislation, they do so. Between the time Morrison was nominated, with background checks in hand, and the time a hearing on his nomination supposedly was going to be held, the White House managed to nominate two people for the Supreme Court and the Senate found time to confirm the first of the two. Yes, I know the Supreme Court is important, and even supreme, but the country is in no less need of a fully staffed tax division at Treasury. It's not as though the Finance Committee handles Supreme Court nominations.

There's a lot of blame to go around, but that's not important other than in giving clues as to the more deserving question: what should be done? The answer, perhaps to the chagrin of many, is that elected officials and their staffs need to get their act together. Priorities need to be reset, something that many Administrations and Congresses have not demonstrated an ability to do. Considering all that looms ahead, especially matters with respect to which tax policy decisions need to be made, the folks in Washington need to develop and embrace a sense of urgency. Otherwise, for which one or more of these issues will resolution remain on a distant horizon while the gates are besieged: Katrina relief, tax reform, energy shortage amelioration, energy supply and delivery remediation, health care maintenance, mutant avian flu pandemic, future natural disaster relief planning, .....?

Until and unless Washington, and most, if not all, state capitals, streamline and update their procedures and culture, the increasing flood of crises, disasters, and citizen needs will slowly overwhelm the political system. As citizens increasingly come to understand that not only are offices vacant but things aren't getting done, there is a higher likelihood that they will react in ways not limited to the ballot box. Increasingly I strengthen my belief that neither major political party has lived up to its duties, promises, or voter trust. After gridlock comes collapse.

The Tax Reform Commission is entering its home stretch, and news of its first few decisions is beginning to show up in various places, including this Philadelphia Inquirer story picked up from Bloomberg News. There are several highlights, which for some folks, and in some instances, for me, could be called lowlights.

First, the panel chose to reject a national sales tax. I know folks who will be very disappointed by this decision. I'm not. A national sales tax, unless it is modified to become another engine of complexity, shifts the burden of financing government from those with moderate to tremendous wealth to those who have little or no wealth.

Second, the panel "expressed reservations" about a value-added tax. I'm not sure what that means. The reservation expression, that is. It's not a rejection, because the panel knows how to indicate, and did indicate, rejection. Is it a warning? Is there a delay in rejection because there is some support on the panel for such a tax that its opponents want to quiet so that the panel can appear to be unanimous? Stay tuned.

Third, the panel agreed to reduce the $1,000,000 limitation on the amount of mortgage debt interest on which is deductible. I noted that the news story didn't report it this way, and was written in a manner that suggests $1,000,000 is the cap on the deduction, which it is not. Nothing, it seems, was said about the additional $100,000 of mortgage debt interest on which is deductible under current law if that debt qualifies as home equity indebtedness.

The point of this limitation reduction is to remove tax benefits for acquisition of expensive (read, more than $400,000) homes. Unfortunately, this proposal seems to be made by folks who don't understand that in today's real estate market, $400,000 doesn't purchase much of a home. Worse, in some markets there are no homes available under $400,000 other than shacks. In other markets, $400,000 might purchase a residence in a rather nice upper-class neighborhood. Is it time for geographic-based indexing?

The recommendation, however, goes further, and proposes to add more absurd complexity to the Code. The deduction would be limited so that it would reduce taxes by no more than 25% of the deduction. This will require another form, separate computations, dozens more lines of text in the Code, and the hiring of additional IRS employees to focus efforts on compliance with this creature of theoretical musings. Has anyone on the panel done their own or anyone else's tax returns? It is beginning to appear, as I feared, that this panel will do more of the fiddle-and-fidget dance that has afflicted tax legislation for the past 20 years.

If the goal of this proposal is to reduce investment in energy-consuming McMansions with those heat-wasting, brutally difficult to clean or reach the light fixtures for replacement 20-foot ceilings, it will fail. Limitations on mortgage interest deductions do nothing to affect the purchase of homes by the ultra-wealthy who plunk down cash or its equivalent when their "I want it" impulse takes charge of their checkbook.

The proposal, though designed to "clearly redistribute" tax benefits for home ownership to lower-income Americans, does so at the expense of the middle class, not the ultra-wealthy. This flaw in the proposal is especially galling when considering the panel's claim that it is being done to finance reform of the alternative minimum tax which was designed to end tax avoidance by the ultra-wealthy. In other words, alternative minimum tax relief for the middle class will be accomplished by cutting back on tax breaks for the middle class. It's becoming quite apparent whose agendas are driving the panel.

The panel also announced agreement on a deduction limitation for employers who pay medical plan premiums for employees. The existing exclusion of this benefit from the employee's gross income apparently would not be changed. The panel is considering a cap equal to the $11,000 maximum health care premium paid by the federal government for its employees. How a deduction cap would have an impact on the millions of employees who work for tax-exempt organizations (governments, schools, research facilities, charities, churches, etc.) is not described.

Again, though this proposal also was included in the statement that the change would finance alternative minimum tax reform by redistributing tax benefits for health care to lower-income Americans, it makes no sense. Employers who have expensive plans will cut the benefits back, or cut back their contributions, and who's in better financial shape to absorb the increase in the employee-funded portion? Yes, the ultra-wealthy and the upper middle class. How this assists lower-income Americans is beyond me.

If the goal of this proposal is to cut health-care costs, it won't work. People don't behave in logical patterns that generate healthier lifestyles because employer financing of health care has been cut. People will continue to patronize fried fast food joints, tobacco sellers, and tanning booths while avoiding gyms, outdoor recreation, and adequate sleep.

The root of the problem is exposed by this statement from the panel's vice chair, John Breaux, a veteran of the fiddle-and-fidget approach to tax legislation: "We have a concept. We know where to go. We just don't have the details." My advice to the panel, not that it will be heard or followed, "A concept is no more valuable than the quality of its application to reality in the form of details." In other words, the panel could just as easily announced that it would make deductions for time travel part of the tax code, and then explained that, "We have a concept. We know where to go. We just don't have the details."

With this sort of work product, the panel should refund to the taxpayers the public funds it has wasted. Charged with reform, this panel seems dedicated to window dressing that masks maintenance of the status quo for their friends and financial backers. America is being short-changed.

I'm amazed. Startled. Bewildered.

They just don't get it.

Why?

An editorial in this morning's Philadelphia Inquirer, written by no less than the seemingly eternal and ever-present Larry Kane, simultaneously decries the failure of this nation to deal adequately and appropriately with energy management and conservation, and yet suggests that oil-producing nations which have received the benefit of U.S. military protection against terrorism, get an invoice stating: "Total Due: a reasonable schedule of oil production that will avoid gouging, maintain profits, and protect the sanctity of the world economy." Huh? Yes, I agree that this nation, and its politicians, have been about as successful with energy management as they have been with tax reform, hurricane relief, and just about everything else they have succeeded in trashing. But what's this notion that oil-producing nations can jack up oil production at will? Larry, oil is a finite resource. More is used each day than is discovered. Arguments among the peak oil crowd aren't about the truth of the "we're running out" problem but about the date (or year) that oil production has or will have peaked. Anyone seriously interested in this issue ought to visit the Oil Drum website.

It's this simple: There is not enough oil and gas to support the current demand, even if natural disasters, accidents, and other events do not arise and damage the energy infrastructure. There is even less capacity to support projected future demand as China, India, and other nations jump on board the oil and gas consumption train.

It's that simple.

Larry Kane specifically points to Saudi Arabia, but the chatter is that it has passed the peak with most of its fields, and that is why it is beginning to drill offshore. Much of what's left is so-called "sour crude" which does not refine as easily as "sweet crude" and which cannot be refined in existing refineries without major alterations to the equipment. The pipe dream of endless supply, whether oil, water (shortages of which I continue to believe will trigger a global conflict), or food (another report in today's news talks about the tens of thousands of farms that have disappeared in recent years) and the advocates of that pipe dream need to be exposed.

Sensibly or not, we've environmentalized ourselves out of coal and nuclear. We've underfunded ourselves out of solar, wind, and biomass. The nation has stuck to its "don't look past the end of its nose" outlook while condemning or shunning long-term planners and thinkers as "Jeremiahs" intent on breaking up the party. Well, I (and others) do think the party is over. So the anger that Larry Kane saw on his most recent gasoline station visit, and which he describes in necessarily masked quotations, reflects a genuine ignorance (i.e., "a not knowing") on the part of the consumer. Who's to blame? That's easy. The education system, the government, and the main stream media. Rather than telling the truth, they'd rather sugar-coat the news, and they defend their decision because the truth might generate panic, as though it's better to foment anger than panic. A little panic might not be a bad thing. I know I'm alone, or in the minority, on this point. There are times when it is foolish to put comfort above common sense and reality.

