MauledAgain

Yes, blogs can be "heard" around the world. Recently an attorney in India responded to my post on outsourcing. He didn't mention the first followup post. He has agreed to sharing our email exchanges and to being identified. I learned, for example, that outsourcing enterprises in India are now being challenged by outsourcing enterprises in Romania.

The man's name is N. Ramaswami. He wants to "accept the challenge that Indian lawyers cannot do what American attornesy can do." He has a good point. He and I, and anyone else, can debate and run theory at each other all day, but the ultimate test, of course, is in the practice world. In the dialogue you'll see why I'm not in a position to provide the practice opportunity that Ramaswami seeks, but perhaps someone in American law practice disagrees with me, and welcomes the opportunity to prove me wrong. Or perhaps someone simply is curious, and sees an opportunity to try an alternative approach to legal research. You can reach Ramaswami at ramaswami2000@yahoo.com. Tell him you met him here. I'm sure he'll be letting me know what happens.

So for those interested in a dialogue between a U.S. law professor and an attorney in India, who come from different cultures and yet share some things in common, read on to see how the power of the Internet is reshaping how the world operates, not only in terms of outsourcing, but simply in terms of dialogues taking place between people who otherwise surely would not have communicated with each other over such vast distances. It is, yes, the 21st century.

The email came from Ramaswami Natarajan on 9/2/04:

Dear Prof. Maule:

I'm pleased to write this mail to you. Please do not consider this as spam as this mail is a challange to you due to your postings at http://www.mauledagain.blogspot.com/

I'm an Indian Advocate and a Patent Agent. I have learned American Legal Research while working for www.citethelaw.com I had been trained by Mr. James P. Kimmel, Jr., Esq. President of Citethelaw.com. Mrs. Chris Kimmel who now works in Pepper Hamilton studied in your Law School and possibly she is one of your students.

You can find my resume at www.tmpsearchers.com/resume.html and two of my legal writing samples at www.tmpsearchers.com/sample1.htmland www.tmpsearchers.com/sample2.html. Please go through the samples and my resume.

I have been mainly trained in Westlaw and I do not have a copy of the Blue book. Therefore you might find that my legal writing is not as per
rules. I'm trying to improve that.

I find that your criticism of outsourcing legal research to India a bit far fetched. Actually if you put a Lawyer to learn the basics and then focus on one area of law, all that you need is about 6 to 9 months. Of course the lawyer must have had his training in India very well.

Let me give a challange to you. Let me do one project free of cost for you. I do need a Westlaw password to do it and you can expect me to do the legal research and analyse it accurately but fall short in legal writing. After all I have to write for both India and America and this coupled with the absence of blue book has made my legal writing not as good as it should be.

I have given this challange to few other Attorneys and they have refused to take it even when it is offered free of charge and obligations. I hope and trust that you would do take it. If I succeed please do let me introduce to others known to you.

The few Indian firms that offer to do legal research outsourcing have refused to take me either for they consider me to be a potential competitor and my efforts and time spent are being wasted.

* * *

Best Regards,

N. Ramaswami
Advocate & Patent Agent

I replied:

Sir,

Your offer, with its implicit and explicit limitations, proves the case I am making. What you offer is what I might expect of a first or second year law student, but not what I would expect of an attorney. If and when I need the sort of assistance you wish to sell, I can obtain it by having the Law School hire one of our students to do the research. There is no economic efficiency in exporting the work to India, and there are many disadvantages to having the work done by someone who is not physically present and unable to be present at the school.

I totally disagree that one can learn an area of the law in 6 to 9 months. As someone who advocates the lengthening of law study from 3 to
4 years, I surely do not find any support for the idea that someone can attain professional forensic ability in less than a year. I thnk what you are describing does not even rise to the level of what we expect from research librarians who are not lawyers.

This is not to condemn you or to insult your training or those who taught you. You have learned some American legal research, but that alone is insufficient to do what lawyers do. At best, you are finding information, a task which digital technology makes easier for lawyers to do without assistance. For example, though in years past, in the 80s and early 90s I had one, two, sometimes five research assistants, I now have none, and only occasionally have a need for one. Yet my scholarly production has not diminished, and arguably, depending on how one measures it, has increased. Why? Because I can do research sitting at my desk that once required me to walk to the library and dig around for hours.

Understandably the companies that provide outsourced legal research consider you a competitor. So, too, do the students who would lose an opportunity to work with one of their professors because the work has been shipped elsewhere. The opportunity to work for a professor is not simply a matter of earning an income but an opportunity to enrich a piece of their legal education by digging into a specific area under the guidance of omeone expert in that area.

What I do not fully understand is why there is a need for Indian advocates to do American legal research. Is there not a need for Indian legal esearch? In a nation with a population 3 times that of the U.S., I would expect that the need for attorneys and legal researchers to be so great that there would be no surplus available to enter into an outsourcing. Surely the Indian legal system and the citizens of your nation would benefit much from access to your skills and talents.

Good luck with that.

Jim Maule

Of course, a response came my way later that evening:

>>> Ramaswami Natarajan 9/2/2004 9:05:46 PM
>>>
Dear Prof. Maule:

I thank you very much for the very prompt email.

Please just call me Ramaswami in future correspondence please.

1. Every Indian Lawyer now goes through three or five years of intense legal study to qualifiy. What I meant as 6 to 9 months for such a Lawyer
is to specialize in one Area of American Law. This is actually done by Indian students who do their LL.M after graduating from India and the course duration is one year only. Getting a B.L in India now takes five years whereas getting a J.D takes only four years in the United States.

2. Labor Arbitrage is the main reason why all kinds of services are outsourced to India and other countries. Just as you describe that you no longer need assistants and can take information far more quickly yourself, so too can persons sitting at the other corner of the world where the average income level is about 100 times lower than that in the United States. So companies that are losing money can save themselves from a crisis by getting things done offshore. If the economy goes down, businesses go down and to survive they need to cut costs. And they do it by paying some overseas worker 10% of that they pay a worker in the United States. I believe that corporate law departments are going to have to do this now. And I would expect the compensation to go down in future to fresh associates.

3. I do not wish to work for you since you have a large number of law students to train. The only limitation that I have at the moment is on legal writing. None on legal research and analysis which you have mentioned in the blog. I had no hesitation to disclose the limitation for I write for two legal systems and this problem creeps up. And of course I had never been to the United States and have learnt every thing through the internet.

4. However unpalatable this is to all of us, this digital revolution is going to affect us all. I have lost myself some times. Once one firm known to me refused to do a work saying that the price offered was too little. The client posted the project on elanceonline.com and got a lesser quote from a more competent person from Romania. So ultimately even in India we will have a problem five to seven years from now or may be early.

5. Unlike the United States, education in India is not costly. We turn out thousands and thousands of specialists every year around the country. In our state Tamil Nadu alone, the number of seats for admission to the Engineering course which were not taken remained at around 30,000/-. This is just in one year. You can imagine the number of seats filled up across India for all disciplines. Also unlike the United States most of the population here is young and so the competiton and talent levels are high.

6. When you have a strong dollar, you have certain advantages and certain disadvantages. I think this is some thing that has to be accepted or else the United States must radically bring down the value of dollar to remain competitive in services? Can any one agree to this?

I thank you again for the prompt response.

Best regards,

N. Ramaswami

And so, not surprisingly, I continued the conversation:

Dear Ramaswami,

My ability to sit at a screen to do my research provides an advantage over using research assistants in two ways.

First, if I do the research myself, I do not need to invest time teaching the research assistant about the particular project in which I am engaged. That time investment was worth it when the alternative was to go to the library. Now that I can visit the library through on-line research, there is no such advantage to the use of research assistants.

Second, if I do the research myself, I do not need to go back to the research assistant for clarification. I can look at the source materials with the same brain that is holding the entire project.

When I did use a research assistant, I would overcome the second problem by meeting with the person. The person was nearby. There were no
time zone impediments to spoken conversation. Written dialogue was possible, but it is more time consuming, and the ability to measure if the person was "getting" the point I was making did not exist. So I could invest time in writing many paragraphs only to lose the person in the first one.

Thus, I don't think that hiring someone thousands of miles away is the same as hiring someone who is close at hand. Outsourcing can and does work for repetitive tasks that do not change intellectual demand each time through. It can and does work for physical activities, such as manufacturing. It is used, but I think badly, for customer service, because that is an area where, again, each call (or at least many of them) brings a new dimension or challenge.

Thus, I don't think the product is the same. It may be cheaper, in the short-run, but in the long-run I think it will be more expensive than having kept these sorts of pursuits in the hands of those immersed in the culture and legal system in which they arise. To put it another way, I think that if you came to the States and practiced here, after a few years you'd be a totally different lawyer and would bring to the table, research and otherwise, perspectives and appreciations that you simply cannot obtain on-line.

You are right, I think, that as time goes by, the same outsourcing problems afflicting US business will affect India. The question is, what happens where there are no more countries where the currency value difference makes outsourcing tempting in the first place? The answer is the long-term cost to which I refer, namely, the need to re-train people who had left the industries or professions when the outsourcing started.

Although the dollar is strong as to India, it is in fact much weaker as to Europe. So weakening the dollar to "balance" the exchange with India would devastate European trade. Perhaps the problem is that European currency is too strong. Or perhaps the investment decisions of countries investing in the US should change (how, I don't know) so that they are investing in capital, not just labor, in India. An influx of capital into India would provide jobs for the ensuing construction and development, and for the services that would then need to be provided. I don' t think that bringing capital into India by paying what are low wages in the outsourcing country (even though they are higher wages by the standards of India) is going to infuse ndia and other nations with the necessary capital. All that is happening is that large corporations are finding new pools of labor to exploit.

And perhaps policies in India that steer too many people into some professions and insufficient numbers into others needs to change. Surely there are needs that must be met, and labor isn't being funneled to those needs. The same is true, to some extent, here and in some other countries. The long-term risk is that instead of developing their own practice to carry into older age, young professionals in India are holding themselves out for outsourced work, which, as you suggest, won't be there in five or ten years. Then what? The years that could have been spent developing one's own practice, or a practice in a firm, are lost. And a new cohort of people willing to work for less will displace those who are now working for less.

* * *

Respectfully,

Jim Maule

Shortly thereafter, I received this email:

Dear Prof. Maule:

I apologize that I have forgotten to respond to one of the most important points that you raised.

Please see what you wrote in your mail below:

"When I did use a research assistant, I would overcome the second problem by meeting with the person. The person was nearby. There were no time zone impediments to spoken conversation. Written dialogue was possible, but it is more time consuming, and the ability to measure if the person was "getting" the point I was making did not exist. So I could invest time in writing many paragraphs only to lose the person in the first one.

Thus, I don't think that hiring someone thousands of miles away is the same as hiring someone who is close at hand."

I beg to disagree with you with due respect.

I believe that you use the Internet very frequently and I'm some what surprised. I use the Yahoo email account principally for I also use the Yahoo Messenger. Now Yahoo and MSN messengers enable you to have live, I repeat live, video conferencing with any one of your buddies if you make some simple investment in a web cam that costs about $50, and a decent internet connection ( I myself have a 256 kbps connection and so would expect you to have far higher speeds). You can interact with other persons have a voice and video chat live free of charge. Some times the service of these messengers are poor and if you pay about $25 per month you can have a private account with some web servers where you can have a live video conferncing.

Now let me know which is cheaper. A one time investment of $50 plus about $25 per month for video conferencing with no telephone bills to spend or an expensive person nearby. I think that today we can have virtual assistants sitting any where in the world close by. Yes, initially the accent problems in the voice are there but they are over come quickly. I'm not sure if you are aware of these things. Of course you may have different views but it is no longer necessary for some one to sit near you to converse with you live. It can be done easily and cheaply through video conferencing.

Technology has improved enormously.

