MauledAgain

The Extreme Makeover? Extreme Tax post did not pass unnoticed. A nearby CPA asked several questions.

His first question was whether section 109 would apply. Section 109 provides that a landlord does not have gross income to the extent of the increase in value of the rented property caused by improvements made by the lessee, provided those improvements are not paid as substitutes for rent (in which case their value would constitute rental gross income).

For section 109 to apply, several conditions must be satisfied. First, the transaction between ABC/producers and the homeowners must be a rental. ABC appears to be buying the homeowners' story, and the stories of the other members of the household, and they appear to be purchasing their time (in this instance, the time spent painting a hospital). It does not appear that ABC or the producers are renting the house for use as a house. Second, the improvements must not be a substitute for rent. In the paradigm, the lessee pays rent and also adds an improvement. If this transaction is a rental, where is the rent payment? We're back to the section 280A issue. Third, lessee improvements are improvements made and used by the lessee. ABC and the producers did not live in the house that was demolished or in the house that was built. The house is no more a lessee improvement than is a house constructed on my raw land by a contractor. Yes, the contractor's employees are "in" the house as it is being built but they are not "using" the house.

Apparently (and I would have known this if I watched the show but I haven't), ABC and/or the producers also bless the family with big-screen TV sets, new furniture, and all other sorts of personalty. Unquestionably, section 109 does not apply. Nor would section 280A. And if the family is characterized as employees, compensated to perform painting and public relations services, section 102(c) precludes treating these items as gifts. So there's even more gross income. Does ABC "gross up" its payments so that the families have money with which to pay the tax? We don't know.

The CPA's second question is whether I think the IRS would go after these families, some of whom were in dire straits. His question referred to orphans, so I'm guessing (I should stop writing tax stuff and watch TV) that in one episode some orphans got a new or remodeled home. I do wonder what the IRS will do (assuming that ABC/producers are not providing money to be used to pay the taxes). Would it make for bad PR for the IRS to issue notices of deficiencies against these families? Maybe. Surely other families, in similar circumstances but not getting new or remodeled homes, might not be so sympathetic. Or perhaps they would be. Of course, politicians, especially the "eliminate the IRS" crowd, would jump all over this, oblivious to the fact that the LAW that applies is law that they wrote, but we know that they, paradigms of postmodern culture, are expert at shifting blame from themselves to anyone within range and anyone they don't like.

But if ABC issues 1099s to these taxpayers, the IRS computer system will automatically flag the tax returns of these families. It isn't a question of whether the IRS is "too busy" to do something, but whether someone at the IRS manually overrides the mis-match flagged by the computer. The first, benevolent negligence, is not all that uncommon, as the IRS has for decades "overlooked" some things for reasons of administrative logistics or policy, even though the law required something else. But the second, stopping a computer-generated "there is a mismatch" letter from going out to the taxpayers, is an affirmative interference with a system set up in compliance with, and designed to increase compliance with, the tax law. It might even be a violation of IRS internal working procedures for tha sort of interference to take place.

We do know that the IRS went after Richard Hatch, another TV show winner, who failed to report his income. From what I understand, he wasn't a likeable guy, but should tax law outcomes reflect the presumed likeability of orphans (assuming orphans are per se likeable, which isn't necessarily the case) and the dislike of others? If the answer is that Hatch received cash and these families received property, the outcome would turn on a distinction always rejected in the tax law, namely, the fact something is received as property rather than as cash makes no difference in the gross income analysis (except for certain narrow exclusions not relevant to this discussion and arising from specific statutory exceptions). And if the argument "it's in property so don't tax it" carries the day, I guarantee that tomorrow all sorts of transactions will be shifted from cash exchange to property exchange arrangements. The IRS cannot write, and the Congress cannot approve, such a ticket.

The solution will make the income tax even more complicated. Would some other sort of tax be better? What of a sales tax? My guess is that ABC/the producers would simply pay it as part of the deal. What of a VAT? Same outcome, as it would be imposed on ABC/the producers who would choose not to shift it to the families. What of a consumption tax that had no exception for residential realty? Boom. The discussion would not involve the niceties of sections 102(c), 109, and 280A(g), but would be just as laden with cries of "this isn't right." Well, then, what is right?

One of the ABA-TAX listserv participants explained earlier today that the producers of Extreme Makeover: Home Edition shifted gears last night and did more than a makeover. Following the family's request, the producers sent the family to paint a pediatric cancer center unit in another town's hospital. They were absent for a week.

ABC then tore down the family's house and built a 5400 square foot replacement. The family did not know this would happen. Gee, did anyone ever think someone could build a house in a week? Even ignoring time for the building permit and environmental clearance processes, actual construction in a week?

Anyhow, there's a tax issue here. (I really need to start watching television for other than sports, news, and weather. I'm told I don't get out enough. I also don't sit at home and watch network TV enough. I must be flunking something.)

Anyhow, does the family (or at least the parents) have gross income? And can ABC (or the producers or whoever actually paid for the new house) claim a deduction?

Let's start with gross income. Gross income is all income from whatever source derived, unless an exclusion applies. Go read section 61(a) of the Internal Revenue Code, which is where that not-for-everyday-conversational-use language can be found.

Income? Certainly. The owners are economically wealthier and they've taken the house into their ownership and possession.

Exclusion?

First possibility: the exclusion for gifts (section 102). For it to be a gift, it must come from the donor's "detached and disinterested generosity." That's a quote from a Supreme Court case called Duberstein, and even though the Court told us not to quote that language as a test, everyone, including the lower courts, has been doing that for decades, so why should I be different? ABC does this to get ratings, because ratings mean income. ABC is not the kindly uncle buying a house for his starting-out-in-life niece and her husband (disclosure: I have not done that. Warning to my son, daugher, nieces and nephews: don't get your hopes up). Someone suggested that it was a gift because if someone leaves money or property where an intended donee is expected or intended to find it, it's a gratuitous transfer. My response: Mr. Duberstein's employer left the car where he expected Mr. Duberstein to find it. And yet the Supreme Court held it was not a gift.

Second possibility: an exclusion for rental gross income if the rental period is less than 15 days of the year (section 280A(g)). Is this a rental? That question has been debated in instances where ABC remodeled a house. The obstacle in those cases is that the value of the benefit is disproportional to the rental value of the property. But this demolition scenario is even tougher. How can the owners claim ABC is paying rent for the house when ABC promptly demolishes the house? Rental for the land? If so, is $500,000 or whatever the house is worth equal to the rental value FOR A WEEK for a small plot of residential land? Hardly. The rumor mill has it that attorneys for ABC have advised it that section 280A(g) does apply, but even if that is true, there are serious reasons to doubt the conclusion. I'm very certain that if the attorneys advised anything, it's in a letter that hedges its way all over the map.

I'll come back to this after I consider ABC's deduction.

First possibility: ABC deducts the value of the house as a business gift. The problem with this approach is that there is a $25 (yes, twenty five dollar) limitation on the amount that can be deducted as a business gift to any one individual for a year. I cannot imagine ABC taking this approach.

Second possibility: ABC deducts the value of the house as a rental expense. The problem here is that the deduction is limited to ordinary and necessary rental expenses that are reasonable. There is no way that the value of a 5400 square foot house is reasonable for a one week "rental" of a plot of residential property. It won't fly.

Third possibility: ABC deducts the value of the shouse as an advertising expense. That's what it is. Advertising. Ordinary and necessary? Yes, within the context of the business (television production) in which it is incurred.

So why would ABC limit itself to a minuscule gift deduction or risk losing most of the deduction as a contrived rental deduction when it can get the best (and correct) tax result taking an advertising expense deduction? Of course, that leaves the owners in a tough place. What happens to the gift argument, already shot down under the gross income exclusion analysis? What happens to the rental exclusion that was struggling to stay alive?

Well, what happens, I contend, is that the family has gross income. That's a brutal result. So, too, were the results for the recipients of all those automobiles that Oprah gave away on one of her shows. At least in that case the producers forked over cash sufficient to pay the taxes. Does ABC do that with the Extreme Makeover: Home Edition episodes? We don't know. The families sign confidentiality agreements, evident from looking at the application.

One last item. In addition to the statutory provision making all income gross income unless there is an exclusion, yet another provision (section 74) provides that prizes are included in gross income. Is this house a prize? The families entered a contest, much like a lottery. Some selection process beyond their control is used to determine the winner. It's like a lottery, except it costs 37 cents for the postage rather than $1 for the ticket. Someone suggested that it might not be a prize because they don't enter to win it, but the application surely is an entry form.

Or perhaps, as one listserv participant suggested, the show is staged. I doubt it. I think they really do seek out "needy" families because it makes good television. After all, tax professionals are watching. Well, some of them, at least.

Oh, the producers or ABC or someone paid off the mortgage on the old house. Well, sure, after all, the bank wouldn't be too happy to see its collateral get razed!!! Think of all the loan officers who must be watching the show!

So, I'm sure once ABC's tax advisors realizes how important it is to ABC's deduction that it NOT be a gift, they'll decide to send that 1099 to the recipients. Then let the fun (and tax games) begin!

It's so nice to have the experts affirm what I assert. Several years ago I wrote an article for the Villanova University School of Law weekly newsletter, in which I asserted that the best way to learn is to teach someone else, and that law students should focus on learning how to teach, because they will spend their careers teaching clients, judges, other lawyers, bureaucrats, and others.

