MauledAgain

Tax ignorance weakens the civic bonds that constitute the fabric of our nation's democratic and constitutional principles. In an ideal world, all citizens would understand the tax law, including not only the technical application of its substantive and procedural provisions, but also the policies that shape its existence. Because our world is far from ideal, it is asking too much for all citizens to understand the tax law, but it surely isn't asking too much for all public officials whose hands and votes touch the tax law to understand it. Yet an incident last week demonstrates why it has been so easy for special interest groups and people with the power of money to hijack the tax law.

Last week, Congress passed and sent to the president a farm bill that is packed full of goodies for constituents whose votes are sought by the legislators voting for the bill. Though the president has stated his intention to veto the legislation, it passed by such wide margins that a veto override is very likely.

Under current law, farmers can receive subsidies no matter their income. The administration proposed limiting subsidies to farmers with adjusted gross incomes of $200,000 but the Congress rejected that proposal. Eventually the administration modified its position and indicated it could live with a limit of $500,000 in adjusted gross income. The legislation that was enacted disqualifies individuals with more than $750,000 of adjusted gross income from farming, married farmers with more than $1,500,000 in adjusted gross income from farming, individuals with more than $500,000 in adjusted gross income from sources other than farming, and married individuals with more than $1,000,000 in adjusted gross income from sources other than farming. In other words, there will continue to be people with incomes higher than most Americans' incomes getting subsidies from the government.

Earlier last week, mainstream media picked up on the language of the bill and began to question the sense of handing out tax dollars to farmers with six and seven figure incomes. According to Plowing into the farm bill, a Denver Post article that came my way thanks to Paul Caron's TaxProf blog, one member of Congress defended the legislation in a very disappointing manner:

Sen. Ken Salazar, a Denver Democrat who supports the bill, disputed the idea that it pays rich farmers. The bill allows payments to farmers with adjusted gross incomes of $750,000 or less.

That number doesn't take into account deductions for the cost of running a farm, Salazar said.

"A farmer with an adjusted gross income of $750,000 might be losing his shirt" after paying for fuel, a new tractor and other expenses, Salazar said.

Putting it simply, the Senator is flat-out wrong. The concept of adjusted gross income is so foundational in the tax law, and so easy to understand, that it is one of the benchmarks that I build into my exams to determine whether a student understands tax law well enough to earn a passing grade. Adjusted gross income DOES take into account the cost of running a farm, because farm expenses are business expenses deductible in computing adjusted gross income.

According to his biography, Senator Salazar is a lawyer. He has a law degree from an elite American law school. And he doesn't understand adjusted gross income? I don't know who's to blame, and I'm not sure it matters. Was he permitted to graduate without learning something that pervades all areas of law? Did he skip classes? Did someone do the unthinkable and teach the course without referring to adjusted gross income? According to the same biography, the senator has been a farmer. I'm going to guess he didn't do his own tax returns, or, if he did, he didn't pay close attention. Did someone on the Senator's staff misrepresent the bill? Did some special interest group or groups take advantage of the situation and circulate misinformation about what adjusted gross income represents? Considering that adjusted gross income is used in hundreds of legislative provisions each year to measure qualification for one or another benefit, it is not some obscure concept that pops onto the legislative stage every once in a while. No matter, when someone is elected to Congress, that person has an obligation to understand at least the basic principles applicable to the legislation on which they vote. We, the citizens, deserve no less.

In an ideal world, the tax law would be much less complicated than it is. But what tripped up the Senator isn't one of those obtuse, overly complex provisions that infects the Internal Revenue Code. I doubt I would have much sympathy even if it were one of those horrific provisions that did in a politician, because they're the folks who have allowed those terribly drafted provisions to become law. I'm sure my outlook is affected by the fact I'm currently writing about tax credits, and the new ones that have come into the Code during the past five years include some of the most abysmal drafting I've ever seen. There are terms that are not defined, and definitions for terms that are not used. Calling it sloppy would be too kind.

Someone on the ABA-TAX listserv called the entire situation outrageous. I am going to repeat my reply:

What should be outrageous isn't that this is being proposed.

What's outrageous is that this is just yet another in a very long line of subsidies to the wealthy, either direct (as this one is) or indirectly (through "tax expenditures").

