MauledAgain

It begins with an email from a student to a tax law professor, who shares the question with other tax law professors.

The student had been watching Food Channel, which put up a factoid that said in 1893 the Supreme Court ruled that a tomato was a vegetable, making it subject to a vegetable import tax. Fruits were not taxed. The student wanted to know if this was true, and could the Supreme Court do this?

It is impressive that within minutes, two tax law professors came through with responses, identifying the case (Nix v. Hedden, 149 U.S. 304 (1893), along with the explanation that the Supreme Court relied on the "ordinary meaning" of the words fruit and vegetable. Before there was a federal income tax, tariffs were important revenue sources, requiring courts to decide if dictionary definitions should be used when statutes failed to define terms. See Aprill, The Law of the Word: Dictionary Shopping the Supreme Court, 30 Ariz. St. L. J. 275 (1998).

Yet another response brought this quote from the case:

Botanically speaking, tomatoes are the fruit of a vine, just as are cucumbers, squashes, beans and peas. But in the common language of the people, whether sellers or consumers of provisions, all these are vegetables, which are grown in kitchen gardens, and which, whether eaten cooked or raw, are, like potatoes, carrots, parsnips, turnips, beets, cauliflower, cabbage, celery and lettuce, usually served at dinner in, with or after the soup, fish or meats which constitute the principal part of the repast, and not, like fruits generally, as dessert.

And tax law professors being the way they are, while I was drafting a response, someone asked how happy we would be if a fruit salad ordered at a restaurant came with tomatoes and beans, both of which are classified as fruits by botanists. Someone else noted that in North Carolina it is said that tobacco is a vegetable (but I wonder if something that should not be eaten is a vegetable, but wait, brussel sprouts are vegetables). Another person reminded us that ketchup is a vegetable (remember the school lunch issue from a few years ago?).

I then shared this typical MauledAgain response (with the requisite dig at Congress):

But what of the cranberry, often served with turkey during the meal?

Or pineapple, often served with ham?

Or apples, not rarely served as a side with dinner.

And then there's duck in orange sauce......

Perhaps the Congress, in using words that do not have established meanings (after all, people have been arguing over the classification of tomatoes ever since they were discovered), should have defined the word vegetable in a manner that eliminated the need for Supreme Court consideration.

Remember of course, the most important definition. Chocolate is a vegetable. Really.

Which brought this retort (retorte?):"Orange you glad we moved to an income tax system?" The professor who started the discussion replied off-list with ":))))))))))))))))" which I suppose was a reaction to the "chocolate is a vegetable" quip. (Chocolate IS a vegetable. Vegetables are good for heart health. Recent studies tell us chocolate is good for heart health. Therefore, chocolate is a vegetable.)

The deep discussion of Supreme Court tax analysis with respect to tomotoes having reached this point, I made another scholarly contribution to the tax world with this:

I came very close to sending an email about the way the Supreme Court SLICED through the case, hoping the justices GRILLED the attorneys, and didn't let themselves get STEWED about the issue. Oh, for a moment my resistance was stronger than the temptation. But this email got me SOUPED up, and at least via email there's less risk someone will be tempted to PASTE me after I do this to everyone. I haven't been near the SAUCE, and I just got in from doing some work outside which caused me to become SUN-DRIED.

The original poster replied, "I should post more often. This group will bite on anything :)" and I, of course, had to send this message: "Brilliant, but remember that some of the arguments made on this list are tough to swallow. Chew on that for a while. :-)"

I hope that my taxprof colleagues don't get all JUICED up over this publicity.

With thanks to Prof. Ellen Aprill of Loyola, Prof. Bryan Camp of Texas Tech, Prof. Sam Donaldson of Washington, Prof. Linda Galler of Hofstra, Prof. Alan Gunn of Notre Dame, Prof. Calvin Johnson of Texas, Prof. Michael Lang of Chapman, and Prof. John Swain of Arizona, and with special thanks to Prof. Paul Caron of Cincinnati, who maintains the list on which this gourmet discussion took place, and who will hopefully be blogging this topic on the famous TaxProfBlog, with a reference to this posting as I try to drag along on his coattails.

Tax bills originate in the Ways and Means Committee. As in how many ways can we change what we mean?

Today the House-Senate Conference on HR 4520, the American Jobs Creation Act of 2004, came to an agreement. Will this one be called AJCA? Ouch.

If and when the House and Senate approve the Conference Report, it will be sent to the President for signature. When and if signed, it becomes law, though its provisions have all sorts of effective dates.

I touched on this bill in one of its previous incarnations in the context of a larger discussion on tax and economics. The bill has changed. Even if you aren't a tax professional, it's quite an education to browse through the titles of the sections in the Chairman's Mark of the bill. Doing so provides a bifocal view of the existing complexity of the tax law and the layers of complexity added by this bill if and when it is enacted. If you look closely you will see the most ironic provision, one that sets up a commission to study reform and simplification of the tax law. I guess that's like a group of litterers setting up a commission to study the adverse effects of littering and ways to stop littering. Yes, there are times when tax law and litter seem closely related and it's not because paper is involved in both.

I've been informed that a law professor who teaches in the state of Michigan and who specializes in the value added tax has VATMAN1 on his plates. He couldn't get VATMAN because it was taken. So for what else is VAT an acronym?

Paul Caron has posted up (on TaxProfBlog) photos of a Texas license plate with TAX CUTR and a Massachusetts plate with TAXHIKER. I'm very sure Paul (or someone helping him) is having fun with Adobe Photoshop.

The thought of putting TAXJEM on my plate met with an "Anonymity is key to a tax prof" advisory from an associate dean. Anonymity? For ME? Impossible. They wish we tax profs were anonymous. Never. We were engineered for the spotlight, just a hearbeat away from the grand stage.

Previous tax license plate postings:

More Tax License Plates

A License to Tax?

Listening to the vice-presidential candidate debates, I was puzzled by several comments concerning taxes (as taken from the transcript of the debate). Once again, politicians who have been involved in setting tax policy don't seem to understand it. What a marvelous bipartisan inadequacy.

Let's start with the incumbent. When responding to Edwards' response to the question of whether Kerry could lower the deficit and not raise taxes, Cheney asserted that Kerry-Edwards were determined to "go after" people in the "top bracket," and continued:

Cheney: "They talk about the top bracket and going after only those people in the top bracket. Well, the fact of the matter is a great many of our small businesses pay taxes under the personal income taxes rather than the corporate rate. And about 900,000 small businesses will be hit if you do, in fact, do what they want to do with the top bracket."

Wait. There are about 25 million small businesses in this country. One can argue about the precise measurement depending on how one counts and whose information is used but the order of magnitude isn't in dispute. That means roughly 24 million small businesses would NOT be affected by changes in the top bracket.

Interestingly, Cheney later pointed out, in an anecdote, that product liability insurance premiums may have a bigger adverse impact on small business hiring. Maybe a high tax on contingent fees would generate some revenue?

Now let's turn to the challenger. When asked the question about Kerry's plans to reduce the deficit and not raise taxes, he replied:

Edwards: "And I want everyone to hear this, because there have been exaggerations made on the campaign trail: Roll back tax cuts for people who make over $200,000 a year; we will do that."

A bit later, he adds:

Edwards: "We are for more tax cuts for the middle class than they're for, have been for the last four years. But we are not for more tax cuts for multimillionaires. They are."

Wait. Does that mean that rolling back tax cuts for "people who make over $200,000 a year" is the same as opposing tax cuts for multimillionaires? And what does "make" mean? Gross income? Taxable income? And what about married couples filing joint returns? If "make" means gross income, two spouses each with a $98,000 salary and $2,001 in interest income would have their tax cuts rolled back.

No one seems to comprehend that the top bracket is TAXABLE income over roughly $319,000 (which translates to gross income from $325,000 to infinity). No one seems willing to discuss the idea of creating a new bracket for millionaires and another new bracket for multimillionaires. Lumping taxpayers who earn $500,000 a year with taxpayers who earn $15,000,000 a year is as silly as lumping taxpayers who earn $10,000 a year with taxpayers who earn $150,000 a year.

They don't talk about it because (a) it's complicated, (b) it requires a long audience attention span, (c) it doesn't generate great sound bites, (d) and they don't really understand it.

I'm not impressed. As usual.

With the presidential campaign debate over domestic issues (including taxes and the economy) looming on the horizon, I decided to share some thoughts about taxes and the economy in the context of the disagreement over tax cuts that gets so much attention. My thoughts are mostly questions rather than answers.