Now, in a new report about the comparative success of siblings, researchers claim that one reason, and probably the most important reason, first-born children tend to be more successful than their siblings is that they have more opportunity to, and in fact do, teach their younger brothers and sisters.

Of course. OK, so I'm the second-born of my parents' children. But I had two younger sisters who probably could claim to be my first students. Somehow, despite that, both have done quite well. One's a teacher, the other a lawyer. And I'm a lawyer who teaches.

Credit, though, goes to my mother, who through the years, even when I was in graduate school, would insist on my sitting down and explaining to her what I had learned. Until I was in my 20s I thought it was something for her benefit, which, of course, I was more than happy to do. Then I realized, it was really for my benefit. Too few parents do that for their children. Thanks, Mom.

I was startled when I read the news about the House passing a new highway funding bill to read this quote from Representative Peter A. DeFazio, a Democrat from Oregon, who is a member of the Transportation Committee:

It will be the signature domestic legislation in this Congress in terms of the positive impact on the economy of this country.

Keeping in mind that "this Congress" sits from January 2005 through January 2007, that's quite an assertion.

It means that any tax legislation enacted this year or next would fail to qualify as "the signature domestic legislation in terms of the positive impact on the economy" and it means any social security legislation enacted this year or next also would fail to qualify as "the signature domestic legislation in terms of the positive impact on the economy." That means one of the following:

• No tax and no social security legislation
  
• No tax and insignificant social security legislation
  
• Insignificant tax and no social security legislation
  
• Insignificant tax and insignificant social security legislation

Considering the political realities, it would not be a shocker if this Congress failed to pass social security legislation or enacted some minor tweaks that were insignificant in the context of the overall economy. But for a spending bill to overshadow the tax legislation of this Congress would mean that this Congress, like its predecessors, will fall flat on its face when it comes to putting the needs of the nation, its citizens and its economy above their own individual pet projects. The cynic in me would not be surprised, for, after all, the highway spending bill contains piles of special pet projects inserted by members of Congress to appease highway construction firms in their districts even though the 8-lane highway in the middle of the prairie that gets four vehicles an hour really doesn't energize the nation's economy or reduce traffic gridlock.

But this is a Congress full of members who have orated incessantly about their dedication to reforming the tax system. Perhaps Representatvie DeFazio is stating what would be obvious to Maule the Cynic, "That won't happen but at least we got this highway spending bill through" or perhaps he is stating what he intends to try preventing, "This Congress should not do anything else that could qualify as the signature domestic legislation in terms of the positive impact on the economy." Or perhaps he simply meant to use the article "a" and somehow the article "the" slipped in. Or maybe he was just so excited that the legislative date of the evening overshadowed every other statutory encounter he's had or expects to have.

Perhaps, though, there won't be any more economic legislation because the Congress will be busy investigating the use of steroids by major league baseball players. Hey, first things first. Forget about the unimportant stuff like the economy, jobs, health care, defense, and safety. Several months of televised hearings, giving members of Congress more opportunities to grandstand, may generate a new tax provision denying deductions for the cost of steroids. Wow. It might be as effective as the provision enacted years ago denying deductions to drug dealers. We know how effective that was in reducing the use of illegal pharmaceuticals.

Still, the ideal of giving "the signature domestic legislation" status to a bill passed (and not yet enacted) early in the first year of a two-year Congress is much like a baseball player claiming that a 2-hit, 2 RBI game in later April is "the signature performance" of his season. Doesn't Representative DeFazio have any hope that maybe the Congress can accomplish something better in the 22 months it has left? Perhaps he knows his colleagues too well.

Steven Lubet, a professor of law at Northwestern University, has written a thought-provoking article that challenges the traditional approach to examinations taken by most law schools with respect to most courses. It deserves a full read not only by law faculty and law students, but also lawyers who use the results of examinations as a factor (sometimes the principal factor) in their hiring decisions and even the rest of the citizenry, many of whom are affected by what lawyers say and do.

Prof. Lubet's thesis is that "law school tests and bar exams reward skills that are largely disconnected from everyday lawyering." How very true. For years I've contended that first-year law school examinations put too much weight on a student's memorization skills and not enough on their analytical skills. Students who do not have the sharpest memories, but who nonetheless can be and have become excellent attorneys, struggle to do well and rarely "make" Law Review, the gateway to admission into the elite circles of large firms and the law professoriate.

Prof. Lubet points out that law faculty try to measure a student's educational achievement in a semester-long course with what they accomplish on one three or four hour final examination. He notes that these sorts of examinations reward "rapid recall and facile composition" rather than depth of understanding. That's one of many reasons I base as much as one-third of course grades on student performance on exercises assigned throughout the semester. It's a huge amount of work, but it's worth it. When an administrator told me I must be crazy to subject myself to the workload, I replied that I'm paid to do this. See why my colleagues want me to be their next Dean, hahahahahahahahaha?

I enjoyed Prof Lubet's comment that if lawyers did in practice what law students are expected to do on law school exams to earn high grades they'd probably be hit with malpractice suits. Of course. The disconnect between the ever-more-philosophically-focused law faculty and the practicing bar is growing. This is not good, especially when many firms need to cut back on mentoring and training because of the competitive business characteristics that have infected law practice. No wonder that hiring preferences are shifting to searches for attorneys with 3 or more years of experience, namely, folks that some other lawyers have trained. Do I hear "free agency"?

Prof. Lubet also notes that though lawyers sometimes need to react quickly and to have good recall, chiefly in certain litigation areas, most lawyers don't do those things and those who do generally don't do them most of the time. He points out that many important legal skills get little attention outside of clinics. Think "tenacity, diligence, thoroughness, collaboration, consultation, fact investigation, and, crucially, the willingness to admit error and start over from scratch." Then he tries to match me in becoming endeared to our colleagues in the academy by revealing the truth about law school exams: they get used because they are "easy to grade."

His comments about the bar exam raise similar concerns, though in a different context, and without as disadvantageous an effect as law school exams, but for the moment I leave a critique of his views to those who have experienced the joy of writing and grading those exams. Suffice it to say I agree with his analysis.

I hope to get Prof. Lubet's permission to reprint his article in our law school newsletter. I wonder if I'll have a more challenging task getting permission from the newsletter's editor! But I'm glad I'm not totally alone in the law faculty universe. It's a comforting thought. Perhaps fifty years from now scholars writing about the history of legal education will look back to 2005 as a meaningful turning point in the modernization of law school pedagogy as it was dragged from the late 19th century into the 21st. That I would live long enough to see that happen. Or, perhaps, at least that my students should live so long.

Andy Cassel's Philadelphia Inquirer column on consumption tax possibilities addressed some of the same issues that everyone else interested in the fate of tax reform has been pondering. Andy's comments have inspired me to elaborate on my most recent analysis of the consumption tax.

Would the consumption tax be simpler than the income tax? How could it not be? How could anything be more complicated? At least any sort of tax system. Well, the income tax COULD be more complicated. After all, ten years ago, twenty years ago, people characterized the income tax as absurdly complex, and hindsight tells us that what existed then, in the "good old days," wasn't anywhere as complicated as what now exists. The trend is for the Internal Revenue Code to set up a different tax system for each citizen.

So, yes, the consumption tax could be at least as complicated as the income tax. Why? Andy describes the complexity of the income tax as "the need to distinguish "taxable" income from other kinds of cash flow." That's true, though most of the complexity involves deductions, credits, and special rates. There's very little room to twist around gross income, short of fraud or near-fraud tax shelters.

With a consumption tax, the question is a focus on "spending," to use Andy's term. But what spending gets taxed? A consumption tax that resembles a state sales tax is going to have a bad role model. To appreciate how simple the federal income tax is, take a peek at state sales taxes. The lists of taxable and non-taxable items not only are long, but difficult to comprehend in terms of policy. And many don't simply classify something as taxable or not, but make the distinction turn on where the item is used (eat-in versus take-out, for example) or who uses it, or who buys it, etc. etc. The reason consumers are shielded from the complexity is that the vendor is responsible for figuring out if the tax applies, and in recent years digital technology has made that much easier. The problem is that when a mistake is made, the consumer doesn't realize it unless the mistake is huge. Years ago, several bold people suggested that the IRS be allowed to tap into citizens' bank accounts so that the IRS could compute the income tax and pull it out of the citizen's account. Painless, like the sales tax. Errors unnoticed, like the sales tax. The problem was that about the same time the IRS was erroneously depositing refunds into citizen's bank accounts that were orders of magnitude out-of-whack. So the idea went nowhere. Fortunately. Today, businesses and the government are far more likely to make mistakes than they were twenty years ago. The reasons can be the topic of a future post.

So what WOULD get taxed under a consumption tax? Buying a house? But that's not consumption. Houses are used but not consumed. Perhaps the tax should be on the person who demolishes property. What about purchase of a refrigerator? Is it "consumed" as is food? Yet food is the most common exception to state sales taxes. If, as consumption tax advocates argue, the consumption tax is more efficient because it forces savings, ought it not be designed to encourage efficiency? No taxes on recycling, and high taxes on use of resources that cannot be replaced, would fit the bill. Will it happen? No.

I pointed out the problem with the argument that comsumption taxes are good because they encourage savings, which in turn is good because it causes economies to grow. Savings simply shift consumption to a debtor, because ultimately the saved amounts are loaned to other consumers. Those with, become creditors. Everyone else, a debtor. What makes an economy grow is development of resources, either through recycling or discovery (of either natural sources, an ever-diminishing prospect, or through invention). Let's see if a consumption tax does this.