Larry Kane is right in pointing his finger at politicians. But they're not alone. They've been enabled. And the enabler is no less "guilty" than are the politicians. The energy crisis is simply a symptom of a deeper cultural failure, namely, the decades-old message that life comes without cost. It is time to start electing public servants who will take their servant-leadership skills into the public arena. Easy to propose, tough to do. After all, the powers-that-be will need to be pulled out of office, kicking and screaming, because with only a few exceptions they continue to believe in their own majesty.

But perhaps I am wrong. Perhaps tomorrow or the next day some exploration company will announce the discovery of an oil and gas field with several hundred million hypergigagazillion barrels of product that will meet the needs of a 15-billion person world for the next 10,000 years. Nah, this is one time I'm very certain that I'm not wrong. Wish I was.

Last month, I pointed out the challenges of coming up with the dollars to rebuild the Gulf Coast. Early in the month, in a posting that drew more than the usual attention, I argued that with an expected demand for federal spending in the wake of Katrina, it was time to eliminate the capital gains and dividend tax rate preferences, and to postpone a vote on eliminating the estate tax. Within a few days, as I reported in this post, the estate tax permanent repeal vote was postponed. No news appeared about the proposed extensions of the capital gains and dividend tax rate preferences.

So, a few days later, I expressed hope that Congress would postpone any votes for extending the tax cuts for dividends and capital gains. Later in the month, I penned another post, one in which I criticized the idea of increasing federal spending while holding fast to, or extending, existing tax cuts.

Not that I dare take any credit for the postponement of the estate tax permanent repeal vote, but surely the powers-that-be in the Senate aren't listening to my advice with respect to capital gains and dividend tax rate extensions. This latest bit of news is enough to assure me that my opinions about estate tax repeal either weren't read by Senators and their staffs, were read but ignored, or were read and embraced by those who at the moment are powerless to do anything with them.

The news that triggers this dismay comes from a BNA Report, the headline of which evokes concern. When I read "Senate GOP Leaders Confident Tax Cuts Can Go Forward" I begin to wonder whether the Twilight Zone's parallel universe concept is playing out in some sort of hazy way. According to the report, Senate Republican leaders and the Finance Committee insist that legislation extending the capital gains and dividend tax rate preferences will move forward, even though members of both parties are urging that Congress re-think the wisdom of doing so. Hmmm. Maybe some folks are reading my ideas. Or perhaps, knowing that I don't hold a monopoly on them, they are reading the commentary of folks who share my disdain for taxing capital gains and dividends at lower rates. In Washington, the buzz is that Senator Rick Santorum is the architect of the idea that the revenue attributable to not extending those preferences be used for Katrina relief. Whodda thunk? Hmmm. But within days, he relented, because he was "assured" that the "cost" of extending the tax rate preferences would be "offset" which he said makes him "feel a lot more comfortable."

Well, it doesn't make me comfortable and I doubt it makes very many Americans comfortable. After all, where does the offset come from? Leaving the alternative minimum tax hidden tax increase in place? Raising taxes on someone? Who?

The silliness of the argument supporting these rate preferences and their extension is evident in the statement made by Senator Charles Grassley. He "fears" that failure to extent these rate preferences "could cause a ripple effect and discourage investment in the wake of Hurricane Katrina." Excuse me, Senator, are you saying that without these rate preferences the investors who are swimming in funds to invest would invest in China? In Europe? In oil refineries? In anyplace but the Gulf Coast? In jars buried in the backyard and paper bags in the mattress? You see, Senator, these folks who have amounts to invest need to invest somewhere, and even if they plunk their money into bank certificates of deposit, the banks can in turn loan the funds for the construction that needs to be done. Why reward investors for doing what they would do in any event? Your logic, sir, suggests that if we don't lower the tax rates on earned income to as low as those on capital gains and dividends, that everyone with compensation income would simply stop working.

When the buffet table is loaded up, we often don't notice, or if we do notice often don't mind or say anything about, the person who is loading up his or her plate to the breaking point. But when the buffet table is lean on supply, we do expect the loaded plate crowd to back down and to have some sense of balance and equity. In polite society, we ask kindly before taking the last serving from the bowl. Why is it that some folks, especially folks who seem to be getting their way so often in how things are done, seem unaware of, or willing to ignore, the sort of civil behavior that is at the root of the orderly society they also claim to admire?

That, of course, is a rhetorical question.

As many people in the tax world know, one of the tax topics in which I have serious interest is the question of alleged Tax Court bias. Six years ago, in response to an article that challenged a letter to the editor in which I asserted that the Tax Court was not biased in favor of the government, the University of Tennessee Law Review published "Instant Replay, Weak Teams, and Disputed Calls: An Empirical Study of Alleged Tax Court Bias," (66 Tennessee Law Review 351 (1999), see here), in which I presented carefully culled empirical evidence that demonstrated that the Tax Court was not biased in favor of the government, and that if there was a bias, it was a slight bias in favor of the taxpayers.

In the intervening years, other commentators have explored questions that space limitations kept out of my 1999 article. For example, in "Political Affiliation of Appointing President and the Outcome of Tax Court Cases," (84 Judicature 310 (May/June 2001), available here), the quartet of Mark P. Altieri, Jerome E. Apple, Penny Marquette and Charles K. Moore explored in detail the impact on tax court decisions of the political party of the president who appointed the judge. In "Empirical Research on Judicial Reasoning: Statutory Interpretation in Federal Tax Cases," (31 N.Mex.L.Rev. 325 (2001), see here), Dan Schneider explored whether judges favored any one method of interpreting the Internal Revenue Code over other methods, and whether specifically identifiable personal characteristics nudged judges to use a particular method. In "Assessing and Predicting Who Wins Federal Tax Trial Decisions," (37 Wake Forest L. Rev. 473 (2002) and 96 Tax Notes 1147 (2002), see here), Dan Schneider explored whether the outcome in a tax case was affected by a judge's gender, attendance at an "elite law school," previous work experience, race, years as a judge, or appointing president's political party affiliation.

The topic continues to fascinate researchers, commentators, and, I would hope, taxpayers and their advisors. Recently, Robert Howard, of Georgia State University's Department of Political Science took on the question of whether, and if so, why, tax decision outcomes in Tax Court cases and District Court cases might differ. In "Comparing the Decision Making of Specialized Courts and General Courts: An Exploration of Tax Decisions (26 Justice System J. 135 (2005), available here), he concludes that the Tax Court, as a specialized court, is "free from any practical structural constraints" and "uses its expertise to allow a much freer hand in decisions for its judges' policy preferences." He finds that this is not what one would have expected from a goal of having an expertised court decide cases without ideological influences. He also concludes that "while there has been some concern that, like the tax court, specialized courts would be no more than extensions of the IRS and thus likely to exhibit bias in favor of the agency, and while the U.S. Tax Court might issue more rulings in favor of the IRS than the U.S. District Court, the reason might be as much due to ideology as any bias based on structure or experience."

Howard bases his conclusion on the results of his empirical research. He discoverd that the Tax Court and district courts are "slightly conservative in their decisions, ... confront roughly the same types of cases, [and that] more than two-thirds in both courts are from individuals, with roughly one-fourth of the dockets of each composed of business matters." He also notes that in Tax Court 36% of taxpayers act without counsel, whereas only 10% of taxpayers do so in the district courts. In addition, "more than twice as many tax-shelter and tax-protester cases are heard in the tax court (21 percent) than in the district court (10 percent)." Finally, his data showed that "the taxpayer ...l won 20 percent of the time in the tax court and in 32 percent of the cases in the district court."