Perhaps the difference is that this one is (a) getting attention, (b) isn't as well disguised behind smoke and mirrors as are most of the others, (c) was defended in a totally ignorant way (literally), and (d) is sufficiently understood by the mainstream media to get attention.

To leave Americans with the impression that the subsidies are going to poor farmers, when in fact farmers with six and seven digit incomes are getting them, simply is wrong. Either the Senator knew what he was saying or he spoke in ignorance. Neither explanation does anything to restore public trust in the American political process. Is it any wonder that calling for change attracts voters?

The tough question is the one I posed the other day:

Ultimately, a simpler tax system requires a less tainted political system. That's a choice for citizens to make, but will they ever get the opportunity?

Indeed, whether we will get the opportunity remains to be seen, but there's no question America wants that opportunity.

Last week, during a conversation among a group of people at the gym about taxes, someone turned to me and said, "OK, expert, wouldn't the flat tax solve all these problems?" My answer came in a sentence as short as I can make one. "No," I replied. "Why not?" was the rejoinder.

Why does a flat tax not make tax simple? A flat tax, that is, a tax imposed at a flat rate rather than multiple rates, makes the computation of tax liability easier, but that computation contributes little to the complexity of the tax law because once taxable income has been computed, the tax liability can be found in a table or generated by tax software. It is the computation of taxable income that is complicated, and playing with the tax rates does nothing to alleviate that complexity. A flat tax does not make any simpler the complex rules that determine what receipts are included in gross income, and thus taxed, and what receipts are not. A flat tax does not reduce the complexity in the numerous provisions that allow deductions and that impose limitations on otherwise allowable deductions. A flat tax does nothing about the impact of money's time value, which generally encourages attempts to delay income and accelerate deductions. All of the statutory, regulatory, administrative, and similar provisions, and all of the case law, dealing with these timing issues would be no less voluminous nor any less complicated.

The phrase "flat tax" makes for a nice soundbite. It serves well those politicians who seek votes by misrepresenting the impact of a flat tax, trying to sell it as a solution to a genuine problem when, in fact, it is at best the equivalent of using touch-up paint on an automobile that has been totaled in a wreck. What goes unsaid is what some mean by the phrase "flat tax," namely, a flat rate tax on wage and salary income. Yes, that would be a much simpler system, though not without complications. Think of the game by which investment bankers use partnerships to convert compensation for personal services into capital gains taxed at special lower rates. Worse, it would shift the burden of taxation even more heavily onto workers and give investors a free pass. The fact that something is simpler is insufficient to make it the chosen path to simplification. Have you seen the joke Form 1040 with two lines? The first one asks what the person received. The second one instructs the person to "send it in." Simple? Yes. Good policy? No.

The federal income tax can be simplified greatly without shifting the tax burden solely onto workers. All that needs to be done is to remove the special interest giveaways and the government grant programs that are hidden in the tax code but should be restructured as expenditures administered by the appropriate federal agency, where the nation can see them for what they are. Ultimately, a simpler tax system requires a less tainted political system. That's a choice for citizens to make, but will they ever get the opportunity?

In Why I Don't Write, Geoffrey Rapp explores the decision by some law professors to stay away from writing and to focus on the teaching and service components of the three principal components of law faculty hiring and tenure decision making. Geoffrey wrote his blog piece partly in response to the Why I Write blog posting that Paul Horwitz shared a few years ago.

Geoffrey notes that law faculty write all sorts of things, though he doesn't mention books or, to appease those who consider Tax Management portfolios something other than books, monographs. But his explanation on this point makes sense. Writing, particularly so-called scholarly writing, but often other legal writing, is rewarded. Deans approve research assistance for writing projects. Merit compensation committees take writing into account, though the pecuniary reward is far more symbolic than economically powerful. Writing brings attention to the author's law school, which affects rankings, and which accordingly makes deans happy. It is always good to have a happy dean.

So, asks Geoffrey, why do some law faculty choose not to write? He concludes that they are not lazy, and that the non-writers tend to contribute disproportionately more time and effort to committee work, other university service, additional classes, and even CLE program participation. Geoffrey explains why the usually reasons that are provided by non-writers don't justify the lack of writing:

1. I have nothing to say that would re-invent my field.

2. No one will read it anyway.

3. I object to student-edited law reviews.

4. I get more satisfaction out of service and teaching.

Though Geoffrey makes good arguments - read his posting - I'm not unsympathetic to the claims of the non-writers. Law reviews are saturated with articles exploring all sorts of things, even issues of little practical use. Outside of the academy, most law review articles get little attention, as even judges are ignoring them in increasing numbers. There are all sorts of valid criticisms that can be leveled against student-edited law journals, particularly by those of us who write in time-sensitive areas where the usual student lag in getting things published turns great articles into yesterday's headline. And surely there are good teachers, and great teachers, who just aren't writers.