A manufacture takes resources and builds an automobile. The manufacturer is not hit with a consumption tax, because it is imposed on the purchaser (even if the manufacturer is stuck with collecting it, in the style of a state sales tax). The tax doesn't take into account the proportion of materials in the automobile that can be recycled or that cannot be recycled. The purchaser eventually sells the automobile to someone else. What happens? Another consumption tax, just as there is another sales tax. The difference is that the sales tax is what it says it is, a tax on sales, and if the automobile is sold from purchaser to buyer to third buyer, and so on, the state collects far more than just, say, 6% of the original manufacturer's sales price. So, who has "consumed" the automobile? The first purchaser? No, because the first purchaser has sold the automobile for something more than zero, indicating that the first purchaser did not consume the entire automobile. Ought not the first purchaser get a consumption tax REFUND when selling to the second purchaser? Or, to put it another way, ought not the second purchaser reimburse the first purchaser for the consumption that is being shifted from the first purchaser to the second purchaser? That sale, from first to second purchaser, does not consume additional resources. Does it cause the economy to grow? Yes, if measured by volume of goods changing hands. Yet this sale is a transaction that "grows" the economy without consuming anything. Why tax it? After all, if the economy could be "grown" without anything being consumed, taxes would be unnecessary.

So, something more must be involved. Let's think again about what gets taxed, even before all the special interest lobbyists show up and turn the consumption tax into an inspiration for a "bring back the less complicated income tax" movement. Is the "purchase" of corporate stock taxed? No. The purchase of a building? Hmmm. But isn't the purchase of real estate an investment just as is stock? Goodness, even purchase of a high quality refrigerator is an "investment."

What if the building is a home? Imagine a 25% consumption tax on home sales. Very good for the economy? OK, exception needed. But wait. Purchase of an existing home is merely a transfer of resources, not a consumption. Purchase of a new home consumes resources (at least in the sense that they are transformed from tree and bauxite deposit into a residence). But if only new home purchases are taxed, that puts builders out of business. Or at least moves them into the remodeling business. Maybe that's not a bad idea, considering how many vacant buildings populate both the urban and rural landscape.

Of course, we know that real estate will be exempted. After all, the Congress (not the IRS, Andy) has been persuaded by every "don't let taxes get in the way of our real estate deals or the country will go bankrupt overnight" song chanted by the real estate lobby. Good thing, too, else we'd have a huge shortage of vacant office buildings and empty shopping malls, and we know it's not good for the economy for resources to be diverted from building commercial properties that will sit unleased for years. Thus, real estate financed with third-party nonrecourse debt is treated as at-risk for the investors even though they are not at risk. Investors who own real property that increases in value are permitted to deduct depreciation that doesn't exist as though they were no different from business owners who purchase equipment that diminishes in value in very visible ways. Real estate investors are the beneficiaries of special exceptions to the passive loss limitations. So I doubt real estate is going to end up being taxed under a consumption tax.

What about K-12 and college tuition? Is that "spending"? Of course. Taxable? Just imagine, an overnight 25% increase in the cost of education. Good for the economy? Who gets hit? The person making $500,000 a year sending two children to school? Or the person earning $50,000 a year trying to send two children to school? OK, let's make tuition exempt.

So what gets taxed? Mostly the money that is spent on shoes, clothing, food, medicine, automobiles, and, OH WAIT. We can't tax shoes, clothing, food, and medicine. After all, they're exempt under most sales taxes. Unless, in many states, it's prepared food being taken out of the establishment to be consumed. Hmmm. Food is consumed no matter where it is eaten. What's the difference? So, anyhow, do those necessities get taxed? Maybe not.

What's left. Oh, let's see. DVD players? Ah, to some people those are necessities. No matter, they'll find some common value set that tells us that DVD players are not as important as food or medicine. And they're right. So what gets taxed is the stuff that isn't necessary. What does that do to an economy that for more than fifty years has thrived on the "disposable income spending" pattern? I'm not sure. It could be good. It could be bad.

So what will happen is that people who must spend most or all of their income on necessities will pay taxes on most or all of their income. Those with incomes that permit saving will pay about the same amount of tax (after all, one can double the cost of food by choosing more expensive items but there is a limit to how much one can eat) as do those with far less income. If, as some suggest, provisions will be put in place to rebate the tax to the poor, who's left paying the tax? A tax that is, essentially, a tax on wages? Why, the middle class.

What will happen? Eventually the middle class will disappear. It already is beginning to disappear, and the consumption tax will hasten its demise. How awful, one might think. Well, someone IN the middle class will think that way, unless they're fairly confident they can break into the upper class (the wealthy, super wealthy, hyper wealthy, etc.). No wonder parents go nuts at sports games. Their child making the pros is perhaps their only ticket out.

Would the poor be upset? In theory, yes. It means that there would be far less chance of "moving up" the economic ladder (because the middle rungs will have been removed). So, as is the case today, much emphasis will be placed on getting one's self, or one's children, into the limelight that brings big bucks. No wonder so many untalented people flock to the TV reality shows, and all the other "lotteries in disguise." This is not news. The fact that lotteries draw most of their revenue out of the poor neighborhoods has been known for quite a while.

And that leaves the upper echelon. Historically, the upper echelon has always feared the middle class. Whether it was royalty bucking the nobles, the upper crust fending off the merchant class, the Soviet power brokers putting the middle class on the farms, the Maoists in China and the Khmer Rouge of Cambodia putting the intellectuals into the fields, or the Roman Senate keeping close tabs on citizenship rights, the money-fueled, power-lusting megalomaniacs have always been far more of a threat to the middle than to the peasants, despite the common portrayal of Robin Hood feuding with King John. The middle class thrives when the upper echelon needs a buffer during times of social unrest. Robin Hood didn't steal from King John as much as he did from the petty nobility.

So, the more I think about it, the more palatable I find a user-fee based revenue system that rewards production and discovery, and burdens irrecoverable resource consumption. The more I learn what sort of thing a so-called "consumption tax" would be that imposes multiple taxes on the same automobile sold 5 times over a 15-year period even though its manufacture used no more resources than the one held by the one owner during the same period, one that imposes a tax on the purchase of residences but not corporate stock, and one that is loaded with exceptions resembling those permeating state sales taxes, the less I like it. I might even like it as much as I do the income tax. Which is to say, not very much. No, not at all. At least not what presently exists.

Speaking of which, Andy mentioned that he started in on his tax return preparation this weekend. What a coincidence. So did I. I hope he's done. I'm not. As I was slogging through, I realized I had not yet done the tax return for TaxJEM, and it is due in a week. Fortunately, its return doesn't look like Microsoft's, so I should be able to get it done within a few hours. HOURS? Yes, the Pennsylvania return, which includes an antiquated capital stock franchise tax, makes the federal 1120S look like child's play.

I wonder if a consumption tax would apply to the oxygen I will consume as I do the return. Perhaps I get a credit for planting and caring for trees and shrubs that replace the oxygen. Or perhaps I could impose a consumption tax on the legislators who require me to consume time (an irreplaceable resource) filling out the forms that their revenue laws require.

And, for those thinking that states would say bye-bye to their income taxes and jump on a consumption tax bandwagon being pulled by the federal tax locomotive, brace yourselves. At best, states will ADD the consumption tax to their already interminably long list of revenue devices.

And with that, I've consumed my allocated time and space for today's posting.

In his column this morning, Andy Cassel reports that the buzz in Washington suggests making individual social security accounts an "add-on" to, rather than a "carve-out" from, the existing system. My response to those suggesting add-on accounts is this: "We already have them. They're called IRAs, SEPs, SIMPLEs, 401(k) plans, etc etc. We don't need yet another layer of complexity. It would be better to reform the mish-mash of retirement planning devices and create one device. It does not need to be, nor should it be, part of social security."

I also would ask, "What would these add-on accounts accomplish? Those too poor to contribute to IRAs wouldn't contribute to add-on accounts. The wealthy would get what, another tax deferral opportunity?"

Folks, the add-on suggestion makes no sense as a proposal because it makes no sense to propose what already exists. I wonder if it is some sort of smoke screen, or some device that is a stealth carve-out.

We'll see, soon enough. Thanks to Andy for alerting us, because I hadn't seen this add-on news.

In a comments before the President's Advisory Panel on Federal Tax Reform, Alan Greenspan explained:

a consumption tax would be best from the perspective of promoting economic growth" because it would encourage saving and the capital formation that the economy needs to expand and modernize.

So let me see if I understand this. A consumption tax encourages us to reduce spending. OK. We reduce spending. People who sell stuff and who manufacture stuff see their sales decline, or, at best, flatten out. So the factories lay off workers and stores cut back the hours worked by sales clerks. This is good?

And the money that is "saved" rather than spent goes where? Into banks and financial institutions? Who do what? Ah, lend it to other people so that they can, aha, buy homes and cars and, whoops, they're spending. That's bad, right? Oh, perhaps the saved money goes into the stock market. That pushes up stock prices. Which generally has the effect of making people feel good about the economy and they start... yep, spending.

Or perhaps the idea is to get people to invest in government securities so that the government can pay off all the foreigners who currently hold a good chunk of our Treasury obligations. Which is, of course, a way of financing government spending. So rather than paying taxes, consumers will be encouraged to cut spending and to invest in government obligations so that the money can be spent by the government.