Best Regards,

N. Ramaswami

I could not resist continuing the dialogue:

Dear Ramaswami,

Only the best videoconferencing provides the same sense of presence. For me, not only eye contact but body language is important. To see the entire person the resolution needs to be high, and that requires bandwidth. The bandwidth I have here at the school (but not at home) is high, but it's shared with a lot of people.

So we end up with videoconferencing that is either the face, or a way too fuzzy look at the entire body to pick up body language. Eventually we'll get there, you're right, but it's not quite the prime time player that I'd like it to be, for me. I may be a bit more demanding than most people in this regard and I know it works well for some people.

I'll look at the things you sent sometime over the long weekend.

Jim Maule

My last reference was to Ramaswami's request that I look at his work product.

Dear Prof. Maule:

I thank you for agreeing to look in to the papers I submitted and I would be very obliged if you could give me your insight and valuable guidance as to how I can improve my legal writing.

I look forward to hearing your insightful comments on my legal writing and analysis.

Best Regards,

N. Ramaswami

When I looked at Ramaswami's work product I did so primarily to evaluate my contention that legal research is not something that ought to be outsourced. That was, of course, the point in my blog post to which Ramaswami had made his objection. With his permission, I share my response:

Dear Ramasawami,

I've looked at the two writing samples that you shared. My reaction is affected by not knowing what you were asked to do. I am guessing that you were asked the question as you stated it, because the memos don't contain any statement of facts. Thus, one very important legal analysis skill, applying law to facts, isn't present.

One concern is that you are hampered by having English as a second language. Your English is very good, but our legal writing instructors would take their red pens to it. I have the same problem with my French, and that's why I have not tried to spend a semester in Quebec or France teaching tax in French. I suppose that the more you interact in English the more you'll get the technical aspects of using the language in the legal field polished. My French improves when I am in France and then rusts up when I am not using it.

Another concern that I have is that what you are presenting is chiefly a series of quotations from primary sources (statute, cases, etc) Thus, there is little opportunity to evaluate your analytical skills. As for research skills, I don't know the areas well enough to know if you found all the relevant authorities.

Our Legal Writing instructors incorporate legal analysis into their course. They believe, and I agree, that one cannot learn to write well as a lawyer without polishing legal analysis. That's because what shows up on the paper is a manifestation of what is in one's brain. So not only do they focus on the technical stuff (e.g., grammar), which gets polished with use, but they also pay close attention to the structure of arguments, sequence, paragraph clusters, sentence sequence, and application of law to facts. The students write memos, opinion letters, appellate briefs, and a few other short documents. In their memos, they are presented with fact situations for which there is no clear authoritative answer. Those are much more challenging than simply dealing with research into a question for which there is a clear answer.

Most American lawyers who seek assistance need help with the cases for which there is no clear answer. In litigation, they look for predictions of the arguments from the other side, and proposed responses. In planning, they look for the advantages and disadvantages and the factors that favor one alternative over another. When the answer is clear, most lawyers don't need the assistance because they know the law.

I'd characterize your research as what I would see from a law student or a person recently graduated from law school. What the person doesn't yet have is the experience of being in American legal practice. If you practiced in an American firm for a few years, you'd develop as they do, but you've already explained how that option doesn't work for you.

The delay in putting our conversation onto my blog is simply a matter of reacting to other issues. Of course, our conversation about your writing stays between us.

Jim Maule

Despite my offering to keep my evaluation "between us," as is apparent from this posting, Ramaswami requested that I share it, as explained in his next email, in which he also explains the context in which his outsourced legal research assignments arose. Read carefully and you'll note that Ramaswami has yet another skill, as an examiner. He remains convinced that outsourcing legal research to India can benefit both persons in his position and U.S. attorneys. Perhaps our exchange can help readers decide for themselves. Anyhow, here's his response:

Dear Prof. Maule:

I thank you for your very kind assessment and very prompt response as promised during the Labor Day weekend.

A legal research firm gave the fact patterns to me and then the issue was presented to research. I had an understanding with them that I shall not disclose the facts. Since the the fact patterns revealed the identity of the parties (and when I was not hired by them) I had to delete the names of the parties and delete the fact patterns and edit the memos done by me significantly. Unfortunately since I have had prior contacts in the United States, the legal research firm felt that I could pose a threat to them in the long term by putting up an commerce website myself once my skills are polished and so refused to hire me. I apologize for not stating the lack of fact patterns in the earlier emails, as I believed perhaps inaccurately that when the sample law memos are given this is the accepted practice in the United States.

I'm amazed by your humility and openness that you are not exposed to the areas of the Law dealt with in the law memos. The Legal Research is accurate and on point but I suspect that the Legal writing is not in the law memos.

Yes, my legal writing suffers from want of exposure to the Blue Book and the citations style. I have done more complex legal research assignments with www.citethelaw.com that involved legal analysis but we had a clause that I should destroy them when the contract was terminated and I did so promptly. So I have no back up copies.

In so far as analysis is concerned, in the sample memos, the issues asked were simple and direct and so I did not have much of an opportunity to analyze. So I had to leave it at that. The only memo that required an analysis is the Trademark memo but again the aspects for analysis are very limited.

In 1998 I had the kind of evaluation packet that you describe where for a situation you have no clear answer and I was asked to write both for the Plaintiff as well as the defendant. I wrote it and out of several who attempted I was the one among the two selected for having done it correctly. Of course legal writing was perceived as weakness at that time but when we started working, Legal Research and paralegal support became more important than polishing my legal writing. Therefore to this day I have not had a focused training on legal writing alone. The only equivalent of the Blue Book is available online for free at www.cornell.law.edu. At the moment the link is not working and I will send you the link when it works. Yes, if I master the Blue Book and the rule on citations and write correctly I think I can meet their expectations. I just do not know how to get this training on legal writing. I agree that this also needs a sound knowledge of law and when you put words in to writing you put essentially your thoughts in to your writing and so the analysis part is correct.

I agree with your very candid assessment that you would rate me as a recent law graduate without much of an exposure to the practice in a Law firm. This is indeed the truth. I had learned American Legal Research overseas focusing on my practice here and tried learning a foreign practice at the same time and I have not had much of an exposure in the last two years. I believe if I manage to work for a law firm continuously for one year and keep writing these Law Memos and other duties expected of a Junior Associate, well I will learn to do things as done in the United States. But I guess that this continued exposure to the environment that a Junior Associate is entitled to is exactly (the same problem and the situation) which I have not had so far.

I have studied several cases and in most the situation turns out to be a repetitive one. Say on motions for and against summary judgment etc and most legal research firms are asked to do this kind of work only. I guess only 20% of the work done by Legal Research firms is complex. And I have worked here off again on again for four years now. So I think that most Law firms would also need non-complex legal research regularly. Perhaps I'm wrong. Perhaps being at the higher end of the legal profession teaching tax law, you look at it differently. I must however confess that I have not had exposure to Tax law questions and have not studied it just as I have not practiced tax law in India. Your Tax Law and Criminal Law appear to be somewhat different than ours being a far advanced economy and having a different culture. We have a very lenient criminal justice system here.

Please do not hesitate to put my writing to the blog and please do not hesitate to disclose your assessment. I'm honored that you agreed to assess me and made very candid remarks. This proves both of what we are saying. With practice, Lawyers in India can assist the Lawyers in the United States but this requires a constant devotion and continued attention. Not on again and off again kind of experience that I have had so far.

I'm actually trying to find if a small law firm would retain me to assist them online. So far I have had no success but I'm still trying. I was offered a salary of a two way air tickets and $1200 per month for working for 12 hours a day as a paralegal in 2001 beginning and Jim Kimmel ruled it out saying that it would not even enable me to survive on my own. I needed to send at least $1000 to my family to support them here and that was not possible and hence I decided to work online and did not choose to come to U.S.

Ironically I'm qualified to write the exam to qualify for a Solicitor in the United Kingdom but I have not studied their Law.

You can very well ask, why not focus on India? I believe that the essence today is getting to know more people in several places, getting to know several systems and then try to bring in the capital needed whether it is for outsourcing or other projects to benefit my country. I'm trying and I will try to do this by all fair means until I succeed with God's help.

I thank you again for your very kind assessment, very prompt and very candid response and frank statements of your own limitations. I feel humbled. Please do not hesitate to put any one of our conversations on the blog. I do not believe in hiding my weaknesses and only if I learn what they are, I can correct them.

Please let me know when this is posted to the blog and if possible please let me have automatic emails when some one posts a response. No problem if this is not possible.

If possible, and if it is within your powers, please let me compete with your students in one legal research assignment you give them (Unfortunately I have no idea of American Tax Law) and I have no passwords to Westlaw or Lexis for my personal use. If the assignment would test the analytical skill, then I believe you would know first hand whether legal analysis is also possible to be done offshore. I do not know if you would appreciate the idea or would do it given the cry against offshoring. Well, coming back to the benefits for corporate on offshoring, would a fresh Law Graduate, just out of college work for $25 to 30000 per year?. That would be a significant addition to my income here and I would very happily accept it. This is why offshoring works. I doubt if you could hire a paralegal for that salary in your State. This is what actually drives the economics. I hope you would agree with me.

I thank you again for your very magnanimous and kind emails.

Best Regards,

N. Ramaswami

I then brought this particular exchange to a close with an email that explained why there could be no such competition, and that Ramaswami's concept of law salaries in the U.S. was perhaps not unlike the perceptions held by many Americans outside the profession:

Dear Ramaswami,

I do not give my students in my courses research assignments. So there's no opportunity to put you in competition with them. Research assignments are given to research assistants when I have them, but as I mentioned, I haven't had research assistants for several years because I don't need the help. I don't anticipate having one in the near future.

There are law graduates who take jobs paying in the $20,000 and $30,000 ranges. Much attention is given to the top students who go to New York, where salaries are inflated because the cost of living there is so much higher, and start at salaries of $120,000. In the next group of cities (e.g., Philadelphia), starting salaries for the top students are just now reaching $100,000. Salaries in San Francisco and L.A. may be closer to those in NY as those are expensive cities but I don't know for certain.

Students who work in smaller towns start at $30,000, $40,000, $50,000. Starting salaries for law clerks for judges and attorneys in federal agencies are in the $30,000s and a few in the $40,000s.

Students who work in public interest, such as advocates for the poor, or in legal aid (for impoverished criminal defendants) often have starting salaries in the low and mid $20,000s.

So when you hold yourself available for a salary in the $25,000 to $30,000 you're not presenting, to most law employers, a significant financial advantage. For those to whom you would, the counter-balance is their reluctance to hire any law student other than the top students from the top schools.

The economics of lawyer compensation in the U.S. are complex, sometimes counter-intuitive, and misleading at times. A plaintiff's lawyer will win a big case, get paid on contingent fee basis, and bring in millions from that one case. Suddenly everyone thinks all lawyers earn that amount!! (It happens too with professional athletes, where for every player making big dollars there are two players making far less (though they do earn a nice amount)).

I will let you know when I post up to the blog. It will be soon but not immediately. Late this week, early next week?

Jim Maule

Suddenly there's been a flood of speeches, articles and blog bits focusing on a connection between the number of jobs in the economy (including the outsourcing issue) and the tax policies of George Bush. For example, John Kerry claims that "George Bush has chosen to support a tax code that rewards outsourcing." In a Slate article, Daniel Gross asserts that the enactment of tax breaks for investment in capital has turned business outlays away from hiring employees to capital purchases. On The Leiter Reports blog, Benjamin Hellie and Jessica Wilson argue that a Bush second term would bring attempts to reduce depreciation periods to a one-year expensing deduction, with dire consequences for the jobs market.

Is it this simple?

No. Economics is never simple. Its formulas and concepts are almost as complex as those characterizing quantum physics.

