Wednesday, April 30, 2008

The Quick Way to Becoming a Tax Practitioner? 

A few days ago an email showed up in my inbox, with the subject "tax consultant." I opened it, and found this:
Dear Sirs,

If you have a serious tax problem and you do not know what to do?
If you do not trust irrelevant professional that the claim to be gurus?
If you are fet up with talk and talk and talk with irrelevant consultants?
If you have unreported money and you want somebody to help you represent it the right way and report it to authorities in due time?
If you like any kind of inquiries relate to above then contact us at [removed] visit our web address [removed].
Yours faithfully,

[sender's name removed]

In case your are and professional consultant read below:

I know that nobody reads emails today due to a lot of rubish going around, so do I unless:

When I found something that relates to my work in order to benefit.
If you are lawyer, accountant or business man this might me interesting you.
You can represent your selves as being the persons who can sell the following services although you might not have any knowlegde, do this simple thing. Go to our web www.successbuz.net register like an affiliate.
Make your orders your clients like to make and direct this order to us and sit back and enjoy your commission plus your local fees in the country of your consultation.
I know that nowadays global economic conditions have changed very rapidly that we have to adopt to the new global market rules .
We sell the following very specialised products and if you are in the same line of business then this can be very good business opportunity for you and your clients to LOWER YOUR LOCAL TAXES, EXPAND AND DO BUZZ WORLDWIDE 178 COUNTRIES, LEARN HOW TO FORM AN INTERNATIONAL OFFSHORE COMPANY AND BANK A/C, GET BUSINESS LICENSE ANYWHERE.....
JUST CLICK ON TO [removed] enters the magic ..........only 1 minute.

[sender's name and email address removed]
Now, let's assume that for some reason I, or a sensible tax practitioner or professional consultant, would decide to do business with a stranger who appears out of thin air with promises of, well, I'm not certain what is being promised, would we be delighted at the opportunity to rely on someone who admits that there is a lot of "rubish" going around in emails? Particularly when that stranger has sent an email that surely seems destined for the email folder called trash?

It's not just the horrific grammar and the spelling errors that alarm me. All of us, myself included, make mistakes, particularly when it comes to typographical errors. But, seriously, what conclusions should one draw from a sales pitch that claims "You can represent your selves as being the persons who can sell the following services although you might not have any knowlegde"? Wow. Maybe they could help me sell myself as a professor of biochemical engineering.

I removed the names, URLs and the email addresses because I don't want to encourage visits to the advertised site. But I did visit, chiefly out of curiosity. I can't tell if it's a scam, a joke, or a legitimate attempt to sell all sorts of software (ranging from carpet business templates to licenses and forms for doing business in 178 countries) by folks who don't do quality control analysis on their own website and email workproduct. It makes me wonder about whatever it is that's being sold.

There is no quick way to become a tax practitioner. Buying some software that is useful for doing something doesn't make the purchaser a professional in that something. The pathway to success is quality education and the investment of intellectual effort. I wonder how many people received the email and are getting ready to "sit back and enjoy [a] commission and ... local fees." Every quality tax practitioner with whom I've dealt has collected fees, but not by sitting back. They've earned them by working diligently and carefully. And they've never spammed me with an email.

Monday, April 28, 2008

Economics Lessons from a Road Trip 

This past weekend I took a short road trip. Short in terms of duration (38 hours) and in terms of distance (approximately 600 miles, which is short in comparison to most of my journeys). I learned several things.

First, it's tough to believe the nation's economy is in a recession. During the years I have been driving, there have been several certified recessions. One noticeable feature of these recessions was a distinct decrease in highway truck traffic when compared to truck traffic volume preceding the recession. This past weekend, the density of truck traffic was no less than what I have seen during the past 6 years and during the late 1990s. Those trucks are hauling goods of some sort, from one place to another. I doubt businesses are simply moving inventory. These trucks are moving items that have been sold, and parts for items that are being constructed.

Second, it's tough to believe that increases in the prices of gasoline and diesel fuel are having any sort of effect on driving or demand. Two things stand out. First, traffic volume, even at times one would expect it to be light, was heavy. A lot of people were going somewhere, or returning from somewhere. By a lot of people, I mean more vehicles than I have ever seen on I-95 late on a Saturday evening. Second, even though I was driving approximately five miles per hour above the speed limit, I was passed by most of the traffic. Many of the vehicles passed me at high rates of speed. Even truckers were moving along at a good clip. Considering that fuel economy is better at 55 mph than at 65 mph, and better at 65 mph than at 75 or 80 mph (for more, read this, for example), if the cost of gasoline and diesel fuel truly was having the harsh effects that we're told it is having, would not people slow down, and thus by cutting fuel consumption, cut total fuel cost? Perhaps what I am seeing is the impact of a have versus have-not economic separation, with the have-nots suffering from a recession and the haves zooming along oblivious and impervious to cost increases. If that is in fact the case, then perhaps most of the haves were on I-95 Saturday evening. Either that, or there are a lot more haves than I thought there might be.

Third, for the first time in several decades, I pulled into a gasoline station - something that I needed to do very infrequently on this trip thanks to the efficiencies of hybrid technology - and discovered all of the pumps with "out of regular" hand-written signs on them. Was it a spot shortage due to a delivery truck breaking down, leaving late, getting delayed, or getting lost? Was it a consequence of reduced refinery output on account of the winter-to-summer-fuel-mixture conversion? Was it a sign of times to come? Was it a miscalculation in the timing of the refill order caused by underestimating the number of vehicles that would stop for gasoline earlier in the day? With all of those vehicles, and with so many of them traveling at high-fuel-consumption-rate speeds, it very well could have been an upward tick in demand. Is it proof that even as price increases, demand does not drop as the classic theoretical supply-and-demand curve claims?

The other day, I noted a comment by someone observing how little most drivers understand about fuel consumption. The person explained how he had changed his driving habits after purchasing a vehicle with a real-time mpg display. He suggested that much fuel would be saved if every vehicle were required to have such a display. Considering that these displays can be acquired in the after-market and easily installed, the cost of such a requirement would not be severe. The benefits would be outstanding. I've had fuel consumption displays in both my current and previous vehicle, and they truly make me more aware of how driving habits, including significantly excessive speed, and dilly-dallying, reduces fuel economy. My only tweak to the suggestion is that the display should also include a "dollar equivalent" counter so that the impact of inefficient driving habits on the driver's wallet or pocketbook could readily be seen.

Borrowing from and modifying an old quotation, perhaps most drivers figure, "Top speed ahead, damn the cost." So they seem to be saying by their actions. And so it is so difficult for me to understand why they are griping about gasoline and diesel fuel price increases, and sharing how those increases have compelled them to cut back on other expenditures. But perhaps those weren't the truckers and automobile drivers I saw on the highway this weekend.