Whoa! So this is a complex way of getting money into Washington rather than having it go to China or other countries in exchange for consumer goods, and then being invested by these other countries in Treasury debt. Not that this is a bad idea. After all, who wants to wake up some day and discover that China owns the United States?

If this is the goal, let's put it up front. Why? So that we can figure out who would be giving up spending in order to finance the deficit.

Let's divide the population, like ancient Gaul, into three parts: the poor and near-poor, the middle class, and the superwealthy, wealthy and near-wealthy. The consumption tax will not deter the first group, the poor and near-poor, from spending because they spend on things such as food, clothing and shelter. So they're stuck. They'll be paying a consumption tax. Absent a reduction in income and payroll taxes (and even some sort of rebate system because it may not be enough to reduce income taxes considering that most of the poor and near-poor don't pay income taxes), this group takes a hit. The consumption tax will not deter the third group, because for them, it is an outlay from petty cash. They're already saving and investing. After all, how DOES one spend $12,000,000 a year? So who's left that ends up cutting spending because the tax makes spending unaffordable? Yep, the middle class. The group too poor to pay lobbyists to buy votes and too rich to get sympathy from the idealistic reformers of the world. Caught in the middle. That's why it's the "middle" class.

There's enough libertarian in me to object to regulations that limit income. If Americans want to watch television and purchase products from sports and other advertisers that fund multi-million dollar salaries for celebrities, professional athletes, and overpaid executives, that's their right. Even if it means that the bus drivers, pothole fillers, nurses, cancer researchers, day care workers, and others scrape by on far less. After all, they're nowhere as near glamorous or exciting. We'll miss them only when they're gone and there's no more left.

But there's enough pragmatic in me to harp back to user fees. And sometimes income can be a benchmark for a user fee. Here's one example. Folks who make huge amounts of income usually do so because huge numbers of people gather in public places, such as concert halls, stadiums, and theaters. Well, the homeland security costs of defending those places are high. Time for a user fee, based on the benefit obtained by being present (physically or virtually) in those places. Here's another. Folks with huge amounts of wealth (in the form of investments (savings) or other property (spending)) have more that needs to be protected against attack. Time for another user fee, measured by excess value. Now, it may simplify things to measure these user fees by a surrogate benchmark. A combination of income and wealth. Actually, that's what already exists, if one considers federal, state, and local taxation as one huge monolithic revenue raising machine.

So what we're talking about is fine tuning. Not tinkering with engine settings. No, the fine tuning that racers do: tear down the engine and rebuild it. The way it should have been built.

Greenspan's reluctant approval of a combined consumption - income tax suggests he might support heading in such a direction. That, however, tells us little about the Advisory Panel's eventual conclusions.

When do we, the people, get a chance to question and challenge that Panel? As is my custom, I extend to those whom I question here to consider and respond to my questions and comments. And I invite readers to spread the URL for this post throughout the citizenry, so that tens of millions of taxpayers begin asking these questions of the Panel. Find out NOW what's going to happen before it becomes a huge snowball rolling down the hill, gathering momentum, and suffocating everything in its path. I can't imagine anyone in the Administration objecting to the idea of asking questions and raising challenges pre-emptively.

My recent posting on Bill Gates' call for education reform brought yet another response in addition to this one. It's a long story but well worth the read, because it provides some insight into the sorts of things that are happening in the schools, and I'll break up the comment with my editorial asides:

I just read your two blog entries on education (Bill Gates and I Agree and the followup). I have to say that I agree with Bill Gates as well. (Or more accurately, I agree with the people Gates copied to make his speach. This topic has come up several times on NPR and on some TV shows on The Science Channel, etc. It wasn't Gates's idea.)

I don't have that much to add, just some personal comments. First, I remember in high school there was a class that was available that was supposed to teach people things they needed to survive out on their own, things like how to balance a checkbook and other such things. Many of my friends took the class and tried to talk me into taking it as well. I didn't, thinking it was a stupid class and it was only "common sense" stuff that everyone should know anyway. One friend told me that there was more to balancing a checkbook than I realized and he would have a leg up on me after graduation. It turns out that he had more trouble balancing a checkbook than I did so how usefull was the class anyway? [MauledAgain says, "The person making this comment is a very intelligent fellow who probably could teach himself quantum physics. Actually, I think he did. Probably wrote a check-book balancing program years ago. Oh, wait, I'm the one who did that. The concern about education isn't so much a need to teach those at the upper ends who can teach themselves. It's the "middle 90%" that often gets short-changed."]

Second, I don't think that teachers care to teach concepts anymore, they just teach how to take tests. Here is a real world example. My
stepson get very good grades in almost everything including math. One time last year he was out of school for a few days and needed help with catching up in his math class. He had his book and the list of homework problems from the book that he was supposed to do and turn in and he wanted help doing the problems. Since he didn't go to the classes he didn't know how to do the problems so I was supposed to teach him. I wanted to make sure that what he learned from me was similar to what he would have been taught so I read through the chapter he missed in his math book and set about teaching him how the book said that he was supposed to learn it. He had a lot of trouble learning it that way so I figured that I would help him out by teaching him a slightly different way than was in the book. A light went off in his head and he immediately understood and was able to get the right answer to all the assigned problems (from a spot check of the answers in the back of the book). He was happy, I was happy, everthing was ok. He then came back home the next day upset and saying that his teacher didn't like what he learned and said that every single answer he gave was wrong. I asked him how it was wrong and what answer did the teacher want. He said she wouldn't tell him, she just said that everything was wrong. I knew that what I had taught him was right and maybe my pride was a little hurt so I told him that he needed to learn this the way his teacher wanted it learned so he had to insist that she teach him the "right" way so that he wouldn't be behind for the rest of the year. He came back the next day and said that she refused again and then told [him] that it didn't matter that he didn't know the subject! (What?!?!) A few weeks later he told me that the teacher said he was back on track again and his grade picked up from the drop it took learning the "wrong" thing from me. I decided to test him to see what he had learned and to find out how things differed from what I learned about math. I took one of his tests that he had scored an 'A' on and I changed one of the numbers then asked him to solve the problem. He was lost and couldn't do it. I then gave him his test back and showed him the problem he got right then asked him to use the test as a guide to do the problem I just gave him. He couldn't do it! He later had some goofy problems of trying to figure out how to maximize profit for a business. The book gave *one* method for solving the problems. Worse, the book didn't explain *why* you were using that method as opposed to some other method, the concept behind the method it chose, how the method worked, or even how to check your answers to make sure you got it right afterwards! He did a lot of graphs but he doesn't know why. He doesn't know what the slope or intercept mean (straight line graphs, not anything resembling hard stuff). He doesn't understand why a steep slope changes the answer, but he gets 'A's and the occasional 'B' so he thinks he knows math. His teacher thinks he knows math! He doesn't want to learn from me anymore because he thinks I take this too seriously and that I am too much of a math geek. I don't understand what is truly important in his life.

[MauledAgain says, "Yet another classic information of teaching information without comprehension and teaching formulaic processes without understanding. My students, especially in tax, learn processes. That gets them to a C+ or B- at best. If they can EXPLAIN the process, or identify errors in a corrupted process, they climb into the honor grade region (A, A-, B+, B). Merely knowing information in any of my courses gets a student a passing grade, but unless they can understand it they won't earn an honor grade. Why? Because law, like many other areas, is dynamic and the fact situations that are encountered change and evolve. Learning how to learn is more important than learning how to mimic processes or regurgitate information. There are many teachers who can do things and show others how to do things but who do not understand why they can do what they do and thus cannot teach the understanding. It's a reason that some of the best hitters in baseball don't do well as hitting coaches. When students get to law school and struggle with the challenge to learn how to 'think like a lawyer' I tell them that lawyers don't think any differently than any other professional, skilled artisan, or worker. What we're doing is teaching students to think. Some can, some can't. It depends on what and how they've been educated for the 16 or more years before they arrive.]

BTW, even after a stern warning from his mom on use of the ATM card he insisted he needed, it turns out he had trouble balancing his checkbook too. I guess he should have taken a class on that... [MauledAgain says, "Very funny. YOU could have taught him, no? :-)]

I wish I knew who first said that quote about common sense. "The problem with common sense is that it is not so common." Or something
like that. [MauledAgain says, "Heard that from my parents. But they don't claim authorship. I'm going to guess it was Mark Twain. It wouldn't be the first Mark Twain quote that was shared with me as I was going through my formative years."]

Now I'll wait for the teachers to explain that they'd like to explain the hows and whys rather than just the whats, but that administrators restrict them, their time is constrained, the students don't get sufficient support at home, and other problems interfere with such an objective. Probably true in some cases, and not in others. It takes us back to the question, "What are we trying to instill in the students? Information? Comprehension? Capability? Diligence? Adaptability? High score tests for the sake of high score tests? Life skills? Something else?" Only after that question is answered can a productive discussion of "how" begin.

My postings (original, first follow-up, second follow-up) on dealing with email and other digital content at death included a discussion of password lists. This brought a response from Mark Morin that includes both a sensible suggestion and a humorous suggestion that demonstrates, I suppose, that sometimes we can go too far looking for the perfect solution. Mark Morin wrote:

Since we're talking about a password list, how about encrypting it with some public key-type method and sending the private key to your attorney or executor. Heck, if you wanted to get clever, put the key in your will. If you really didn't trust anyone, encrypt the list with a large key. Encrypt the key and give the encrypted key to your attorney. Give the key to decrypt that key to your executor, then both the attorney and executor must conspire to violate your trust.