From this data Howard generates some interesting observations. "As expected, the more liberal the judge, the greater the likelihood of support for the Internal Revenue Service, while the more conservative the judge, the greater the likelihood of support for the taxpayer. Tax court judges are more ideological in deciding cases than are district court judges. Finally, the hypothesis that liberal judges would react more negatively, and conservatives more positively, to tax-protestor or tax-fraud issues was confirmed for both courts." He also notes that when taxpayers in the Tax Court have an attorney, it is more helpful to them than in the district court, suggesting that the district court relies more on the IRS whereas the Tax Court judge can "appreciate and understand the arguments of counsel." He also noted that "the district court was more sensitive to the type of litigant, being more likely to support a business or a trust or estate, than was the tax court."

What this does to the oft-repeated thought that taxpayers have more success in district court because the judges, and their clerks, are far from expert with taxation, and tend to be more sympathetic to taxpayers, remains to be seen. Howard concludes that Tax Court judges indeed are more expert. Yet he also concludes that the judges in both forums are roughly the same, ideologically speaking.

There is good news. Affirming one of the conclusions I reached in my 1999 article, Howard states, "prior IRS experience does not matter for type of judges." He also refers to me as a "scholar" and as a "tax scholar," and brands my 1999 article as a "scholarly examination" of the issue. Note to self: photocopy, enlarge, and hang on office door.

As Howard points out, more research comparing specialized and general jurisdiction courts is necessary. A particular question worth exploring is "the issue of congressional and executive control[, because t]he fifteen-year tenure of nineteen tax court judges, as opposed to the lifetime tenure of more than 600 district court judges, allows Congress and the president to modify and alter the small tax court's ideology more quickly than the ideology of the district courts[,and g]iven the volatile and highly politicized issue of taxes, the ideological rulings of the tax court might be due to congressional design, and the decisions might deliberately match congressional and executive preference."

It is gratifying to see that my 1999 article, the first in which a comprehensive, systematic, extensive, and thorough empirical exploration of Tax Court decisions was the basis of the arguments (in contrast to articles such as the one in which the author "flipped through" several volumes of Tax Court decisions), has inspired other scholars to examine other factors. I'm told that this is the way tax commentary and dialogue ought to work. Propositions are made, debated, affirmed, or discredited. Mine appears to have survived.

It is an important question. Despite the seeming "academic" tone to most of these articles, and despite the fact that this is one work product I sent to student-edited law journals rather than the usual places I send my manuscripts, it deals with an issue of serious practical concern to taxpayers and tax practitioners. The decision to contest an IRS deficiency in Tax Court or district court, which is affected by a variety of factors, not the least of which is ability to pay the tax so that a refund can be claimed and suit brought in district court, is one that has faced taxpayers for decades. Frequently affected by anecdote, tax "lore," and personal experience, these decisions can now be considered against the backdrop of empirical research and conclusions offered by an ever-growing body of analytical works that inform those dealing with tax litigation issues.

He's at it again. Andrew Mitchell, that is. Or TaxChartMan as he could well be known.

This time, he's cranked out a six-part chart of Tribune Co. v. Commissioner, 125 T.C. 8 (2005), which involves a failed reverse triangular merger. Aside from assisting tax practitioners in analyzing the decision, it also serves as further proof of a point I often make to law students who struggle as they tackle tax law, namely, that sometimes it is the complexity of the transaction that overloads the brain's neural circuits. One look at Andrew's most recent chart demonstrates that complexity, but it also arranges it into digestible, sequential pieces. Breaking things into pieces and illustrating them, figuratively speaking, is a very useful way to learn.

Take a look at my previous postings about the various tax charts from Andrew (here, here, here, and here) for additional kudos for this rapidly growing project. To see the other charts, start at the main tax charts entry page.

I received an invitation to an event that I'd like to attend but cannot attend. I knew I'd regret not starting sooner or making better progress on the cloning project. It wouldn't surprise me to discover that some other event I couldn't attend would have moved me further along the "clone myself" path.

Anyhow, Dennis Kennedy, who is hosting this event (no, not a cloning event) also invited me to invite others, and so I am sharing with readers of MauledAgain an invitation to what should be an educational, thought-provoking, and fun event.

The event is the LexThink BlawgThink conference being held on November 11 and 12 in Chicago.

This year's conference is built on three questions that Dennis raised after attending BlogWalk 6, an day-long conference on knowledge management and blogging that used the Open Space Technology scheduled for use on BlawgThink's second day. Question One: If blogging is a world-changing technology, when and how do we start to change the world? Question Two: Is it the technology or is it the bloggers? Question Three: And, what happens if we bring bloggers together, turn them loose, and see what projects and collaborations grow out of
that combination?

Thinking about those questions inspired Dennis Kennedy and Matt Homann, the other co-organizer, to try to get a group of legal bloggers together, in person and face-to-face. Dennis and Matt believe that despite all the advantages of email lists, wikis, collaboration software groups, IM sessions and conference calls, "there's nothing like being together in person if you want to have collaboration happen." One of the reasons that I'd attend if my schedule permitted me is the lure of this assertion from Dennis: "In fact, I believe that, in the future, some of the most important innovations that happen in the practice of law will be traced back to conversations that began at BlawgThink." I don't think he is reaching beyond credulity when he makes this claim.

Among the readers of MauledAgain are folks who don't have a legal blog, folks who have one, and some who have one that is connected with their law practice. There's something in this conference for everyone.

BlawgThink's first day has three tracks, one for each of those three groups I mentioned. Track one, which would have been useful to me back when I was getting started with blogging and surely will be of value to the lawyers, judges, law students, and law faculty who are thinking of "getting on board the blog train," will focus on "Blogging Basics" such as blogging tools, how to write a post, blog etiquette, news aggregators, and blogging tips and predictions. Track two, for legal bloggers with a law practice to promote, will focus on "Marketing and Client Development" that digs into using blocks to market a practice, builiding reputation with blogs, the ethics of blogging, tying the blog into practice areas, and more tips and predictions. Track three, directed at those who have figured out the basics of blogging, is simply called "Blogging 2.0" and addresses advanced RSS, podcasting, collaboration, blog design, Flickr, OPML, De.licio.us, Rojo, other cutting-edge blog-enhancing tools, and yes, still more tips and predictions. Anyone want to guess which of these tracks caught my eye?

BlawgThink's second day has no agenda as such. Scary proposition for a conference planner, but I like the idea. Rather than more panel presentations, PowerPoint slides, and keynote speakers, the proceedings get turned over to the attendees. Not unlike a law school seminar. Small group meetings are anticipated to highlight the day, along with opportunities to go one on one with others, and brainstorming should overshadow the proceedings. Can't get to all of the small-group sessions because your clone project also hasn't gotten untracked? No problem: Notes from each small group discussion will be circulated to attendees later in November.

I wish I could be there. It would be fun, and educational, to meet the people behind the other law blogs and to pick their brains about the technical and substantive aspects of their blogging. Goodness, maybe some of the people attending BlawgThink 2005 would want to ask me some questions. Yeah, I know, that can be dangerous.

For more about BlawgThink, go to the LexThink website, and then click on the link to BlawgThink 2005. To register, follow the "contact us" link on that website.

If the outcome is even one blogless reader cranking up his or her own blog, or even one reader who is a blogging practitioner ramping up his or her blog, this extension of the invitation will have served well. If you do attend, I surely would like to hear from you, and I'll share your comments. Oh, no, wait, you'll be doing that on YOUR blog, so I'll post a link.

In a Law.com article, "Law School: Make It Optional?," Professor George B. Shepherd of Emory University School of Law proposes a radical change not only in the requirement (in almost all states) that lawyers must have attended law school but also in the use of a bar exam to identify those who are qualified to practice law. After outlining each of his proposals and arguments, I will analyze them. Prof. Shepherd's points are numbered and my reactions are prefaced with "JEM:"

1. Law schools are very similar in terms of the number of years required (three), the size and cost-per-student of libraries, and the retention of full-time faculty who are more expensive than part-time teachers.

JEM: Essentially, this is true. However, the size of libraries is changing because the adoption of less expensive digital resources in place of more expensive paper volumes is progressing at different speeds among the various law schools.

2. Law schools are very similar because they comply with accreditation standards established by the American Bar Association (ABA), which are followed because almost all states require lawyers to have graduated from an accredited law school.

JEM: This, too, is pretty much true. Most law schools also belong to the American Association of Law Schools (AALS), which sets even tougher requirements for membership.

3. The accreditation standards, though defended by the ABA as "necessary to train students properly and to protect the public from law schools producing incompetent lawyers" do less in protecting the public interest and more in protecting the interests of law professors, law librarians, and the lawyers serving on the ABA accreditation committee.