Friday, April 25, 2008

Should the Tax Law Encourage or Dampen Demand? 

The latest entry in my analysis of current economic woes, If Only It Were Prices Getting Depressed, hasn't dampened Joe Kristan's spirits. In GOOD MORNING! WE'RE STILL DOOMED!, Joe explains why he thinks the problems can be solved. The great news is that Joe is no less concerned about "the security of the nation's strategic chocolate reserve." Whew!

Joe points out that in my latest post I "correctly, if perhaps unintentionally, identified our salvation: the law of supply and demand." For Joe, that law means that as prices rise, demand will fall or, as he prefers, suppliers will "gear up to meet the demand." Here's my concern. The law of supply and demand works well for items that are not necessities, in other words, for luxury goods, and other items that have low levels of "essential utility." It may be annoying or frustrating for consumers to cut back on their purchases of diamonds, caviar, or vacations, but it's life threatening for many people to cut back on purchases of bread, milk, vegetables, heat, medicine, and similar hallmarks of survival. Worse, no matter how much someone desires to ramp up the production of a scarce commodity, it isn't going to happen if the natural supply of the commodity is fading away. The notion that any item can be supplied is a theoretical one that is subject to practical limits. No matter the demand for saber-tooth tigers, there aren't any out there to buy or to sell.

For Joe, the shortages that exist are the fault of the government. Which one, he doesn't say, but from the context I think he is referring to the one seated in Washington, D.C. He ascribes shortages of steel to protective tariffs, food shortages to government subsidies to burn food in our vehicles and on government efforts to block genetic modification of the food supply. Fuel shortages are put at the doorstep of those opposed to drilling off the Florida coast or in the Arctic, on government regulations on "what fuel can be burned where," and on government "hassles" that prevent the building of new oil refineries and nuclear power plants.

I agree that government intervention in the markets has, at times, contributed to shortages, but I think that contribution accounts for a small percentage of the supply deficit. In some instances, the intervention has been necessary to keep free markets free. If anything, there are instances where the government has failed to intervene and has permitted private cabals to generate fake shortages to drive up prices. One need read only the story of the Enron shenanigans to figure out how miserable a job elected officials have done in serving the people.

One could remove all tariffs and there still isn't enough steel, because the building booms in China, in southwest Asia, and in several other places requires more steel than can be produced. People started burning food as vehicle fuel long before the government started paying people to do what they would do otherwise. My objection to the government policy with respect to energy credits isn't that it generates shortages, but that it directs money in ways that are inefficient and somewhat ineffective to solve the problem. I'm just not into the "bribe people to change their habits with another tax code provision" approach.

I'm not convinced that genetic manipulation of the food supply solves the supply problem. Even if it did, I'm not confident that it will do so without long-term costs that aren't yet apparent. When thalidomide was introduced, it entered the market as a wonder drug. It left in shame, having deformed thousands of children. Considering what happens when private industry is left unregulated, we ought to be careful to chase the market supervisors out while the market bullies are defining "free" to their own benefit. I can't imagine trying to compel a government to supervise market places in the manner Beijing handles the production of lead-based children's toys, poisoned pet food, death-causing heparin, and other items that are designed, manufactured, and sold with no concern for long-term costs.

What is accomplished by drilling in the Arctic or near the Florida shoreline? Perhaps a year's supply of oil? Two years' worth? The world is running out of oil, and quickly. It is running out of natural gas, though not so quickly. And it will run out of coal. I do think there is a place for nuclear power, and I do think that current government regulation of the industry leaves much to be desired, but I'm very unwilling to let the free nuclear power market run unsupervised. Whether it's the incident at Three Mile Island, the catastrophe at Chernobyl, or any one of hundreds of other incidents in nuclear powerplants worldwide, the industry has demonstrated that it hasn't reached an acceptable level of "good enough" for the world to unfetter it from tight supervision. As for oil refineries, my understanding was that oil companies weren't building them because the profit margin on gasoline isn't high enough to finance the construction costs. If those costs are higher than they otherwise would be absent government regulation, then I ask, which regulations should be ditched? Hopefully not the ones that are designed to clean up the air and prevent it from returning to the miserable condition in which it was thirty years ago. Hopefully not the ones that minimize the risk of explosion and that maximize the facilities built to curtail the impact of fire and other calamity at a refinery.

Without government, I wonder what people would be eating, burning for fuel, or using in construction. My guess is that the strong would take from the weak. I doubt that things would be better than they are now. How free can a market be if there is no one policing it?

Where I do fault government is in its social and other policies that contribute to the increases in demand. Governments might exacerbate the supply problem, but it's far from the adverse impact that they have on the demand side. The message that everyone can have as much of whatever they want, which some governments and politicians use to get votes and to remain in power, is nonsense. Opposition to behavior, and to education about behavior, that can contribute to the easing of the supply problems is unwise. Government failure to insist on the teaching of economic principles, budgeting, long-term cost analysis, and similar concepts that would assist people in recognizing and solving the problems of the just-started economic storm might be one of its worst shortcomings.

This exploration of economic woes, and my suggestion that supply shortages are at the root of those problems, began as a criticism of the tax rebate as the solution. If the tax law is to be used for purposes of regulating the economy, it ought to be used to curtail demand so that demand abates to accommodate reductions in supply. The tax law as it currently exists tends to encourage demand, by providing deductions for interest, exemptions for dependents, and credits for all sorts of expenditures, only some of which have a long-term dampending effect on demand.

Joe noted that I continue to provide "unhappy forecasts for shortages of, well, everything but shortages." Ah, Joe, there are quite a few things of which, unfortunately, there are no shortages. Homicides. Car thefts. Abandoned babies. Embezzlement. Tax fraud cases. New diseases. Fortunately, though, there's also no shortage of people trying to make the world a better place, including those who are grappling with the present state of the world economy and looking for ways to help people understand what is happening. In that regard, in my attempt to turn on the spotlight, I'm helping out, by doing my best to make certain there's no shortage of words.

Wednesday, April 23, 2008

If Only It Were Prices Getting Depressed 

Several months ago I started a short flurry of blog exchanges when, in Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, I not only questioned the wisdom of churning out tax rebates to solve the nation's economic mess, but emphasized the seriousness of the debacle with these words:
This nation has been living beyond its means for far too long. Most people, though not all people, in this nation have been living beyond their means. Some people need to live beyond their means simply to survive. A family of four trying to live on income of $25,000 will be racking up some of that credit card debt that has reached a total of almost one trillion dollars. Some people live beyond their means because they simply must have what they want. A very small slice of the population does not live beyond its means because its means are so huge that the limits of time and space prohibit a person from spending that much money. So these folks join the creditor nations in making most Americans their economic vassals. And to think we concluded the middle ages ended a few centuries ago. What a surprise!