I'm going to focus on the second and third reasons. After all, if someone isn't a writer, or as once was said to me, "some people just HAVE to write and those are the people we want to hire," then that person isn't a writer. Writing something without having the desire to write is a recipe for a bland, weak, and sad work product. It is so true that great writing rests on the enthusiasm and energy that flows from that need to write, that desire to express one's ideas. I'm not convinced that everything that could be said has been said, else I'd be quite quiet, and so I'm in agreement with Geoffrey that it isn't a very strong justification.

For those who want to be read and who want to avoid the pitfalls of student-edited law journals, opportunities to write are plentiful. I've mentioned books and monographs. For example, there are several areas of tax law for which portfolio authors are needed. Professional journals pepper my in-box, both digital and postal, with requests for articles. Some CLE enterprises seek authors to write explanations and examples that can be used for educational purposes. As Geoffrey notes, blogs are open to anyone, and I add that well-written scholarly posts, or series of posts, are beginning to find acceptance and recognition in some circles as worthy writing. Often, the number of people reading portfolios and blogs are orders of magnitude larger than the number of people reading traditional articles published in student-edited law reviews.

The underlying question isn't why does someone write or not write. It is why the institution wants its faculty to write. Though it is claimed that writing makes a person a better teacher, there are people who contest that assertion. The reason institutions so value writing, particularly law review writing and traditional legal texts, is that it brings the school to the attention of faculty elsewhere, which theoretically boosts the institution's rankings. Law faculty at school A might know enough about the writings of faculty at schools B, C, and D, to mention one or another of them. How many faculty at school A know anything about the teaching quality at schools B, C, and D? In other words, when law faculty respond to the U.S. News questionnaire, their placement of a school is affected by that school's faculty scholarship and not by the reputation of its teachers. There is no question that law schools, when hiring, seek people who have published or who demonstrate significant potential when it comes to writing. Is this a good thing?

For me, it isn't essential that a school's faculty consist solely of people who are legal scholars, whatever that means. A faculty is not unlike a baseball team. It is impossible, I think, to field a lineup of players all of whom are base-stealing threats and 50-homers-a-season sluggers. A law faculty needs great teachers, and if the price that is paid for having them is to have a few who don't write, so be it. Similarly, among the writers on the faculty, it is beneficial to have not only those who pen law review articles, but others who produce books, write monographs, post blog pieces, and contribute editorials and essays. If a school is fortunate, it might have writers who do two or more of these things, and if a school is truly exceptional in its recruiting, it finds some writers who are also great teachers. The risk is that an institution which seeks only those who are great writers and teachers, it will struggle to find the balance that is required for a faculty that excels as a team.

The true concern is when a faculty member who does not write anything also does little beyond the usual teaching. Though Geoffrey claims that laziness is not an issue, there indeed are instances of law faculty who teach their classes, server on several committees as do other faculty, and don't do much else in terms of professional activities. Fortunately few in number and increasingly rare, they are the ones who fuel the popular misconception that law faculty "have it easy" because they're only in the classroom a few hours each week.

Geoffrey concludes that perhaps the reason some law faculty do not write is the avoidance of rejection and the need for "more immediate affirmation of worth." Yet, for me, that does not answer the question. One does not need the approval of a law student editor to publish a blog. Professional journals and publishers seek writers. The opportunities exist to make one's mark. I think it's something different. It could be that some law faculty don't want to publish because they don't want what they say to be criticized. They prefer a low profile. They feel safe in the classroom, because they are at the podium and the students are not, and because they are good or great teachers they know that student evaluations will be fine, or they adjust their teaching so that the evaluations are fine.

But as lawyers, why not run the risk of being criticized? There's always the opportunity to respond. Done well, and with respect, it is enriching, enjoyable, and enlightening. If that were not so, would I be blogging away? Nah.

Twenty-five years ago, I taught my first class at Villanova. It was in the Graduate Tax Program. Because the school needed me to teach a course during the program's summer session, it was arranged that I would begin in May rather than at the usual August start date.