JEM: I would like to see empirical data supporting this claim. The accreditation standards ensure that legal education will satisfy minimum requirements geared to developing competent attorneys. For example, it is a worthy goal to require that faculty have satisfied certain requirements so that students are properly educated. If there is a problem, and I tend to think that there is, it involves the failure of accreditation standards to require that law faculty bring not only outstanding educational achievement to the classroom but also meaningful practical experience.

4. Law faculty and librarians have an incentive to extend law school to as many years as possible in order to increase the number of full-time faculty who must be hired.

JEM: Much of the need for additional faculty reflects the increased enrollments in most law schools. If the number of students increases by 20 percent, the number of faculty must increase, especially for courses that are limited in enrollment size. Although the cost of adding a faculty member is marginal in terms of salary, it is significant in terms of office space. Most law schools, absent a building expansion, face finite constraints on faculty size. Another cause of the need for more faculty is the expansion of the number and types of courses that must be offered, but most law schools address a substantial portion of these needs by hiring adjunct faculty.

5. Lawyers serving on the accreditation committees are motivated by a desire to minimize competition by curtailing the number of persons admitted to law practice each year.

JEM: Even assuming one can determine motivation, the facts suggest that if this is indeed a goal, the accreditation committees are failing miserably. During the past decade, more than several law schools have been accredited, and enrollments have increased rather than decreased. Law school enrollment tends to increase when applications increase, and applications are dependent in part on the hiring rate of law school graduates. This semester, it seems as though all the students in my basic tax class are getting interviews and call-backs by the boatload, suggesting that lawyers in practice are trying to hire more lawyers.

6. Practicing lawyers manipulate bar examination pass rates to limit competition, taking advantage of a system installed during the Great Depression to prevent an "oversupply" of new lawyers.

JEM: Bar examination pass rates have been manipulated in certain instances, such as happened some years ago when Pennsylvania lowered the minimum passing score in order to increase the number of minority lawyers passing the bar examination. Pennsylvania has since raised the minimum passing score. There is no evidence that I have seen suggesting that the passing score is adjusted after some sort of determination by practitioners of how many attorneys ought to be admitted after a particular bar examination.

7. Students should have the choice of two, three, four, five, or more years of law school.

JEM: I'm all for increasing the number of years of law school, though I think the fourth year should permit changing the third year to year-long externships in the law practice world. The fifth year would then exist in the form of matriculation in an LL.M. Program. If three years of law school are more than enough, and two years is supposedly sufficient for some lawyers, then why are enrollments in LL.M. programs, and the establishment of those programs, mushrooming? Could it be that lawyers graduate from law school only to discover that they did not learn enough, do not understand enough, were not pushed enough, and suffer from trying to do six years of bachelors', masters' and doctoral work in three years because they did not come into a J.D. program with a prerequisite LL.B, and LL.M.?

8. Students should have the option of attending law schools with no libraries or small libraries, and only part-time faculty.

JEM: I was waiting for the option of attending law schools with no classes, but that comes later. I do agree, however, that there must be ways to reduce library resource costs by taking advantage of digital technology. What has been happening is a reduction in the space need to store paper materials, with the resulting space savings being transferred to computer facility and study room areas.

9. Law school should be optional, and the lawyering profession should be open to those who have not attended law school.

JEM: I'll agree if Prof. Shepherd agrees that medical school should be optional and that he'll be the first patient of a physician trained in some other manner. I could be persuaded, though, that a person without law school education should be permitted to take a bar examination, of the type I think it ought to be, and if the person passes, excellent. I predict, however, that almost no one without a law school education could pass the practice-focused, think-on-your-feet bar examination that needs to exist.

10. The bar examination should be eliminated because it is a "relatively recent experiment that has failed."

JEM: I totally disagree. If anything, bar examinations need to be toughened. Steps have been taken to make them more useful predictors of practice success, such as the "case project" that is part of the New Jersey bar examination. To the extent that the bar examination reflects the "memorization and spit back out" approach of many law school examinations, it simply separates good memorizers from bad memorizers and disadvantages those who are great problem solvers and problem preventers so long as they have access to the information. The bar examination, as deficient as it is, has not failed, because it has kept a lot of unqualified people from heading out to make other people's problems worse.

11. The unaccredited law schools in California offer a model that could be put in place in order to provide low-tuition legal education.

JEM: The California system is tied to one of the most brutal bar examinations in the country. The pass rate for the July 2004 examination was 69.4% for those graduating from ABA-accredited law schools in California, 65.8% for those graduating from ABA-accredited law schools in other states, 28.6% for those graduating from law schools not accredited by the ABA but approved by the California State bar Committee of Bar Examiners, and 9.1% for those who graduated from unaccredited law schools. See this site for more details. With this sort of track record, how are unaccredited law schools going to "sell themselves" to prospective students? Even if a student is seeking lower tuition, can the student safely assume that his or her intellectual skills are sufficient to beat the odds, or should the student assume that there is something about the program at an unaccredited school that will reduce the student's chances of passing? I'm all for reform of legal education, but I'm not for its destruction.

12. Students seeking to do sophisticated legal work at "elite law firms" could select "expensive, full-service law schools" and students seeking to "work with individuals on simpler matters, or ... to work as lawyers in local business or government" could select "a more basic law school."

JEM: This proposal assumes that one can do "simpler" legal work with less sophisticated legal education. The twist in this notion is the idea that legal work can be simple. The past several decades has brought an explosion of legislation, administrative regulation, and judicial decisions that have complicated every area of practice. A fine example can be found in the experiences of law students who, seeking less demanding and complicated legal education for reasons other than cheaper tuition, namely, preservation of G.P.A. and minimization of course load demands, decide to "not take tax." What happens? They discover that just about every area of practice requires an understanding of tax. Ask those domestic relations lawyers whose clients were disadvantaged because the spouse's lawyer, understanding tax, transferred burned out tax shelters in the property settlement after their clients succeeded in getting the transferee spouse almost to beg for the property. It's no wonder that domestic relations lawyers are among those enrolled in the Graduate Tax Program. Or perhaps one can propose that "simpler wills" can be drafted by those with more simplistic legal education. The common misperception that will drafting for clients with assets less than the applicable federal estate tax cut-off can be done without understanding tax overlooks several important factors. First, it is possible that between the day the "simple" will is drafted and the day the client dies that the client become wealthier and subject to estate tax. Second, almost all clients, even those with modest assets, need living trusts, powers of attorney, health care powers, etc. etc. Third, the income tax issues involved in estate planning exist for all clients. Estate planning and will drafting is an area of practice for which malpractice claims are among the highest. Unfortunately, there's not much left in law that is simple. I don't like that, but if I'm designing a system for educating and admitting lawyers to practice, I must accept the reality of complexity. And the idea that government lawyers can or should do their work with a "more basic law school" education is a scary thought. Very scary.

13. Eliminating accreditation would permit competition among law schools, causing some of the new, less expensive schools to offer higher quality education.

JEM: I've tried to think of the things that a law school would do that would cause it not to qualify for accreditation but yet cause its education to be of higher quality. Remove all paper materials from a library? Sorry, but until everything from the past is digitized, that's very bad. Remove all of the "library" in the information supply sense? Even worse. hire fewer faculty and increase class size? All education experts agree that educational quality diminishes as class size increases, no matter where one is on the spectrum whether K-12, undergraduate, or graduate. By increasing faculty size, we have been able to tri-section courses that once were bi-sectioned, thus cutting class sizes in the big courses from roughly 120 or 130 to 70 to 80. Having taught classes as large as 160 and as small as 15, I can vouch for the difference in quality of education for the student, because in the large classes they are less likely to ask for, and get, individual attention. Hire only adjuncts? That's a possibility, but remember that despite finding excellent adjuncts who remain affiliated with the school for years, law schools also have had to deal with adjuncts whose client demands prevented exam grading, too many canceled or rescheduled classes, and similar problems. Although digital technology has made it easier for students to interact with an adjunct professor, they still do not get from adjuncts the same educational mentoring they can obtain from faculty whose full-time responsibility is, at least theoretically, caring for the education of law students. About the only thing I can think of that would, perhaps, increase educational quality is the assignment of more courses to faculty members, cutting down the size of the faculty, but also cutting down or eliminating faculty "scholarship." There is a serious question of whether student tuition ought to be devoted to funding "scholarship," especially when the faculty member is teaching few students and publishing theoretical pieces of questionable value and interest to the legal profession. If, underneath all of Prof. Shepherd's proposals is a plea for a teaching-oriented law school, that's something that can be accomplished without eliminating law school as a law practice prerequisite and without eliminating the bar exam. On the other hand, it is essential for law faculty to research and write at least with respect to practice-oriented issues so that they remain competent in their areas of expertise. At best, we're talking about a slight reduction in faculty size and a slight reduction in costs, surely not of the magnitude Prof. Shepherd seeks.