The tax code's treatment of U.S. companies doing business abroad was pretty much established before George Bush took office. Much of it has been around for a long time. It's complicated, a true bipartisan mess, and I suppose that what Kerry means is that George Bush has failed to change what he found in a way that would keep jobs in the United States.

Kerry's proposal, which is to "repeal the tax breaks that encourage companies to ship jobs overseas and use the savings to reward companies that create jobs in America" doesn't say anything about how this would be done. He claims that under his plan "99 percent of companies will pay lower taxes." So who pays the tax increase to prevent this plan from increasing the deficit that Kerry dislikes?

Kerry says nothing about the pending legislation, which changes the taxation of U.S. companies doing business abroad, in an attempt to comply with the WTO ruling that portions of the U.S. tax code constitute an export subsidy that violates WTO agrements. The WTO authorized the European Union to impose retaliatory tariffs on U.S. companies until Congress removes the offending provisions. Though Congress has bickered about how to solve the problem, nothing has been done, the EU retaliatory rate has increased to 7%, will reach 17% if nothing is done, and is draining billions from these companies and the U.S. economy. Kerry's statement, "“Today, the tax code actually does something that’s right. It actually gives tax breaks to companies that export American products." suggests that he doesn't quite "get it" when it comes to understanding the WTO ruling. Perhaps Kerry wants the U.S. to go it alone and ignore the WTO. Perhaps in seeking a role-model to follow in going it alone he can ask advice of the fellow he often accuses of ignoring international relations, a guy named George Bush.

What Kerry and many others don't seem to understand is that the US has two choices. The first is to ignore the WTO, suffer the retaliatory penalties, watch companies either pay the penalties or stop exporting to the EU, and watch those companies cut jobs because the money for jobs is being paid in EU penalities or because the cessation of exports has reduced the need for workers. The second is to comply with the WTO ruling, end the penalties, and let the companies manufacture products people overseas are willing to buy. The first option is the one Kerry advocates though he doesn't say so explicitly. The second option poses the risk that to make products attractive to overseas buyers the companies will try to keep costs down by outsourcing jobs to people willing to work for less money. So back we come to outsourcing, with Kerry describing the attempt to comply with the WTO ruling as advocacy of outsourcing, though, in all fairness, Bush and some members of his administration have characterized outsourcing as good for the economy. Could they be right?

Outsourcing is good only if it frees up a group of workers from one set of tasks to be hired for another set. The bottom line is, as will be discussed in an outsourcing dialogue that I've had with a person in India and that I will post soon, that when worker A offers to do the job for less than worker B wants, worker A will be hired unless worker B presents something that justifies the price differential. If worker B, losing the competition in job set 1, turns to job set 2, and offers a service for which there is no competition, then the outsourcing (whether to another country or another domestic community) can be a net positive. For all the talk about the loss of jobs and the slow creation of jobs, the classified ads remain numerous, certain industries continue to beg for applicants (e.g., skilled nursing care), and try to find a contractor to build an addition to a home. The problem is a mismatch between what workers can offer (and what they want for it) and what companies need (and what they're willing to pay).

The solution, therefore, isn't to prohibit outsourcing per se (though I continue to assert that certain types of services, such as legal research, ought not be outsourced, and that will get more attention in the upcoming posting). The solution is to re-train individuals so that they can offer the skills that companies need in place domestically. This nation somehow managed to handle the shift from buggywhip manufacturing positions to auto worker positions. It managed the shift from blacksmith's apprentices to machinists, and now must handle the shift from machinist to skilled nurse. Our education system, at all levels, fails miserably in preparing students for multiple career paths, something that is essential in a world where having a backup plan is essential.

Using the tax law to prevent outsourcing isn't possible. Here's an example. Suppose that a company pays $100 to a domestic worker, B. It deducts the payment and, using an easy but artificial 25% tax rate, reduces taxes by $25. The net cost is $75. The company then finds that worker A, in India, will do the job for $40. The deduction reduces taxes by $10, so the net cost is $30. The company saves $45. If Kerry's proposal is to deny the deduction for the payment to worker A in India, it simply makes the net cost $40. The company saves $35. The company will continue to outsource.

In the meantime, keep in mind that worker A, now "wealthy" by economic standards in India, has disposable income, and purchases products manufactured by, or services provided by, American workers or by multinational companies employing American workers. So perhaps worker B gets back into the game, but at another position. See, it's far more complicated than the simplistic soundbites spewed by candidates, and I've left out much of the complexity.

The same sort of complexity afflicts the question of whether tax breaks for capital investment causes domestic job loss. Surely at one level, when the tax law encourages spending for capital items to increase, the purchaser has less available to hire employees. In the Slate article, Daniel Gross explains nicely the answer to the next question, namely, doesn't the company need to hire people to operate the capital items being purchased? The answer is that some of the capital items being purchased are complex software packages that permit the company to do more (or at least as much) with fewer workers. Another example, I suppose, is the purchase of robots to build automobiles and other items. And that takes us to the next question. Don't the sellers and manufacturers of the capital items being purchased in larger numbers because of the tax breaks need to hire people to keep up with the demand? Aside from the use of robots (which ultimately, I suppose, will be built by other robots as cyborgs take over and science fiction comes to life, but I digress), some of the jobs created in order to manufacture the capital items are located overseas. These are not necessarily "outsourced" jobs, because the product is being made in the same country as are the workers; it's just that the purchasers getting tax breaks for purchasing the capital items are choosing products manufactured elsewhere rather than products manufactured in the U.S. Why? Usually because the foreign product is cheaper and of no less quality. Toyota can explain how a product of better quality can outsell a domestic product even if the price is *higher.* Why is the foreign product cheaper? Because the workers in that country don't demand as high a wage? Why not? Because the cost of living is cheaper in that country. Why? Because the standard of living is not as high. In The Leiter Reports blog, Hellie and Wilson explain that some of this economic disequilibrium is attributable to American life-style. It's expensive, they point out, to have sprawl and to be automobile-dependent.

Perhaps it's been a matter of having lost an undeclared and unnoticed (until now) economic war. Without bombs, without military action, without declarations, workers in other countries stood up and made themselves available at lower wages. Some came to the U.S. and are engaged in jobs that "Americans don't want." Others stayed home and manufactured products that were at least equal to, or in some instances, better, than the American counterpart, and generally offered those products at lower prices. Still others stayed home and used 21st century technology to provide services at cheaper prices to Americans.

For the moment, in a few areas, Americans hold an edge. Development of new medicines is one. Workers in that industry will be quite unhappy if as a result of pressure for lower drug costs, these companies move offshore. It's dangerous to cook the golden goose.

I've not mentioned interest rates. I've not mentioned money supply. I've not mentioned a lot of things. But let me add one more wrinkle. Suppose that Kerry, or Bush, or, more accurately, the Congress (it's on its members, after all) manage to create millions of jobs in America paying the amounts American workers demand. What happens? Prices go up, except to the extent that tax breaks are used to subsidize the job creation. Either way, the American taxpayer/consumer pays the increase. Inflation heats up. Americans begin complaining about price increases.

What started this? I think it began with the spread of industry from cottage to village to town to region to nation. Technology means that a professional athlete or entertainer can be seen by millions. The audience is 100 times what it was, so the person gets paid 100 times what they had earned. There's no news in comparing what present-day baseball players earn not with someone like Ty Cobb or Babe Ruth, but with Hank Aaron and Willie Mays. Corporate CEOs and brokers jumped onto the more-numbers-more-money bandwagon. The economies of scale, rather than being used to benefit all, benefitted a few. The same few who then demanded tax breaks on their capital gains and interest. As if a ballplayer or entertainer brings to the economic table some fabulous investment making skill that deserves a tax subsidy. Sorry, but those who thought this post was an ode to George W. Bush were wrong. That's because, as I've noted, neither of them have impressed me as a complete leadership package.

And who's to blame? Who attends the games and watches the movies? Who buys the products of the companies that bankroll this wealth shift? Who flocks to some Idol tryout seeking to get on the bandwagon even if dozens of others are injured when they are shoved off the back end?

Well, this was no sound bite. Yet another reason I am not, cannot be, and surely will never be, a politician. I don't like giving simplistic answers, I don't like one-sentence generalizations, and I don't get satisfaction from twisting things. I like details. I enjoy a ten-minute or ten-hour immersion into a deep read-and-think exploration of a topic, new or old. So for those who share that with me, here's hoping you found something worth reading in this post, and more importantly, some reasons to keep thinking.

Buried in last week’s news was the announcement that Medicare premiums are slated for a 17% increase next year. That means the monthly fee of $66.60 will jump to $78.20, the largest dollar increase in the program’s history. People are very unhappy about this news. The increase comes on top of a 13.5% and an 8.7% increase for this year and last year. People, and some politicians, have become very emotional when discussing the issue or criticizing the increases.

It makes sense that at an emotional level purchasers dislike price increases. I’m not certain that sellers experience some sort of emotional glee when prices increase.

Logic, though, suggests that only when price increases are not matched by fair return should there be principled opposition from purchasers. Likewise, if a seller is merely passing along increases in the seller’s cost, then the seller doesn’t have any reason to consider the price increase a particularly happy or unhappy occasion, except to the extent the seller empathizes with the purchaser.

So what’s the deal with Medicare premium increases? Assuming that logic can trump emotion, which itself is a highly problematic premise, are these increases a necessary and logical unhappiness or are they anger-justifying pocket-picking?

Congress has provided by law that the federal government pays 75% of Medicare Part B benefits, and the recipients of the medical care pay the other 25%. Part B is the medical insurance portion of the health care coverage provided by Medicare, whereas Part A is the hospitalization portion.

The medicare program is not a for-profit corporate endeavor. Thus, when the fees charged to Medicare beneficiaries are increased, the increase is passed through to the providers of the medical care. There are no profits to be affected by the increase. There are no corporate executives whose compensation is increased. The compensation of the government employees managing the program is unaffected by the size or existence of an increase in premiums.

What causes the increase are the same things that cause increases in medical insurance premiums paid by employers for their employees, paid by employees who contribute to their employer plan, paid by persons who pay for their own plan, and paid by parents for dependent children who are not enrolled in other plans. If the cost of medical care increases, premiums for medical insurance, including Medicare, will increase.

A portion of the increase is attributable to the prescription drug coverage that was added to Medicare. It makes sense that if the benefits under the plan are expanded, the plan will incur more costs, which will be passed on to the beneficiaries. Also passed on to the beneficiaries are the benefits of having the plan pay for what the beneficiaries had previously been purchasing. Thus, the increase should be netted against the savings realized with respect to prescription drugs. Because the amount spent by each individual on prescription drugs varied, the net benefit or detriment will vary from person to person, making generalizations difficult. Nonetheless, they are made, and depending on how they are made, they can be polarizing. Hence, the emotion that is stoked by the issue.

For some Medicare recipients, the government subsidizes some or all of the premium payments, including the increase. Although Medicare is not means-based as a general rule, there is an element of means-testing in this subsidy.

Criticism of the increase has been widespread and intense. The concerns fall into two categories.

The first is the allegation that Medicare is a giveaway to medical providers, drug manufacturers and insurers. The amount paid by Medicare to physicians will increase by 1.5%. That increase is consistent with inflation, and surely far less than what physicians need to pay for the huge increases in malpractice insurance premiums. More on that in a moment. The charge that drug manufacturers are overcharging, chiefly based on the prices at which drugs sell in Canada, overlooks the fact that almost all of the development of new medicines takes place in the United States. What would happen to drug prices in Canada if new drug development shifted (along with its jobs) to Canada? Or perhaps we would be better off having kept drug prices so low during the past several decades that there wouldn’t be any new drugs the prices for which could be the subject of a present-day argument? And insurance companies? Are they rolling in excess profits? Allegations have been made that insurance companies have been “stashing cash,” arguably to cover future medical catastrophes. This issue, however, is one that transcends Medicare, and requires close examination of how, for example, the medical costs of a biological, nuclear, or chemical attack would be paid. Consider that in the casualty insurance arena only the setting aside of reserves will blunt the huge cost of multiple hurricanes crashing through Florida.