And so on, and so forth, depending on your level of paranoia. (I wanted to include a[n encryption] key tattooed on the tongue of a rottweiler who hates everyone somewhere in the chain so the principal would know when the key was compromised. [As the dog would be dead before giving up the secret.] But, I thought that would be going too far.)

My response:

Wow, Mark, my brain was whirring through the chain and then I got to the dog and lost it!! Excellent.

I guess if we left instructions to executors and lawyers as to how public key/private key encryption worked, it would make sense. And perhaps, eventually, people will deal with encryption the way they now deal with telephones, that is, without a second thought. But for the next decade or so, there's a lot of folks "out there" who would need hand holding. On the other hand, imagine the law firm that puts "understands and uses encryption keys" in its brochure or on its web site.

Somehow we could end up with a benchmark telling us what percentage of the population is paranoid. Or at least what percentage has email or other digital content they don't want getting into anyone's hands. Looks like a law and sociology or law and anthropology course beginning to take shape.

To that I add this thought. What happens if the attorney and executor die before the testator dies? Somehow the key must move from them to their successors. Yes, there is a risk of overkill (no pun intended) with this issue, but on the other hand, I love watching the reactions I get when I ask people, "So what do you think happens to your email when you die?" Maybe I just happen to hang out with a lot of paranoid people.

So, how many people will answer "I don't care" when asked that question. Responses such as "my spouse/child/parent will take care of it and make sure no one invades my privacy or usurps my rights in web sites and other digital content" don't count because there's no guarantee they will survive. So we get to add something else to the "to do" list. Namely, "what to do about the email, the web site, the diary, the letters, the novel in progress....."

My recent posting on Bill Gates' call for education reform brought several comments.

The first was from my sister the teacher:

You omitted one very essential ingredient to the education of students.

Equally important to knowing the content, is the requisite that a teacher knows HOW to teach. Teaching is a craft and a discipline. Consider from Webster:

ped.a.go.gy n.

1. The art or profession of teaching.
2. Preparatory training or instruction.

1: the principles and methods of instruction
2: the profession of a teacher

3: the activities of educating or instructing or teaching; activities that impart knowledge or skill

Not all physicists would be effective teachers. However, an effective teacher of physics should be an effective physicist.

I completely agree. Consider this comment adopted as "Fourth,...." in my previous post.

Another comment, from friend, former student, and colleague Ryan Bornstein, explores the question of what the schools should be teaching, not so much in terms of subjects, but in terms of objective:

I just read your post today (advantage of classes being canceled by snow!). Education is a very big issue for me (obviously with my teaching and my mother having just retired after teaching 30 years for the Philadelphia School District). As you discussed a big part of education is preparing for college and standardized testing. My first question is
should school be about preparing a student for college or for just simply, life after school? One of my major issues with the education system and I think the country in general is the belief that everyone needs a college degree. The world has so many people with college educations that cannot get jobs to pay off their educational loans and general living expenses. It almost seems that you cannot succeed in many cases without a graduate degree (making a college diploma irrelevant or just a stepping stone). I think there is a lot missing in that people are not getting job training. Obviously everyone needs to understand their and they're; its and it's; but I see many people going for college and bypassing learning trades like plumbing, electrician, etc. It is amazing to me how many people graduating high school and cannot talk properly on the phone, cannot balance a checkbook, etc.

Again, I agree. There are teachers, though, who consider their task to be introducing students to intellectual discourse, leaving the "other stuff" or the "trade school stuff" to someone else. Why? Perhaps, turning back to the issue of proficiency, because the person doing the teaching doesn't know how to balance a checkbook or speak well on the phone?

Ryan then turned to the issue of testing:

Now for standardized testing, we have a real problem in balancing: how do we know a child is learning what they need to know in order to live and does a standardized test effectively tell us if the student has learned what they need to know in order to live. We all know people who take standardized tests real well and others who don't even though they may know the material. I also hear of teachers teaching a test and not the subject matters that a child will need to know to live. Now I have no answers to what should be done but I think people (like you did today) really need to start talking about these issues so that we can start fixing the system (because I do not believe throwing money at a system that is not working will all of a sudden make it work).

Testing is a skill. It is much more challenging to design an effective test than it is to take one. On that, I speak from experience. One huge challenge is to shift from teaching and testing knowledge alone to teaching and testing knowledge wrapped in understanding. In other words, it is time to teach people how to learn when they must handle problems without the benefit of a teacher in the front of the room. Otherwise we are creating one-track machines.

Considering the financial crises and challenges confronting educational institutions at all levels (public schools, colleges, large universities, private schools, ....), it is time to determine where the money is going and what it is doing. What really is the reason that, at all levels, out-of-class support staff has grown at rates far exceeding the growth in classroom teachers? Could it be the many layers of triplicate paperwork burden imposed by those who think that generating reports somehow solves the problem? Could it be the attempt to create a separate, special education experience for each child in the same manner Congress seems intent on creating a separate tax law for each taxpayer (or at least for each campaign contributor)?

The nation had best get onto this problem pronto. Students in other countries, living in a different cultural context, and in many respects hungrier and more dedicated, will eventually build business structures that will out-perform those staffed by people who cannot speak well on the phone, think straight, or adapt to change. About the only things that poses a more immediate threat with similar far-reaching consequences, are political instability and its offspring (war, terrorism, poverty, hunger, and disease) and the avian flu pandemic that seems to be lurking under most radars. That topic is for another day, when I'll reflect on how post-modern politics is ill-suited for reality.

Yes, it is amazing. Bill Gates said some things about education with which I agree. And unlike yours truly, he has the money and the clout to do something about it. After all, I share my opinions on a blog. He shared his with an audience of the nation's governors.

According to the report, Gates asserted that the nation's high schools offer an education that is "obsolete and morally indefensible" because it fails to prepare many students for college. Gates made special note of the inadequacies of the education offered to poor minorities, but from my vantage point, they're not alone in being shortchanged. Unless a child goes to one of the top high schools or prep schools, the child is behind before the first pitch of the college season. Gates agrees, stating that "only a fraction" of high school students are getting the best education.

Gates claims that "only one-third of our students graduate from high school ready for college, work and citizenship," and I wonder where he gets that one-third figure. I would peg it at 10 percent. No matter, that's not enough of a disagreement to belie the congruence of my view and Gates' view of the American education system. Gates didn't say much about college. I'll simply add that the college education pursued by most students doesn't do much to make up for lost ground, let alone prepare students for graduate school, work, and citizenship. When many of my law students cannot distinguish between "their" and "they're," or between "its" and "it's," or "principal" or "principle," the logical conclusion is that the college graduates not in the top 5 percent of their classes are doing no better, and surely have even more difficulties.

What's to be done? Notice I don't think asking "who's to blame" does much, because it ultimately takes us to the important question. What's to be done?

First, there needs to be agreement on the knowledge, comprehension, and skills that students should master by the time they graduate high school. This is not an invitation to the federal government to step up its existing involvement in education. It's an invitation to associations of citizens, business leaders, parents, teachers, and school administrators to hammer out sensible curricular designs. Here and there, a few states and a few school districts have been trying to tackle the issue. But they are few and far between. What most schools currently do, as Gates points out, reflects choices made 50 years ago in a world very different from the one in which we and the students now live and the one in which the students will live long after we have left the planet. I am no longer surprised, but remain disappointed, at how much the students in my law school classes do not know or understand but should have learned long before they arrived here. It matches my disgust with some of the stuff that has been washed into their brains by school administrators and teachers who put their own agendas ahead of the students' futures. Remember folks, we are the stewards of our children. We do not own them.

Second, there needs to be much better cooperation between parents and teachers. Parents who invest their energy into "protecting" their young, denying any imperfections on the part of their offspring, and arguing for higher grades (even if undeserved) so that their children can be advanced to the next stop on the education journey are not serving their children well in the long run. These parents need a paradigm shift, and the political system entangled in the public school system needs to stop worrying about votes, power, and turf protection, and to start putting the welfare of the students above the bleatings of their parents. Similarly, parents who coordinate their at-home education efforts and provide out-of-class support for their children's homework endeavors need to be encouraged and rewarded, perhaps in the form of increased influence on the operation of the public school system. Parents need to learn that academic endeavors are as important as extracurricular activities, and far more important than television, games, goofing off, and partying. When a parent shows up at a law school to argue about their 22-year-old child's grade, it should be obvious that the erosion of the parent-teacher partnership has gone too far. And, yes, that has happened. Here, and elsewhere.

Third, teachers need to be tested for proficiency in the subjects they are teaching. Aside from emergency substitution, a person who is only two pages ahead of the students is not serving the students or the nation well. Some of the problem, of course, is the difficulty in finding people willing to teach certain subjects, usually because private industry outbids the school systems. Another obstacle is the unwillingness of qualified teachers to subject themselves to the dangers of working in environments where discipline is out of control, thanks to the mentality of leniency that infects judges and some school administrators who think that coddling someone is more effective than laying down the law. Backing down from the need to discipline isn't all that different in spirit than yielding to a bully, and when the latter happens enough, the frustration triggers the sort of violent reactions that contribute to the risks posed to teachers and students in the schools where discipline is out of control. This obstacle to getting good teachers into all the nation's classrooms is another reflection of the breakdown in parental support for educational effort.