Two and a half years ago, as I wrote in Happy Silver (Teaching) Anniversary to Me, I marked 25 years of law teaching. The first two and a half years were spent at The Dickinson School of Law, now part of Pennsylvania State University. Thus the two and a half year lag between the silver anniversary of teaching and the silver anniversary of teaching at Villanova.

And this year marks the thirtieth anniversary of my post-law school professional writing career. So although it is almost impossible for me to reach 50 years in law teaching, chiefly because retirement is around the corner if I have my way, it is not unlikely that I will continue writing for another 20 years.

When I noted my 25th teaching anniversary, I compiled some interesting but useless statistics about the number of courses and students that I had taught. For whatever it's worth, here is comparable information with respect to my teaching tenure at Villanova. I have taught the basic income tax course, under several names, 25 times. I have taught Partnership Taxation in the Graduate Tax Program 50 times, and in the J.D. Program 10 times. I have taught Introduction to Taxation of Business Entities 15 times. I have taught Decedents' Trusts and Estates 12 times. I have taught Digital Legal Practice Skills or its predecessor Computers and the Law 6 times. I have taught the J.D. Estate and Gift Taxation course once. In the Graduate Tax Program, I have taught the Taxation of Property Disposition course several times, the Taxation of Real Estate Transactions course several times, the Tax Policy course once, and several other courses once or twice. Between 4,000 and 5,000 Villanova University School of Law and Graduate Tax Program students have been enrolled in my courses.

This year, the Law School administration decided to initiate a program whereby they confer academic cords - part of the academic regalia worn at graduation and other academic convocations - on members of the faculty with at least 25 years of service teaching at the law school. Good timing, yes?

Along comes news that the House has passed H.R. 3221, the American Housing Rescue and Foreclosure Prevention Act of 2008. To see the text, one must go to the Library of Congress legislation web site and enter HR 3221 as the search term. The URL changes with each search and has a limited life span.

This legislation contains a variety of provision touted as remedies for the current housing market mess. As I pointed out a month ago in Preventing Foreclosure through the Tax Law? Not This Time, in which I addressed similar or identical provisions in its predecessor bill, The Foreclosure Prevention Act of 2008, this legislation does little to prevent foreclosures. In its present form, it does little to rescue housing. Why? Again, it fails to address the underlying issues.

The earlier version contained four tax provisions. Three remain, though in modified form, and one appears to have been ditched. Gone from the legislation is a provision permitted corporations to carry net operating losses back four years rather than two.

The provision increasing the limit on tax-exempt private activity bond authority remains, and is joined by additional provisions affecting tax-exempt bonds also designed to open up some funding for the refinancing of failed loans. These provisions might help clean up the mess, but they won't prevent foreclosures.

The provision that would provide a tax credit to encourage the purchase of homes in foreclosure has been replaced by a provision that would allow a tax credit to first-time home buyers. How this prevents foreclosures baffles me. How it rescues the housing market also baffles me, because the foreclosures are hitting higher-priced markets far more severely than they are affecting entry-level markets. With record numbers of Americans having acquired homes during the past decade, there aren't very many people remaining who would be first-time home buyers, and many of them either prefer to rent because at the moment it makes more sense in many instances, or cannot afford to purchase a home even with the benefits of the proposed credit.

The provision providing additional standard deduction for up to $500 of a taxpayer's real property taxes ($1,000 on a joint return) has been modified to a standard deduction for up to $350 ($700 on a joint return). This provision remains just as useless as it was a month ago. As I explained in Preventing Foreclosure through the Tax Law? Not This Time:

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.

But it sure makes the tax law more complicated and the process of filling out a tax return more confusing.

The latest version adds more tax provisions. That's not a surprise. Once a bill begins to move through Congress, special interest groups persuade members that their particular provision must go into the bill for the bill to have any chance of success and that its omission spells doom for the economy. So we have an increase in the state housing credit ceiling for purposes of the low-income housing tax credit, adjustments in the computation of the credit rate, changes in the amount of eligible basis, and other modifications to the credit. Those changes might make more tax credits available to the wealthy who invest in low-income housing, but I cannot figure out how it assists middle-class taxpayers facing foreclosure when those folks don't qualify for low-income housing. Tacked onto the bill is a provision dealing with foreign exchange gains of real estate investment trusts. Nothing in the provision appears to do anything to prevent foreclosures or rescue American housing. Also tacked onto the bill, surely intended to raise revenue to pay for the tax breaks provided by the bill, are provisions that require brokers to report their customers' bases in stock and other securities. Another revenue provision involves increases in the payment of estimated taxes by corporations.