The impending shortages of critical goods and materials, including oil, clean water concrete, steel, natural gas, health care, copper, agricultural products, and similar life-essential ingredients, will only worsen the problem. An ever-increasing world population, seeking more and more quantities of these and other items, coupled with the emergence of a small creditor group and massive hordes of debtors, is a recipe for disaster. Somewhere along the way, these conditions will trigger armed conflict, pestilence and pandemics, civil disorder, and breakdowns in societal structures. No one ever promised that the Dark Ages were a one-time event.
It didn't take long for Joe Kristan, who writes the Roth & Company, P.C. Tax Update Blog, to react in horror at my going "all Malthus" on the world, in a post whose headline still makes me chuckle, GOOD MORNING! WE'RE ALL DOOMED!. I responded, in Can Tax Rebates Help Prove Malthus Wrong?, pointing out that "Once upon a time, I was an optimist. Then I became a guarded optimist. Then I began to worry. And now, I am beginning to wonder. I would like to agree with Joe, as I once would have" and concluding "I would like to be wrong. I would like Joe to be right. And he well could be, if people and governments mobilize to deal with these issues while there still is time. Dishing out tax rebates isn't going to get the job done." Well, the rebate spigot is about to open, so let's see how the economy has reacted.

We could begin with rising crude oil and gasoline prices. Only those living in some remote wilderness aren't aware of the almost daily record-setting increases in the price of crude oil and gasoline, and similar increases in the price of natural gas. The title of this article, No respite in rising price of crude oil, seems to say it all, but it doesn't. It doesn't mention gasoline. The story does. It also describes decreases in supply. In other words, the prices will continue to increase.

Or we could focus on something that poses a more immediate threat. Throughout the world, food shortages are beginning to pop up, not only in areas torn apart by war, drought, and other externalities, but in areas where food production cannot keep pace with demand. Sunday, according to Bloomberg's On the Economy, "United Nations Secretary-General Ban Ki-moon said he will form a task force to address the global food shortages and rising prices that have sparked riots in poor nations." Yes, folks, hungry people are desperate people. And their numbers are growing. They are growing not only abroad, but here at home. Part of the reason is that we're beginning to consume what could be used as food for other purposes, chiefly fuel. In The Growing Oil and Food Crisis, U.S. News and World Reports suggests that as bad as the oil and gas price problem might be, the food shortage crisis is worse, quoting the Guardian to the effect that the crisis poses "grave implications for international security, economic growth and social progress."

Don't care about oil and gasoline prices? Not affected by food prices? Perhaps steel is your thing. Recently, according to a National Railway News story reported here, the Southeastern Pennsylvania Transportation Authority was compelled to extend the delivery date for new railcars, in part because of steel shortages. The demand for steel is outpacing supply. Similar shortages have been cropping up with respect to lumber, timber, and polyvinyl chloride pipe. Prices for these items have increased at rates exceeding the inflation rate, even if not quite at the rates oil and gas prices have increased during the past several years.

Why? There simply is more demand for these items than the supply. Ultimately, there is a finite supply of oil and gasoline, and there even is a finite supply of annual crop yields. There doesn't seem to be a finite limit on demand.

But if news of food riots, thefts of fuel trucks, construction site pilferage, and other manifestations of the inadequacy of supply aren't sufficiently alarming, let's turn to what might hit home. According to a story reported throughout various news sources, such as this Charleston City Paper story, there now is a worldwide shortage of hops and barley malt. Prices for beer prices are headed up. If people are angry and upset about what they encounter at the pump, imagine what will happen when they walk into the tavern, the state store, or the wine and beer store. Although other factors, such as the devalued dollar and transportation cost increases, also factor into the price of beer, the primary cause is, once again, a shortage.

Turning from something that I don't buy to nutrition that really matters, it's only a matter of time before an extremely serious shortage sets in. What does one do when the headline reads, World chocolate shortage ahead? That's news from a year ago. Chocolate prices have been increasing. Several months ago, Hershey's announced an increase of 13 percent. The law of supply-and-demand is making itself known in every corner of the economy.

We've seen what happens when housing prices rise at a pace that outstrips the increase in individuals' incomes. Houses are abandoned, neighborhoods decline in value, former homeowners seek government assistance, creditors incur economic losses, the stock market plunges in reaction to the bad news, and people's economic well-being suffers. What happens when the prices of oil, gasoline, and food continue to climb at rates exceeding income growth? The answers that come to mind are depressing, aren't they? And don't worry, Joe Kristan, I'm not depressed. There are other things in life than the economy and fortunately, most of them are going quite well. But I do worry that for many people, the economic news and their economic experiences are getting them down.

Monday, April 21, 2008

If We're Special, Can We Ignore Taxes and User Fees? 

Sometimes when I am teaching students a complex tax provision, I try to get them to understand that some of the complexity reflects one or more attempts by the Congress to put an end to a taxpayer abuse of an existing provision. In some instances, the language added by the Congress reflects what someone with common sense would have thought already was the rule. The same can be said of IRS regulations that add dozens of paragraphs and examples to the rules through which practitioners, and students, must dig. Here's an example. There are tax advantages to a partnership in treating a liability as nonrecourse, but often the lender wants to have recourse against someone. All sorts of games are played trying to make the liability nonrecourse for tax purposes while making it recourse for credit purposes, even though the tax law makes it clear that one cannot have it both ways. It's easy to understand why someone unfamiliar with the law would seek to get the best of both worlds. It is troubling to think that those expert in the law would play the game. On more than a few occasions I've been heard to say to the class something along these lines: "Is this simply a matter of someone thinking he or she is so special that they get to go straight out of the left-turn lane?" I use that example because once upon a time, almost immediately after I obtained my driver's license and could drive alone, some clown (figuratively) did exactly that. Oh, it could have been a case of needing to rush a child to an emergency room, but it wasn't, because there was no child in the car. It wasn't a case of trying to find a way around a slow driver (because I wasn't clogging up the road, and this driver came out of nowhere while I was sitting at the red light). The smirk on the driver's face said much. The lesson I learned was that even if someone grows up physically and chronologically, if they are a spoiled brat as a child they are likely to be no less selfish as an adult, even if they learn to put a smooth gloss on their antisocial behavior.