The second criticism is that the news was “leaked” at a time when other news stories were getting the attention. The Administration claims that the news was released when the numbers were ready. If this is such an important issue, then those to whom it matters can come forward with evidence that the numbers were ready several weeks ago, or a month ago, and were held back until hurricanes struck Florida. I suppose that someone *knew* hurricanes would strike Florida and create a news blur under which the Medicare premium increases could be announced. The silliness is particularly evident when one considers the fact that the increases come to the attention of those paying them. Many Medicare beneficiaries are as adept with the law, the regulations, and news affecting Medicare as are lawyers practicing in the area.

In my last post, I criticized Bush for his inconsistencies with respect to tax reform and tax incentives. Now I am going criticize Kerry for making silly statements concerning Medicare. If you get the idea that I have doubts about both of them, you’re right.

In his statement, Kerry painted the President’s promise in his convention speech to make Medicare stronger as inconsistent with the increase in premiums. I suppose Kerry thinks that things can be strengthened without cost. I’ll give him the benefit of the doubt and guess that what he was *trying* to say is that Medicare could be made more efficient, so that strength could be maintained without raising costs, and that strength could be increased with less of an increase than the one announced. To do this, of course, would require the Congress (of which Kerry is a member) to change the law that governs Medicare. As happens with tax, the Congress, responsible for the mess, blames the IRS, and now members of the Congress (Kerry not being the only one making the charge), responsible for tacking all sorts of things onto Medicare that go beyond medical care for needy retirees, blames the Administration.

What is particularly puzzling about Kerry’s statement are these questions: "Who are they going to send the bill to? Are they going to send the bill to Halliburton? Are they going to send the bill to Ken Lay and Enron?" "You bet they're not," Kerry said, answering his own question. "They're going to send the bill to our senior citizens. They're going to send the bill to all of you people." I cannot find Kerry’s explanation of why Halliburton, Enron, or Ken Lay should be billed for increases in Medicare premiums. That’s because he doesn’t have one. I do. It’s called demagoguery. To paraphrase a long-ago chair of the House Ways and Means committee, “Don’t tax you, don’t tax me, tax the guy behind the tree.” There is nothing to indicate that Halliburton, Enron, or Ken Lay, for all their shortcomings and misdeeds, caused the increase in health care costs that drive up the Medicare, and other health insurance, premiums. Yet the “someone else pays” mindset is evident in proposals such as Rep. Herseth’s proposed bill that would limit Medicare insurance premium increases to no more than 25% of the annual social security cost of living increase for the year. Fine. WHO PAYS THE REST OF THE BILL? Or perhaps medical services can be cut back, as has happened in England, where the same sort of misregulation made a shambles of medical care?

Who drives up the costs? We do. Yes, us. No politician will stand up and say that. That’s why I’m not a politician. How do we drive up the costs.

First, we insist on a medical profession that cures all problems. There are tens of thousands of diseases, ailments, injuries, and medical ills. Some are common, some aren’t. The cost of curing all of them is expensive. The cost of *finding* the cures is even more expensive. Someone has to pay. So the argument, of course, is that someone *else* will pay. That’s a silly argument, of course, because the “someone else” is us when someone else is making the argument. Understandably, there is an argument that the costs should be borne in some relationship to means rather than as a user fee, especially as those most in need of medical assistance often are disadvantaged because of the condition, but even if all persons earning more than $200,000 a year turned their entire incomes over to the government for this purpose there would be insufficient funds. Few seem willing to say it, but we’re not going to cure all diseases, save all lives, or create a medical utopia. Ever. A bit of study about parasites, viruses, and bacteria shows why.

Second, we make the cost of medical care much higher than they would be were we to adhere to lifestyles that reduced the chances of illness and disease afflicting people. People smoke, they ride motorcycles without helmets, they drive cars without wearing seatbelts, they get into arguments and shoot each other, they fatten the coffers of vendors of disease-enhancing foods, they use drugs for recreational purposes, and they engage in all sorts of activities that jeopardize health. I’ve heard the argument, especially from smokers, that “even if we lived a healthy lifestyle, we’d all get cancer when we were 100 and it would cost money anyhow, so by dying young we are saving the nation money.” The flaw in that argument is that when a young person’s health deteriorates, that person loses some or all of his or her economic viability, and thus loses the opportunity to generate more wealth to be set aside for late-life care.

Third, in response to the first two problems, we sue. We are a nation of blame shifters. We do stupid things and sue someone for having failed to stop us, even though had that other person tried to stop us we would have sued because of their interference in our life. It is a cultural characteristic. We cherish independence, which gets defined as doing whatever we want to do, suing anyone who gets in our way, and then suing someone when the lack of good judgment demonstrates that independence without responsibility is the opposite of freedom. And who benefits? The personal injury lawyers who pursue ill-advised litigation and nuisance lawsuits, and who rake in fees based on outcome rather than on hours of services rendered. Kerry, of course, said nothing about the impact of malpractice insurance premium increases on Medicare insurance premiums because his running mate happens to be a personal injury lawyer turned politician. Oh, I understand the argument that without contingent fees the impoverished plaintiff would not find access to the courts, but that argument merely supports a fee structure that charges successful plaintiffs a bit more than an hours-of-service fee, not a fee structure that causes personal injury lawyers to rake in tens or hundreds of millions of dollars because their plaintiff was awarded a huge sum. After all, the fee for writing an estate plan for a person worth $50,000,000 ought not be, and is not TEN TIMES the fee for writing an estate plan for a person worth $5,000,000, even if the fee is a wee bit inflated to cover the cost of providing low or no-cost will drafting for a person worth $5,000.

Political campaigns would serve the citizenry well if they triggered serious logical discussion of these sorts of issues. Instead, we are treated to emotional outbursts, screaming matches, insult trading, ad hominem attacks, Monday morning quarterbacking, scheming, plotting, and dedication to party rather than dedication to nation and citizenry. On the one side we get simple complexity and complex simplicty, and on the other we get thoughtless demagoguery that keeps logic from trumping emotion.

I took a look today at the text of the President's speech to the Republican National Convention. A student had stopped by my office earlier to tell me that the President had mentioned taxes a few times. The student noted that now he's in the tax class he's finding himself paying attention to things that would not have caught his ear or eye in times past. I wonder if it would be worthwhile to require all voters to sit through a basic tax course.

Anyhow, the President seems to have made two points about taxes:

1. The tax system, along with other government programs, was "created for the world of yesterday, not tomorrow." It is a "drag on our economy" and is a "complicated mess filled with special interest loopholes." It saddles "people with more than six billion hours of paperwork and headache every year." So he has concluded that a "simpler, fairer, pro-growth" tax system is in order and he intends to "lead a bipartisan effort to reform and simplify the federal tax code."

2. If the President has his way, the tax code will be used to provide tax relief to attract businesses to American opportunity zones. He would "offer a tax credit to encourage small businesses and their employees to set up health savings accounts."

So, which is it? The tax code is complicated and needs to be simplified? Or the tax code should be made more complex by adding at least two more special provisions?

Note that he didn't propose expanding enterprise zones. Wait, maybe it's empowerment zones. Wait, maybe it's the New York Liberty Zone. We're getting zone out here, folks. There are so many zones that Tax Management, Inc. decided it would make sense to have a separate Portfolio dedicated to the wide array of special provisions applicable to all these different zones. So I wrote it, and it's now in the publication process and should appear before too long.

Adding a new zone to the zone list complicates things. So too does the creation of yet another health care related provision.

It would make more sense to revamp all of the provisions relating to medical transactions, which in current form are so garbled that students continue to experience bewilderment as they sift through sections 104 through 106, turn to section 213, take a peek at MSAs, actually, wait, I don't have them do that anymore because it was short-circuiting their neural connections.

Nothing was said about abolishing the IRS. I guess not. Advocating new credits is inconsistent with jettisoning the system to which those credits attach. Almost as inconsistent as advocating tax simplification at the same time as advocating more layers of complexity.

Lest anyone think I've singled out the President and the Republicans for criticism, go back and look at my expressions of disbelief with respect to John Kerry's proposals. Unwise tax policy making, pandering to special interests, careless drafting, and half-baked tax ideas are a totally bipartisan effort. Whether they take turns adding to the mess or collaborate in doing so, members of Congress don't need Presidents and presidential candidates giving them even more ill-considered ideas to toss into the tax glop.

The student who stopped by asked me, "Do the people in Congress understand what they're doing with tax? Do they have to attend a class?" OH HOW I WISH THEY DID. I am sure I could persuade the Dean that as a public service I would provide a one-week tax course to all members of the Congress. What fun. What an absolutely enticing idea. Don't hold your breath. It won't happen. I'll spend my time instead writing new Portfolios on the next 12 zones, 30 credits, 15 phaseouts, 12 rate changes, 8 sunsets, 9 revivals, and 23 re-definitions of existing terms for special purposes that are almost certainly going to invade the tax law during the next 30 months.

I should have known better. Early in the afternoon on Wednesday I posted my blog entry about the case upholding licensing requirements on on-line casket sellers. I made a quip about the death part of death and taxes.

Within minutes of posting that item, I learned that our Director of Media Services, Jeffrey Samuelsson, had keeled over and died while on his way to meet with one of my colleagues concerning some technology use matters. I've talked at times on this blog about my use of technology in the law classes I teach, including my recent foray into the world of "clickers." Jeffrey was very much a part of the entire process through which I adapted my classes to clicker use. For 15 years he was ever-present, hooking up projectors so I could use Powerpoint slides, hooking my laptop to the network, introducing me to laser pointers, and experimenting with "just over the horizon" technology that he figured would find its way into the classroom in the near future.

Jeffrey was a great guy. He'd stop by, busy as he was, to show or explain a new feature he figured I might want to use. He'd stop by and visit anyone he knew would want to learn about a new technology. He would invite us to stop by what I called the "AV Lair," a place filled with all sorts of equipment, wires, boxes, and the usual tech room jumble of things. We'd get to see the "really cool" stuff. He was into gadgets, as am I, so there was always a supply of new devices to explore. In his few spare moments he'd find interactive Internet games, and he'd share the URLs and show us what they were like. Actually, there was only one really important one, a World War 2 simulation, and I never really did learn to maneuver the tank or fly the airplane. He'd let me sit in for him and within 15 seconds, I'd lose his entire force. "No problem, we'll get some new ones" was his typical response.

Jeffrey was 41. He leaves his wife Vivian and four children, three of them still in middle school. His dedication to his family was the talk of the school. We knew his children because he'd bring them in with him. They loved getting to see Dad work. They'll miss him. So will we. When the law school community gathered yesterday to honor him, I remarked that Jeffrey's departure was a huge loss for this institution.

On the long and ever-changing journey through technology that has me at the moment blogging, using Powerpoint and clickers in the classroom, and creating web pages, Jeffrey was a reliable, trusted, caring, and informative companion. He was a fine friend. I will miss him. May you rest in peace, Jeffrey.

Busy day, but I can't let this go by. It's too good an opportunity.

As seen in earlier posts, such as this one, I've babbled on about taxes and the internet. It's a topic often in the news.

But death and the Internet?

Well, here's something to fill in the death part of that famous eternal duo, "death and taxes."

A long-time friend and a reader of this blog sent news that the Tenth Circuit has upheld a state regulation prohibiting several individuals from selling caskets to Oklahoma residents over the interent without a state license. The United States Supreme Court has on its docket cases involving state regulation of on-line wine sales.

The casket case is reported here.

So there we have it: death, taxes, and wine on the Internet. Not quite a movie title. Perhaps a best seller.