This bill is a classic example of bad tax policy and bad legislation. First, the provisions do not address the underlying cause of the housing market mess. Second, the provisions will not accomplish what they are marketed as accomplishing. Third, tax breaks wholly unrelated to the mess are tagged onto the legislation as it works its way through the legislative process, for a variety of reasons that are far more political than economically sound. Fourth, the legislation will make the tax law and tax return preparation more complicated. Fifth, it will make tax compliance and tax return preparation more difficult.

My suggestions, that Congress enact legislation penalizing loan brokers and loan merchants who induce people to take out loans they cannot afford, and funding high schools so they can teach their students some basic information about home buying to reduce the chances they will be bamboozled by loan merchants with more concern about their up-front fees than the economic well-being of their customers, have not seen the light of day. I wonder why.

In What Law Schools Should Tell Applicants, David Friedman makes the interesting and in many ways sensible suggestion that law schools should provide its graduates' bar passage rate information in a different way. Currently, law school simply provide the percentage of their graduates who pass the bar exam. Friedman explains why this information doesn't reveal what I will call the "value added" to the student by the school. In other words, a very bright student has a higher chance of passing the bar examination than does a not-so-bright student, and therefore the overall bar pass rate does not reveal the extent to which a school's high pass rate is attributable to its graduates' natural talent. Friedman, who uses LSAT scores as a marker for brightness in lieu of any other readily available data, suggests that law schools disclose the bar passage rates of its graduates arrayed by their LSAT scores. I like Friedman's idea but I don't think it goes far enough.

Friedman's rationale for his proposal rests on this assertion: "Most law students study law in order to practice it." I heartily agree, though dissenters can be found, especially within law faculties. The reason I think Friedman's proposal doesn't go far enough is that it satisfies the following assertion: "Most law students study law in order to pass the bar examination." The glitch in Friedman's analysis is that another factor enters into bar passage rates, and that is the service offered by bar review courses. Surely some law school graduates are workout wonders, ramping up their intellectual efforts for several months to squeak by the bar examination, only to fall back into a mediocre experience when showing up at their first law job.

Though it might be difficult and expensive to get some of the following information, it surely would be revealing, in many ways. Is there some way to ask law firms to identify how many graduates they have hired from each law school during the past, say, 5 or 10 year, how many were asked to leave, how many left after being given hints, how many made partner, how many were helped find other employment, how many would have committed malpractice but for the sharp eyes of a reviewing attorney, how many demonstrated excellent writing skills, how many demonstrated miserable writing skills, how many could not do legal research, and so on? It would also be helpful to know how many firms have said to someone at a law school, if at all, something to the effect of "Please do not send us any more of your graduates, as the last three did not work out at all." Yes, that has happened.

Law schools understandably might argue that if under Friedman's proposal they ought not be given high marks simply because of high bar passage rates, they also should not be considered responsible for the failures of graduates who did not apply themselves while in law school, who carry some sort of baggage through law school and into practice, or who finally slid off the ice while trying to succeed in life by skating by. My response is that law schools are no less gatekeepers to the profession than are the bar examiners, and therefore have an obligation to put their students to the test. The goal is not to find a way to get students through, and, yes, that happens, but to determine if the student can hold up when subjected to demands that are equivalent to what the student will face in practice. These are matters not just of substantive knowledge and understanding, but of ethics, of time management, of diligence, of common sense, of team work skills, of compassion, and of creativity. On that side of the equation, law schools need to improve their filtering processes. On the other side of the equation, law schools need to identify where they are coming up short in educating their students to practice law. Ascertaining what sorts of mistakes and bad judgments are being made by graduates through surveys of employers is essential. It is particularly important to focus on the students who are not as gifted, because they are the ones for whom a law school can do much. As was said to me often by law faculty during my student days and in the early years of my teaching, it doesn't take much to teach the A students. How much credit can the teacher of a Michelangelo take? The greatest satisfaction in teaching is helping the average student develop, if not into a superstar lawyer, into a competent and reliable attorney.