A recent story in the Philadelphia Inquirer provides an example that demonstrates the point much more easily. It also is likely to rile up people who are not tax experts in ways that the "recourse or nonrecourse but not both" debate cannot. It also involves drivers, but this time the drivers are zipping through E-Z Pass lanes without paying. According to the story, the state of Delaware identified its "top E-Z Pass violator," a fellow who made 633 illegal drive-throughs without paying. He's not a Delaware resident, but he could end up in a Delaware prison for as long as two years. He owes $4,748 in unpaid tolls, and $30,000 in fees and penalties. As outrageous as this might seem, New Jersey has a bigger scofflaw. The New Jersey violator has 1,444 violations, and he owes $1,700 in unpaid tolls and $36,000 in administrative costs.

This isn't the first time that toll evasion has been the target of my pointed criticism. Almost four years ago, in Money: The Root of All Evil?, I relayed the story of a trucking company whose drivers collectively "zoomed through E-ZPass lanes 2,559 times without paying tolls" and who racked up more than $20,000 in unpaid bridge tolls. That effort, however, required the collaboration of several drivers, whereas the Delaware and New Jersey toll evaders managed to avoid all of those tolls all on their own.

There's no doubt that the people who are evading tolls on a regular basis aren't dealing with a momentary brain failure, or an unsuccessful attempt to hold up the transponder as they drive through the toll booth. These indeed are people who think they are special and therefore above the law. As a spokesperson for the Delaware Department of Transportation summarized the situation, this is someone whose mindset is "I'm going to violate the law, and I don't care what anyone thinks." An indication of how deliberate are their actions is the account given in the Inquirer story about one driver "who hooked his license plate to a rope inside the car," and as he went through the tool booth, would "tug the rope, causing the plate to flip up so that the cameras couldn't catch the tag number." As I was told when I was a child, being smart doesn't mean much if it's used in the wrong way. The prisons, I was told, are full of smart people and people who thought they were smart.

The total revenue lost to toll theft has not been calculated. Nationally, tolls generate about $8 billion each year, so a guess that the lost revenue is in the tens of millions, or more, isn't all that far off-track. Considering how much one violator can avoid, and multiplying that by the number of toll facilities in the nation, the burden being shifted onto honest drivers is far more than petty cash.

When I wrote Money: The Root of All Evil?, I rejected the idea that money is the root of all evil, because money is simply a tool that does not dictate the purposes to which it is put. Like a hammer, money can be used to help build housing or to cause death. I asked this about the trucker who was caught taking what appeared to be a free ride across a toll bridge:
What's this fellow's mindset (assuming that the allegations are true)? Was it curiosity or a dare to see if it was possible to avoid the toll, that ripened into an addiction? Was it greed? Was it an attempt to avoid financial problems? Was it an attitude of "me first and the rest of the world isn't as important as I am?" My guess is that it is another instance of selfishness and greed, reflecting outlooks on life that are learned somewhere and that somehow escape reformation as a person grows and develops. Under almost every moral code, it simply isn't right.
I continue to think it is a manifestation of selfishness and greed, though I think selfishness is the stronger of the two catalysts. That there aren't even more selfish people who think they are so special that they can ignore laws is a blessing, considering the examples that are set and the messages that are delivered by society, and people in highly visible positions, to the residents of the planet. Once upon a time, not so long ago, someone whose law-breaking interfered with my professional activities said to me, "I don't care about no law." I didn't think I'd succeed in creating a teaching moment by trying to get the person to understand the disadvantage they'd face if I, or anyone else, took the same approach. If for all of her life, this person was told, "You are special," would it not indeed be difficult to understand that she, too, must obey the law? Perhaps it's time to change the refrain, and when necessary, explain that "You're no more special than anyone else, and like everyone else, you will pay the toll."

Friday, April 18, 2008

Vote Trolling Creates Bad Tax Policy 

Senator John McCain, the presumptive Republican Party nominee for President, proposed that the federal government suspend the gasoline tax for the summer. His stated reason is that this would lower the price of gasoline and funnel money into the economy. What nonsense.

Though I've repeatedly tackled the various shapes under which this idea has surfaced, in A Tax Trifecta: Gas, Enforcement, and Special Interests, Gasoline and War, Up, Up, and Away, Gasoline and Free Markets, and most recently, in Raise, Don't Lower, Fuel Prices, it seems that the message just isn't getting across. Let's consider this most recent idea.

First, if the price of gasoline is reduced through a suspension of the gasoline tax, it will remove or dull the incentive for American drivers to reduce their use of gasoline. If the price stays high, drivers will think more about consolidating errands. They will re-think their decision to chauffeur their children to school because the school bus isn't good enough. They will think more about how they drive, perhaps reducing their speed so that their vehicles function in a more energy-efficient way. How much sympathy can one have for truck drivers complaining about the cost of diesel fuel when they would reduce their consumption, and cost, by 10 to 20 percent if they would slow down to a speed within 5 or 10 miles-per-hour of the posted speed limit? The same can be said for the speed demons who are zooming up and down the highway at 80 and 90 miles per hour while complaining about the cost of fuel.

Second, a reduction in the price of gasoline probably will drive up demand. That, in turn, will cause gasoline prices to climb back up to where they were before the gasoline tax was suspended. McCain's answer to the supply-and-demand problem is to eliminate increases in the Strategic Petroleum Reserve. Oh, that's just brilliant, isn't it? Let's eat the seed corn.

Third, if the gasoline tax is suspended, who gets to decide which bridges are named as winners of the "further delayed maintenance" award? Will the Senator and others who support the proposal be on the bridge when it begins to shake and tumble? McCain's answer to this problem is that the money can be recovered by cutting "wasteful spending." Why not cut the wasteful spending and let the federal budget deficit decline? That action would bolster the credit markets, the dollar, and the economy, because it would send a signal that of a nation trying to put its economic house in order.

Fourth, how does reducing the price of gasoline change the amount of money that enters the economy? I understand that the amount not spent on gasoline taxes will be spent on other items, but that doesn't increase spending. The person spending $10 on gasoline and $40 on other items is spending the same $50 as that person would spend if they spent $9 on gasoline and $41 on other items. The $1 might shift from one industry to another, but there are other and better ways to accomplish that result than to suspend the gasoline tax. Considering that the federal gasoline tax represents, at the moment, about 5 percent of the cost of the fuel, its suspension would be more symbolic than anything else.

It is unlikely that McCain's proposal will be implemented. Opposition from members of Congress and state governments is very strong. But by making the proposal, McCain plays to the crowd and offers bread and circuses to the masses. Would it not be better if he proposed some education reforms that permitted high school and college students, along with adults, access to courses that taught some basic economic principles? Yes, I know, I've harped on that topic in previous posts, with Economically Depressing? clearly describing the problem.