14. States that choose to eliminate the requirements of bar exam passage and attendance at an accredited law school could offer other pathways into the profession, such as apprenticeships.

JEM: Been there, done that. I was fortunate to know, and still know, lawyers who made their way through the preceptorship requirement that Pennsylvania had in place "back before my time." It was a relic of the pre-1920s era for which Prof. Shepherd pines. It was abandoned. Why? It didn't work. If anything failed, as Prof. Shepherd claims is the case with the bar exam, it was preceptorship. Great concept. Inadequate in practice. True, sometimes the match was excellent, and worked to the benefit of attorney and new graduate. But often it was a case of "make work" or tagging along. Today, the experience that comes closest is the judicial clerkship, and if there were some way to have every law graduate do one I could be persuaded to go that route. The advantages of clerking are so well-known and so universally acknowledged that I'll omit singing the praises. Unfortunately, the business environment that permeates today's legal practice makes it difficult, if not impossible, not only financially but logistically, to re-create an apprenticeship program. Even assuming that the mentoring attorney is of high quality, there's no guarantee that the apprentice would be getting experience relevant to what the apprentice ends up doing in practice.

15. This proposal is a return to the system that existed before the 1920s, which was characterized by easily passed bar examinations such that an Abraham Lincoln could become a lawyer by passing a 10-minute oral bar exam.

JEM: When Abraham Lincoln was alive, it probably was possible to manifest one's knowledge of the law in 10 minutes. There was no income tax. There was no environmental law. There wasn't much of domestic relations law. There was no civil rights law and not much in the way of employment law. There was no aviation law. There were few statutes, hardly any regulations, and only occasional cases. Abraham Lincoln could handle a will or a land transfer with far less effort than is required of today's lawyers, some of whom sadly think they can get away with 19th century practice skills in a 21st century world. The transfer of land involves familiarity with a wide array of legal topics. My fourth cousin several times removed Abraham Lincoln would struggle to practice in today's world unless, aha, he went to law school and studied far more than he could hanging out in a law office. And it surely would take more than a ten-minute conversation to determine if he was up to par.

16. This proposal would create a system like those used in other "responsible professions, such as business and accounting."

JEM: Prof. Shepherd, why did you use as examples two of the most maligned professions of the late 20th and early 21st century? With apologies to the capable and honest accountants and entrepreneurs that I know, the last thing I, or others, want to see, is business and accounting being held up as models for lawyers.

17. Employers would have the choice of hiring lawyers with J.D. degrees or lawyers without J.D. degrees, depending on need.

JEM: About the only thing this would do for employers would be to pay lower salaries to these hypothetical un-degreed lawyers. But employers already do this. They hire paralegals. And that's pretty much the sort of work that un-degreed lawyers would be trusted to do.

18. This proposal would generate a "large increase in the number of lawyers," of which a "large proportion ... would be minorities."

JEM: This proposition presupposes several things. It presupposes a pool of qualified individuals who do not go to law school simply because of the high tuition, in spite of numerous scholarship and financial aid programs at almost all law schools designed to assist economically disadvantaged applicants, especially minorities. I don't think that pool of applicants exists. It also presupposes that individuals lacking the requisite intellectual skills for admission to, and successful completion of a law school education, or for the successful completion of a bar examination, would somehow become good lawyers by investing time being apprenticed. It would be helpful to have proof of such an outcome. I don't see it.

19. There are not enough lawyers in the nation, and this shortage causes high fees ("$60 per hour or more"), which blocks the poor and middle class from obtaining legal services.

JEM: I tend to agree that there are not enough lawyers. I do not think $60 per hour is a high fee. I pay that much or more for my auto mechanic, my lawn cutting service, my physician, my plumber, my heating and air conditioning specialist, and I would pay that much or more for snow removal services if I went that route. Legal fees are high, not because of the per-hour rate, but because of the number of hours required for a task. If an estate plan could be put together and all the documents drafted in two hours, $120 would be a bargain. Unfortunately, living in a highly regulated, complex, and litigious society, in which every possible outcome needs to be, and probably ought to be, taken into account, the simplest of estate plan arrangements is going to cost $250 or more, unless someone is trying to get by "on the cheap" or deliver less than what is being promised. Generally, we get what we pay for.

20. Increasing the supply of lawyers would drive hourly rates "down to $25 per hour or less for simple tasks." This rate is comparable to that charged "by qualified professionals with similar training ... in other fields, such as management of small businesses, bookkeeping, tax preparation, nursing, carpentry, plumbing, physical therapy and chiropractic."

JEM: I haven't paid a plumber $25 or less for many years. I haven't paid a nurse, physical therapist, or chiropractor, but from what I see, $25 is on the very low side. Nurses, for example, are in such demand, that those acting as independent contractors can charge more, except when Medicare or health care plans artificially push down their rates. Interestingly, reference to such plans brings to mind the pre-paid legal services plans, which have been, pretty much, dismal in their success.

21. Even though it admits lawyers with degrees from unaccredited schools, "California does not appear to have higher levels of lawyer malpractice or dishonesty."

JEM: If that is true, and I haven't been able to find statistics, probably because of confidentiality issues, it's because California admits very few lawyers from unaccredited schools. See the statistics under point 11, above.

22. Many people needing legal services do not need accreditation protection, because they are sophisticated. A lawyer's status as a graduate of an accredited law school has little influence on the hiring decision of a corporate legal department, because the decision will reflect the applicants' reputations, experience, and referrals. Admittedly, accreditation requirements do help protect the poor and unsophisticated, yet at the cost of reducing the supply of lawyers and raising legal fees.

JEM: I think there are too few graduates of unaccredited law schools to permit a conclusion as to what corporate legal departments, or other legal employers, would do if there were a large supply of such graduates. My guess, based on employer reaction to factors such as G.P.A., identify of school, and other characteristics, is that employers would hold a bias in favor of accredited law schools, whether that accreditation were mandatory or, as indicated in point 27, below, optional.

23. The risk of consumer harm posed by removing the accreditation and bar exam requirements would be offset by the establishment of reputable enterprises, with H&R Block as an example of how exploitation by unscrupulous tax return prepares is eliminated by the market.

JEM: The existence of H&R Block, even if one accepts Prof. Shepherd's description of it as the be-all and end-all of tax return preparation, has not done much to remove dishonest tax return preparers from the scene. Not that H&R Block should have the responsibility for doing so, but absent a controlled gateway, there's no guarantee that the honest will drive out the dishonest. It's for this reason that Congress passed legislation regulating paid tax return prepares and the IRS continues to seek ways to enforce those rules and to advocate additional protections. Oh, and as for H&R Block, visit, for example, this site, and make up your own mind. I worked for H&R Block years ago, and I am not convinced that being an apprentice there is the best way or even a good way to learn how to do tax returns as well as they need to be done.

24. Lawyer incompetence and dishonesty should be punished "more severely" and punishment should not be limited to the most egregious violations.

JEM: I totally agree. But this can be done without eliminating the bar exam or removing accreditation of law schools.

25. Lawyers should be policed not by other lawyers but by others, perhaps detectives and attorneys hired by state governments to investigate and prosecute lawyer misconduct.

JEM: I'm a wee bit confused by the rejection of self-policing coupled with the idea of hiring attorneys to investigate lawyer misdeeds. Perhaps it has something to do with moving lawyer regulation from the lawyers who now handle it to a different government agency. If so, there are serious issues, because the courts regulate who practices before them, and so moving that task to the executive branch of a state government might raise separation of powers issues in states where the constitutions resemble the U.S. Constitution in this regard. On the other hand, if the proposal is to add non-lawyers to lawyer disciplinary boards, why not? I think it's been done in some states, and it might advance the goal of cracking down on lawyers who violate the rules.