I'll be back today if I can. I have things to share but it's a day with a very full schedule.

What are you politically, that is. I've always maintained that I don't fit any label. Now there's a place where one can go and get plotted onto a graph that measures left/right and idealistic/pragmatic.

Well, no surprise. I'm just a wee bit right of center and barely on the pragmatic side of the pragmatic/idealistic divide.

SEE? I keep telling people I'm (a) moderate and they don't believe me. Well, here's the proof.

Go and get yourself plotted at Chris Lightfoot's Political Survey, which takes about 4 minutes to answer 75 questions of the "Agree/AgreeStrongly/Disagree/DisagreeStrongly/NoOpinion" variety.

Thanks to Paul Caron who runs the TaxProf Blog. Curious as to where tax professors are on the graph? Visit Paul's summary.

My comment, in a previous blog post, that "Scholars, most economists, many lawyers, and others agree that a progressive income tax is the most equitable." brought this reaction from a reader:

I dare say that no classic Austrian economist (Mises, Hayek, Friedman, etc.) would agree with that. In my eyes, they are the only school with a constitent understanding of the negative effects of taxation on wealth creation and freedom, and they would say that any form of taxation that imposes a heavier pro rata burden on the persons that are actually creating wealth (i.e., most effectively employing capital) has a similar disproportionate effect of economic dislocation (again, by taking more capital proportionately out of the hands of the people that are best using it). Progressive taxation is wealth transfer, pure and simple. If you believe in compelled wealth transfer, then yes, I suppose you believe it is equitable - but to me (and those of a libertarian ilk) there is nothing equitable about compulsion. Don't get me wrong, relief of the poor is noble - but only when it is voluntary - again of course, in my opinion.

Indeed, a progressive income tax is not proportionate. It imposes a higher rate of taxation on those with higher incomes. Of course there is a school of thought that taxation should be proportionate. And Hence the use of the adjective "most" when describing economists. More importantly, what are the justifications for a progressive income tax? And, how can a progressive income tax be designed?

Some proponents of a progressive income tax simply advocate wealth transfer. That is, the income tax is considered to be a good measure of wealth, and higher rates are imposed on those with higher incomes so that the revenue flow to the government can be used to provide goods and services to those with less income. Other proponents of a progressive income tax, without necessarily rejecting the first approach, argue that an income tax reflects a payment for the societal costs imposed by those generating income, and that those with higher incomes impose higher societal costs.

I will set to one side the question of whether TAXABLE INCOME, which is used to compute the federal income tax, or ALTERNATIVE MINIMUM TAXABLE INCOME, which is used to compute the supplemental federal alternative minimum tax, are good measures of wealth, or even of wealth increment. I do not think that they are, because they are riddled with all sorts of exclusions and deductions that cause wealthy individuals to report low taxable income and not-so-wealthy individuals to report high taxable income. Toss in credits, most of which are variant manifestations of the same "social policy" engineering reflected in exclusions and deductions, and the computation of federal income tax liability has far less to do with wealth increment than progressive tax adherents claim. Nonetheless, let's consider an income tax that taxes income, period.

Taxation as a mere wealth transfer device seems to fly in the face of libertarian principles. It is the government's business to protect the opportunities that people make for themselves or acquire through effort. It is not the government's business to guarantee outcome. Yet that libertarian perspective must yield, as do other libertarian perspectives, to the reality that "pure" libertarianism cannot exist unless people treat each other appropriately. People, however, don't. Hence, my "right" to drive a car must be tempered by government regulation of traffic signals, speed, and licensing. Most libertarian thinkers, though not all, accept such restraints. The justification is that these restraints are a price that needs to be paid to protect the opportunity to drive (else we'd all be dead very quickly). The justification, though, rests on the notion of protection, or, in other words, safety. Returning to taxation, does not the need to protect the society that provides the opportunities to earn income warrant elimination or amelioration of abject poverty that if left unchecked would cause society to disintegrate? True, it WOULD be nice if voluntary giving and charitable works eliminated poverty, but that hasn't happened. So wealth transfer can be seen more as an investment than a mere transfer. Taxation to support education increases the pool of qualified workers available to those who have the opportunity to employ people in order to earn income. Taxation that shifts wealth can maintain or improve the health of workers so that sick day inefficiencies don't plague the enterprise. There are other examples. True, there are individuals who succumb to the temptation to "live on the dole" which is why efforts, complicated as they end up becoming, are needed to transfer the wealth in ways that benefit society and not just a free-loading individual. Defining and applying the line is a challenge.

Turning to the second approach, it is not difficult to identify the societal costs imposed by those generating income, and to show that when the income is proportionately higher, the societal costs increase disproportionately. This isn't a new idea, and I won't repeat all of the commentary. Consider, for example, the real estate developer who builds a shopping mall or commercial strip. There are societal advantages: jobs are created (though in reality jobs are shifted from other areas as stores close because of the competition from the mall), markets are expanded. But there are costs: traffic becomes congested, increasing pollution and gasoline consumption. The locality's infrastructure, from fire and police protection through emergency medical services to street cleaning, is burdened. Taxes are increased. Some are imposed on merchants, and some on the population of the locality. The developer, having pocketed the profits, is long gone. If the developer doubles profits by building a mall that is twice as large, or by building a second one "down the road," the congestion increases disproportionately. So, too, do the burdens.

The user fees that I have long advocated would solve these problems. However, they would be resisted vehemently by developers. The true cost of most development, and of many other enterprises, causes many to be far less profitable than they appear to be. Consider Microsoft. It is very profitable. But most of its profits reflect the shifting to end users and corporate IS staffs the burden of fixing the mistakes in products rushed to market that aren't ready for prime time. The societal cost in the millions of hours wasted while Service Pack 2 downloads, verifies, unpacks, prepares to install, install, reconfigures, reboots, and then crashes, or while some other fix is installed or bug researched, almost outweighs so-called productivity gains generated by the software. Again, a user fee as I have proposed, such as a $n fee for each time Windows crashes, would obviate the need for an income tax. But it won't happen, will it?

One can also argue that the user fees for some government services, unlike a bridge toll user fee, would be more heavily imposed on those with higher income (assuming income was measured properly as a wealth increment). For example, from an economic perspective military defense is of disproportionately greater value to those with more to lose. Consider that even the provision of human capital to the military is a disproportionate tax on the not-so-wealthy.

So one can see why "most" economists (and others) conclude that a progressive income tax is the most equitable. It is not, however, the most efficient. In its current form, the income tax is horrendously inefficient. And inequitable. Because it is not an income tax but a "tax on the income of those who lack the resources to prevent themselves from being taxed." The earned income tax which I was condemning is the federal income tax taken to its logical extreme: only wages are taxed, because interest, dividends, capital gains, and pensions escape taxation (or are taxed at token levels) because their recipients have the political power and resources to wiggle free of a genuine income tax base. And it was in that posture that I described the earned income tax as violating, in effect, the principles of everyone, whether advocating progressive taxation or proportionate taxation. There simply is no justification for taxing earned income and not other forms of income. None. Period.

I don't like the federal income tax as it now exists. Or has existed. I don't like state and local income taxes. Or earned income taxes. I prefer user fees. I understand that user fees are "regressive" because they claim a higher share of a lower-income person's income than they do of a higher-income person's income. But so, too, are the fees for food, clothing, and other necessities. User fees, after all, are simply the prices charged by a supplier who happens to be a government. (Yes, I know that privitization of many government functions makes sense, and would shift charges from a "user fee" to a mere "private sector price" but I don't want to stray into that discussion at this time.)

There is, however, one sort of income tax that I could support. It is on its face not progressive but it is when it is carefully analyzed. To the advocates of wealth transfer I argue: If income is being used to measure wealth increment as a basis for taxation, then let's accept what it means to be "wealthy." A person is "wealthy" if they have something left after paying for food, clothing, medical care, shelter, and the like. So what's left over (assuming income is measured properly) is what should be taxed. To the advocates of "income tax as paying for societal costs" I argue: "Those who pay for what they eat or wear, etc., are paying societal costs as built into the price. So let's deal with what's left over."

With a goal of minimizing the current paperwork and compliance nightmare that stalks the income tax, the notion of requring each person to keep track of what they spend would be contrary to simplification goals. A poverty level income is calculated annually by the government. Take a percentage of it, say 125%. Each person computes income, subtracts this amount, and pays a tax of, say, 30% of the excess.

Is it progressive? Of course. Let's say the 125% level amount is $20,000. A person with $18,000 of income has no tax. A person with $25,000 of income has a tax of $1,500 (30 percent of $5,000). That's 6% of income. A person with $40,000 of income has a tax of $6,000 (30 percent of $20,000). That's 15% of income. A person with $500,000 of income has a tax of $144,000 (30% of $480,000). That's 28.8% of income. Looks awfully progressive to me.

As for revenue, with exclusions eliminated and deductions limited to the cost of generating income, a lot more goes into the initial computational base. I used numbers that were easy for computation. It would not be too difficult to determine a number that is revenue neutral.

There are other advantages to such a system. I wrote about those advantages in Section VI of TAX AND MARRIAGE: UNHITCHING THE HORSE AND THE CARRIAGE, 67 Tax Notes 539 (1995) and I'll let you go read it. That was almost ten years ago. Of course nothing has happened to move us closer to a sensible tax system.

In remarks (here, here, and here)unlikely to rise as far above the distant horizon as they ought, Alan Greenspan has dangled the prospect of cutting or delaying social security benefits to the 77,000,000 baby boomers born between 1945 and 1964. Noting the impact of longer life spans on the cash flow of the social security system, Greenspan suggested that if benefits are to be cut or the retirement age extended, it ought to be done now rather than later so that people have a chance to plan alternative sources of retirement income.

Greenspan's comments criticized promising more than can be delivered. But, Mr. Greenspan, isn't that what happens every day in every walk of life? Isn't every new TV show, computer program, automobile feature, airport check-in system, newly signed free agent, or $9.95 cleaning solution touted as far more than what it turns out to be? Oh, you're right, of course, Mr. Greenspan, but we live in a culture that likes the hype, and doesn't understand why enabling the hype produces the very disappointment of which the hype-lovers complain.

What Greenspan sees is the shadow that forms over every Ponzi scheme beginning to darken the distant horizons of social security. By 2035 the over-65 population will have doubled (if I'm around, I'll be one of them, so I can't make any jokes about highways and cruise ships, can I?). If social security benefits remain unchanged and the retirement age remains unchanged, there are three choices: (a) the system goes bankrupt, (b) higher taxes are imposed on workers and employers, (c) the government borrows a lot of money.

Without going into detail, each of those choices is bad. Very bad. So bad that the very security of the nation could be threatened. When 10 people are trying to bake 1,000 pies for 10,000 people but have only 4 hours and 2 ovens, it isn't going to happen. That's why Greenspan proposes that people stay in the kitchen a little longer, reducing the population in the dining room.

Will it happen? I doubt it. It will be studied. It will be debated. It will be discussed at conferences. It will be the subject of articles and press releases. But can the Congress figure this out and come up with a solution that works? I doubt it. No matter the solution, someone is going to be unhappy. And Congress doesn't want to make anyone unhappy. After all, we live in a culture that dictates happiness as some sort of condition the lack of which is the end of the world.

Notice that I didn't mention returning social security to the "I" part of Federal INSURANCE Contributions Act (FICA). As I wrote on a related topic a few months ago:

None of this would have happened had Social Security been left as an insurance program designed to assist those whose pensions and other income were insufficient to support them after retirement. Social Security was enacted, after all, as the Federal INSURANCE Contributions Act. Yep, the I in FICA means INSURANCE, not entitlement.

It's amazing how much a mess is created when the grabbing outpaces the growing, when the reaping outpaces the planting, and when the using outpaces the production.