Come fall, when election season is running full bore, McCain will be in the interesting position of being able to say he supported something that did not happen. He will have all sorts of opportunities to claim that failure to implement the proposal is a reason for the nation's economic woes, when in fact the reason is that the nation, and many of its citizens and residents, are living beyond their means. Encouraging people to think that the deficit spending syndrome, at both the national government level and at the individual level, can continue is harmful. In the long-run it will destroy the nation and ruin the lives of individuals. Its short-term appeal as a vote trolling device ought to be recognized for what it is and soundly rejected.

Wednesday, April 16, 2008

Employee-Independent Contractor Distinction Still Eludes Some Lawyers 

Almost two weeks ago, in It's Time to Adjust Withholding, But Can You Do the Calculations?, I commented on a tax withholding calculator that was designed to help taxpayers with the very common problem of being overwithheld. That brought a response, which inspired Getting More Specific with That Withholding Question, in which I provided a step-by-step set of instructions on how to make withholding more closely approximate estimated tax liability. In doing so, I also provided an example.

It didn't take long before a sharp-eyed law student, a former tax return preparer, spotted an additional issue. She pointed out that had I factored in the Lifetime Learning Credit, for which the student in my example likely qualified, I would have concluded that even more exemptions would need to be claimed. I replied to her that her point about the credit was well taken, and that I was trying to keep the example simple. I should know better, to think that there is such a thing as a simple tax example.

The student raised another question. She pointed out that students who are treated by law firms as independent contractors rather than employees face a variety of disadvantages. The student bears the full burden of the self-employment tax, rather than the one-half share that employees bear. The Lifetime Learning Credit does not offset self-employment taxes. So, asked the student, should law firms hiring law students treat the students as independent contractors? Her conclusion was that the law firms should treat the students as employees, primarily because the firms have the right to control or direct what the students do and the method of doing so. I agree with her.

I wrote an extensive blog entry on this issue three years ago yesterday. In Law Student Tax Conundrum, I discussed the issues, explained why the law students are not independent contractors, commented on what appeared to be a diminution in the number of attorneys misclassifying their workers, and then lamented the seeming increase in the number of attorneys who were doing so. I speculated that the attorneys who are now making this incorrect decision weren't around when the IRS hauled law firms into audits to put an end to the practice.

Not that I expected my blog post to curtail the problem, but I am disappointed to learn that it continues unabated. Though large firms appear to be complying with the tax law, smaller firms are somehow flying under the IRS radar. The student who wrote to me explained that she had been offered a position by a law firm, which intended to treat her as an independent contractor if she accepted. What I will call the professional attributes of the lawyers in the firm cause me to wonder how they could end up so easily violating tax law principles. The student polled her classmates, but few seemed to know whether they were being treated one way or another. That's scary. One would think that a law student entering employment would know enough to ask the right questions, not only with respect to tax law, but with respect to the other issues that need to be addressed. My concerns about how law students should file their tax returns when a Form 1099 rather than a Form W-2 is issued become quite moot when it turns out that most of them don't even know that it's a problem.

One of the reasons I teach is because I truly believe only quality education can overcome the ignorance that underlies so many of the world's problems. So I find it particularly distressing when ignorance takes the upper hand where one would expect law school education to have disempowered it.

Monday, April 14, 2008

Bringing Economic Awareness Into the Analysis of Law School Education 

My post of several weeks ago, Why Law School Education Doesn't Mesh with Law Practice, brought another response from a practicing lawyer, one not unlike the response I shared two weeks ago in Bringing Practical Awareness Into Law School Education. The more recent respondent writes:
20 years out now. Have gone from being partner at top ten firm to sole practice. Have seen a lot. Law school is actually perfect for the top students who go on to big firms. Their duties are simple -- to digest and produce papers. Digging for facts isn't necessarily required -- and certainly there is very little client contact.

I was on a case with 6 million documents in early 90's. Many were in Dutch and Arabic. The small firm I was with then had big Phila firm as co counsel to help. (Huge New York firm was on the other side.) The other side denied everything, so we had to assemble a story from documents. That required creativity and pattern recognition. There was little of that from either big firm -- BUT they were very very good at rote tasks.

Flash forward. Two weeks ago (and 15 or so years later.) I am in an arbitration hearing. On the other side, very big firm. Again, exactly the same experience.

The intellect required to do well is school is academically gifted. The intellect required to do well in law practice may be the same -- after all, many of our judges have the same intellect. BUT the intellect required to serve clients well is usually one of creativity, etc. Academic intellect is important -- one has to advise clients as to the law, but before arriving at that point one has to understand the issues, which can only be done by properly understanding the facts in the first place.

Finally, don't forget big firms use the pyramid structure as a revenue generation mechanism. That is associates make money for everyone else, under the inefficiency of the billable hour. Clients are comfortable with that approach I guess -- but that approach also rewards the kind of tendentious academic product that law school is teaching -- in other words if your follow the money (!) law schools are producing precisely the kind of student for big corporate big money firms and their clients want...
I hadn't quite thought about it this way. It explains, perhaps, why a hiring partner from a big law firm recently commented to a group of law professors, including myself, that they are more interested in high grades rather than specific courses when they examine a transcript. The catch is that students who know the focus is on the grade point average will slide themselves into courses that pose the least resistance to the effort to attain an A, rather than into courses that are relevant to practice. It doesn't take long for big law firms to cull the ranks of the associates, as higher-priced third and fourth year employees make way for the slightly less expensive graduates, because one can escape the demanding teachers, the demanding courses, the demanding partners, and the demanding clients for only so long. In some respects, it's not unlike the NFL, where less expensive rookies replace third and fourth year veterans who haven't attained superstar status. Rookies might find ways to pad their combine and workout numbers, but there's nothing more revealing than game time.

So, it was a most pleasant experience when, midway through the email exchange with the more recent respondent, a former student emailed me. The subject of the email? "Why I am glad that I sat in Prof. Maule Fed Tax Class." I would not use the verb "sat" in the case of this student. She worked. She struggled and we talked. We talked about learning and methods of developing one's intellect. We talked about law practice and clients. We talked about identifying questions to pose to clients and partners. We talked about the similarity of legal thinking to the intellectual processes used in other disciplines. The email did not surprise me, because this student had an intellectual epiphany while facing up to the rigors of the course in which she was enrolled. She was willing to do the work, and chose not to object to its intensity or focus but decided instead to let her thinking processes be reshaped. When I tell my students that the best evaluations of my teaching are those that come from graduates, it's not so much to belittle the students' present evaluation skills as it is to help them appreciate that they're really not in a position yet to decide if the course enhanced or impeded the development of their professional law practice careers.