I wonder how many people are going to take offense at my thoughts on what is turning out to be a major legislative battle in Pennsylvania. A while ago, the governor of Pennsylvania proposed that high school diplomas be awarded only to those students who passed state high school graduation tests in ten subjects. According to the Philadelphia InquirerRendell's Graduate Skills Test in Trouble story, the headline for which doesn't quite say it all, opposition to the proposal is growing, is strong, and is widespread.

The governor's motivation rests on several concerns. First, even though tens of thousands of eleventh graders fail one or more state school assessment tests, almost all receive diplomas at the end of their senior years. Considering that as many as 45 percent of juniors have fallen short on one or more of these tests, either an amazing amount of catch-up is being accomplished or students are graduating high school deficient in particular skills. Second, increasing numbers of college students are being funneled into remedial courses to learn what they ought to have learned by the time they graduated high school. Third, employers complain that many high school graduates whom they hire have little or no reading skills, are incapable of doing arithmetic, or both. Are these believable accounts? I think so. Why? Because among law students whom I teach, far too many cannot spell, cannot write well, do not understand grammar, and struggle with simple arithmetic. Considering that law students are drawn from college graduates with grade point averages on the high end of the scale, it is rather disappointing and worrisome that among the very best there is so much deficiency.

Opposition to the proposal is coming primarily from local school boards and, on their behalf, legislators. The argument that they raise is that local school districts "are the best judge of whether students are qualified to graduate." Local educators worry that the tests will encourage unaccomplished students to drop out of school. They also object to increasing the number of tests that students must take. Even though the superintendents of most of the state's larger school districts and the presidents of the 14 state universities support the proposal, its opponents dispute the notion that local graduation tests are "dumbed down." Opponents rest their arguments on the premise that "graduation has always been a matter of local control."

The proposal would permit a student to graduate if he or she passes six proficiency tests or demonstrates competence by passing the PSSAs, advanced placement exams, or international baccalaureate exams. Those who fail would be eligible to obtain educational assistance and to retest. The state board would provide model curricula and additional teacher training. Some opponents claim local testing is a better measure of student accomplishment than are the PSSAs.

Some of the opponents appear to be focusing on implementation rather than denying a problem exists. One school district board president admits that some graduates are not qualified for graduation but that before testing at the high school level, improvements must be made in elementary education. Others point out that students who do not do well on tests would be disadvantaged.

One college student, who passed high school algebra but failed the college course, expressed the opinion that high school had not adequately prepared her for college. She supported the idea of higher standards, but worried that unless students were educated sufficiently to meet those standards, they would fail the tests and drop out, or perhaps drop out before taking the tests because they feared that they would fail.

There is no doubt that there is a problem. There is no doubt that it varies from school district to school district. There is no doubt that over-valuing a student's academic performance sets that student up for ultimate failure, either in higher education or in the workplace. There is no doubt that for many students the difficulties begin at an early age and need to be addressed before those shortcomings blossom into full-fledged failure in high school. The issue is how students' progress should be measured and who should be doing the measurement.

Certainly there are many ways to measure a student's progress, and standardized objective tests are only one of them. Those tests work well for certain skills. Other skills, however, need to be evaluated in other, though admittedly more expensive and elaborate, ways. There certainly is an opportunity for everyone involved with the governor's proposal to sit down and work out effective and efficient testing mechanisms.

On the other hand, there is something troubling about the idea that the effectiveness of education should be tested by those providing the education. I am not persuaded that there is something wrong with the state evaluating the educational achievement levels of a school district's students. Though the state is in some ways an outsider, so too are the colleges and employers that will be admitting and hiring the school district's graduates. Ultimately, outsiders will evaluate how well a school district educates its children. Personally, I like the idea of outside evaluation. Having had students who arrived in my courses lacking the knowledge and understanding that should be acquired in a prerequisite course - because the students did not work as diligently as they ought to have worked, because they were awarded grades exceeding what they deserved, or because the instructor failed to cover critical components of the course - and having observed how much more difficult it was for those students to succeed in the course I was teaching - despite having to squeeze in remedial coverage - I can be tempted to support a mechanism that evaluates how well a precedent course is preparing students for subsequent courses or programs. Yet law faculty, and presumably faculty in other academic disciplines, almost universally oppose the idea of having their students examined by someone other than the person who teaches them. Why? The answer to that question is obvious, at least to me, and perhaps incendiary. So I'll just pose it and leave it.