At present, the federal government is incurring a deficit, that is, it is spending more money than it is collecting in tax and other revenue. One can argue about the measurement, because there are so many ways to classify the specific income and expenditure items and to determine the year in which they should be accounted, but no matter how that is resolved, the deficit exists, it exists for the current and past years, and it is projected to exist for future years. A key point is that no matter who is elected, the deficit will exist. No President and Congress, however aligned, is going to take the step of raising taxes to the levels to which they need to be raised to eliminate the deficit even if coupled with reduced spending. That's not the issue.

The issue is whether some portion of the deficit should (and will) be eliminated through tax changes. I say "changes" rather than "increases" because the issue is more complicated than simply setting rates.

One charge that is made is that the tax cuts enacted in June 2001 (and subsequently tweaked in March 2002 and May 2003, and extended on September 30, 2004) caused the deficit. More reasonable minds assert that the cuts caused part of the deficit, acknowledging that the cost of the conflict in Iraq and the expansion of the Medicare prescription drug program contribute significantly to the deficits.

A recent study (Household Expenditure and the Income Tax Rebates of 2001) suggests that the rebates received as part of the 2001 tax cuts generated more consumption expenditures on the part of households with lower liquid wealth and low income than for higher income individuals. This is not a surprising conclusions. People with less income and less wealth have a longer or much longer list of consumption items (clothing, food, medicine, etc) which they need to purchase and for which a tax rebate provides the need than do upper income taxpayers. So what? The "so what" is that in mid-2001 the economy was reeling from a recession set in motion before 2001, and was about to hurl into a deeper recession by events several months in the future. Recessions reflect, to some extent, insufficient consumption, generated by reduced income (which in turn causes businesses to spend less, causing even less income). Recession, like inflation, is spiral in effect, constrained only by the forces underway in the economy that have a countervailing effect. If the countervailing effects are few in number or strength, things get out of control. After the Great Depression (a recession gone out of control), the government enacted a variety of controls (such as the Federal Reserve Board's control of the interbank funds interest rate) so that countervailing pressure could be brought deliberately rather than in a happenstance uncontrollable manner. Thus, if the government delivers rebates to taxpayers who spend the rebates, the recession is dampened (and theoretically reversed). Accordingly, lower wealth and lower income taxpayers, make better use of rebates in this regard. So, the argument goes, if what is needed is consumption, funnel the rebates and the tax cuts to the lower wealth, lower income taxpayers because they'll spend it.

But does taxpayer use of the rebate forecast taxpayer use of the tax cuts that went into effect in 2001? Perhaps. I'll assume that the answer is probably, because even with the rebate most, if not all, lower wealth and low income households still had a long list of items which they need to purchase.

The position that tax cuts should be directed to the lower wealth and low income households in order to energize the economy encounters at least three strong and popular objections. They are related. First, it is argued that tax cuts should go to those who pay taxes, consistent with the tax burden being borne. If everyone gets a 10% tax cut, the high income taxpayer with a $100,000 tax bill will get a tax cut that is 20 times the tax cut received by the taxpayer with a $5,000 tax bill. Second, it is argued that the high income taxpayers will use their tax cuts in ways that will "trickle down" to other taxpayers. Third, to the extent the tax cuts are directed disproportionately toward low income taxpayers, the government is engaging in wealth redistribution, a policy and practice inconsistent with the philosophy of limited government and libertarian principle.

These objections raise questions. One question seeks to identify what high income taxpayers do with their tax cuts. It appears that they are not spending them to the same degree as do the low income taxpayers. That makes sense. One can eat only so much food, one can wear only so many clothes (though someone obsessed with clothes or shoes can rack it up in this category), one can take no more than 52 weeks a year of vacation, etc. Presumably, the tax cuts directed toward the high income taxpayer are invested. This is the basis of the "trickle down" argument. The investment can take the form of expanding a business owned and operated by the high income taxpayer, thus generating one or more lower-income jobs that would absorb an unemployed person (or a person employed at a lower wage whose job would then open for the unemployed person). The investment can take the form of the purchase of stock in a corporation (same scenario, simply removed one step), or in a mutual fund (same, removed two steps), or in a bank or other financial institution which in turn lends the money to someone who is either (a) starting or expanding a business (same scenario, removed so many steps I've lost count or (b) spending the money, which infuses business with more receipts, helping it to expand. The investment might also be the purchase of a capital good (home or home improvement, car, appliance) by the higher income taxpayer or by the lower income taxpayer borrowing money from the bank in which the higher income taxpayer invested, thus creating jobs for construction workers, auto workers, etc. I'm a bit convinced by this aspect of the argument, because it truly is difficult to find a construction worker or home repair laborer (and that was before Florida became the "winter of 2004" destination for construction workers).

But as a general proposition, despite the demand for construction workers, it hasn't quite worked out this way. Unemployment hasn't changed all that much. Something is out of kilter. Could it be that the investments made by high income taxpayers of their tax cuts are being made abroad? Perhaps. And would these foreign investments be financing off-shore employment? Perhaps. Is that good for the U.S. economy? In the short run? In the long run?

Some say it is not. Return, now, to the objection that it is better to let the taxpayer decide what to do with a dollar than to let the government to take that dollar and decide what to do with it. This objection necessarily is constrained by the reality that the government will take some dollars in order to finance national defense, national parks, and other programs. In other words, taken to its extreme, this objection would put government revenue at zero and government expenditure at zero. There would be no government. There are people who advocate this extreme position but they are few in number.

When there is a surplus, because the economy is humming along and tax and other revenues increase faster than does government spending, the question of whether the surplus should be returned proportionately or directed totally or disproportionately to low income households poses an interesting question. Would the tax cuts be better used by the low income households? Recall that these households would spend the money. In this economic environment, with the economy humming along, throwing more money into the consumption bucket would increase the spiral, cause shortages of goods and services, and trigger inflation.

On the other hand, if there is a deficit, a tax cut means that the deficit is larger (no matter who gets the cuts). Then the question is whether the deficit would be reduced more quickly if the tax cuts were directed to the low income households or to the high income households. If the high income households are going to funnel their tax cuts to enterprises abroad, the tax revenue would be less than if the money were spent (by any sort of taxpayer) on domestic consumption. After all, the folks being paid to clean gutters and build home improvements, etc., now have higher income and thus will pay more taxes.

Here is the conundrum. The tax cuts were enacted when it appeared that (a) there was and would be a surplus and (b) the economy was in recession and needed a boost. Though the cuts were not directed as disproportionately to the low income households as some may have desired, there was some sort of positive impact. And then a mostly unnoticed declared war went hot in very visible places and life, including economic life, changed. Permanently, but that's another posting someday.

The need for increases in government spending (even aside from the Medicare prescription drug program expansion) quickly became apparent to some and eventually to most. The conditions which had justified a tax cut evaporated. The tax cuts should have been delayed, at least for higher income taxpayers. After all, during war, taxes increase. When I tell my students the marginal rates during the Second World War (which I know from research and not first-hand experience), they gasp. Vietnam brought a tax "surcharge" (a tax increase by any other name is a tax increase). So what happened? Not only were the tax cuts not delayed or discarded, they were subsequently extended.

Why?

Begin with a President who refuses to take away a tax cut, having seen first-hand the adverse effect similar decision making had on his father's re-election bid in 1992. Even Ronald Reagan had to scale back his initial tax cut, but he was gifted with a personality, charm, demeanor, wit, and private meeting persuasion skill that does not exist in any of today's political headliners. In other words, Ronald Reagan could "get away" with raising taxes (and the timing was such that it did not adversely affect him).

Then add in a Congress controlled by the tax-cutting wing of the Republican Party. Having promised constituents that they would go to Washington to cut back the size and intrusiveness of government, including taxation, they are not in a position to go back on that promise so long as they value re-election over economic necessity.

Yet with all the accusations being tossed about concerning the deficit and the horror of the tax cut, the Congress extended the tax cuts in a bill signed into law a few days ago. The vote?
In the House, 339-65. in the Senate, 92-3. Surely the tax-cut Republicans don't hold that sort of majority. No, this was a bipartisan effort. Politicians of all parties (431 to 68) had something in common: the need to trumpet to the voters back home that they had voted to extend a tax cut. "Aren't we nice?"

It's like giving candy to a diabetic child. What the nation needs is fiscal discipline. If the nation is going to provide all that it has promised, the nation needs to pay for it. One can argue the merits of what should be spent on prescription drugs, social security benefits, homeland security, national defense, and the tens of thousands of other expenditures in the federal budget or waiting to be added (no matter who is elected). Tax revenue must equal expenditures. Raise one or cut the other. One can debate how the tax burden should be allocated, and I am not going to reinvent that wheel. Suffice it to say that the worst thing that can be done is to increase spending (something both candidates propose to do, because votes come more easily that way) without raising taxes (something one candidate promises not to do and something the other candidate seems to support though with campaign trail words very different from the realities of the plan).