Friday, April 11, 2008

Getting More Specific with That Withholding Question 

My post last week, It's Time to Adjust Withholding, But Can You Do the Calculations?, generated some replies. One respondent, a law student who will be working this summer and facing the prospect of having too much federal income tax withheld from her pay, noted that she had been "trying to use every calculator and IRS tax publication available to figure out how many allowances to claim in order to have the correct amount withheld from my paycheck." Not surprisingly, she discovered what I learned years ago, to get it right, one must do it for one's self. She requested that if I 'know of a way for me to do the calculations (even if they are mind-numbing)," she would appreciate the education. She describes the problem as "seemingly common" and in fact it is widespread.

The computations aren't quite mind-numbing --- I could introduce her to section 751(b) or the computation of the section 743 optional basis adjustment --- but they are a bit tedious. I will share my response to her, somewhat revised:
1. Do a pro forma tax return for 2008. In other words, figure out what your tax liability will be on your summer earnings (and other income, if any).

2. Determine whether you are paid weekly, bi-weekly, monthly, etc.

3. From that determination, compute how many paychecks you expect.

4. Divide the tax liability by the number of paychecks to get the "need to withhold per paycheck" amount.

5. Divide the expected earnings by the number of paychecks to get the "wages per paycheck" amount.

6. Find the IRS publication that has the employer withholding tables in it. The current one appears to be this one.

7. Get to the correct chart (weekly, bi-weekly, etc) that reflects your filing status. These begin on page 28.

8. For each possible number of withholding allowances, find the line that contains the appropriate "wages per paycheck" amount from step 5, and compute the withholding that would occur if that number of allowances were claimed.

9. Find the withholding that is closest to the "need to withhold per paycheck" amount computed in step 4. Identify how many withholding allowances correlates with that amount.

Note that if you get 10 or more exemptions, the employer might balk because the claiming of that many exemptions has to be reported to the IRS so that they can spot tax protesters who claim 10, 20, 30, 100, etc.
As an example, assume a law student obtains a job paying $2,000 per week for 10 weeks during the summer. If the student claims zero exemptions and the employer withholds based on $2,000 of wages per week, the employer will withhold $433.71 per week ($2,000 minus $451.04, or $1,548.96, multiplied by .28). That is a total of $4,333.71.

The student, however, will have gross income of $20,000, a standard deduction of $5,450, and a personal exemption of $3,500. The taxable income will be $11,050. The tax will be $1,256.25 ($802.50 plus 453.75 (15% of $3,025 ($11,050 minus $8,025))). The student will be overwithheld by $3,077.47 ($4,333.71 minus $1,256.24). What the student needs is withholding of roughly $125.63 per paycheck. Claiming one exemption won't work. It would generate weekly withholding of $414.86 ($2,000 minus $518.35, or $1,481.65, multiplied by .28). Claiming 9 exemptions gets the student closer, by generating a weekly withholding of $268.25 ($2,000 minus $926.99, or $1,073.01, multiplied by .25).

The student does not qualify for exemption from withholding, nor would the student want to take that position, because the student will have a tax liability for 2008. Instead, the student needs to claim more exemptions. Each exemption over 9 has a value of $67.31 and thus reduces withholding by $16.83. To get from $268.25 down to $125.63, the withholding needs to be decreased an additional $142.62, which requires 8 additional exemptions ($142.62 divided by $16.83). So the student would need to claim 17 exemptions. Unfortunately, that makes the student appear to be a tax protester!

The problem is that the withholding tables assume that the student will earn $2,000 each week for the entire year, for a total salary of $104,000. Thus, the withholding is based on the rates applicable to a taxpayer in the tax bracket correlating to income of that level, whereas the student will end up in a lower tax bracket. This scenario plays out repeatedly, as corroborated by the number of students who approach me after I mention the issue in the basic tax class. By focusing their attention on the interest-free loan they are making to the government at a time when they are strapped for cash, I succeed, at least to some extent, in elevating their awareness about the relevance of taxation no matter the area of law in which they wish to practice.

It isn't a problem limited to law students. It affects a variety of people, chiefly those who work for part of the year or who experience an significant increase in income part of the way through a year. They can let things play out as the withholding tables dictate. Or they can go through the arithmetic gymnastics that I have described. Or, I suppose, they can pay or persuade someone to perform the gymnastics for them.

Wednesday, April 09, 2008

Does Borrow-and-Spend Hide Economic Rot? 

There's something reassuring, no matter how confident I am about the positions I take when I post, to discover that I'm not alone in taking those positions. On Sunday, Peter Morici, a professor of economics at the University of Maryland, published an opinion piece in the Philadelphia Inquirer, that nicely articulates some of the same concerns I've raised during the past several years.

The title of his article almost says it all: "Americans must live within their means." It's a warning that reflects the same sentiment I expressed when I wrote, a few weeks ago, that Peacetime Tax Policy While Waging War = Economic Mess.

Morici explains that falling housing prices and questionable mortgages in effect are symptoms and not the problem. At the root of the economic mess is energy inefficiency, the trade deficit, and overspending. The $700 billion annual trade deficit exists mostly because of imports of oil and imports from China. The outflow of dollars not only is causing the value of the dollar to drop when measured against other currencies, but is turning this nation into a debtor nation. In September 2004, I shared this thought: "My guess is that China will own the nation."

Reading Morici's explanation, it becomes apparent that during the past decade, the economy has become one huge national Ponzi scheme. To get people to spend money on consumer goods and other products, lenders, facilitated by tax laws that favor borrowing, encouraged people to take out home equity loans, to purchase homes that cost more than people really could afford, and to rack up credit card debt with teaser offers. Where do these lenders obtain the money they lend? They borrow from China, from oil-producing nations and their wealthy citizens, and from other overseas investors. As credit card debt mounted, debtors refinanced their homes. They ran up more debt to pay off existing debt. A Ponzi-like circle spun and spun until it crashed. Suddenly, the people lending to the lenders who make loans to American citizens cut off the money supply. The risk had become too great. Even the U.S. government, needing money to finance the tax rebates, needs to borrow from these same investors, as I pointed out recently in Can a Tax Rebate Band-Aid Stop the Economic Bleeding? The tax rebates, in this sense, become loans made by taxpayers to themselves, or, in some respects, loans made by taxpayers of the future to taxpayers of the present. Several years ago, when analyzing tax reform proposals in As I Expected, Tax Deform(ity), I noted, with respect to the particular proposals designed to encourage "Strengthening the Competitiveness of the United States in the Global Marketplace," that if the goal was to reduce the amount of stuff purchased from China, the proposal fell short. While the Congress fiddles, the flood of imported products and the outflow of dollars accelerated.