26. States without mandatory bar examination passage requirements could set up voluntary bar examinations through which lawyers could obtain specialization certificates. Uncertified lawyers could be hired to do simple tasks.

JEM: And what would the un-certified, non-specialist lawyer do? Tax? Nah, need a certificate. Criminal law? Best not, for mistakes here can be a matter of life and death. Environmental law? Whoa, almost as complex as tax. Securities work? Ditto. Will drafting? No way, considering how prone this area is to malpractice. Admiralty? Ha. Wait. They'd do "simple tasks." What simple task? Does that mean practicing law as would be done by someone who wanted courses limited to "main rules," as I roundly criticized a few months ago? If anything, in addition to three (or an externship-enhanced four) year law school education, most lawyers need additional education and specialization. That, however, is a matter of making continuing legal education a rigorous exercise that is accompanied by tests and examinations. After all, with the removal of law school (and its examinations) and the bar exam, legal education under Prof. Shepherd's vision would become one giant CLE, which too often is characterized by attending lawyers who are reading novels, knitting, doing crossword puzzles, sleeping, and otherwise not digging in. On this I speak from personal experience both as an attendee and as a provider.

27. Law school accreditation could continue as an option for law schools not concerned with reducing costs and setting lower tuition.

JEM: And every university-affiliated law school would continue to seek accreditation. Why? In part because of university requirements and accreditation of other programs (unless Prof. Shepherd also wants to remove accreditation of other university schools, such as medical schools, which, after all, following his logic, would make sense because there are insufficient doctors, medical costs are high, and many people fail to get adequate medical care, and which would make available physicians with only "basic medical education.") And in part because of the prestige, the same motivation that has brought most law schools to membership in the AALS.

28. Those seeking to become lawyers could choose among accredited and unaccredited law schools.

JEM: Those seeking to become lawyers have that choice today. They vote with their feet. They seek admission at the accredited schools. Those who end up at the unaccredited schools have all sorts of difficulty becoming lawyers, not because the schools are per se deficient but because the students haven't quite put together what it takes to practice as a lawyer in 21st century America.

In conclusion, though Prof. Shepherd makes some good points, and I agree that student tuition ought not be funding some of the "scholarship" being generated by law schools through the efforts of those whose focus is insufficiently directed toward good teaching, I nonetheless think it would be ill-advised to urge states to follow California's example and not require attendance at an accredited law school. The nation does not need 49 more states doing what California does. And I think it would be disastrous to eliminate bar examinations as a prerequisite to admission to practice. To the contrary, there ought to be continuing bar examinations coupled with continuing legal education requirements. After all, the law changes, and I've seen enough incompetence among practitioners to fear the reduction of, rather than an increase in, education and testing. Ultimately, the effort should be to reform legal education rather than tossing it into the dust-bin of history to be replaced by antiquated practices long past their time.

The October 7, 2005 issue of the Chronicle of Higher Education (apparently taking a cue from magazines that ship their November issue in August) has a magnificent article by Henry Farrell on academic blogging. Giving his essay the catchy and affirmative title of "The Blogosphere as a Carnival of Ideas," Farrell, who is an assistant professor of political science and international affairs at George Washington University, makes a very strong case for the benefits that can accrue to the academy, faculty, and the public when the professoriate puts some energy into blogging academic topics. This is one of those essays that brings the "I wish I had written this" thought to my mind.

Rather than beginning with praise for blogging, Farrell begins with a story that illustrates one reason why blogging hasn't caught fire among academics. He describes the concerns of an untenured professor who had been blogging anonymously but who then let his identity slip. He had been trying to avoid real or imagined "invasions of his personal and professional life." Although tenured faculty have far less to put at risk if they blog, barring total implosions in which they reveal confidential information or write thoroughly inappropriate posts, untenured faculty, and tenured faculty who are seeking to change positions, face multiple disadvantages. First, writing about controversial topics can alienate senior faculty, administrators, and hiring committees. Second, time devoted to blogging probably eats away at time available for "traditional" scholarship.

After describing these impediments to blogging, Farrell concludes that it is an "enormous mistake" to "dismiss blogging as a bad idea altogether." He's right. Academic blogging provides all sorts of advantages. Faculty who blog can "debate ideas, swap views about their disciplines, and connect to a wider public." A few use blogs to air their gripes. Many, perhaps most, wrap the blog into their academic identities. As Farrell puts it so brilliantly, "For these academics, blogging isn't a hobby; it's an integral part of their scholarly identity. They may very well be the wave of the future." Blogging, he points out, are intellectually exciting. At least for now, they provide the academic with a forum for interchange free of the constraints afflicting academic endeavors in general, such as seeking grants, getting tenure, and competing for endowed chair positions. Farrell says:

Properly considered, the blogosphere represents the closest equivalent to the Republic of Letters that we have today. Academic blogs, like their 18th-century equivalent, are rife with feuds, displays of spleen, crotchets, fads, and nonsenses. As in the blogosphere more generally, there is a lot of dross. However, academic blogs also provide a carnival of ideas, a lively and exciting interchange of argument and debate that makes many scholarly conversations seem drab and desiccated in comparison. Over the next 10 years, blogs and bloglike forms of exchange are likely to transform how we think of ourselves as scholars.

He focuses on law and philosophy to illustrate the extent to which academic blogging has taken hold. Using Dan Solove's statistics, he reports that 130 law professors have active blogs. That may be a bit understated, but it amounts to about one law professor at each law school. Wow, it is still lonely out here in the law school blogosphere.

Farrell then makes one of those bold statements that I appreciate: "In both of those disciplines, those who don't either blog or read and comment on others' blogs are cutting themselves out of an increasingly important set of discussions." Why is this happening? Farrell points out that although the "depth of thought" in blog posts may not approach that of traditional scholarship, a situation that I don't think blogging necessarily requires, the process of blogging brings to the communication of ideas a timeliness that is almost entirely lost in the traditional venues of peer-reviewed or student-edited journals. If he thinks this is a problem in academic publishing generally, consider the inadequacy of "traditional scholarship" to deal with developments in the world of taxation, where's yesterday's news becomes ancient history very quickly. It takes months, if not years, for another academic to have a response published in the traditional world. With blogging, responses are much more timely, and thus easier to process. Years ago, this sort of impact was predicted for the Internet and its progeny. Having been among those who foretold this change, it is gratifying to watch its emergence.

Farrell also notes that once a person has experienced the pace of blogging, a return to the "traditional" ways of communicating is difficult. Indeed. For me, it would be similar to driving a sports car and then going back to travel on horseback. Farrell then paraphrases John Holbo of the National University of Singapore, "the difference between academic publishing and blogging is reminiscent of 'one of those Star Trek or Twilight Zone episodes where it turns out there is another species sharing the same space with us, but so sped up or slowed down in time, relatively, that contact is almost impossible.'" Wow. This is almost as good as the article I threaten to write on the tax consequences of time travel.

The last of Farrell's points that interest me involve the impact of blogging on the present hierarchy of academia. His proposition that blogging can bring more attention to an adjunct professor or independent scholar who holds an interesting viewpoint than does "ponderous stodge regurgitated by the holder of an endowed chair at an Ivy League university" is magnificent not only in its vocabulary but in its reality. The playing field of rankings and rank are turned "topsy-turvy." Farrell's acknowledgment that blogging can bring academics an opportunity to converse with the "wider public" is perhaps more significant than it initially appears. Blogging may be the machine that brings down the ivy-covered walls that permit too many academics to live in a separate reality than do most people, just as the invention of cannon obsoleted the military advantages of castle walls. As Farrell writes, "This openness can be discomfiting to those who are attached to established rankings and rituals -- but it also means that blogospheric conversations, when they're good, have a vigor and a liveliness that most academic discussion lacks......Blogging democratizes the function of public intellectual."