I will do my part. I will never retire. I will put students through the paces until they cart me away. I will grind out MauledAgain blogbits for as long as my fingers can move (even if my brain quits, so beware!).

Relax, I was joking. After all, they can cart me away while I'm still breathing. And they probably will try.

Imagine living in a city, paying taxes, watching your neighbors' trash get collected by the city without charge, and having to pay a private hauler to remove your trash.

That's what life has been like for people living in condominium and cooperative units in the city of Philadelphia. At least it was until City Council enacted a bill providing no-fee trash collections not only for the neighbors living in single family homes, duplexes, and row homes, but also for the people living in the condos and cooperatives.

Fair? Of course. The tax collections are paid from general revenues, which are funded by taxes imposed on all property owners. So of course people living in condo units ought not be required to pay private haulers to remove their trash.

If that doesn't make sense, consider the user fee approach, which is the system used in some other municipalities. Would it be difficult to see as unfair a system that imposed a trash collection fee on people living in condos and cooperatives but that required them to pay private haulers to collect their trash?

So what's the big deal?

The big deal is that the mayor of Philadelphia refuses to comply with the legislation and refuses to allow the city trash collectors to pick up trash from condos and cooperatives. So, this is great, City Council sued the Mayor.

When the bill was enacted and sent to the mayor for signature, he returned it unsigned but without having exercised a veto. He informed Council he would not enforce the bill, claiming that City Council has no authority to dictate that revenue be spent on a specific activity.

In early 2003 (before the MauledAgain blog existed so I didn't get to write about it back then), City Council sued the Mayor in an action for mandamus, seeking a court order directing the Mayor to have the trash collected. Council moved for preemptory judgment and the Mayor moved for summary judgment. The Common Pleas judge held for Council on its motion and denied the Mayor's motion.

The Mayor appealed to Commonwealth Court. On Wednesday that court affirmed the Common Pleas Court, in The Council of the City of Philadelphia v. Honorable John F. Street. Read the opinion if you like, but the upshot is that the court distinguished between legislation directing that the trash collection services provided to some residence owners be extended to others, which Council can direct, and legislation directing HOW the trash is to be collected, which Council cannot direct.

Supposedly there will be problems. One report notes that the city collects trash once or twice a week, and that means the condo and cooperative owners with limited trash storage space accustomed to daily pick-ups would have a storage problem. The incoming president of the Philadelphia Condominium Managers' Association suggested that the city reimburse condo and cooperative owners for their trash pickup costs. He noted that such a plan would "anger" city unions. To that I add a concern that the reimbursement could not be for more than what other residents get (once or twice a week), else taxpayers would be subsidizing condos for their trash storage space shortage.

Though the Mayor rests his legal arguments on City Council's alleged lack of authority, the bottom line is that the Mayor claims that there isn't enough money to provide trash collection service to the condos and cooperatives. OK, let's charge cars arriving at the toll booth $4 but then refuse to let some cross because there isn't enough money to pave the bridge (while spending the money on some other project). Supporters of the trash collection legislation speculate that without it there will be more incentive for people to leave the city of Philadelphia and live elsewhere. Perhaps. But wherever there is a locality with a nice tax system in place, it will become as has the quiet beach resort suddenly discovered by thousands: not what it used to be. People will flock to the place, demand for services will increase, taxes will increase, and someone's trash won't get picked up. The rest, as they say, is history in the making.

Oh, the Mayor of Philadelphia plans to appeal the Commonwealth Court decision. Warning to the Pennsylvania Supreme Court: trash headed your way.

I'm still catching up on the tax news that arrived while I was away and shortly thereafter. When I read this news from two weeks ago, I thought, "There's good news and bad news in this report."

The news came from a Department of Justice press release. The United States Court of Appeals for the Ninth Circuit affirmed a federal district court preliminary injunction barring Irwin Schiff and two associates from selling their tax evasion scheme. This is the ploy that rests on a very mistaken notion that a person need pay federal income tax only if he or she wants to do so. Not only were Schiff and his comrades prohibited from advertising or selling the “zero-income tax return” plan, they were barred from preparing tax returns for others and from assisting others to violate the tax law, whether by providing instructions on how to file fraudulent returns or otherwise. To top it off, the injunction requires Schiff et al to provide a copy of the injuntion to each of their customers, to post it on their websites, and to provide the government with a list of their customers.

As of the time the district court issued the prliminary injunction in March of this year, more than 3,000 persons had use the plan, and $56 million in taxes had been evaded. The ACLU came to Schiff's defense with respect to his book ("The Federal Mafia"), arguing that the First Amendment protects its sale. The court explained that the First Amendment does not protect fraudulent commercial speech. Nor, according to the Ninth Circuit, did it violate the First Amendment to require Schiff to post the injunction on his website.

The bad news? The bad news is that there are people willing to pay for this nonsense, and who think that the impossible is fact. All citizens have an obligation to know their civic obligations, and it isn't difficult to find an educated tax practitioner who can explain the dangers of following Schiff's advice. Perhaps pointing out that some of the individuals who used Schiff's plan were themselves convicted of criminal tax fraud would make an impression on these folks who follow the pied piper of tax protest. I wonder if this injunction will put an end to use of this plan, and I wonder how many more plans will pop up because there is a market of customers who so desperately want to ride for free.

The good news? The good news is that the tax protest movement, which some considered to be a harmless expression of discontent, is finally finding itself under the hammer because it has moved from mere protest to violation of law. Every dollar that goes unpaid because someone doesn't want to satisfy their legal obligation is a dollar that gets added to another person's tax bill, that gets subtracted from another person's benefit, or that gets added to the federal deficit.

If all taxes that should be paid each year were paid, the federal deficit would shrink, and for most years, disappear. If all taxes that should have been paid during the past 30 years, and that have not been paid, were collected (even without interest and penalties), the government would be awash in money and could cut taxes significantly while reducing the federal debt substantially.

Yes, pulling that much money out of the economy would have a shock effect, but that shock would be mitigated by the money being put back into the economy. What would happen is that the money would be taken from people who ought not have it and get transferred to those who have been financing the deadbeats for all these decades.

Of course, as a practical matter, most of the people who "protested" by not paying have little or nothing in the way of assets. I'm certain they were advised not to stash the cash where it could be found when the piper stopped piping.

Several years ago, after receiving email from strangers who sought my imprimatur on tax evasion schemes, and after dealing with their unhappiness after I declined to do so and explained why the schemes were wrong, I posted a page on my Law School web site explaining why it is, in the long-run, wrong and futile to follow the pipe dreams of someone like Schiff. (Go to the web page, select professional projects from the left-side menu, and then click on "FOR WOULD BE TRAVELLERS ON THE NONCOMPLIANT FEDERAL INCOME TAX PROTESTER PATH:" to read my exposition on the matter.

I think this posting will make me as many new friends as did that web page. Sorry about the sarcasm. And thanks in advance to the several people I know will be emailing me with words of thanks and encouragement.

My previous posts on the proposal to restore the sales tax deduction (here and here) generated some interesting responses.

A colleague at another law school recommended David Brunori's new book "Local Tax Policy: A Federalist Perspective" (Urban Institute Press). David is the editor of State Tax Notes, and has been the recipient (and publisher) of several missives from me. In his book, according to my colleague, David, who supports use of the property tax, explains that some states have accommodated people on fixed incomes by letting them postpone payment, with interest, until death, with a lien in place to protect the government's economic interest. That reminds me of a reverse mortgage. It's not as forgiving as something along the lines of a low-income tax relief provision, but it works.

This same colleague reports he suggested this idea recently at a dinner party, and the group "largely was repulsed by the idea of not being able to pass along their house to their children at death, though they likewise did not support property tax increases." Three questions that I'd like to ask. One, would this group cut school and other government spending or use some other revenue source? Two, why would the existence of a lien necessarily prevent passing the house to the children, and would it be any less of an obstacle than a mortgage or reverse mortgage? Three, how many children really want the parents' house? I'm guessing very few. Children live elsewhere. Children have their own homes. Children, and their families, probably don't want to move. I'm guessing what children want is the economic value of the house. Had the parent paid the property taxes (and sold the house) the net asset value passing to the child would be the same, aside from the interest on the tax payment postponement.

A practitioner in Texas pointed out that utnil the alternative minimum tax is fixed, allowing a deduction for sales taxes would be about as useful as the education credits enacted during the Clinton Administration. He's right, assuming that the sales tax deduction is treated for AMT purposes as is the income tax deduction. The proposed legislation as it now stands does just that.

If a defender of the proposal replies that taxpayers not subject to the AMT would benefit, I would counter with something along the same lines as the comment from the practitioner in Texas: Most of the taxpayers not subject to the AMT are claiming the standard deduction. So, they, too, get no benefit.

So what's the proposal about? It's about politicians crowing that they "did something to help their constituents, to lower taxes, to foster fairness,...." In fact, they've done nothing, with little revenue cost. Nice ploy. Here's hoping the citizens pick up on this gambit and see it for what it is.

I told my students this morning that "tax policy" gets considered in the course because all of us react to a piece of tax law with the one-word question, "Why?" The tax policy answer, I continued, necessarily involves tax politics. I trust that by the end of the semester my students will understand the smoke and mirrors that masks so much of what REALLY is happening with the tax law. Give me another 1,000 years of teaching and 200,000 students (each with 30 clients) and I just might get this message across to enough people.

Who's back? The students, that's who. Classes started today, and so it was time to roll out the latest addition to the teaching toolbox: student response pads ("clickers") from E-Instruction. After all sorts of discussion on this blog, beginning here, and continuing here, it's time to see what sort of impact their use has on the students' learning experience.

Of the 80 students, 63 had obtained and registered their clickers by the time class started. I had intended to ask four introductory questions but only got to the first one (the other three, dealing with student experience doing tax returns, will debut on Wednesday). I had this feeling that some of the students had used clickers while in college. So I asked if they had used clickers while in college. Of the 63 students, 60 replied. I will await your guess as to how many had used clickers.

Other than a few glitches, the mechanics of the process worked well. I must remember to set the receiving unit with its infrared detector facing the class. I had made the same goof while a few of us were "playing" with the clickers over the summer. The students, I think, have learned not to point at the projection screen but at the receiver unit. And I will remember to put the focus back on Powerpoint when in slide show mode before pressing "N" for next, else if the focus has shifted to the stay-on-top clicker toolbar it pops open the next question.

The composition of questions on the fly awaits real-time testing. There were several times in today's class when I was tempted to do that (questions that I would have prepped had I thought of them in advance), but clock management trumped.

One last thought: the students appeared to be "into" the clickers. We'll see if that changes when I shift from a "no wrong answer" question to a "not counted toward grade but has a correct answer" question or to a "counts toward the grade and has a correct answer" question.

The Pennsylvania legislature is sharpening its knives as it readies the killing of the goose that lays the revenue eggs. Fresh off enacting legislation that permits local school districts, if authorized by referendum, to enact earned income taxes or full income taxes as a revenue replacement for reduction of local real property taxes, dozens of legislators have introduced a series of bills (House Bills 2750, 2751, and 2753) that would remove the right of school districts to impose real property taxes, and in return grant them authority to enact not only local earned income taxes and full income taxes, but also to increase the real property transfer tax by 2 percentage points (in most instances doubling it from 2% to 4%) and to authorize a 4.5% business receipts tax.

Do these folks pay attention to the news? Do they live in that ideal world so many desire, where one never meets a "tax type" at a dinner party, PTA meeting, concert or sporting event? Did they ever take a tax policy course?

The impetus for all of this legislative busy-ness is the public dislike of real property taxes. Of course, the public dislikes all taxes, so don't expect a parade down Harrisburg's main street when one bad tax is replaced by another bad tax. Expect another decade of maneuvering to get rid of the replacement tax. To the advocates of real property tax repeal I have these words of advice: Be careful what you wish for. You might get it. And then being pining for the "good old days."