Morici thinks that the price of gasoline must double in order to compel conservation. I agree, as I have often noted in my several posts supporting increases, rather than decreases, in gasoline taxes, as I did most recently in The Return of the Federal Gasoline Tax Increase Proposal Would it work? I wonder. I continue to see energy inefficient vehicles zoom by me on the highway -- and I'm far from a slowpoke -- burning up fuel at rates far higher than they would be if they slowed down to even 10 miles an hour over the speed limit. Are these drivers impervious to price increases? Ignorant of why their gasoline bills could be lower? Engaged in some sort of pre-catastrophe frenzy?

Morici suggests something that I haven't previously addressed. He thinks that the federal government should impose a tax on conversions between the dollar and the yuan equal to the subsidy China provides for its currency, and to do so until China stops manipulating currency markets. Who pays the tax? I suppose it would be paid by the businesses that are dealing with China. If they pass the tax on to the American consumer, would that reduce the purchase of items from China? Not if people have the same "price is no object" mentality demonstrated by the people driving on the highways at speeds near 85 and 90 miles per hour. And certainly not with respect to items that are necessities and that are manufactured only in China. Some segments of American industry have been so devastated by the loss of jobs and the outsourcing of business that they could not retool even if the economics of the situation made that an attractive option.

Though not all of the economic mess can be attributed to the tax policies of the past decade, surely a significant part of the problem is attributable to some very bad decision making. The momentary glimmer of economic paradise that supposedly "proves" the wisdom of cutting taxes when government expenditures are increasing has been replaced by the sobering consequences of short-term vision and long-term blindness. Morici doesn't quite say it this way, but the clean-up of this mess is going to be painful. I'm not happy about that, but there is some consolation in knowing I'm not the only one who recognizes the economic rot underneath the borrow-and-spend facade of the past decade.

Monday, April 07, 2008

Preventing Foreclosure through the Tax Law? Not This Time 

Last week, Senators Dodd and Shelby introduced The Foreclosure Prevention Act of 2008, described by them as a bipartisan agreement to help address the nation's housing crisis. Though the bill is an effort to address a serious problem, it is misnamed. It ought to be called The Foreclosure Mess Cleanup Act of 2008. Nothing in the bill prevents foreclosures. The provisions address the treatment of people who are going through or who have gone through foreclosure. To their credit, Dodd and Shelby don't claim to have created the be-all, end-all solution, but describe their package as "not perfect" and as not solving all of the problems. I applaud their efforts. But I think there is more that can be done, and in some respects, those things should be replacements for some of the proposals in the bill.

For example, making more people eligible for FHA mortgages doesn't prevent foreclosures. It might, as the bill's authors contend, make it easier for people to purchase homes. But isn't the current crisis fueled in part by lending practices that were touted as making it easier for people to buy homes? The bill's authors note that FHA financing requires down payments of 3.5%. The risk of foreclosure decreases as down payments increase, so the better approach for a foreclosure prevention act would be to require higher down payment percentages.

Another provision provides funds to counsel people who are facing foreclosure. The goal is help homeowners on the brink of foreclosure to explore ways to stay in their homes. Many lenders do hold off until there is no recourse but foreclosure. Eventually, unless some unexpected turn-around occurs, such as a substantial increase in income, foreclosure becomes the final chapter in the person's home ownership story. At best, but for a few situations, these other options delay foreclosure, but they do not prevent it. Almost all people facing foreclosure are in that predicament because their mortgage payments are too high for their income. The solution is to find ways to help people deal with two significant income-related problems. First, real income hasn't grown for most people during the past decade, while home prices, prior to the recent sag, increased at rates much higher than the rates at which nominal income rose. Second, tax burdens on the lower and middle classes remain high, both in terms of actual taxes and indirect taxes passed through by businesses, because the income tax distributional structure is skewed in favor of investors and high-income taxpayers.

The bill also increases the disclosure that some mortgage lenders, under some circumstances, must make to loan applicants. There is something I probably don't understand, because what the bill requires is what I thought already was required. The bill requires disclosure of maximum monthly payments possible under the loan. Is that not currently being done? Is it a matter of noncompliance with lending regulations? Of course, some loans are tied to rates that in theory can reach infinity. I'm not sure what impact the disclosure would have on the borrowers. The problem is that many people purchased beyond their means, encouraged by loan brokers who, having an opportunity to make up-front money, played on these people's desire to own a home. So they lent money to people with no assets, no income, no job, and I guess no common or financial sense. Would it not be better to insert a provision that penalizes loan brokers and loan merchants who induce people to take out loans they cannot afford? What about a provision to fund high schools so they can teach their students some basic information about home buying, so that they are much less likely to be bamboozled by loan merchants with more concern about their up-front fees than the economic well-being of their customers?

There is one provision that will prevent some foreclosures. It extends the length of time that a lender must wait before initiating foreclosure proceedings if the debtor is a member of the military. The lender must wait until a specified number of months after the debtor returns from military service. Interestingly, this provision also requires the Department of Defense to counsel members of the military with respect to financial difficulties. Why not require financial education for all Americans?

Of course, there are tax provisions. They saved the best for last. There are four of them.

The first tax provision would provide a "standard deduction" for $500 of property taxes ($1,000 on a joint return) for people who do not itemize deductions. Let's think about this. People who pay real property taxes usually pay mortgage interest. Those two items alone, to say nothing of state sales or income taxes, puts these people in a position to itemize deductions. So who would not be in that situation? People who don't pay mortgage interest because they own their home outright, usually after having paid off the mortgage. Those folks aren't facing foreclosure by lenders because they don't owe money on a loan secured by a mortgage. A few face seizure by local governments on account of non-payment of real estate taxes, but a $500 standard deduction isn't going to help them. If they're not itemizing, the odds are the $500 will save them $50 to $75 in taxes. So here's a provision that adds complexity without doing much of anything other than provide campaign trail sound bites. The solution, which would open the door to tax reform and thus meet much resistance in the Congress, is to abolish non-business deductions and make the personal exemption a sensible amount as it was when it was first enacted, namely, the cost of living (including rent, mortgage payments, whatever) for a person. But the bottom line is that this proposed standard deduction plan does absolutely nothing to prevent foreclosure, nor does it do anything to deal with people who have suffered through foreclosure and probably aren't paying property taxes.

The second tax provision would increase the limit on tax-exempt private activity bond authority. The goal is to provide funds for refinancing failed subprime loans, for first-time homebuyers, and for multifamily rental housing. Yes, this provision would help clean up the mess. But it wouldn't prevent foreclosures.