I am not without sympathy for K-12 educators who struggle to accomplish their mission in the face of circumstances over which they feel powerless. In some school districts, the lack of appropriate funding is a principal reason that the students don't get the best opportunities to learn and to make progress. There surely is a correlation between success rates on graduation and other testing and the economic condition of the school system. In many, perhaps most, school districts, there are students, sometimes very many students, who do not receive educational affirmation at home. Without parents or guardians who encourage good study habits, who supervise homework, who engage children in activities and conversations that complement school learning, and who support the teachers as the educators try to shape the children's academic skills and habits, the teachers face a daunting task. They have only so many hours, and if they are put in a position of needing to do twice as much as can be done in the limited time available, perhaps it is expecting too much to expect most or all of their students to pass graduation and similar exams. In many respects, society ought to consider itself lucky that the teachers and school districts are accomplishing what they are accomplishing, considering the insufficient monetary support and inadequate home study reinforcement that society provides to school systems.

So, though the governor's proposal has much to commend it, there is room for improvement. Beyond that, the governor ought to expand the proposal so that it addresses the reasons so many students cannot pass what graduation tests would be if they truly tested for ability to do well in college or in a post-high-school job. Of course, such an expanded proposal would ruffle even more feathers, but that might be a price that needs to be paid if we want our high school graduates to compete in the global economy and to succeed in college. Do we not and can we not embrace standards that are sufficiently high to match the expectations we have for our nation and our lives?

Tax rebates have started to flow out of the government and into people's bank accounts. According to this MSNBC report, the process has started a bit earlier than expected, and delivery of paper checks is expected to begin on May 9. In making the announcement, the President claimed that "The money is going to help Americans offset the high prices we're seeing at the gas pump, the grocery store, and also give our economy a boost to help us pull out of this economic slowdown." The previous hype for the tax rebates, which some people deep into wishful thinking call stimulus payments, was that this infusion of money borrowed from overseas creditors would somehow fix the current economic mess. Apparently that lofty goal has been shelved.

The President's suggestion that the money will be used to pay for gasoline and food brought criticism from Senator Charles Schumer, who noted, "It's galling to think that taxpayers' stimulus checks will be lining the pockets of OPEC. The sad truth is that the average American family will spend almost their entire stimulus check on higher gas prices this year." Schumer may be overstating the case somewhat, because not all money paid for gasoline finds its way to OPEC nations. But surely some of it does. Consequently, the government is borrowing money from overseas investors to finance rebates that are used in part to move money to overseas investors who then await repayment of their loans. Something just isn't right about that. We're back to the need for government officials and politicians to take some basic courses in economics, finance, and international trade. And perhaps some science courses would be useful, for when Schumer claims that the only solution is for "the administration [to] get .. OPEC to increase oil supply," he demonstrates his membership in the "unlimited supply of oil" wishful thinking club.

It's no secret that I think the entire tax rebate gimmick is just that, a gimmick, as I explained, for example, in Can a Tax Rebate Band-Aid Stop the Economic Bleeding? And it will backfire. What happens when the tax rebate money runs out? Will the price of gasoline and the cost of food decrease? Will there be demands for yet another rebate? If the tax rebate money runs out in October, it's easy to imagine at least one, and perhaps two, of the Presidential candidates, so quick to get on the gasoline tax reduction gimmick bandwagon, as I noted on Friday, jumping on the "yet another rebate" bandwagon. Will the government simply issue rebate after rebate? Does no one understand that by dampening the message behind high prices that a government rebate program adds fuel (sorry, I couldn't resist) to the economic fires that are stoking the high prices?

In Getting Those Tax Rebates Might Not Be So Easy, I pointed out that one of the many administrative problems associated with the rebate gimmick was cost. I wrote, somewhat sarcastically:

And I suppose the Congress added to the IRS appropriations bill money to be used to mail the notices. I suppose the Congress has made funds available to the Treasury Department to process and mail the checks. Or, as often happens, will some other program, such as enforcement or taxpayer assistance, be cut in order to fund this election-year "I voted for a rebate" ploy?