Farrell's concluding paragraph nicely summarizes his thesis, one to which I subscribe:

Both group blogs and the many hundreds of individual academic blogs that have been created in the last three years are pioneering something new and exciting. They're the seeds of a collective conversation, which draws together different disciplines (sometimes through vigorous argument, sometimes through friendly interaction), which doesn't reproduce traditional academic distinctions of privilege and rank, and which connects academic debates to a broader arena of public discussion. It's not entirely surprising that academic blogs have provoked some fear and hostility; they represent a serious challenge to well-established patterns of behavior in the academy. Some academics view them as an unbecoming occupation for junior (and senior) scholars; in the words of Alex Halavais of the State University of New York at Buffalo, they seem "threatening to those who are established in academia, to financial interests, and to ... well, decorum." Not exactly dignified; a little undisciplined; carnivalesque. Sometimes signal, sometimes noise. But exactly because of this, they provide a kind of space for the exuberant debate of ideas, for connecting scholarship to the outside world, which we haven't had for a long while. We should embrace them wholeheartedly.

We must remember that almost everyone who woke up the day after the printing press was invented carried on with their life thoroughly unaware of how much life had changed.

Having seemingly heaped praise on Henry Farrell, or at least having saluted his essay, I need to express some mild disagreement with several of his propositions. I'm going out on a limb, and surely cannot "prove" my position. So perhaps I'm simply questioning the seemingly absolute articulation Farrell gives to these perceptions.

First, Farrell states that blogging "some depth of thought" and that "it's difficult to state a complex thesis in the average blogpost." There is much to be said for these propositions at the moment, but I'm not ready to concede that it must be this way or must remain this way. A complex theses can be expressed in a blogpost, and if a sufficient number of academics begin doing so, the average academic blogpost will evolve to something more than a several paragraph observation. Readers of my blog know that many of my posts resemble short articles, especially when two or three addressing the same issue are combined. I'd like to think that neither I, nor other academic bloggers, are abandoning any portion of our thinking process when we blog. There are days when I invest several hours into composing a blog, reminding me of how my late colleague Dick Turkington impressed on me the need to invest time in composing an email reply to a student inquiry on a substantive topic because tossing an off-hand response, something known to happen in oral conversation with students, could backfire. After all, if others are reading a serious blog post, they will be quick with the criticism if they find error or sloppiness. The same critical eye that reads a printed journal page surely can read a blog post. Farrell, though, isn't wrong on his assertions. It is, of course, a time of transition, and transition often brings inefficiencies and discontinuities. It's just that I'd like to hold out hope that blogging need not be, or remain, constricted, and can provide a forum for thought no less deep than that found in traditional print journals.

Second, Farrell writes, "Few if any academics would want to describe their blogging as part of their academic publishing record (although they might reasonably count it toward public-service requirements). While blogging has real intellectual payoffs, it is not conventional academic writing and shouldn't be an academic's main focus if he or she wants to get tenure." There are two points here. Farrell is correct, that in today's academic world, blogging is not treated as conventional academic writing, and someone seeking tenure cannot ride a blog to the permanent faculty appointment. Somehow, though, that must change. Tenured faculty, who do not face similar risks, must take the lead and pave the way for the world of the mid-21st century when, at least in law, the idea that a third year law student stands as gate keeper to the academic careers of law faculty will have become a joyously discarded awful tradition. The day when untenured faculty can share their theses through a blog, receive comments from peers and the public, revise their thoughts, and make timely contributions to the on-going debate surrounding a particular topic will be a day when the academy surely could praise itself for having turned its currently inward-focused scholarship into a true public service. As to Farrell's other point, I offer myself as a person who describes my blogging as part of my academic publishing record. Of course, since much of my publishing consists of tax books that the academy insists on calling "monographs" for reasons I've never understood, it is easier for me to see "law scholarship" as something far wider than an article in a student-edited law journal. Not that I haven't done that sort of writing, when it was appropriate for what I had to say, but it isn't the center of my scholarship. Of course, that one of the other two bloggers on the faculty is the Dean helps. As does the fact that if Dan Solove's numbers are in the ballpark, as I think they are, Villanova has three bloggers, thrice the national average. Surely that should earn us a place in the U.S. News and World Report top 25. Just kidding. At least for the moment.

Third, Farrell predicts, " While blogging won't replace academic publishing, it builds a space for serious conversation around and between the more considered articles and monographs that we write." I truly hope he is wrong, and I suspect he wouldn't be all that upset if he were. Academic publishing must become "of the blog" and abandon its current process and form. At least in law, blogging opens the door, perhaps a back door, to the peer review that is so noticeably absent, especially when compared with other disciplines. Ironically, my writing that doesn't qualify as "scholarship" in the eyes of many of my law professor peers undergoes far more peer review, treating attorneys as peers, than does the "traditional scholarship" of my law faculty colleagues. Blogging encourages law reviews to say goodbye to paper products and move to a digital world. Not only will this move save money, a proposition that appeals to every Dean I know, but it will also resurrect for law students the opportunity to see their publishable work, denied publication because of cost constraints, made available to the public. Villanova led the way in this regard when it established the Villanova Tax Law Compendium, which for other reasons is hibernating deeply. As student-edited law journals become extinct, law students can turn their attention to their own serious academic blogging, as a few already do, rather than spend time finishing articles and cranking out footnotes for law faculty who leave too much of their writing to law students.

In addition to these three tweaks of Henry Farrell's essay, I want to add another notion that he doesn't highlight, though he gives it some attention. This is the issue of publicity. As he points out, academics like publicity, and struggle to find it, especially in the world outside of the academy. More importantly perhaps, especially in certain aspects of the operation of educational institutions, administrators delight in publicity of the right sort. Publicity helps with fund-raising. It helps with rankings. It helps with attracting quality students to enroll. No university or college administrator would turn a nose up at good publicity. My blogging, much like my other scholarship that doesn't show up in law school academic journals, reaches a far wider audience than does typical law review writing. I understand that the "quality" of the audience matters to many at least as much, if not more, than the "quantity," but if the quantity is sufficiently high, the quality will follow, if that is important. Without getting into the debate about the need to reach beyond other law faculty and judicial clerks, suffice it to say that a school's reputation, in any discipline, is enhanced when it is strengthened in all venues and not just within the bounds of a select few. In other words, administrators ought to be encouraging academic blogging, while, of course, being wise in their reaction to non-academic blogging by academic personnel.

I close with reaction to a quote from the same journal that published Henry Farrell's wonderful commentary. One of my colleagues passed me an email several weeks, in which he prefaced a quote from page A-46 of the September 2, 2005, edition of the Chronicle with the observation, "you will be startled by this." I was. The quote? "[C]omputer-based entertainment, like...blogging, [is] safer than some recreational activities...like drinking." A bit of research revealed that the quote came from an article on student computer addiction. Written by Elizabeth Farrell, who is not identified and who may or may not be related to Henry Farrell, the article points out that students who immerse themselves in fantasy on-line games struggle to cope with, and return to, reality. This is a genuine and serious problem. However, equating on-line gaming, on-line gambling, instant messaging, and "blogging," will do nothing to assist advocates of academic blogging in getting their message across to the uninformed. Worse, it will hinder that effort. The term "blogging" has become a word that needs an adjective to make it meaningful. There are all sorts of blogging, and the type of blogging that Elizabeth Farrell is trying to describe surely does not include the efforts of a student (or teacher) to publish a serious academic analysis of a topic.

Academic blogging will change academic scholarship, including legal scholarship. The number of faculty who blog is growing. A few deans and a few academics are beginning, sometimes grudgingly, to acknowledge not only the benefits of academic blogging to the institution and to the development of academic discussion, but also the nature of serious academic blogging as a form of scholarship that deserves attention, respect, and deference. I live for the day when a hiring committee, rather than asking, "has this candidate already published three articles in a traditional journal?" instead asks, "does this candidate have a blog, and what's its URL?" Maybe dean hiring committees will also make inquiries about the blogs of the applicants they are considering. "Can't be a dean without a blog" sounds good to me.

On Friday, I pointed out that my opposition to cutting the federal gasoline tax as a response to rising gasoline prices had been carried by others to the point of suggesting increases in fuel taxes, as Andy Cassel had pointed out in his Philadelphia Inquirer column that same morning. Shortly thereafter I received an email from former student, Nakul Krishnakumar, a frequent reader of this blog, and an advocate of a no-tax gasoline free market. As he pointed out, we've tossed this issue back and forth several times, though he remains "dismayed and puzzled at [my] insistence on raising the fuel tax." It's not as though I'm insisting on it to the point that I insist we do not lower fuel taxes, it's just that I think it's an idea that makes sense. Where Nakul and I disagree is on the necessity of a user fee (in this instance, wrongly called a "tax") that shifts to the users of fuel the costs that fuel usage imposes on society. At the very least, it ought to be indexed for inflation. Advocates of indexing the income tax rates and fixed dollar amounts in the Internal Revenue Code have made the case for indexing taxes, period. Yet many income tax indexing advocates oppose indexing fuel taxes.