Yet that is where we are. One last piece needs attention. If government expenditures exceed revenues, how is cash flow managed? Is there a huge Federal credit card? No, there is something better. The government borrows money. From whom? From two sources. Remember the question about the high income taxpayers and what they're doing with their tax cuts? They're investing in U.S. Treasury bonds (and other obligations). And foreign governments (especially China), awash in U.S. dollars because of the trade deficit, are also buying U.S. Treasury obligations.

So, instead of the Congress directing tax cuts to people who would spend the money because they have no choice, the Congress directed most of the tax cuts to the high income taxpayers who then loaned the money back to the government so that it could spend it. When the smoke clears, the government (us) is indebted to the high income taxpayers (and to China, if that makes anyone feel any better).

My next-to-last question: so how is this all that different from a feudal economy, in which the low income serfs were beholden to the high income nobles and royalty (and, tossing in some theology and annoying a few folks, the very high income church)?

Someday, we will wake up and the creditors will be at the door. My last question: Who is going to pay?

This is real. From a reader:

have you considered approaching a publisher about a compilation of the "Best of Mauled Again?" I think your work has a much wider audience than it is able to reach via the Internet. While many articles are timely in nature, most have pervasive timeless themes. I think it provides a fundamental understanding of our system of taxes, both in criticism and foundation of its intent(s). It's worth a thought. The publisher would have to be one who can reach a mass market, not merely a legal or educational market. Think about it!

So, of course, never at a loss for a reply, I asked:

I wonder if a paper publication of a blog is inherently inconsistent or
oxymoronic? Perhaps not. Perhaps it makes for good beach reading, where sand deters taking along the wireless laptop!!

And then along came this food for thought:

I think that cross-platform publishing enhances messages that are powerful. Not everyone (believe it or not) is computer literate. What percentage of the population

a.) can define blog

b.) reads a blog regularly

c.) actually corresponds with a blogger, making them a bloggee..or would that be a blogger groupee .oh, that's me!

I don't know the answers, but I suppose some of you would have an idea of whether it makes sense to "paper the blog" as a concept. Even if that makes sense, how many people would want to be seen on the beach reading a book called "The Best of MauledAgain"?

Well, perhaps they'd think it was an anthology of stories about zookeepers who went back into the cage yet one more time.....

I'm beginning to understand what it must be like to be a newspaper editor, as yet more feedback arrives. Unlike the many letters to editors criticizing what's been written, this feedback refuels my ego. Uh oh, right?

A reader, who wishes to remain anonymous, wrote:

I've been updating myself again with the latest posts on your blog.

Many interesting and well done articles, including the baseball and school supplies topics. I read one of the Soapbox articles, Learning to Teach and Teaching to Learn, which one can only hope the students
who need to read it will truly "get" your point. Unfortunately, they either won't read it or won't "get" it. The problem there stems from years of exposure of students to high school and college teachers who are not required to have an in-depth knowledge of the philosophy of teaching and education. Rather, they are permitted to teach because they have an expertise in a specific field. Even though my car mechanic may be an expert in repairing engines, would he be capable of teaching others his craft?

Probably not. Many higher-level teachers continue to view students as "tabula rasa" (a blank slate waiting to be written upon) and as a result students learn to become receptive containers, rather than critical thinkers and learners. A course in the principles of the Socratic Method should be a requirement for every teacher at every level.

I replied:

The reason law school is so "tough" is that most faculty (not all) try to get the students to think. Once upon a time it was a universal truism of law faculty but it is eroding rapidly. The desire to be "loved" (there are more insecure faculty than I would have imagined) and the unwillingness to deal with all that needs to be done to get students thinking (quality feedback is time consuming) combine to encourage playing to the student evaluations.

I refrained from commenting about the outcry that would arise if "socratic" or even "quasi-socratic" methods were imported into K-12 and college education (even though it exists in some classes in some schools at that level). After all, no one really does it very well.

To my reply came a rejoinder that made me laugh (and has me wondering....):

This can also be said of many college professors and maybe high school teachers. The only teachers who don't worry about being "loved" are the elementary teachers because little kids just automatically love us! Maybe that's the secret....give your students crayons, scissors & glue sticks and have them draw pictures to show that they "think" and they'll do great!

Glue sticks? In a law school?

NAH.

Who would have guessed that the tax license plate posting would bring so much traffic to the site and trigger the largest number of responses?

Yes, more tax-related license plates have been brought to my attention:

TAX REBL - The license plate of convicted felon and tax protestor Lynne Meredith (see this very interesting write-up).

0 TAX - license plate of Portland, Oregon tax lawyer and former tax law professor at the University of Cincinnati School of Law Gersham Goldstein (which only goes to prove that some law schools try to corner the market on creativity). Speaking of creativity, I'm sure that other areas of the law have inspired some interesting license plates, but I think the tax folks are in the lead.

The owner of TAX GEEK emailed me, and passed along some plates she has seen:

501 C3S (rather clever, and my google search wouldn't have caught this one)

TAX ESQ

TAX GEEK explains that she "got the idea for TAX GEEK after seeing TAX NERD on a Virginia license plate in DC."

She adds: "It's been fun seeing the smiles on the highway and around Richmond." I wonder what sort of reactions the other tax vanity plates evoke.

The guessing game can begin to identify the owner of TAX NERD, with information found in this report.

You can go to Paul Caron's TaxProfBlog to see photographs of some of these plates. Yes, Paul is a current tax law professor at the University of Cincinnati School of Law (and I wonder what's on his license plate). Still waiting to find out if these are actual photographs or done up in PhotoShop. See, one of the vanity tags is on the wrong state's plate!

Or a tax license?

The getting-very-famous (or at least more famous than MauledAgain) TaxProfBlog has run into a tiny problem. It seems that an accounting professor at Rutgers has a "TAX PROF" vanity license plate, causing Paul Caron of the TaxProfBlog to ask, in all good humor, for a volunteer intellectual property lawyer. Take a look at the photo and comments by Paul.

A former colleague, who years ago taught me tax and who died a few months ago, proudly motored about with "TAX MAN" imprinted on his vanity Pennsylvania plate. Years ago I asked him why he wanted the world to think he was a tax collector, or perhaps a Beatles fan enamored of one particular hit.

Another colleague, still very much alive, reminded me that one of our recent graduates had "TAX CHIC" on her license. I checked in with her today, and, yes, she still has it. And, yes, she is practicing tax. Not much of a surprise, considering she lived and breathed tax as she progressed through the J.D. and LL.M. programs.

So I've set out to make a list of actual tax-related vanity license plates. There are more than a few web sites with lists, large and small, of vanity license plates. Some are geographically limited. There are very many web sites devoted to license plates generally, particularly collecting and trading.

Here's what I've found so far, after allowing myself no more than one hour to wander into an exploration that could become a month-long project. Maybe I can get funding for "Law and Tax Vanity License Plates: An Extrapolation of Cultural Perspectives on Taxation at the Halogen Headlight Level." Sounds scholarly.

TAX RFND on a Red Acura NSX in Los Angeles, CA (from this site)

B4RTAXS Before our taxes, on a new Mercedes (from this site)

NY: FELIXTAX (from this site)

TAXGUY (from this site)

The following are from the official West Virginia list:

TAXFREDM
TAXKUTTR
TAXLAND
TAXLAW
TAXLESS
TAXMAN
TAXMAN2
TAXPREP
TAXPRO
TAXRENT
TAXSLAYR
TAXSTORE
TAXTIPS

These three are from this site) (and I particularly like the first):

IH8 TAX (Sudbury, Ontario) - [ on a tax accountant's car, parked at Legislature )
TAX BAK
TAX MAN

This just in: In Virginia, a TAX GEEK plate has been observed.

So if you have any ACTUAL tax vanity license plate information, please send it along. I'll periodically update the list.

A new poll reveals that 61% of us have lost faith in leaders and institutions during the past four years. It isn't clear if that's 61% in addition to those who lost trust more than four years ago.

Quotes in the news report make it astoundingly clear that people are skittish. No wonder.

It's not really news, though. That's why I ask about the meaning of the 61%. By now, it wouldn't surprise me if 98.6% of us have lost trust. The list of folks in whom trust has almost disappeared is the same list I've seen at various times during the past few decades: politicians, corporate executives, lawyers, entertainers, and journalists. Oh, yes, lawyers come in pretty much at the bottom. I didn't see a mention of schools or religious institutions in this report. Or law professors. Or tax law professors.