Now comes news that yet another cost has been imposed on the rebate, excuse me, stimulus, program. According to a frequent contributor to the ABA-TAX listserv, the IRS has responded to yet another problem that has cropped up. As discussed in Getting Those Tax Rebates Might Not Be So Easy, people who would otherwise not have been required to file a tax return but who are eligible for a rebate must file a tax return in order to get the rebate. If they want to file electronically, but have adjusted gross income of zero or less, they need to "dummy up" the return and add $1 of income to the return. Apparently, the IRS computer is treating the "false dollar" of income as earned income, is computing an earned income tax credit of $2, and is generating and mailing a $2 refund check to those taxpayers. Those taxpayers are confused. The IRS has issued advice, apparently to its employees, on how to deal with this mess:

If you receive a call from a taxpayer who has received a $2 refund check and research shows the refund was generated from an EIC credit (TC 768), assure the taxpayer this is not their stimulus payment. Most taxpayers will not know about the $1 reported as income because their return was most likely prepared by a preparer or software company. Explain that due to a processing error they received a $2 earned income credit and they will not need to pay it back.

Here is my question: How many taxpayers are receiving these $2 checks? Ten? Ten thousand? One hundred thousand? A million? Ten million? If, as has been estimated, tax rebate checks will be sent to 130 million taxpayers, then it would not be a bad guess to conclude that the number of taxpayers filing returns in order to obtain rebates is in the millions or tens of millions range. So, where does the IRS obtain the $2 million, $20 million, or $40 million that it is accidentally sending out to taxpayers? What IRS services or programs get cut? This additional amount is added to the cost of administering the tax rebate computation and deliveries, so ultimately yet another price that is paid for this bad idea is a decline in IRS taxpayer services, or audits that could cause the payment of otherwise unpaid taxes, or some other IRS initiative.

To be fair, I should give this "stimulus" concept credit where credit is due. It has stimulated some of my blog posts that otherwise would not have existed. Unfortunately, stimulating MauledAgain posts does not increase gross domestic product nor reduce the federal budget deficit. But I do not fear that Congress will stop giving me things about which I can find something to write. No fear whatsoever.

A few weeks ago, in Vote Trolling Creates Bad Tax Policy, I explained why John McCain's proposal to suspend the federal gasoline tax through the summer was a very bad idea. I concluded that "Its short-term appeal as a vote trolling device ought to be recognized for what it is and soundly rejected."

Unfortunately, duping people into surrendering their votes for an bad idea hiding behind a sound-bite mask has been afflicting civilization since the first politicians arrived on the scene. Once upon a time it was bread and circuses, at times it has been total demagoguery, and too often it is the promise of government largesse for all matched with reduced or eliminated taxes. If the Congress is foolish enough to go through with this nonsense, will the proponents step forward when another bridge collapses because highway repair funding, which the gasoline tax supports, runs out? Or will they be running for cover?

Now, as reported in this CNN story, Hilary Clinton has jumped on the "suspending the gas tax will save the nation and its economy" bandwagon. One wonders if she truly believes it will, or is simply another way to scrape up some votes. Eight years ago, she opposed a similar proposal. Why is it now such a great idea? The answer is easy. Votes, votes, votes.

So of the three viable potential presidential candidates, only one is yet to get on the bandwagon. Yet Barack Obama not only takes the position he will not call for the suspension, but also opposes it strenuously. But how consistent has he been? According to this story, Obama voted for a suspension of the Illinois state gasoline tax when he was in the state legislature. When attempts were made to reduce the tax permanently, he voted against that idea.

Are there any politicians who understand economics to the extent the leaders of this nation need to understand the subject? Is the citizenry so gullible that a batch of empty promises is all that it takes to entrust the survival and well-being of the populace to those who proclaim those bad ideas?

So, let's see what happens if the gasoline tax is suspended. The price of gasoline drops, and demand continues to climb. At some point, the pumps will run dry. So will what will the geniuses then propose? Lowering the price to zero?

It takes courage to speak the truth and make the right decision. I'm not seeing much of that at the moment. I'm seeing a little bit. But it is in danger of being overshadowed. Empty promises might have much more appeal than tough talk, but empty promises are just that. Empty.

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].
EMAIL OR CALL AS ON SKYPE-TALK DIRECT WITH EX INLAND REVENUE OFFICIAL WITH MORE THAN 20 YEARS OF TAX EXPIRIENCE AND GET OUT OF YOUR TAX PROPLEMS.
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.

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.

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.

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.

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."

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.

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.

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.

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.

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.