Nakul writes, "Suffice it to say, I would prefer a more free market approach. This means we should discontinue all fuel taxes and let the market dictate when we start substituting newer fuel sources. In my humble opinion, increasing the federal fuel tax isn't going to solve our problems." To the extent a free market permits players in the market to shift costs onto those not in the market, such as what happens when a developer plunks a housing subdivision down in the middle of a rural area miles from other development, the market isn't free. Society, through government, must regulate markets, to some extent, to preclude inappropriate cost shifts.

That's why the attempts to deter price gouging, namely, setting market prices above what they would be if all parties to the transactions had comparable bargaining power, is acceptable to free-market advocates of my persuasion. A market is not free if market participants are disadvantaged by extraneous factors. Free markets do not necessarily operate fairly.

On the other hand, government regulation must be limited. It makes sense for government to represent nonparticipant third parties on whom the "free" market would otherwise impose costs against their will. It also makes sense for government, to the extent the free market fails to do so, to act in the interest of integrity and fairness. It is not, however, acceptable for government to regulate the market to the extent doing so puts the government in a dictatorial position. That is why I was amused and dismayed to read one of the responses to Andy's Friday column, published on Sunday in a "Talking Back: Readers' take on gouging" feature by the Philadelphia Inquirer. There is one letter that dismays me, and so Nakul surely is flabbergasted.

Fred Schaffhausen takes the position that oil companies are charging "excessive prices" and "without question are gouging the public." He argues that oil company mergers during the past 10 years have "created monopolies that eliminate price competition at the pumps." He claims that "All the tripe fed to the driving public by the press, TV reporters, and advertising agencies about a shortage of crude oil and refinery capacity is pure garbage. You can get all the gas you want - just pay their price at the pump." After claiming that the nation "has been built around the use of automobiles and trucks by its citizens at affordable gasoline prices," and that because "[g]asoline has become a necessity in our lifestyle[, i]t has become as essential as water and electricity." He concludes, "Therefore, it should be regulated in its price, distribution and manufacturing."

Wow.

Let's first deal with the factual issues. Yes, there have been oil company mergers, but until there is one oil company (Microsoft Oil, anyone?), there is no monopoly. Proof that price competition exists can be found in the news stories of gasoline outlets whose lower prices generate long lines at their pumps, such as this one. There are gasoline price differentials, and it takes a little bit of searching to find them, using, for example, web sites such as this statewide gasoline price comparison dataset.

And then there is the claim that reports of crude oil and refinery capacity shortages are garbage. Before the hurricanes struck, global crude oil production barely matched global demand. The two hurricanes damaged or destroyed dozens of drilling rigs, oil platforms, and underwater pipelines in the Gulf of Mexico, taking significant amounts of crude oil production off-line. The two hurricanes put about 20% of refining capacity out of action, so even if the crude supply held constant, there would be no place to take up the product that cannot be refined at damaged refineries. One good source for deep, technical, beyond the emotion analysis, is The Oil Drum, which brings together people with opinions from all over the spectrum and taps them into scientific, engineering, economic, and other specific data about the oil and gas industry that makes it bewildering that such an ignorant statement about supply could be held as a belief, let alone used as the premise for a call for government regulation. The supply of oil, and gasoline, is finite. Refining capacity is limited. Of course, if Mr. Schaffhausen can produce evidence of tankers of oil waiting offshore, or ready-to-run but empty refineries begging for crude to turn into gasoline, perhaps many in the know would be disabused of their alleged ignorance or caught in their alleged lies. In this instance, though, I think the ignorance is on the accuser's side.

I'll leave to others to ponder whether government regulation of gasoline prices should be put in the hands of FEMA. Or perhaps a new agency could be created, and Mr. Brown or some other "friend of a campaign funds donor" could be put in charge. Yikes. There are some scary ideas floating around out there.

Whether the nation has been built around the use of automobiles and trucks is, at best, debatable. Surely during the last half-century the nation has become very automobile-focused and truck-dependent. But the nation was built long before World War II, using horses, trains, and a variety of energy sources such as water power. Oil wasn't discovered and put to use until the late nineteenth century, and the automobile remained the privilege of the wealthy until the 1920s, not becoming an almost universal transportation mode until after World War II. There's nothing about the automobile, or gasoline, in the Declaration of Independence or the Constitution.

Turning to the proposal to regulate gasoline as government regulates water and electricity, there is nothing more striking than the inadequacies of the electricity and water markets. Competition, only recently introduced into some electricity markets, has been repressed, creating the sort of monopolies that Mr. Schaffhausen so strongly dislikes. After all, whether the monopoly is run by what he calls "the fat cats" in industry or by what I will call "the fat cats" in Congress and government agencies, it's still a monopoly, and far more likely to be inefficient when run by those who have no one to whom they must answer. Though I often criticize executives of large corporations for their excessive salaries and questionable decision making, I have a wee bit more faith in them than I do in a roomful of government bureaucrats. At least the former usually have experience in their industry and aren't relying solely on theory learned in some isolated and sterile environment.

Mr. Schaffhausen's argument proves too much. Yes, electricity and water are essential (although one could argue that water is far more essential than electricity). Gasoline is probably as essential as electricity. But so are clothes. So is food. So is most medical care (setting aside, for example, cosmetic surgery). So are most prescription drugs. Toilet tissue is essential, or so I'm told by someone who was caught in the woods without it and unwittingly used poison ivy leaves as a substitute. Toothpaste is essential. The list goes on and on and on. Perhaps coffee is essential, or so say some of my friends. I could be tempted to argue that sugar is essential but I know better. Should all of these items also be regulated? Goodness, once that happens, we might find some retired Soviet bureaucrats to stop by on an exchange program and help write a five-year plan. After all, government control of life's essentials worked so well in the Soviet Union it ought to be imitated here.

When Mr. Schaffhausen complains that Andy Cassel (and, I presume, those who think like he does on this issue) should "take off [the] dark glasses" and "[t]ake off [the] blinders," he suggests that there is some reality beyond what is apparent to anyone who studies the factual data. But, unfortunately, there isn't. The population of the world doubles, but the amount of crude oil does not double. United States citizens increase demand for gasoline by 20%, but refining capacity increases slightly, if at all. The percentage of the world's population dependent on fossil fuels quadruples, and new oil and gas discoveries during the year don't equal what has been used. Debating whether the last economically recoverable barrel of oil is extracted in 2008 or 2015 or 2030 is distracting, because the facts are clear. The world's population is outgrowing resources. When we're finished debating oil, we can turn to clean water, which I continue to think will be the cause of world-wide armed conflict. However difficult it is to cut back on fossil fuel usage, it is triply difficult to cut back on water usage.

The second half of the twentieth century has been dominated by an American culture that respected no boundaries, whether social, economic, political, military, or religious. It is a culture that was weaned on parental and government promises of cornucopia, dashed with politicians' seasoning of entitlement flavor. Reality was tossed to the dogs of postmodern deconstruction, and pretense ruled the day because it makes most people feel good. Out of the deep ocean come two huge storms, precursors of the ones that will churn up in their vanguard. The house on shaky foundations begins to totter, and the emperor gets a chance to look in the mirror at his clothes.

The nation, and the world, are in trouble. Deep, serious trouble. Even if no further natural disasters, terrorist activities, or other catastrophes strike, there's still far more to do than many people seem willing to undertake. Servant-leadership and stewardship, especially in the public arena, are sorely lacking. Institutions seek to protect themselves, as though they and their entrenched managers are more important than the institution's mission and responsibilities.

So I remain unconvinced that the solution is to remove taxes and user fees and let "the market" run free, if that means it runs free of integrity, free of knowing the facts, and free of common sense. The price of gasoline, with or without a change in fuel taxes, is not going to return to $1.50 a gallon. Unless, of course, someone invents a way of making gasoline from sea water. And how will that happen when the sciences attract far fewer students than in the past? Yes, trouble is swirling all about.