The third tax provision would permit corporations to carry net operating losses back four years rather than two. This benefits corporations. It does nothing to prevent foreclosures.

The fourth tax provision is a tax credit, yes, another tax credit, to encourage the purchase of homes in foreclosure. The rationale is that foreclosure pushes down the value of nearby homes, so encouraging purchases of homes in foreclosure will prevent that decline. There's no need for a tax credit, though, because there are people buying up foreclosure properties at bargain basement prices, knowing that because they can afford to wait, within a few years they will recoup far more than what they invested. The list of people who have made money this way in previous recessions is long. A tax credit to encourage people to purchase homes in foreclosure is like a tax credit to encourage people to purchase and eat or drink sugar, chocolate, coffee, alcohol, and ice cream.

So with one exception, none of the provisions prevent foreclosure. And none of the tax provisions accomplish that goal. Nor do the tax provisions do much to fix the problem. Allowing a loss deduction for the people who realize losses on the foreclosure, though admittedly they're not in the majority, would be of more value to those people than the provisions in the bill.

Friday, April 04, 2008

It's Time to Adjust Withholding, But Can You Do the Calculations? 

It is no secret that many taxpayers have too much federal income tax withheld from their wages. Though some people find some sort of psychological boost from getting a refund in early spring, as though it were a serendipitous gift, the reality is much less comforting. The refund is the person's money, taken out over the course of a year and then repaid without interest. Others note that over-withholding is an effective way of being forced to save money, but there are other, better ways to save, including withholding for retirement and similar benefit plans. Though the IRS supposedly adjusted the withholding tables to reduce overwithholding, there is no doubt that overwithholding exists. It's not all the fault of the tables. Unless the employee claims additional withholding exemptions to account for itemized deductions, overwithholding will occur.

On the other hand, there are taxpayers who discover that they owe additional taxes. In some instances, they are subject to a penalty for underpayment of estimated taxes. Though it is called a penalty, the charge is essentially interest. Isn't it troubling that Congress chooses to charge interest when taxes are underpaid but not to pay interest when taxes are overwithheld?

Trying to claim the appropriate number of withholding exemptions so that the tax liability for the year is roughly the amount of federal income taxes that have been withheld is an exercise for those who delight in dancing with numbers. One has to work backwards, and can do so only with access to the withholding tables used by employers to determine the amount of the withholding. It is a particularly daunting exercise for students who are employed for the summer but whose employers withhold at rates based on the assumption that the student will be employed all year. Even bright law students, and even some of those who are "into" tax, begin to lapse into a comatose state when I describe the process of analytical computation in which they must engage.

The other day I received an email from someone at Kiplinger, inviting me to visit a new "Withholding Calculator" tool now on its website. If it works, it certainly does away with the agonies and frustrations of trying to do the computation with pencil and paper. Yes, I know spreadsheets exist, but how many taxpayers are about to sit down and program a spreadsheet to accomplish this task?

Unfortunately, the Kiplinger calculator uses a short-hand method to compute the number of additional withholding allowances that should be claimed. After obtaining filing status, 2007 taxable income, and the amount of the 2007 refund, it then determines if the refund is large enough, considering the amount of taxable income, to justify claiming additional withholding allowances. If the taxpayer expects an increase in 2008 itemized deductions, or the arrival of another child who would generate a dependency exemption, the calculator does not accommodate those changes. The student who works during the summer will not find in the calculator a means of figuring out how many withholding exemptions to claim so that excessive taxes are not withheld from summer pay. The calculator does not take into account estimated tax payments, which are the preferred means of paying in taxes during the year if the taxpayer's income fluctuates from week to week or month to month.

As to the user interface, the calculator ought to ask for the three items of information on one web page. As presently designed, it requires the user to enter one item of information, click on a "Submit" button, enter another item of information, click again, and so on. That is annoying, and it adds avoidable traffic to the internet. It appears that each click brings another chance for more ads to appear on the page, but I'm sure there's a way of putting all of the ads on one entry page.

With a few tweaks, the calculator could be modified to provide useful assistance to people planning to work for only 10 or 15 weeks. A few other adjustments would permit the calculator to take into account income, deduction, and exemption changes expected in 2008. Adapting the calculator for estimated tax payments would be a bit more challenging. With all of these caveats, there are some taxpayers who will find the calculator in its present instance to be useful. They ought to use it, because many of them are paying in more taxes throughout the year than they need to be paying.

Wednesday, April 02, 2008

A State Rebate Bandwagon? 

In many states, the federal income tax law is a role model for the state income tax law. As horrible as that sounds, it has its benefits, because the alternative, state income tax systems using totally different concepts and principles, would be even worse.

So the question is whether states are going to jump on an income tax rebate bandwagon. My feeble attempt to research the question turned up very little other than the stories that triggered the question. The stories involve a now-dead proposal for a Pennsylvania income tax rebate to stimulate the Pennsylvania economy.

The Pennsylvania rebate tale began in early February when Pennsylvania's Governor Rendell proposed a rebate for poor families. According to this story, the plan would have sent as much as $400 to approximately 475,000 low-income families. Unlike the federal rebate, which is funded by increasing the deficit and thus borrowing from foreign nations and investors, the Pennsylvania rebate would have come out of a general fund surplus that is expected to be more than three times the $130 million cost of the rebate proposal.

Opposition to the rebate, however, popped up immediately. One concern was the wisdom of relying on a projected surplus at a time when economic uncertainties make the size, and even existence, of that surplus far from guaranteed. Other alternatives to stimulating the state economy, such as reducing the income tax rate, were floated.

By late March, the Governor dropped his rebate proposal. According to this report, the Governor concluded that there was insufficient support in the legislature for the idea. Neither political party warmed to the concept.

Although Rendell's argument in support of his proposal appears sound, the notion that rebates will fix what is wrong with the economy, on either the national or state level, is well-intentioned but misguided. As I pointed out in Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, the problem is much deeper than one that would be resolved through one-time rebates of a few hundred dollars. Rendell's argument, that low-income families are most affected by inflation, particularly with respect to energy costs, and are more likely to spend the rebates to purchase food and other items, proves that these families need assistance, but doesn't prove that a state income tax rebate is most suitable for the task.

Though there are other states with tax rebates, for such things as energy conservation expenditures, those provisions are not designed to provide economic stimulus. Because they were enacted before, and not in connection with, the current federal income tax rebate program, they cannot be treated as participants in an economic stimulus rebate bandwagon. If there is a state that has imitated, to a greater or lesser extent, the federal rebate, it would be useful to know.

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