So who DOES get trusted? A person's own family and firefighters, followed by neighbors, police and doctors.

The poll suggests that the reasons include the situation in Iraq, the 2000 election mess in Florida, white-collar crime, and terrorism.

Why make something so complicated? To me, it's easy to understand. Trust has diminished because people react to the inability of other people to accept responsibility, act honorably, put duty and honor above "it's all about me" selfishness, and to take pride in their efforts. Layer onto that the insulation that protects people responsible for a mess from the people whom they've hurt, sprinkle in the "no fault" mentality that represents "it's anyone's fault but mine" post-modern philosophy, and there's a recipe for carrying a mirror so one can watch one's back.

Wouldn't it be nice if a customer whose account has been butchered can talk to the clown who makes the mistakes? Wouldn't it be nice to talk to the programmer who still doesn't quite understand what the software user really needs? Wouldn't it be nice to talk with the faceless bureaucrat who is hidden away behind a screen? It's so much easier to shirk responsibility and to let one's self get by on a lesser standard when the aggrieved person is a concept and not an actual being with a face and personality.

It's simply this: the depersonalization and incorporation of American has eroded trust. Trust reflects a personal relationship. Post-modern society has chopped away at these foundational legs of culture. It's getting very wobbly.

News that a "Top Tax Lawyer Pleads Guilty to Felony Tax Evasion" may come as a surprise to some, but for me it's only in the who and not the what. After all, lawyers as a group do not have a stellar compliance record when it comes to taxes. As I mentioned in a previous post,

...the worse thing to do when in financial trouble is to avoid paying taxes by hiding income.

In this instance, though, it doesn't appear that the lawyer in question was in financial difficulty.

His former partner describes his tax woes as "some mistakes" and attributed the problems to his being "a little bit careless in his bookkeeping." I wonder why, if it was a matter of carelessness and mistakes, and not wilfulness, why he would plead guilty to a crime. By doing so he faces up to two years in prison. And he may end up being suspended or disbarred.

According to federal prosecutors, he failed to report as much as $1.5 million in gross income over 4 years. That's a pretty big mistake. Even for someone who is not one of the nation's top tax and estate planning experts, let alone for a tax attorney.

If it genuinely was carelessness, it is possible that an undiagnosed health problem, perhaps one associated with getting on in years, could be the culprit. If so, it's unfortunate that jail time awaits a person who would have been best served by medical care.

There are more lessons here than simply "don't omit gross income from the tax return." We need to learn to pay attention to those with whom we interact and to watch for changes in behavior or personality that might signal a need for medical or other attention. Maybe that's what happened here. Maybe not. After all, if it is what happened, the guilty plea makes no sense. And we need to learn that any one of us, no matter how skilled or famed, can get into trouble very quickly if we let our guard down.

I doubt we'll ever know the complete story. It is a sad ending to an otherwise fine career.

UPDATE: Some readers have questioned whether I'm cutting "slack" to this tax attorney that I would not allow to other taxpayers who commit tax fraud. I certainly don't intend to cut any slack, but until the facts are known, I'm simply giving the benefit of the doubt to the partner who used the terms "mistake" and "carelessness" to describe what was done. If compelled to take a stance without having additional facts, I'd consider the seriousness of a guilty plea and the pattern of tax fraud indictments not being issued without very strong evidence, and conclude that indeed, there was fraud. If there is a plausible "carelessness" argument, a guilty plea is not the expected reaction.

And if it's shown that what was done involved deliberate and wilful evasion, then my reaction to the use of the terms "mistake" and "carelessness" will be revised, and my disdain for trying to make fraud appear to be mere negligence will be very obvious. Back in November 2003, when the indictment was issued, I posted to the ABA-TAX listserve a comment that I had read the indictment and found nothing that explained what was done (or not done) that led to the indictment. It is a very brief and generic indictment, which is available here. The only clue is that taxable income was allegedly understated, which means that it could be a matter of understated or omitted gross income, overstated deductions, overstated credits, or some combination.

FURTHER UPDATE:

The press release from the Department of Justice gives some additional information about the situation. The attorney in question understated business receipts, and did not use the business and bank records of the actual receipts. He also failed to report gain from selling an interest in his law practice to another attorney. And he also failed to report receipts deposited into his personal bank accounts that represented payments from clients for services provided before the other attorney became a partner.

The guilty plea includes an acknowledgement that these omissions were made knowingly and willfully. Under these circumstances, it is extremely difficult to understand the other attorney characterizing what was done as a "mistake" on account of "carelessness."

Today, Paul Caron's TaxProf blog carried an item analyzing net federal spending by state with the state's character as a "red state" (electoral votes won by Bush in 2000) or "blue state" (electoral votes won by Gore in 2000). Paul points out that of the 32 states (including D.C.) that benefit from net federal spending (more federal expenditures in state than are paid in federal taxes from the state), 76% are red states (17 of the 20 states with the highest net federal spending are red states). Paul also points out that of the 16 states that are are disadvantaged in terms of net federal spending (paying in more taxes than receiving in federal expenditures), 69% are blue states (11 of the 14 states with the highest net tax pay-in are blue states.

The net federal spending report, from the Tax Foundation points out that the net federal spending or net tax pay-in for a state is affected by political factors such as the power of the Congressional delegation from the state and the state's ability to finesse its spending to maximize federal funding, and non-political factors such as age (social security benefits), per capita income, and percentage of federal employees (D.C., Virgina, Maryland). I would add factors such as weather (hurricane relief to states such as Florida and Alabama), and federal land ownership (western states).

Though I haven't figured out how to post a colorful graphic as Paul has, here is a listing of all the states (and D.C.) along with the partisan composition of their Congressional delegations and the governorship (and the 2000 electoral vote). I'll let readers decide for themselves if there is a correlation with any of these characteristics:

State	Fed Expenditures per Dollar of Taxes	House Delegation (D-R-I)	Senate Delegation (D-R-I)	Governorship	2004 Presidential Vote
New Jersey	$0.62	7-6-0	2-0-0	D	D
Connecticut	$0.64	2-3-0	2-0-0	R	D
New Hampshire	$0.68	0-2-0	0-2-0	R	R
Nevada	$0.73	1-2-0	1-1-0	R	R
Illinois	$0.77	9-10-0	1-1-0	D	D
Minnesota	$0.77	4-4-0	1-1-0	R	D
Massachusetts	$0.79	10-0-0	2-0-0	R	D
Colorado	$0.79	2-5-0	0-2-0	R	R
California	$0.81	33-20-0	0-2-0	R	D
New York	$0.81	19-10-0	2-0-0	R	D
Delaware	$0.85	0-1-0	2-0-0	D	D
Wisconsin	$0.87	4-4-0	2-0-0	D	D
Michigan	$0.90	6-9-0	2-0-0	D	D
Washington	$0.91	6-3-0	2-0-0	D	D
Texas	$0.92	16-16-0	0-2-0	R	R
Indiana	$0.99	3-6-0	1-1-0	D	R
Oregon	$1.00	4-1-0	1-1-0	D	D
Florida	$1.00	7-17-0*	2-0-0	R	R
Georgia	$1.01	5-8-0	1-1-0	R	R
Ohio	$1.02	6-12-0	0-2-0	R	R
Wyoming	$1.05	0-1-0	0-2-0	D	R
Rhode Island	$1.06	2-0-0	1-1-0	R	D
North Carolina	$1.07	6-7-0	1-1-0	D	R
Pennsylvania	$1.08	7-12-0	0-2-0	D	D
Vermont	$1.12	0-0-1	1-0-1	R	D
Utah	$1.14	1-2-0	0-2-0	R	R
Kansas	$1.14	1-3-0	0-2-0	D	R
Nebraska	$1.19	0-2-0*	1-1-0	R	R
Arizona	$1.20	2-6-0	0-2-0	D	R
Maryland	$1.20	6-2-0	2-0-0	R	D
Iowa	$1.22	1-4-0	1-1-0	D	D
Tennessee	$1.24	5-4-0	0-2-0	D	R
Maine	$1.31	2-0-0	0-2-0	D	D
Missouri	$1.32	4-5-0	0-2-0	D	R
South Carolina	$1.32	2-4-0	1-1-0	R	R
Idaho	$1.34	0-2-0	0-2-0	R	R
Louisiana	$1.44	2-5-0	2-0-0	D	R
Kentucky	$1.46	2-4-0	0-2-0	R	R
Oklahoma	$1.47	1-4-0	0-2-0	D	R
Virginia	$1.47	3-8-0	0-2-0	D	R
Hawaii	$1.52	2-0-0	2-0-0	R	D
Arkansas	$1.53	3-1-0	2-0-0	R	R
South Dakota	$1.59	1-0-0	2-0-0	R	R
Alabama	$1.61	2-5-0	0-2-0	R	R
Montana	$1.64	0-1-0	1-1-0	R	R
West Virginia	$1.74	2-1-0	2-0-0	D	R
Alaska	$1.82	0-1-0	0-2-0	R	R
Mississippi	$1.84	2-2-0	0-2-0	R	R
New Mexico	$1.89	1-2-0	1-1-0	D	D
North Dakota	$2.03	1-0-0	2-0-0	R	R
District of Columbia	$6.17	n/a	n/a	n/a	D

Partisan composition data as of 2004 fromhttp://www.thegreenpapers.com/G04/composition.phtml

Spending data for 2002 from http://www.taxfoundation.org/ff/taxingspendingupdate.html

* 1 vacancy

Paul Caron has an item on his TaxProf blog this morning, citing a Washington Post article that quotes the President describing describing the tax code as "a million pages long." He's wrong, because it's supposedly only 17,000 pages (as if that's an improvement).