It is nice that Bill Gates and his wife have directed one billion dollars into educational assistance for improved high schools. But think about this question: by choosing to price Microsoft products a wee bit above what might otherwise be the price, is Gates imposing a sort of tax that he then administers? After all, the money he spends on schools comes from the excess of price over the sum of cost and taxes. There is no democratic process to affect what Gates does with his money. He happens to be doing something that is helpful, reflecting a perspective that I, and others, share. But he could just as easily be investing the money to encourage high schools to teach useless subjects. The people who supply Gates with the money have no say in what he does with it. I will leave the discussion to another time. I just want people to consider who, ultimately, will make the decisions.

On the same day, another report highlighted the growing practice of letting students take tests over, and over, and over, until they get the grade that they want to have. A spokesperson for the National Association of Secondary School Principals predicts that the practice will spread, as a logical consequece of the standards movement in K-12 education.

Retesting has its advocates and critics among educators. That doesn't surprise me. My reaction to "retesting" depends on what it means.

If retesting means taking the same test a second time, then the practice is flawed. Of course, after seeing the test and trying it one time, performance will improve the second time around. Even if the test is a shuffling of the same questions, the distortion is no less misleading. According to the report, at least in some school districts, the second test is not the same as the first. But in other school districts, the rules for retesting are highly subjective and seemingly unpredictable.

On the other hand, if retesting means that students are given the opportunity to get feedback, and to then tackle a different set of questions that focus on the same material, then retesting makes sense as part of the feedback loop that is essential to good teaching. The challenge for the teacher is to design second stage tests that do not mimic the first stage tests. This is easier to do if the tests are designed to identify flaws in a student's approach to analysis rather than mere knowledge. My students are given tests throughout the semester, a practice very uncommon in law schools but demonstrably beneficial to ultimate performance. The scores count toward the final grade but they carry proportionately less weight than does the final exam. Students will not see the same question on the final exam, but they will see questions that give them an opportunity to demonstrate that they have improved their ability to identify necessary facts, to apply law to facts, to explain errors in reasoning, etc. Note, however, that students do not get "do overs" for any semester test or the final examination.

There may be circumstances under which a retest is appropriate. A student who takes a test under duress or other extreme circumstances but who does not seek postponement because of ignorance, shyness, fear, or embarrassment arguably should have an opportunity to retest, especially if the inability to postpone was beyond the student's control. Some might say that it's a tough way to learn a lesson, and in law school, at least, this tough lesson is taught. I learned it when I took an exam while ill with the flu, and then for the first and only time in my law school life was admonished vociferously by the law professor when, in response to his inquiry about the less-than-stellar grade I earned, I explained what I did. The tables were turned, many times, when I listened to a student explain what was going on in the student's life during the examination period. Houses burned down, family members died, students were in car accidents on the way to the exam, and the list continues to grow. For many reasons, students are reluctant to ask for postponement. If the student flunks out, re-admission (along with a repetition of the failed courses) is more likely to be granted if the circumstances are severe and beyond the student's control. This, however, is more than a retest, because it is a costly repetition of the academic year requiring payment of tuition.

On the other hand, when retests are sought because the poor test performance reflects twisted priorities, I have far less sympathy. The report describes one student whose need for the retest was attributed to a week of classes missed on account of flu and four evenings of study missed because of rehearsals for a SCHOOL beauty pageant. We're back, are we not, to the principle that academic endeavors must trump extracurricular activities. Somehow the sick student could get to beauty pageant rehearsals but not to class. Excuse my sarcasm, but I see this sort of thing too often even in a school where students are preparing for legal practice in which, literally, the lives of their clients could be at stake.

Proponents of retesting claim it is necessary because students learn at different rates, because it encourages students not to give up, and because it ensures that they are prepared for the next stage in the subject. These are magnificent goals. They can be accomplished through appropriate feedback, tutoring, practice tests, and other arrangements that do not require that the game be replayed. In other words, more emphasis on preparation is far better than taking a risk-free test for which retesting is available.

Critics claim that retests artificially inflate performance measurements for individual students and for the school. With so much riding on a school's performance, it is easy to understand why retesting is so tempting not only to students but also to school administrators. It is easier to tweak outcome measurement than it is to do a good job in the first place. That's why it was so fascinating to see this report show up on the same day as Bill Gates' criticism of the pre-college education system.

Critics also claim that retesting devalues the efforts of those who properly prepare and do well the first time they take the test. The critics are correct. Post-modern society continues to eliminate the price that must be paid for bad decisions, which contributes to the bad decision maker's inability to learn how to make good decisions. Students who need to learn responsibility are being coddled. This is nothing new. Too many students arrive in law school thinking that everything will shape to their demands rather than asking what it is they should be doing to earn a degree. In some school districts, there is a cap on the grade that can be earned on the retest. But in others, no such limit exists.

Students also divide on the issue. Some see retesting as an opportunity to learn more. Others see retesting as unfair because of inconsistent rules, or as letting a student who slacks and then retests out-grade a student who works diligently. Some see the practice as posing the risk of becoming a "crutch." Others worry that colleges will discount high grades from schools with retesting practices, adversely affecting all high grades even if earned on the first try.

One student noted that after they graduate, the world won't give them many chances. In contrast, a school administrator claimed that in the "real world" most people get a second chance, other than airline pilots and brain surgeons. I disagree. Second chances are unpredictable and far from guaranteed. And airline pilots and brain surgeons, some of whom DO get second chances, are far from alone.

Not too long ago I posted some comments concerning the treatment of email after death, to which I quickly added a followup.

Now the topic has been given some attention in an article by Susan Shor, of TechNewsWorld, "Digital Property and the Laws of Inheritance," posted 22 Feb. 2005. Susan points out that "If a password list is part of your estate planning, a number of issues will be alleviated. Create an inventory of URLs, Web content, e-mail passwords and any other property an heir will need access to." Yours truly, more specifically postings on the MauledAgain blog, is quoted. Others, too, were quoted and raised ancillary issues, such as the need for the executor to have access to digital address books so that friends and associates can be notified of the person's death.

Though making usernames, passwords, URLs and other information available to the executor makes sense, there are some things that ought not be done. A person might think that to avoid having the list fall into the wrong hands, it should be put into the safe deposit box. The procedure for opening a safe deposit box after death is at best cumbersome and it doesn't happen instantly. Perhaps putting the list into a home safe, the combination to which is known by the executor, would reduce the chances of compromising the passwords while also reducing the chances that the executor would have a tough time finding the list. Surely an executor is someone who can and should be trusted, and thus giving the executor the combination to the safe, but perhaps not the house keys, should be a workable arrangement. I'm not comfortable having a client leave a password list with an attorney, not because I distrust attorneys, but because there is too much risk in terms of employees of the law firm, among whom there can be high turnover rates, having deliberate or accidental access.

Though there are some wrong ways to proceed, there is no one right way to work out what will be an issue for an ever-increasing number of decedents-to-be. Eventually, it will be an issue arising in every estate planning instance. Trial-and-error (which is not the same as error-in-trial) will be a common experience. I urge lawyers to share with their professional colleagues and with the public their approaches to these issues that have worked. Actually, none of us would mind hearing about the arrangements that tanked, because someone might be on the verge of taking the same steps.

It doesn't take long for a new tax or government fee to be proposed. Someday I'll figure out how much time elapses, on average, between the issuance of new tax proposals. Something that would resemble the "every 3 minutes a person catches the flu" warnings that pepper our daily lives.

This time it's a fee on the sale of computer equipment, not to exceed $10 per sale, proposed by Rep. Mike Thompson of California and 21 of his colleagues, as part of the proposed National Computer Recycling Act. Thompson's major concern is the impact on the environment of the many tons of electronics discarded each day. Declan McCullagh has written an informative explanation of the science issues, and I recommend every computer user read his report. After all, we're the ones throwing the stuff out.

I prefer to focus on the fee proposal. There are both positive and negative features to the fee as proposed.

First, assuming that dumping obsolete computer equipment in landfills has a negative impact on the environment (and that is something Declan's report discusses), a user fee makes more sense than other alternatives. It is better to make the environmental cost part of the product cost rather than something that is imposed on all citizens regardless of their contribution to the problem. After all, some of us buy electronics the way Imelda Marcos purchased shoes --- ok, not quite, but you get the picture. Some people own very little in the way of electronic gadgetry and there even are people who don't use electronic devices at all. Really. But that's another story. I like the idea that those who make the mess (if there is one) either clean it up or pay someone to clean it up rather than shoving the job off onto other people who have nothing to do with the mess other than to be disadvantaged by it.