Yes, the real property tax poses a problem for people whose incomes are fixed and whose homes continue to increase in value. Real property taxes for these folks increase while their income doesn't. But let's look more closely. Is it really such a HARDSHIP if a person pulling down $300,000 in pensions and investment income needs to cope with a $400 real property tax increase? On the other hand, someone scraping by on social security and a small pension finds a $250 increase taking a meaningful chunk out of a $15,000 annual income. And let's not forget that a significant number of elderly no longer own homes, and in some cases, never owned homes.

The cry that real property taxes hurt the elderly is as misleading as the silliness the late Rep. Claude Pepper rode to fame. His mantra that "the elderly are poor" led to a shift in government outlay allocation that has left us with a nation in which poverty is rampant among children. The simple fact is that a person's age should no more be used as a measure of their economic status as should their hair color or lack thereof. And, of course, there are people who cannot be classifed as "elderly" for whom real property tax increases are a serious burden, though most young poor don't have the opportunity to own real property.

So the relief ought to be provided to those who need it, namely, the poor. This is what has been done with the state income tax. True, the definition of "poor" can and will fuel some debate, but it can be resolved.

How does one pay for real property tax relief? By raising taxes. Either the real property tax imposed on those not getting relief is increased or some other tax is increased or invented.

Good tax policy dictates that the replacement revenue source ought to be the most equitable tax available. Scholars, most economists, many lawyers, and others agree that a progressive income tax is the most equitable. It may not be the most efficient, which suggests that revenue needs to be sourced among multiple taxes. The Pennsylvania income tax isn't very progressive. There is that poverty relief provision, and there are some incomes (e.g., pensions and IRA distributions) that aren't taxed.

But even the far-from-ideal Pennsylvania income tax is a whole lot better than the regressive earned income tax. Why should someone with $400,000 of investment income be spared participation in the funding of public schools while a person sweating to bring in $30,000 is nailed with a $300 or $600 tax bill? Probably because the person living on $400,000 of investment income can pick up the phone and call powerful people in Harrisburg.

Notice to Pennsylvania legislators: the earned income tax is a horrorible tax. Get rid of it. Do not encourage its proliferation.

It gets worse. The same legislators propose a business receipts tax. Are they aware that this is the same type of tax that pushed businesses out of Philadelphia? Are they aware that even more businesses would leave but for the return of the revenue through the so-called Keystone Zone tax relief? Are they aware that a business receipts tax applied throughout the state leaves no source of revenue to provide tax relief to keep businesses from leaving the state? Are they aware that businesses are already leaving the state and have been leaving for the past decade? Are they aware that their taxation policy toward business has made Pennsylvania the new "poor person on the block" among Northeastern states? Have they been reading the news reports about college and university graduates leaving for jobs in New York, Washington, Atlanta, New Orleans, and places not in Pennsylvania?

Have any of these legislators read or heard the story of the golden goose? Were they, as children, too busy trying to figure out how to get an allowance increase that they had no time to study the lessons of mythology?

Have the Pennsylvania legislators read the studies that analyze what happens when taxes on a business are increased? Do they understand that the tax increase will be passed on to consumers, including the so-called "poor elderly" who will turn from complaining about real property tax increases to complaining about increases in the cost of getting their heaters serviced, their gutters cleaned, and their pizzas delivered? Do the legislators understand that some businesses will up and leave or shut down? Have they read what happened in states that made insurance companies limit their premiums while accident claim costs increased?

Why it is so difficult for the Pennsylvania legislature to authorize a local piggyback onto the state income tax, and to leave it at that, puzzles me. There could be something more to this that I'm missing. Is there something truly admirable about a business receipts tax?

Don't get me wrong. There are some sensible legislators in Harrisburg. I don't envy them. I can't imagine what it's like to try to convince one's legislative colleagues that they're going about it the wrong way. Oh, wait, yes I can. I do that here quite a bit.

A public hearing will be held on August 25 at 9 a.m. at the Tredyffrin Township Building in Chester County. Thanks to regular blog reader, former student, and Graduate Tax Program teaching colleague Ryan Bornstein for bringing this to my attention.

Oh, have you noticed that a 9 a.m. meeting is inconvenient for people out EARNING their income and CONDUCTING BUSINESS. So who's going to show up and stomp their feet in support of this legislation? Yep, you've got it. Don't tell me that the bill sponsors aren't picking their audiences carefully. I'd go, except I have a class to teach. It's a FEDERAL tax class but perhaps I can sneak in an analogy to the Congress (whose tax legislation practices have won disciples in Harrisburg). I'd do so at the risk of being accused yet again of "going off on a tangent." Too bad. It's the stepping back to see the bigger picture that brings appreciation of what's being painted on the entire canvas.

One of this blog's regular readers, Joe Kristan, of Roth & Company, PC, posed a question to me in response to my previous posting concerning the federal income deduction for state taxes. He asked, "What are your thoughts about a trade or business deduction for income
taxes paid on business income of pass-throughs?"

It's a though-provoking question. I've decided to share the thoughts that were provoked. Hopefully, people won't find these thoughts to be too provocative.

So let's get MauledAgain: If the federal income tax deduction for taxes is repealed, then there are two logical ways to treat taxes on business income.

No deduction, if one accepts the idea that whether or not a state imposes a tax on the income (on gross, net, or some differently defined taxable income) the federal income tax burden ought to be imposed on the pre-tax profits.

A deduction, if one accepts the idea that a tax on business income is akin to a fee or other business expense.

If one takes the second view, then taxpaying entities should get the deduction. So, too, should sole proprietors. So, too, should the pass-through member who pays the tax.

Taking the second view requires defining business income. Are wages business income? In one sense, yes, they are income from performing business as an employee. In another sense, no, the employee is not operating a business but working for it.

For purposes of simplicity, I'd favor the first approach. That, of course, would favor taxpayers who do businesses in states with higher user fees and lower (or no) income taxes. Businesses can vote with their feet.

But.... then the states with user fees would be favored, and the tax law could be seen as encouraging states to have user fees (which isn't a bad idea, but it conflicts with the idea that Congress ought not try to influence how states do taxation apart from Constitutional concerns.

I add to those thoughts a few things that have since wandered into my brain.

A good argument can be made that so long as the income tax permits the deduction of business expenses, then a deduction should be allowed for user fees, taxes, and other governmental charges. Of course, if the charge or fee is for something with a long-term benefit capitalization and amortization would be in order, but that's a timing question. Deductions also are allowed under current law for the cost of producing or collecting income, even if it is not in connection with a trade or business.

There are user fees and taxes that are not paid to run a business or to generate or collect income. These ought not be deductible. Thus, the bridge toll paid while driving to a vacation resort is non-deductible, even if called a user fee. The gasoline tax paid on fuel consumed in a personal-use vehicle is not, and ought not be, deductible for this reason alone, let alone energy policy issues.

But the line in the tax law isn't so clear-cut. What happens those expenses which if not paid or incurred would prevent the running of the business or the generation of the income. The sole proprietor needs food and clothing, and in most cases, a hair-cut. Tax law is settled. These expenses are not deductible. The test, therefore, is not so simple as "paid to run a business or to generate or collect income."

Let's consider, then, state taxes. A state excise tax paid on a product to be resold becomes part of inventory cost and eventually is deducted (or subtracted) in computing taxable income. A state excise tax paid on the cost of electricity used to power the business is deducted (or in a manufacturing situation, added in whole or in part to the cost of the manufactured product and eventually deducted). Generally, businesses do not pay sales taxes on products purchased for resale. What of a sales tax paid on something like office supplies? Deductible? Yes.

The results should be the same for the sole proprietor and they are.

Turning next to state income taxes, under current law they are deductible. My proposal that a way to resolve the existing advantage held by taxpayers living in states that rely more heavily or totally on income taxes rather than sales taxes is to eliminate the deduction for state income taxes leaves us with Joe's question. In other words, ALL state income taxes? Or something similar to what the law permits with respect to state sales taxes?

The comparison breaks down at one point. Sales taxes are imposed on the sale of items. Income taxes are imposed on a business profits, as measured generally. Is the income tax a cost of doing business or an imposition that arises AFTER the business has generated its output? I favor the conclusion that income taxes are NOT a cost of doing business but are a cost of MAKING MONEY FROM a business.

Where does that take us? It takes us to a repeal of the deduction for state income taxes, with survival of the deduction for state sales taxes imposed on items purchased and consumed by a business. So what? After all, it also leaves us with a deduction for license fees, highway tolls, and other user charges incurred by the business even though those items are not deductible when incurred outside of a business (or income generating activity).

So what? The "so what" is that, in theory, state legislatures would shift revenue sources from the income tax to user fees, thinking that with the federal subsidization in place (through the deduction), businesses could "withstand" higher rates for deductible state taxes than for nondeductible state taxes. Such a result would mean that the federal decision to repeal the state income tax deduction would influence state revenue choices. Not that federal legislators are shy about trying to tell state legislatures (and state judges, and state everyone elses) what to do.

But that's in theory. In practice, I doubt much would happen. Consider current law. In theory, states without deductible state income taxes ought to be shifting FROM nondeductible state sales taxes TO deductible state income taxes. But as a general rule, they're not. (The theoretical Pennsylvania shift from a deductible real estate tax to a deductible local income tax proves nothing in this respect).

Why not? Because a whole host of other factors influence state legislators when they fiddle with state revenue sources. Legislatures are pressured to set up lotteries and permit gambling as these are seen (wrongly) as cost-free to the taxpayers. So-called "sin taxes" are favorites. State income taxes meet a lot of resistance. More, in many respects, than do state sales taxes. Why the latter are so distasteful to academics but not to the citizenry generally is an interesting question that suggests a need for some "psychological tax perception" studies. Money deducted from a paycheck for some reasons seems more painful to people than money added to the tally at the cash register, even if the latter is more than the former (as it is in some states).

Of course, my proposal, Joe's question, and this posting in reply all qualify as theoretical musings. That's because, barring some blinding light knocking Congress off its tax horse, it's unlikely that we'll see the repeal of the federal income tax deduction for state income taxes.

I just cannot resist reacting to a story heard this morning on the local news station. I don't see it on the home page of its web site.

According to the story, auto insurance companies will lower their rates for drivers who agree to put tracking devices into their cars. Premiums will be reduced based on speed and on total miles driven.

The privacy advocates will have problems with this proposal, but if the government isn't involved, there's no Constitutional issue. Several major trucking companies have been using these types of devices for years, in some instances using them to recover stolen tractor-trailers.

What I don't understand is how use of the tracking devices will permit the reduction of rates. What will happen is the SHIFTING OF RATES.

First, the people who will "sign up" for the tracking devices are likely to be those who drive less and who drive slowly. I doubt the speed demons who haul down the interstate at 85, 90 or more will sign up. At least not voluntarily.

If the insurance company lowers the premiums paid by the people who agree to use the devices, what happens? Easy. Corporate revenue declines. Then toss in the cost of purchasing, installing, and tracking the devices.

Then what happens? Pick one, or some combination:

1. The salaries of the CEO and other big-wigs are reduced. Nah. Are you kidding me?

2. Profits are reduced and the shareholders revel in the knowledge that safety, somehow, has won. Nah, nah, and nah (no, the profits are not reduced, no, the shareholders don't revel, and no, safety doesn't win).