Had the President described the tax code as being more than a million WORDS long he would have hit paydirt. As of 2000, the last year for which I have a count, the Code contained 1,669,514 words. In 1954, when its predecessor (the Internal Revenue Code of 1954) was enacted, there were "only" 409,421 words.

The number of pages, of course, depends on page size, font size, kerning, and a bunch of other variables. To many people, it feels like a million pages. Perhaps the President uses the large print edition, with one or two words per page. Or perhaps he uses the illustrated edition that has a photograph page for every word. Ever see a picture of adjusted basis?

As of 2000, tax regulations contained 7,307,000 words. In 1954, tax regulations had already crossed the million-word mark at 1,033,000.

I've never seen a count of the words in IRS rulings, court opinions dealing with taxation, and tax commentary. I'd guess more than a hundred million words. My publisher tells me that I've contributed more than a miniscule portion of that total (and that's not counting the legislation and regulations I drafted several decades ago).

So it's partly my fault.

Sorry.

Very low on the national news headline radar, but getting some attention in the sports pages, is the allegedly imminent move of the Expos from Montreal to Washington, D.C. Though baseball's cerebral challenges and its bucketloads of statistics have always interested me, it's the public finance and taxation aspect of the story that gets my attention today.

Negotiations between major league baseball and D.C. officials have progressed so far that the location for a new stadium has been identified. It would be on the shores of the Anacostia River south of the Capitol.

The new stadium would cost more than $400 million. Some of that cost would be expended to acquire the site, which consists of more than two dozen parcels used for a variety of purposes. All are privately owned. This news surely pushed up the value of these parcels. Yet some of these owners don't want to move, and don't want to sell. Unless, of course, they get much more than current market value. If that happens, the price of the stadium goes up.

Major league baseball wants D.C. to fund the stadium. D.C., an area that has had, and continues to have, serious financial problems, which depends on the Congress for appropriations to assist it in balancing its budget, and which can barely provide services to its residents, is being asked to come up with money to pay for a stadium to be used by a bunch of multi-millionaire team owners and their almost-as-wealthy employees. In addition to charging the team rent for use of the stadium, a tax on concessions, D.C. proposes to impose a tax on other businesses, and has set out to try to "sell" this plan to them. In the meantime, three candidates for D.C. Council who oppose public funding won their elections last week. Surprise. The citizens have spoken. So now D.C. is trying to rush this deal to completion before the newly elected members of the council take office.

Once upon a time, if a business chose to move one of its facilities, it found a location, negotiated a price, worked out any zoning problems, and carried on in true free market tradition. That's not how it happens anymore. Businesses that choose to move approach two or more governments and bargain for public financing and/or tax breaks. Sports teams are among the most notorious for seeking public financing of their private enterprises.

The argument that is used by the sports teams and by other businesses is that they are bringing "economic growth" to an area. Therefore, so the argument goes, because they are improving the economic condition of the community, the community ought to pay. Through the government. So governments trip over each other trying to entice the business to their neighborhoods.

There are three huge flaws in the argument.

First, there is no guarantee that the newly arrived sports team or business will bring economic growth. Yet any attempt to obtain a pay back of the governmental financial assistance if the promises of the sports team or business aren't met is rejected. Why can't the team or the business put its money where its mouth is? Simple. They want the risk to be shifted to the taxpayer.

Second, the community gets its chance to pay without the need for tax revenues to be funneled to the team or business. If the team or business is selling something that people want, they will come. They will buy tickets or pay for the goods or services being sold. They will patronize the subsidiary businesses that sprout up around the principal team or business location. They will watch the team on television, pushing up ratings, and increasing the amount of money that networks and advertisers are willing to pay to the team. A tax, in contrast, is a forced extraction of money that lacks the voluntariness of the free market.

Third, the idea that governments need to cave because the team or business otherwise would not locate in the area is tempered by the fact that the team or business needs to locate somewhere. There are only so many cities that can support a professional sports team. Most businesses need to be near a port, or an airport, or a good highway system, or the source of raw materials. No one city can "grab" all the teams or all the businesses, and when a city gets too big in that respect, businesses begin to avoid the city because its success in attracting businesses breeds its rewards of congestion, higher infrastructure needs, crime, and other disadvantages. In the long run, it balances out.

It is interesting that D.C., which could use revenue to fund schools, playgrounds, and other beneficial social services, is expected to come up with revenue for a baseball stadium when it hasn't been able to find the revenue to meet more important needs. And that is one of the reasons there is opposition on the current D.C. council that makes it less than a slam dunk that the proposal would get the necessary approval.

Although other teams have persuaded other cities or states to pay much or almost all of the stadium cost, such as Camden Yards for the Baltimore Orioles, or the new Padres stadium, the tide is turning. The teams in Philadelphia, Pittsburgh, and St. Louis are getting less than half the costs from publicly financed sources. The San Francisco Giants failed to get any money out of San Francisco or California to build their new stadium. What? Government fiscal sanity in California? Indeed.

The history of public funding of private enterprise sports facilities in D.C. is inconsistent with what major league baseball is trying to get. The NHL and NFL arenas were built with private money, though a relatively small amount was spent by public authorities on roads.

One of the reasons D.C. is getting attention from major league baseball is that the other locales trying to lure the Expos are not offering 100 percent public financing. But they are offering a good-sized chunk.

For critics, including myself, the idea of taxing citizens, directly or through business taxes passed on in increased prices, to build a facility for a private enterprise is nothing more than a breach of public trust. The argument that the local or state government is making an investment that will bring returns has been refuted. Andrew Zimbalist, an expert sports economist, does as much in his many writings, and summarizes his findings in this interview. And the citizens of D.C. who had an opportunity to vote sent a concordant message when they elected three council members who oppose the use of public funds to shore up private enterprise.

Let's face it. The Montreal Expos are a business that fell on hard times, mostly through mismanagement and the impact of the player strike. The team cannot survive in Montreal, and it lacks the money to move elsewhere. Hence, major league baseball is trying to make everyone else, but mostly folks in D.C., bail out the team. Why not have the players and owners, whose foolishness led to the strike that catapaulted the Expos into financial oblivion, bail out the team? Is major league baseball playing on the sympathy of low and middle income D.C. citizens to make them willing to bail out a bunch of millionaire and multi-millionaire owners and players? No, with negative D.C. Council reaction looming on the horizon, major league baseball and its cronies in government are trying to rush something through and jam it down the throats of the citizens before the newly elected Council members are seated. THIS is democracy?

Even supporters, such as Michael Wilbon, in his Washington Post article, A Stadium Grows, a City Will Blossom, admits that the economic benefits he claims will result from the proposed deal will not flow back to the citizens. He writes:

I'm not about to argue that any stadium built for a professional sports franchise is going to benefit working class and poor people. Primarily, it's going to benefit folks who own the franchise, and people who entertain in luxury boxes that lease for $200,000 or more per season. But it can greatly benefit businesses that attach themselves to sporting palaces.

It doesn't take much to see where this is going. I admire Wilbon's honesty. I don't understand his sympathy for taxation designed to enrich the already rich.

While the baseball dealings swirl and whirl, the D.C. United soccer team announced that it intended to seek approval to build a new soccer stadium in the vicinity of the proposed baseball stadium. The stadium would be privately funded. How refreshing. Oh, for those who don't know, major league soccer players earn far less than do major league baseball players, whether measured by averages, medians, or maximums.