Second, the fee would apply to each sale of a "computer, monitor, or other electronic device designated by the Administrator" of the EPA. A computer is defined as any "electronic, magnetic, optical, electrochemical, or other high speed data processing device performing logical, arithmetic, or storage functions, and may include both a central processing unit and a monitor, but such term does not include an automated typewriter or typesetter, a portable hand held calculator, or other similar device" and a monitor is defined as "a separate visual display component of a computer, whether sold separately or together with a central processing unit, and includes a cathode ray tube or liquid crystal display, its case, interior wires and circuitry, cable to the central processing unit, and power cord." The Administrator can designate additional electronic devices to which the fee applies if those devices "(1) contain a significant amount of material that, when disposed of, would be hazardous waste; and (2) include one or more liquid crystal displays, cathode ray tubes, or circuit boards." Does anyone see cell phone in the list? I do. I'd like to see a list of all the devices that meet the two tests, because I'm sure that if the proposal is enacted these devices would be designated. My question is this: "Considering the extent to which processing units have proliferated and reside in the gadgets we use, what's left that ISN'T a device that would be subject to this fee?" I ask because the revenue could be enormous. Although the bill requires that the proceeds be used to cover the cost of administering collection of the fee and to provide grants to people and entities that resell, recycle, or extract toxic materials from, used computers and other devices, I think that $10 multiplied by hundreds of millions of computers and devices is a lot of money. "Social Security funding perhaps?," he asks cynically. Of course, the EPA can set the fee at less than $10, but bureaucratic restraint isn't guaranteed.

Third, a flat $10 charge is disproportional to the harm. Some devices contain larger amounts of toxic materials than do others. A $10 tax on a $40 device is equivalent to a 25% tax. A $10 fee on a $1,000 monitor or $800 computer is a mere 1% or 1.25% tax. A flat fee is regressive, and thus its impact would fall more heavily on the less affluent members of society. Someone who takes the time to shop carefully and find a cell phone for $59 instead of paying $99 ought not be saddled with the same $10 add-on fee. To all of this add the fact that price alone, of course, does not measure toxicity. The fee should reflect the weight or other equivalent of the toxic materials. Manufacturers have that information, so it ought not be difficult to use that data to set a proportional fee. And it would serve the additional purpose of disclosing exactly what it is that's inside the thing we're buying. It might make better electronic devices shoppers of us.

Fourth, this is something that even I will concede needs to be within the ambit of the federal government. Computer and electronics sales are interstate in nature. According to Declan's report, already five states have banned these things from their landfills. So where are they going to go? Next door. Will we see barges of used computers sailing around the world in search of a dump the way that cargo of waste circled the globe several times (and for all I know is still circling the globe)? Imposition of a scaled fee and use of the proceeds to remediate the toxicity makes sense.

Fifth, considering that California imposes an "advanced recovery" tax on new video displays and TVs, it is not unlikely that other state legislatures, always thirsting for additional sources of revenue, will follow California's lead. That's to be expected, if it's true that "everything, including the weather, starts in California." All of the confusion attendant use tax collection by interstate sellers will cast a large shadow over effective implementation of state-level environmental fees that come in 50 or more flavors.

The big issue, of course, is whether there is an environmental problem. That discussion is underway. If there is to be some sort of fee, however, it ought to be designed more sensibly than the one in the proposed National Computer Recycling Act. Done properly, it could be a good thing.

A question that was presented to the ABA-TAX listserve, and to which I provided a reply, presents an interesting example of the challenges faced by those who propose changes to a highly interconnected tax law.

The American Jobs Creation Act increased the number of shareholders permitted in an S corporation from 75 to 100, and also added a provision that treats six generations of a family as a single shareholder. Before this provision was enacted, a husband and wife were treated as one shareholder but no other combination of relatives were so treated. As a practical matter, the 100-shareholder limit will be a problem only in rare instances.

What happens, though, if someone in the family is a nonresident alien? Can the person be a shareholder? The answer is no. A corporation is not permitted to be an S corporation if it has one or more nonresident aliens as shareholders.

This puts a planning obligation on the professional advisor, who needs to make certain that stock transfer restrictions are in place to prevent a nonresident alien from becoming a shareholder. Unfortunately, if a member of the extended family treated as one shareholder marries a nonresident alien and subsequently they divorce, a state court equitable distribution order requiring transfer of some of the stock to the nonresident alien creates a serious tax problem for everyone in the picture.

The "treat family as one" rule is an extension of the "treat married couple as one" rule. Yet under the "treat married couple as one" rule, the corporation did not qualify if one of the spouses was a nonresident alien even though the other spouse was a citizen. In these sorts of situations, there exists the option for the nonresident alien to elect to be treated as a resident alien. The price is that the nonresident alien will be taxed on all income, including income from sources outside the U.S. that otherwise would not have been taxed. Whether the election makes sense requires use of a spreadsheet or the "what if" features of tax return software.

However, no such option exists for the grandchild who somehow has become a nonresident alien, unless the grandchild happens to be married to a citizen or resident alien and makes the election to be treated as a resident. Should the drafters of the amendment that extended the "treat married couple as one" rule to a "treat family as one" rule have extended the "permit nonresident alien spouse of resident or citizen to elect to be taxed as resident" election to a "permit nonresident alien member of a six-generation family to elect to be taxed as resident" election?

Perhaps.

As is the case with complex software, fiddling around with one part can cause unanticipated and even unnoticed consequences in some other area not immediately recognized as connected with the part undergoing fine-tuning. There is an area of science that deals with this phenomenon. It has a name, a word I haven't used and ought not put into my everyday vocabulary: PLEIOTROPY, a word that even many scientists and engineers know more by concept than name. Briefly, pleiotropy literally means "at more than one turn." In practice, quoting from the cited URL, it is manifest in this truism: "Change one a single item (a gene, a bit of code in a software program, the placement of a mechanical strut) and other subsystems may be affected in wholly unexpected manners." In politics, the effect is known as "the law of unintended consequences."

So, change one bit of the Internal Revenue Code and .......

Was there a conscious decision NOT to expand the election by nonresident aliens to be treated as residents despite the expansion of the "treat as one" rule for S corporation shareholder identification purposes? Or was the matter not considered? Was it not even noticed?

I leave the matter as a red flag for practitioners. I end this post with a small amount of satisfaction at having found one more bit of evidence demonstrating that tax is, in some ways, like quantum physics. And I go forward trying not to use the word PLEIOTROPY in my everyday conversations.

In his Philadelphia Inquirer column this morning, Andy Cassel posits several interesting observations about social security. His chief point is agreement with Alan Greenspan's observation that the key to making social security work is to design a system that increases savings. I agree.

This issue goes to the heart of what social security is or should be. Andy writes, "Stripped to its bare essential, Social Security is basically just a way of giving retirees and disabled people a formal claim on the stuff that the rest of us working people produce." Is that what it should be? If so, is the current system getting the job done? This is another way of asking the questions I posed the other day when I argued that the debate must begin at the beginning.

Apparently, Andy agrees with my observation that the current rhetoric distracts us. After summarizing (succintly) the Democratic and Republican positions, he concludes, "Neither side is dealing with the real guts of the issue - which is that Social Security's problem isn't fundamentally about money."

Bingo.

Andy asks whether the nation can produce the goods and services that are desired by workers and non-workers. He concludes that if the answer is no, there is a serious problem. He's right.

Sometimes when I try to explain the economy, I use a kitchen metaphor. It probably reflects a deep-seated, long-time memory of family gatherings, where it appeared to me that some people were in the kitchen preparing food and others were in other rooms talking and playing. You can guess who was in the kitchen, but the weird part was that in summertime when the grills come out, the roles changed. Though this seems to be a totally different topic, there's a grain of economics in the picture: although one person can prepare food for several people, there is a limit. One person would struggle to prepare a meal for fifty. I don't think I'm the only one thinking kitchen....Andy begins his list of goods and services with tuna-noodle casseroles.

Anyhow, the problem is what demographic studies tell us will happen. As the "baby boomers" retire, the number of workers per retiree will decrease to 2 or 3. Fifty years ago, it was approximately 12. As more people leave the kitchen and go off to talk or play, food preparation will slow. Perhaps it will grind to a halt when the last remaining person in the kitchen collapses. What Alan Greenspan and Andy Cassel, and others, are saying is that if people show up bringing already-prepared food, or food needing simply some reheating, it's a lot easier on the kitchen workers. I also think they are suggesting that any left-overs (what my mother called "planned extras") ought to be put to good use and not trashed.

There is another complication, though, that Greenspan and Cassel do not address. In all fairness, Greenspan was curtailed by time and Andy faces the challenge that all of us writers dislike, the space limitation. Imagine that as the folks in the kitchen are preparing food, some of them make mistakes. Food gets dropped on the floor. Worse, some of the children zoom through the kitchen and in their rowdiness knock things over, spill hot sauce into the coffee, and take biscuits to feed to the squirrels. Toss in some similarly disproductive behavior by talking adults, or if you don't want to picture that scene, just imagine the talking adults showing up in the kitchen as they try to get a drink of water from the sink or make coffee. And both children and adults are making forays into the kitchen to "sample" the chocolate chip cookies. I've known since childhood, surprise, surprise, do not ever get in the way of someone preparing food in the kitchen. And, of course, my years of preparing meals gives me a wonderful understanding of that rule that wasn't so obvious to me when I was seven years old.

Thus, when we measure the goals and efficiencies of social security by considering the underlying goods and services, we encounter two issues. One is the distribution question, namely, if the goal is for all workers and non-workers to have what they want, how should that be accomplished, if indeed it can be accomplished? Should someone with three automobiles get another? Should someone with a thousand cans of soup be entitled to a few more? Is the system one that compels savings through retirement rewards that are indifferent to the savings accomplished by the retiree outside of the system? Is the system one that should focus on need and thus function like insurance? I examined those questions in my last post.