3. Expenses are reduced because the tracking devices reduce the number of accidents by encouraging slower, and thus safer, driving. No to this one. First, as I pointed out, the people going for this deal are already driving few miles and driving slowly. Too slowly, in a lot of instances. See, too many people think that speed kils. WRONG. What kills is SPEED DIFFERENTIAL. I saw it last week on my trip to New Hampshire. Three lanes of interstate, moving along at 65 and there, in the center lane, is Ms SafeDriver, putting along at 45, YES, 45. This forces all the traffic around her. It forces three lanes into two. Then cars from the right and left lane seek to return to the middle. VERY DANGEROUS. Ms. SafeDriver is a cause of "lane turbulence" and is among those dangerous drivers whose bad driving increases the risk of accidents FOR OTHER DRIVERS. Before you think I invented this, keep reading. My father, who worked for decades for an automobile insurance company, persuaded me to read a book, "The Book of Expert Driving" which his company distributed as a public service. EVERYONE WHO WANTS A LICENSE MUST READ THIS BOOK. Especially Ms SafeDriver and others who think that slower is better. Right. Why not drive at 5 mph? Why not go back to horses? Oh, horses were far more dangerous than cars, on a per person and per mile basis.

4. Revenues are maintained, and increased to cover the cost of the speed tracker program, by raising rates. Whose rates? Everyone else. Even the good drivers.

So this speed tracker device program is a bad idea. It will encourage the dangerous slowpokes to slow down even more. It won't find participants among the speed demons. And as for miles driven, the insurance companies already know that through the vehicle annual inspection program.

Instead, A GOOD IDEA would be a "drunk driving detector" and a "substance abuse in progress detector." The best would be a "stupid idiot driver detector" but I don't think they've yet been invented.

OK, maybe the program will be implemented in a way other than as described in the news program. I'd really like to hear from the theoreticians who have designed this program, especially from an insurance company executive.

Ah, I almost forgot. Where is this happening? Minnesota. Where are you Jesse Ventura? My prediction: the next states to get on this bandwagon will be Wisconsin, Massachusetts, New Jersey, and California. Curious as to where I get that prediction? Let me know and I'll share what the students in my Decedents' Trusts and Estates classes already know.

In the last post I declined to get hyper-technical, motivated by a desire to refrain from chasing away the few readers that this blog has.

Just to prove the point, let me share a quotation from a tax case that was shared among tax law professors by a colleague who was responding to an inquiry asking us to nominate our "favorite tax quotes." Keep in mind that Tax Analysts annually publishes a growing list of tax quotes that is worth reading if you can find the time.

This one, though, is so wonderfully reflective of life in the tax world:

From PHINNEY V. TUBOSCOPE CO., 268 F.2D 233 (5TH CIR. 1959): "We here deal with problems arising under the Korean Excess Profits Tax Statute, as to which others have said, and we have echoed, that this statute " * * * probably represented the most intricate and baffling enactment ever to receive Congressional approval." Burford-Toothaker Tractor Co. . . . . As we struggle through this intricate web of definitions, exclusions, provisions, exceptions, cross references, limitations, provisos and a general but unavoidable obscurity, it is our conclusion that § 430(e)(2)(B)(i), expressly incorporating § 445(g)(2)(B), impliedly carries with it § 445(g)(3), though not necessarily that portion of § 461 impliedly incorporated by the reference to § 462(g) in § 445(g)(1), so that the attribution rules of § 503(a)(1)(2) (5) makes ownership of the corporate stock by the minor beneficiaries of a trust the ownership of the father, and thus pushes the stock ownership beyond the critical 50 per cent to make thereby a new corporation an old one."

My thanks to Eliot Manning for reminding us of this, especially as it arrived in the world long, long before I knew anything about taxes, and only a few years after I did. No, I've never read, studied, analyzed, or taught the Korean Excess Profits Tax Statute. Wow, I missed out. I feel SO deprived.

Last week's Tax Notes carried two articles addressing the current proposals to restore the federal income tax deduction for state sales taxes, which was abolished in 1986 as part of the "deductions and exclusions are removed but rates are lowered" reform that fell to the wayside when rates subsequently were increased. This is a topic on which I previously commented.

After reading these two articles, two more thoughts wandered into my head. The article supporting the deduction restoration argues that the absence of a deduction puts taxpayers living in sales-tax-dependent states that do not have income taxes at a disadvantage. This is true. Both articles address the notion that repeal of the sales tax was an attempt to encourage states to shift from regressive sales taxes to progressive income taxes.

First it's just plain inappropriate and silly for the federal government to try to influence or control how a state raises revenue, other than restrictions intended to prevent states from violating the Constitution. It's inappropriate because if the residents of a state want a regressive tax system, that's their choice and they have a right to make it. It's silly, because, as events show, eliminating the sales tax deduction had no effect on tax decisions made in state legislatures. There's a lesson here for the Congress. If it bothers to read, study, listen, and learn.

Second, resolving the unquestioned disparity in the federal tax treatment between taxpayers living in "income tax states" and those living in "sales tax states" doesn't necessarily require restoration of the sales tax deduction. Resolution also can occur by REPEAL OF THE DEDUCTION FOR STATE INCOME TAXES. Trust me, that one won't sell anywhere, but logic, in contrast to greed, supports such a conclusion.

Here's why. A federal income tax deduction for a state tax shifts a portion of the burden of that tax from the person on whom it is imposed to taxpayers generally. It shifts the burden from taxpayers in one state to taxpayers in another, it shifts the burden among taxpayers in the state, and it can shift the burden from higher income taxpayers to lower income taxpayers (because lower income taxpayers tend to use thed federal standard deduction and forego the state income tax deduction). A taxpayer in the 25% federal income tax bracket who pays a $3,000 state income tax to State A saves $750 in federal income taxes on account of the federal income tax deduction for state income taxes. That means taxpayers across the nation, and not only in State A, pay $750 more in federal income taxes than they would have paid had there been no deduction. But wait! A taxpayer in State B, who pays state income tax, in turn gets a federal income tax reduction, and depending on how much state income tax is paid, comes out a bit ahead, even, or a bit behind as compared to life without a federal income tax deduction for state income taxes. The taxpayer in a state requiring payment of high sales taxes but no income tax loses. But does restoring the state sales tax solve the problem? No, it simply adds to the shifting. With restoration, it means state tax burdens will be shifted from taxpayers in high tax states (whether the tax is income, sales, or as is sadly the case in a few states, BOTH!) to taxpayers in low tax states. Thus, taxpayers who voted to have lower taxes and less government intrustion in life end up paying for the programs operated in states where the taxpayers voted to imitate Sweden. OK, that's a bit simplistic and contrasting the edges, but if I got hypertechnical the reading of this post definitely would stop here.

This debate reminds me of the discussion between two children and a parent that takes place after one child is caught playing with one of dad's power tools. "It's not fair," says the other child, "he gets to play with a power tool and I haven't." Fairness could dictate that both children get to play with power tools. It also dictates that neither child gets to play. It's common sense that helps make the choice between the two avenues to fairness easy to make. Ah, common sense. I haven't seen much of that lately.

Righting a wrong can be done by eliminating the wrong rather than wronging the right.

I cannot resist a brief comment on a story in today's Philadelphia Inquirer. Penn State University, which "acquired" the formerly independent Dickinson School of Law in Carlisle, Pennsylvania, in a merger several years ago, has been trying to relocate the school in State College. The Law School's Board of Governors, which retained powers with respect to the school's name and location, has voted to recommend that Penn State renovate the school's Carlisle campus rather than build it a new facility in State College.

The relocation plan would have divided the Law School between two locations. The School's clinic programs, which give students practice-world experience while assisting persons in need of legal assistance who most likely would not otherwise get it, would need to remain in Carlisle. That alone is reason to consider the relocation plan detrimental for the students, their present and future clients, and legal education in Pennsylvania. Interestingly, it would cost less money to renovate the Carlisle campus than to build a new facility in State College. Perhaps there is some perceived long-term operating cost savings?

My interest in this story remains high, not only because I am a legal educator who pays attention to these issues, but also because I taught at Dickinson for two and a half years at the beginning of my law teaching career. Though some students might think a so-called "party happy" State College (a/k/a "Happy Valley") has its advantages over an allegedly "boring" Carlisle, I continue to wonder why there would be any advantage to the law school from such a relocation. In an era of digital technology, including video-conferencing and distance learning, the need to concentrate everything in one place flies in the face of the "decentralization" approach that political and other conditions suggest is needed in both the near-term future and the short-term future (if not longer).

Here's hoping that the trustees of Penn State, which "acquired" the law school in order to keep up with the Big Ten universities that have law schools when it gave up independent athletic status and joined that athletic conference (another bad move), have the sense, this time around, to refrain from destroying one of the qualities that has permitted Dickinson to be a quality law school. The other, unfortunately, which is independence, has been lost, though perhaps it may someday, somehow be recovered.

For a law school, independence has its advantages. Yet few independent law schools remain, just as few independent banks or other businesses remain. When a university founds a law school, the latter is dependent for a few years. But then law schools become "cash cows" for the universities. Even the law schools created by persons or entities other than universities become attractive merger targets.

The alleged advantages of merger to an independent law school don't outweigh the benefits of independence. Having a university handle administrative tasks, ranging from registration and billing to custodial services, is over-rated, and can easily be done by an independent law school for itself. The opportunity for multi-disciplinary and inter-school cooperation is closer to home for the university law school, but independent law schools don't have the "partner with the university's school of whatever" pressure that can preclude partnering with a more reputable school that is not part of the university. In fact, some university law schools have partnered with schools outside their university because the university does not have a school, and it works well.

Some other time I can get into the particulars of these advantages and disadvantages. For the moment, I'll simply hope that this situation works out in a way that counters the past pattern of merger mania and that encourages the development and nurturing of educational independence in graduate programs much as it's beginning to develop in the K-12 world with charter schools and other innovative ideas.

One of my readers posted a reaction to yesterday's posting on attempts to expand the phone excise tax. Joe Kristan, of Roth & Company, P.C., quoted a part of my summary of Declan McCullagh's column on the topic. You can see Joe's post here.

Credit goes where credit is due. The analogies to a tax on Henry Ford for horse troughs and on laser printer manufacturers to prop up manual typewriter manufacturers are the product of Declan's imagination. And they're good. That's why I brought them to the attention of more people.

Joe then comments, "And then he gets angry." I'm not sure if that's in reference to my comments, or the rest of the summary of Declan's column. Or perhaps both.

I'm not angry. Anger requires energy, and there's no way I'm wasting precious energy on the Congress. I, and probably many others, share a different perspective: total amazement, bewilderment, and sorrow that legislatures and legislators are so ineffective and inefficient. And a lot of other things. I can't speak for others, but the words for me are disgusted, disappointed, offended, and a few others that I'll leave to your imagination.

In any event, Joe drew an analogy to Lou Ferrigno, a/k/a the Incredible Hulk.

Anyhow, Joe's comment inspired Paul Caron, a member of the law faculty at the University of Cincinnati who runs the TaxProfBlog to start a Tax Profs as Super Heroes? contest. So he has a picture of me next to Ferrigno in green. Man, does that make me look good, ha ha!!

I surely don't identify with the "Incredible" part. I am, I think, quite credible. It's almost a liability.

As for the Hulk stuff, ha! I wish! 'Cept I'd need to get a new wardrobe.

And I do need to get Villanova to change the picture it has of me, which Paul and others use. Ever since Breton Littlehales* photographed me for the Tax Management Millenium calendar, I've found it much more difficult to look favorably on the work product of many other photographers. The ones taking the pictures at Villanova (they seem to get replaced every year, hmmmm) don't seem to have the knack to get the shutter release timed with the best of the pose.

So perhaps next year I'll show up for the photo appointment with my face painted green. And I'll scowl.

As for that contest, I'm going to sit back and watch who shows up as Hercules, Xena, WonderWoman, Austin Powers, MightyMouse, Roadrunner, Wile E. Coyote, and, oh wait, cartoon characters don't count? Drat. Tax professors CAN be amusing. Even to people who aren't tax professors.

*I cannot find a web site for Breton Littlehales. I wish I could because I'd put in a link. It was the best photographic experience (as a subject) that I've ever had.