Somehow, it never fails. A person's financial problems make the news, and sometime later the other shoe drops: the person has tax problems.

A story in today's Philadelphia Inquirer reports that Neil Stein, famous for his several popular, elegant restaurants, was indicted for skimming receipts from his businesses so that he could avoid federal income taxes. He's been charged with filing false tax returns. He's also being investigated for possible mail and bankruptcy fraud charges, as well as more tax charges.

The amount involved in the federal income tax fraud case is $120,000, but the IRS contends that Stein owes $4.5 million in back taxes. It's possible, of course, for tax fraud charges not to attach to all of a taxpayer's unpaid taxes. Plus, the city of Philadelphia and the Commonwealth of Pennsylvania have already obtained rulings that Stein owes $1.1 million in city taxes and $773,000 in state taxes.

Each semester I explain to my students that the worse thing to do when in financial trouble is to avoid paying taxes by hiding income. It's better to file a return without paying the taxes. No fraud, no crime. Lots of aggravation, but no jail time. Stein's bankruptcy lawyer is one of my former students, who is getting a first-hand look at what happens when someone tries to outsmart the IRS.

Yippee! I published again. No, not the sort of "scholarly" work that gets the usual attention. It's another "soapbox" column in the Law School's weekly newsletter. Gee, what a surprise. Jim Maule delivers a "soapbox" column.

It's not a surprise because this is the fifth in a series of essays on legal education directed primarily toward law students. Anyone interested in what at least this law faculty member is trying to do while educating future lawyers should take a look. Just click on the column title. Monday's column is at the top of the list, and they progress in reverse chronological order.

Doing Puzzles While Learning and Practicing Law, The Gavel Gazette, at 1 (Sept. 20, 2004)

Time Can Be on Your Side. Or At Least By It, The Gavel Gazette, at 1 (Feb. 16, 2004)

Learning to Teach and Teaching to Learn, The Gavel Gazette, at 1 (Sept. 29, 2003)

Crumbling Myths & Dashed Expectations, The Gavel Gazette, at 1 (Sept. 3, 2002)

Money for Nothing and Work for Free?, The Gavel Gazette, at 1 (March 5, 2001)

Yes, there will be more.

Today in the Introduction to Federal Income Taxation class it was time to tackle section 86 of the Internal Revenue Code, which specifies the extent to which social security benefits are included in gross income. Though the students may think I delight in dragging them into the morass of computational complexity and policy pitfalls that characterize the provision, I wish it did not need to be done. Until this point in the course, one which inspires high anxiety or fears of boredom for many students, the experience, though a bit obscure at times, generally is positive. Students learn that much of tax is not simply "just numbers," that there are unresolved issues, that tax affects almost everything in life, and that it can, at times, be fun.

Then section 86 appears. And dark clouds cover us.

Why?

Section 86 is a testament to legislative inefficiency. The first step is easy. Should social security benefits be taxed? There are good arguments for yes, and for no. The better outcome is yes, because after all, it isn't all that different from a pension. The next question is, what should be taxed? The answer should be, the excess of what a person gets over what a person pays in. In other words, the net gain, or profit. That's pretty much how pensions are taxed.

Did Congress do it that way?

Of course not.

Congress decided that it would be too complicated to have people figure out how much they had put into the system. Hmmm. Every year we get a statement from the Social Security Administration that tells us what its records show, and gives us a chance to correct the records. So that information exists. What's the problem? Probably the realization that a lot of people would have a lot of social security gross income. And they'd be unhappy. And Congress fears the outcome.

So Congress made two decisions. First, it would tax 50% of social security benefits. It's not a rough approximation. It guarantees that almost no one would be taxed on as much as they gained. Second, it decided not to tax social security benefits if the taxpayer's modified adjusted gross income, increased by tax-exempt income, which I'll call "modified aggregate income," does not exceed a base amount ($25,000 for unmarried taxpayers). Why? Because "poor people shouldn't be taxed on social security." Well, poor people shouldn't be taxed on ANY KIND OF INCOME. Congress avoided the real issue, which was the need to increase the standard deduction and/or personal exemption so that a poor person, no matter the type of income, would not be taxed. The notion that different kinds of income should be taxed at lower rates is not something new that arrived with the low rates on dividends. The folks that enacted low rates for dividends had mentors... the ones who decided social security income should be treated differently.

Then Congress realized that if a taxpayer's modified aggregate income was $25,100, it would trigger taxation of 50% of social security benefits, which is quite a high price for that extra $100 of income. So Congress limited the social security gross income to the lesser of 50% of the benefits or 50% of the excess of modified aggregate income over the base amount.

Complex, but manageable. Tough to defend as a matter of policy, or efficiency in administration. But at least I could teach it, and the students could understand it well enough to comprehend the underlying sausage factory environment, in about half a class (25 minutes) plus the time they need to invest outside of class (another hour to hour and a half in preparation and assimilation).

But then someone in Congress needed a revenue raiser to offset a revenue loser, and their eyes turned to section 86. It was proposed to raise the 50% to 85%, an amount much closer to an "average" rate of gain for the typical social security benefits recipient. Others howled. Horrible idea. So we get a compromise. Use 85% rather than 50% if the social security benefits exceed an "adjusted base amount" ($34,000 for the unmarried taxpayer). But, again, a few dollars of modified aggregate income could push someone from 50% being taxed to 85% being taxed, so an absurdly complex provision was added to ensure that the inclusion rate scaled or stepped smoothly from 50% to 85%. They put it in section 86(a)(2), drafted it as an alternative, and then labelled it as an additional tax. It's an alternative, not an addition to what's in section 86(a)(1), so what's the problem with using some accurate language?

We didn't get to the 85% stuff today. That's on Friday's schedule.

By this point students are in mental pain. I risk being in physical pain when things fly (but that's never happened). I give them a bunch of examples. I don't and won't test them by asking them to do the computation. Computer software can do that. They can, too, though they don't believe it, for all they need to do is to follow the form.

But following the form makes much more sense if one understands WHY one is doing what the form asks. That's one of the things I want the students to figure out. The WHY of it.

But there's something else I want them to understand. It's the bubble effect. Only after I explain this mess can I explain the bubble. The bubble happens when someone with modified aggregate income under the base amount (or adjusted base amount) has an increase in income, which happens if the retiree needs to go back into the workforce in order to make ends meet or to pay extraordinary expenses. The person's taxable income increases not only by the amount of the additional income, it increases by the increased social security gross income caused by the increase in the person's aggregate modified income. Instead of having a tax liability increase equal to the additional income multiplied by the marginal tax rate, the person ends up with a tax liability increase equal to the additional income multiplied by as much as 185% of the additional income. I'm not going to do the computations here, but in a law school class I'm not going to say "trust me" to the students. I want them to see the WHY of it, to look at the arithmetic so that they can understand the phenomenon. I want them especially to understand the significance of the question, "So why is this retiree couple scraping by on a few tens of thousands being taxed at an effectively marginal rate far greater than that imposed on a multimillionaire picking up a few more thousand dollars of income?" How can that be justified under any philosophical, moral, or theological canon?

After all, it is the inability of most Americans to understand the bubble phenomenon that permitted certain members of Congress to enact phaseouts and scale-downs that, to quote one of them, "let's us increase taxes without increasing rates" so that people will think taxes were not raised when in fact they were. We don't reach the phaseouts until late in the semester. About the time we cover marriage penalties and marriage bonuses. By then the students are either rolling along with me or sick to their stomachs, or both. And yet I continue to insist we ought to be teaching Real Civics in our high schools.

When we begin this topic there usually are some questions about social security. Some students know what it is and how it works, and others have only a vague idea. So I explain it, of course with my bias that emphasizes the "I" in FICA. The word Ponzi is heard. References are made to the problem that looms when the number of social security recipients will be only 1.4 times the number of workers rather than the 41.9 to 1 it was in 1945 or the 16.5 to 1 it was in 1950 or the 3.something to 1 it's been recently.

Most of my students are in their early 20s. Most have held jobs, but mostly as part-timers. They're just about ready to enter the full-time workforce. The idea that each group of three of them must support two retirees doesn't appeal to them. The fact that the funding of the social security program has been woefully inadequate, costing far more than its proponents admitted, doesn't sit well with them. Or me, but I don't count, because I won't be around when these students are in their 80s. If I am, I'll be so old and decrepit I won't know that I'm around, that I'm old, or that I'm decrepit.