The second issue, though, is just as important. Aside from encouraging the production of goods and services, ought society not encourage their preservation? Returning to the kitchen example, if half of the food is trashed, fed to squirrels, or doused with hot sauce, that means there's less for everyone. Think of how many resources are lost to preventable waste. It's one thing when a freeze wipes out a chunk of the orange crop, or an earthquake destroys 1,000 cars at dealerships in the stricken area. Natural loss must be built into the system. It's another thing when drunk driving wipes out people, vehicles, and other property, or when crime, corporate theft, and vandalism eat into the resource stockpile. Though these incidents create jobs for the rescuers, restorers, and investigators, the bottom line is that those efforts are not as economically efficient as they would be directed toward natural disaster relief or generation of additional, rather than replacement, product.

Dealing with the second issue raises concerns not unlike those presented by the first issue. If someone else, whether it is the person in the kitchen or the government, will clean up the mess and make sure we get food no matter our contribution or lack thereof, then the economic incentive to produce and protect the resource stockpile is far less than it would be if the consequences fell on the perpetrator. Of course, in some instances the consequences cannot be avoided or perhaps the perpetrator is innocent, unable to produce or protect the resource stockpile.

Underneath Greenspan's question is a tougher challenge. How can people be persuaded to produce and protect the stockpile ("savings")? I leave out economic incentives because they are simply glorified bribes. It is a question of values. The "carpe diem" folks somehow trust that tomorrow will hand them replacements for what they seized today. I disagree. So in addition to the challenge of persuading people to save, there is the disagreement over the need to save. In contrast, almost everyone agrees that smoking is bad, and the challenge is persuading people to stop or to refrain from taking up the habit.

A lot of it, I think, comes from how the nation has raised its children during the past fifty years. Living in abundance, society has forgotten deprivation, and sometimes tends to forget those who don't share in that abundance. The greatest generation vowed that no one would ever again experience the sufferings of the Great Depression, and yet the steps taken to ensure that result seem destined to cause an situation, if not just like it, similar enough to be a problem. Comparing the 1920s with the 1990s is an interesting exercise. How does a nation tell its children-turned-adults that perhaps there won't always be someone there to generate whatever the child-turned-adult's heart desires? How does someone tell the people in the other room that because there wasn't enough help, because hot sauce got dumped in some of the food, and because biscuits were fed to the squirrels, that there's not enough food, at least not unless people decide to pitch in and help out?

The good thing about the social security debate is that it is happening. The bad thing is that so few, aside from Greenspan, Cassel, and others who can see past the soundbites and headlines, understand the significance of the debate and what it really involves. Andy's column should be required reading in schools, colleges, and workplaces. Then it should be read aloud to a joint session of Congress, with members of the executive branch and judiciary in attendance. Oh, I wouldn't mind if they added in this blog posting and the one from the other day. So I'll waive my copyright in this posting and in the one from the other day, and grant permission for people to copy it (digitally or in hard copy) and send it to their Senator and Representative. I'll know it worked when I get summoned to testify in front of the social security reform commission or some other Congressional panel. I'll let you know.

Several readers of MauledAgain have shared comments about Social Security reform proposals, including reactions to various plans (or bits of plans) advanced by members of the Administration and of Congress and support for other plans whose proponents don't walk in the corridors of power on Capitol Hill or in the White House. I've been waiting until something more specific than the generic concepts is proposed, but I suppose it's time to make some general preliminary comments.

The difficulty for me is that most, if not all, of the discussion presupposes continuation of the social security system, with changes in the way revenues are gathered to fund it. A few proposals discuss changing benefits, either in amount or by delaying the age at which a retirement payout would begin. There has been almost no discussion that begins at the beginning. What is the social security system designed to do? What SHOULD it be designed to do?

The current social security system is a hodge-podge of benefits. When Medicare was carved out, given its own dedicated portion of the payroll tax, and limited to medical coverage, an excellent first step was taken to untangle the mess that the politicians have made of the Federal INSURANCE Contributions Act. A program of insurance against the economic ravages of pension-less retirement morphed into an entitlement program covering retirement, disability, survivor benefits, and an array of minor miscellaneous benefits. It's easy to figure out how that happened. Members of the Congress knew, and know, that promising something for nothing, or promising more in return than is given, is a sure-fire way to get votes. It did wonders for Claude Pepper. But not for the many children living in poverty while well-to-do retirees gather social security benefits.

No analysis about funding, about trust fund investment and growth, or about benefits eligibility makes any sense until the objectives of "social security" are defined, and then categorized in separate programs, each of which gets funding appropriate to its goals and each of which is managed and invested in ways suitable to its objectives. No private sector insurance or assurance business would set premiums, investment policy, and benefits formulas BEFORE determining the nature of the products it wishes to market. Of course, it is not unusual for a government to do things in reverse order.

The primary and original objective of social security was to provide assistance to retired workers who did not have pensions or whose pensions disappeared when their companies went under during the Great Depression. In those days, funded pensions were not the norm. Instead, companies made unfunded promises to make payments to retirees. If the company went under, so did the pension.

Much has changed since those days. Yes, there are employees whose employers do not offer pensions to them, and who fail to take advantage of the several tax-favored self-funded retirement plans such as IRAs. The failure may be lack of resources or it may be a lack of good planning. A person earning $23,000 and trying to support two children finds it almost impossible to stash several thousand dollars into an IRA. On the other hand, a college graduate pulling down $60,000 or $80,000 ought to think seriously about funding retirement, even if it means cutting back on what otherwise would be a consumer spending spree, but our education system racks up another demerit for ITS failure to teach retirement planning (and budgeting) to its graduates.

With the Pension Benefit Guaranty Corporation (PBGC) standing by to deal with pensions that go under, the role of the Federal INSURANCE Contributions Act can and should be curtailed to focus on retirees whose employers did not offer them pensions or whose self-funded retirement savings are insufficient. To offset the temptation of workers to rely on "Uncle Sam" to pay the retirement bills, funding could be set at a bare bones minimum for those retirees whose earnings and expense history (determinable from tax returns, for example) demonstrate a lifetime of squandering and bad judgment, whereas those who saved as much as possible for retirement (for example, the person earning $23,000 and raising two children who managined to squirrel away $500 a year) would receive "thrift lifestyle" bonuses. The mentality that led to reform of social welfare abuse surely can inspire some methods to deal with retirement abuse, because the "live well and let Uncle Sam support me when I retire" approach is not good for the individual or the nation.

Another goal of social security was to assist survivors of retirees, mostly surviving spouses. Social security was enacted when most surviving spouses had no pensions or retirement savings of their own, because almost all were women and few women held jobs, let alone pension-qualifying jobs, for more than a few years before marriage. Seventy years later, when many surviving spouses have their own pensions or self-funded retirement plans, the idea that a surviving spouse is per se entitled to financial assistance during retirement lacks cultural context. Similarly, penalizing those surviving spouses who DO have their own work history, as does current social security benefits computations, is no less anachronistic.

Social security also provides assistance to survivors of workers who die before reaching retirement age. If, however, the deceased worker's pension benefits are payable to the survivor, or if there are death benefits, life insurance funded by the employer or the family, or other sources of assistance, why is there a need for the social security system to provide a benefit? The response by most defenders of the current system is that the worker paid in money, making the survivors ENTITLED to a return. That, however, is an approach that treats social security as compelled savings rather than as insurance. Is that what the goal should be?

Social security also provides assistance to disabled workers. Should not a government disability program be synchronized with private disability insurance coverage? Some workers have employer-provided disability benefits that in some instances eliminate the need for government assistance. And to the extent the government is operating a fall-back disability plan, ought not that plan be carved out as was Medicare? Are not the funding, investment, and benefits considerations for disability different from those applicable to retirement annuities?

The answers to these questions are required before arguments about funding sources, the level of payroll taxes, the apportionment of the funding burden between employer and employee, retirement age, privatization, and other issues can make any sense. There are sensible arguments to support a compelled savings/entitlement program wrapped around retirement annuities. There also are sensible arguments to restrict the government's role to insurance, similar to its role in providing insurance under other circumstances. And there are sensible arguments that the government ought not be involved in providing insurance unless it uses that role to discourage decisions that have long-term negative effects, much like the arguments that the federal government ought not be insuring homes built by individuals on barrier islands because by doing so it is encouraging a long-term disadvantage.

This is where the debate ought to begin. The Administration, the Congress, and most commentators are not helping us begin the debate at the beginning. Perhaps they don't want to begin at the beginning because they don't like what it would do to the likelihood of success for their particular reform proposal. An informed debate is a useful debate. An uninformed debate generates confusion and bad decisions. I do not need to cite current or past examples. They surround us as does pollen in the spring.

Current technology makes it possible to inform the citizenry and to obtain feedback. Do Americans want to pay higher payroll taxes to fund a compelled savings plan? Would doing so discourage private savings, and if so, what would be the effect on the economy? Do Americans prefer that social security benefits be paid to well-to-do retirees? Should social security be treated as insurance against need, as is homeowners' insurance or automobile insurance? Should disability assistance be provided and, if so, should it be separately programmed as is Medicare? I am sure there are many more questions. My goal is not to generate the ultimate list but to spark some discussion among those responsible for leading the debate (though I doubt members of the Administration or of the Congress are reading this).

So that's the reason I'm not jumping in with arguments for or against this or that reform proposal or for or against the "leave it as it is" position. Nor does it make sense to me to argue about transitional rules. Perhaps if enough people pick up on my approach of first things first, the public debate over "social security" might progress in a useful, sensible way. And it might bring us to some surprising perspectives. And it might, note might, get us to something that works and in which most Americans would have confidence.