The date is voluminous and worth a read. Take a look at the 2004 OASDI Trustees Report, especially at IV, B, 1 Annual Income Rates, Cost Rates, and Balances. Lots of numbers, some nice charts, intense text, and alarming news. But we knew that because Alan Greenspan drew our attention to it, as I pointed out in one of social security posts. Or at least he tried. Most folks weren't and aren't listening. Those that are try to soundbite the issue and play to the electorate.

The impending doom of the Social Security program doesn't stand alone on the horizon. It's wrapped up with general government revenues and expenditures, simply because for a while the program has had a surplus. It's far too small, of course to fund its obligations, but it exists and it was invested. In what? Mostly in loans to the rest of the government. What happens when social security needs to tap its surplus when social security tax revenues begin to slip behind payments to beneficiaries? The government will need to issue debt. I'm not going to do the entire macroeconomic analysis. Suffice it to say, it won't be pretty. My guess is that China will own the nation. Yes, that's alarming, but go look at the numbers. There are numbers in the TENS OF TRILLIONS. That's a LOT of money. Even for Bill Gates. Well, hmm, now that I mention him, if China doesn't own us by then, Bill will.

Some serious reform is needed. Not just of tax, but of expenditures and programmatic decisions. Should social security be treated as an entitlement or as insurance? How should it be financed? Bruce Bartlett points out the alarming truth in A New Money Machine for the U.S.; The old ways can't keep up. We need a value-added tax to meet revenue demands. We need SOMETHING.

Politicians speak of tax reform. Yes, speak. And they get hard-working, intelligent officials in Treasury to prepare tax reform proposals. Proposals that are unlikely to become law, even if they generate discussion in the political arena and find a temporary home in a Congressional committee. The proposals are alternates so there's a lot to read and ponder. Each one has its advantages and disadvantages. Some I like more than others, and some I dislike. Does it matter? Practitioners generally want to, and need to, deal with the law as it exists. Some get involved in studies to refine or repair a narrow technicality. A few pay attention to the big picture and lift their eyes to the horizon. Politicians can't think past the next election. In the meantime, the tax system has become more complex, more inequitable, and more inefficient. Tick tick tick

It's sad, but we have a long history of a nation of being unprepared and then needing to scramble, quickly, painfully, expensively, and fatally, to solve the problem. Oh, and then there will be a commission to figure out what went wrong. But this time perhaps there won't be any money to fund a commission. Or a Congress.

That doesn't sound very optimistic, does it? And supposedly I'm am optimist, a Saggitarian who when getting a box of pony dung figures the gift of the pony isn't far behind. (Someone told me that years ago and it stuck. The analogy, not the pony stuff.)

It's not as though the system CAN'T be fixed. It's that too many people can't or won't set aside personal agendas for the common and better good. When asked what I would do if I were the "tax czar" my response usually includes a comment that it wouldn't matter, because reform needs to come from within each citizen rather than being imposed from above (or below, depending on one's perspective).

I hang on to one shred of hope. Modern technology, linking people together in ways far different from the communications of the past, provides an opportunity for people to organize and coalesce around issues that matter. Perhaps I'm wrong and most Americans like the current system, look forward to the impending economic failure of social security, await with glee the financial collapse of the nation, and think Grandpop and Grandmom should indeed be taxed on their part-time earnings at two or three times the rate the millionaires and multi-millionaires are taxed on their capital gains and dividends. I could, after all, be wrong. It wouldn't be the first time.

But if most Americans share my fears about the tax system and the larger national economic situation, and want true tax reform, it will require that many of those who understand the smoke and mirrors be willing to explain the game to the tens of millions who don't. Those who are invested in the current tax system, even though its failure will take down rich as quickly as it takes down poor, include too many who understand (and created) the smoke and mirrors and who have the skills to use them to their advantage.

And, so, it comes back to the need for education. I guess as long as I keep trying to explain section 86 to second and third year law students I must think, at least deep down inside, that there is indeed some glimmer of hope.

One could write a book on the complex relationship between taxes and education. Actually, it's been done. Several times. At one end of the spectrum are issues involving the selection of the type and amount of tax imposed to fund public education. At the other end are issues involving income tax exclusions for scholarships, deductions for educational expenses, exclusions for employer-assisted education, credits for lifetime learning, and a long list of similar provisions, both at the federal and state level. Somewhere along the line between the two are sales tax exemptions involving education, and estate and gift tax charitable contribution deductions for gifts to educational institutions.

I'm not going to write another book. I want to focus on provisions that connect the public education financing side of the spectrum with individual income tax deductions and credits on the other end. Specifically, I want to consider tax credits and deductions for school supplies purchased by teachers for use by their students.

What turned my attention to this question was a news report today with this headline: Teachers lose tax breaks for class expenses. The news was that the California legislature has suspended a state income tax credit (limited to $1,500) for teachers who purchased school supplies for use by their students. There are similar credits (or deductions) in a few other states.

Note: The news article erroneously states that there was a federal deduction (limited to $250) that has expired. For federal income tax purposes, there has been and continues to be an employee business expense deduction for supplies purchase by teachers. What expired was a provision that permitted this deduction to be taken in computing adjusted gross income for taxable years 2002 and 2003. The deduction remains as an itemized deduction subject to the 2% floor and the overall 3%/80% limitation on miscelleaneous itemized deductions.

What's not news is what anyone who pays attention to education issues already knows: teachers spend hundreds of dollars of their own money providing supplies to students that schools do not provide (even though the supplies are necessary) and that, in some instances, students and their families cannot afford. The scale of the problem is alarming. Students cannot learn if they lack the required supplies, and many taxpayers are unwilling to pay increased taxes so that the schools can provide the supplies. Though the problem afflicts all sorts of schools, it is most acute among public schools.

The article also reports more information that is not news. Sometimes teachers and their unions oppose enactment of tax breaks because they prefer increases in public school funding. I agree with this position. First, tax breaks do not provide full reimbursement, and teachers continue to bear a burden that should not be theirs to bear. Second, tax breaks hide the problem, whereas school funding debates get the spotlight that the issue needs to have.

The school funding issue is another example of the "we want it, and we want it cheaply" demand of the post-modern culture now dominant in the country. Taxpayers complain about teacher salaries, and point to salary figures that are deceptive because they don't reflect the portion of the salary that is spent by the teacher making up for employer omission. How many of these complaining taxpayers would be happy if they were required to purchase supplies for their clients and customers on a regular basis?

People want inexpensive goods and services, but when corporations seek to lower costs so that prices can be lowered, they turn to outsourcing, and an uproar begins. How long until children begin to get their schooling through outsourced public education? It's already being done in a few rare instances of home schoolers getting their children connected via the Internet to cultural, educational, and historical sites outside the U.S.

People want inexpensive airline flights, but when corporations seek to lower costs by cutting unprofitable routes, seeking worker give-backs, or lobbying for public financial support such as tax breaks and government-funded facilities, all sorts of objections are lodged. Today's cheap flight on the other airline will become tomorrow's expensive flight once the undercutting has put the more expensive airline out of business. And the person making the boatload of money, like the developer who leaves behind for the rest of us the traffic congestion and related costs caused by the development, will be long gone.

Inexpensive public education buys cheap learning. Cheap learning guarantees that the country will lack the informed, capable citizens and leaders of the next generation that it needs. Let's add up all the things we demand of our schools and put a price tag on them. Then calculate what taxes would need to be if the public bore the full burden, rather than shifting some of it to the teachers. Logic and common sense dictate that the list of "wants" be pared to the essentials, but emotions get in the way. An anecdote: when I was about 9 or 10, I overheard a discussion among the adults in the extended family about the "stupidity" of putting carpeting in an public elementary school (which was also getting a full-sized Olympic quality swimming pool). I have never forgotten the bluntness of one of the adult's comments (I think it was one of my aunts): "Who in their right mind would put carpeting in a place where at least every other day some kid throws up?" Indeed. Who in their right mind.

Somehow right minds need to prevail and alter the spending so that it is done with logic and common sense. The "everything for everybody" and "make each person happy" emotional mantra causes public education to invest in (or at least in some instances to be pressured into investing in) each full-fledged athletic facility or extracurricular activity program that is wanted by the parents of any given child. So schools end up with football fields, baseball fields, hockey rinks, Olympic swimming pools, spinning rooms, ...... In the meantime, driver education programs are discontinued for lack of funding.

Someone has decided that athletics and certain other activities are more deserving of funding than supplies for the academic programs. Perhaps it's the parents who put far more energy into working for successful school athletic programs (measured by won-loss record and occasionally by number of athletic scholarships earned) than into working for successful academic programs. Ever wonder why the high school football or basketball team's game makes the headline and the National Merit scholars might get a tiny mention at the bottom of a column on an inside page?

This tension between academics and everything else has existed for a long time. It exists not only in the public K-12 schools but also in higher education. We hear that athletics "teaches" valuable character traits, and I suppose in some instances it does (though I doubt that such is the case at some schools, such as one out near the Rocky Mountains). Character, however, can be taught, and sometimes is more easily taught, under adverse conditions. Successful progress in academic courses cannot be accomplished, however, when the requisite basic tools are missing.

I suppose I'd be less aggravated by the short end of the deal that teachers are getting if I thought that the current system of K-12 (and higher education) in this nation was turning out a nation of highly educated individuals. I teach at the terminal end of the system, in graduate and post-graduate education. The information and analytical deficiencies that I see in our "best and brightest" is sad, alarming, and unjustified. Class attendance and learning (in contrast to "getting a grade") rank too far down the priority list for most college students. I wonder where they learned their priorities?

An income tax credit is NOT the place to solve the problem. Giving small tax credits to teachers is a poor substitute for schools taking responsibility for education. In the case of public schools, that means the public taking responsibility for education. That responsibility belongs both in the civic arena (school funding and expenditure issues) and in the household (determining spending priorities for individual education expenses).

In the meantime, the teachers in California are faced with this choice: watching their students suffer because they need to cut back on their purchases of school supplies by the amount of the suspended tax credit, or cutting their own household expenses (including spending for their children's necessities) to make up the difference.

Maybe the professional athletes who got to where they are because their schools gave them the opportunity can jump in with 1% of their multi-million dollar salaries in an "Athletes Grateful for their Schools" program that would fund these supplies. At least in the short term that might bring some relief to people in need of the tools for learning how to be tomorrow's informed electorate.

After all, children without the necessary school supplies are far more likely to be children left behind. And all of us have a responsibility to say and do something when children are getting the bad end of the deal.

In my post about taxpayers being awarded emotional damages because the IRS tried to collect discharged tax debts, I stated that the making of mistakes and failure to respond with corrective action was as prevalent in the private sector as with government agencies. As an example, I share this story.

Early in the year it became apparent that the 7-year-old software I used for generating HTML documents was useless with Windows XP. Yes, I know Word and WordPerfect documents can be converted to HTML, but they come with too much overhead and it's more convenient using software designed for HTML composition and programming.

So I found a replacement. I downloaded it. I tried it. I liked it. I paid for the Professional version. All was well, though the "better" professional version would slow down after it was in use for a few hours.

On Wednesday I received an email from the company inviting me to download a FREE "upgrade" to my paid version of the software. The upgrade included a few new features but, more importantly, fixed numerous bugs. Good, I thought, this might solve the slow-down problem.

I went to the URL provided in the email. It was a web page that invited me to download the trial version of the software. Don't need that. I looked through the company's site and did not find an upgrade download. So I clicked on the "contact us" link in the email, came to a web page permitting the sending of messages, and sent my message. There was no reply.

So I looked again at the trial version download page, and it was described as the version number of the upgrade. I downloaded it. I installed it. I clicked on Help, and then About. It showed itself as the upgrade, with a September 14 date. Excellent. Except for one thing. It also described itself as an unpaid trial version.

How nice. A supposedly FREE upgrade to fix problems in a purchased product ends up demoting me to a trial version.

So I decide it's time to contact the company again. By now, I am more than annoyed. Are the company's programmers too incompetent to distinguish between paid users getting the upgrade and first-time users downloading a trial version of the upgraded software? Apparently so, for all users reach the same trial version download page.

Before sending the message I check my email. I have a response from the company. Great. Great? Noooo. It is an automated response telling me that my email sent from the company's "contact us" web page went to an obsolete email address and that I should use a different address. Huh? If you change the email address, why not go to the web page and change it there also? Don't treat me as though I was the one who decided to send the email where it went. The company's web page did that. Now, of course, the programming staff's stature fell more. A lot more.

So I sent an email to the new email address and explained the situation, much more elegantly than I did in this post. Have I had a response? Nooooo.

So I may end up having to change programs yet again. How I wish I could sue for emotional distress. I can't. I didn't have any. Being dumbfounded at the incompetence of others isn't a cause of action. If it were, I'd own the world by now, for I'd have sued Bill Gates so many times.... ha ha, maybe Bill Gates bought the company that developed the HTML software I was trying to update. Hmmmmm.

I haven't named the company. I'm sure if I did, it would sue ME, because it would be OFFENDED that I dared to criticize it. After all, they're perfect and their parents told them that the world was all about them.

Just checked my email again. Nope, no response.

UPDATE (Wed 21 Sep 2004): I received a reply from the software developers. They claim that even though the trial version and the update are the same file, that the program was not demoted to a trial version. There's no way to prove or disprove that until the trial period ends. So, we'll wait and we'll see.

Blogs are very useful. Paul Caron’s TaxProfBlog brought news about an article written about a bankruptcy case decided in May. It’s now September, so the case had flown under my radar, but after reading Paul’s summary curiosity got the best of me.

The case, In re Torres, 209 Bankruptcy Reporter 643 (2004), involved taxpayers who filed for bankruptcy in September 1992. In January 1993, they received a discharge of all their liabilities, including almost $14,500 in 1985 self-employment taxes and $7,100 in 1989 through 1992 self-employment taxes. Discharge means that the debts are absolved, and need not be paid.

At first, the IRS suspended its collection activities on the discharged debts. Why not close the case? Closing the case would have prevented the next part of the story.

Three and a half years later, in September 1996, the IRS began to send notices to the taxpayers, requesting payment for the taxes that had been discharged. The taxpayers responded each time with a telephone call to the IRS. The IRS then notified the debtors that a refund due to them for 1995 was being held by the IRS so that it could be applied against the taxes that the IRS claimed were due. Then the IRS sent a final notice of levy to the taxpayers.

The taxpayers brought an action seeking to have the IRS held in contempt for violating the discharge injunction. The IRS conceded to a willful violation of the discharge injunction. The bankruptcy magistrate awarded damages to the taxpayers for emotional distress, but rejected their request for attorneys' fees and costs because they had not exhausted their administrative remedies. On appeal, the court affirmed the damage award and reversed the denial of fees and costs, sending the latter issue back for determination of the fees and costs.

Nothing is more aggravating than when a clerk, bureaucrat, or other administrator makes an error as to which there is no room for discretion, and then fails to admit the error and fails to fix the error. In this instance, the IRS heaped insult onto injury by trying to collect taxes and then holding back a refund.

The bad news about this case is that the award for emotional distress is authorized under bankruptcy law and thus is available only in the limited number of cases in which the taxpayer dealing with the mistake is in, or has gone through, bankruptcy. The good news is that perhaps a message will get through to the IRS.

I am among the first to defend the IRS when it deserves to defended. It is underfunded, it is charged with administering a mess of a tax law, it is treated as though it wrote the foolish provisions in the tax law, and it is a favorite scapegoat of Congress for the latter’s tax legislation incompetence. But when the IRS does goof, it gets the headlines, and leaves the world thinking it’s like this all the time.

There probably are no other cases, or perhaps just a few, in which the IRS has pursued collection of taxes that had been discharged. What happened?

First, the case should have been closed. Second, an employee made a mistake. Third, the mistake was not corrected.

True, the blame can be attributed to high turnover among IRS employees, miscommunication, inadequate funding (thanks to the Congress) for employee education, and perhaps ignorance concerning the meaning of “discharged debt.” Before hauling the IRS up on charges, consider that this sort of nonsense goes on in every company, and is the reason for many, many customer service calls, Better Business Bureau complaints, and lawsuits.

The individual employees who erred won’t be paying the bill. The odds are they no longer are with the IRS. They were not identified. Their current employers surely don’t know of the problem they caused. While we cheer the award of damages to taxpayers whose lives were made miserable by incompetence, we might forget that WE, yes, WE, are paying the bill. That’s because the employees involved in this mess are protected. Wouldn’t some ACCOUNTABILITY be nice here? Just as it would be in the private sector?

Modern culture needs to stop rewarding incompetence, laziness, greed, and crime, it needs to stop pretending something bad is good, and it needs to elevate the values of individual responsibility and accountability to the same level to which their counter-balancing forces, freedom and independence, have been raised. Why society is so reluctant to be intolerant of incompetence, laziness, greed and crime puzzles me. Far more good is done in the long-run by confronting the problem head-on and dealing with it than is done by protecting the sensitivities of an employee who isn’t helped by pretending that reality is a fantasy.