MauledAgain

The IRS has released a new Form 4868 which will permit individuals to obtain automatic six-month extensions for filing their tax returns. A companion new Form 7004 will permit business taxpayers, including not only corporations but also trusts and partnerships, to do the same thing. Note that the filing extension does not permit a delay in paying any tax that is due. The changes take effect for returns due in 2006.

For all individuals except those few without a calendar taxable year, this means that filing can be extended from April 15 until October 15. Just in time for Halloween. Actually, it’s very close to Columbus Day. How fitting. Taxpayers can celebrate what they’ve discovered as their returns are prepared.

In its announcement, the IRS explained that the new procedure will save taxpayers between $73 million and $94 million each year by eliminating or consolidating several existing IRS forms. How do they figure out those numbers? How do they know it’s not $52 million or $116 million?

Formerly, the automatic extension for individuals was a four-month extension, with a follow-up two-month extensions for taxpayers with acceptable explanations. That’s why tax return preparers weren’t taking vacations in August. August 15 had become a second April 15. Even though only 6 percent of taxpayers, according to the IRS, asked for the four-month extension, and only 2 percent asked for the second extension.

How can 6 percent of taxpayers make August such a busy month for tax return preparers? These aren’t the taxpayers with the simple returns filed in March and early April. These are the taxpayers with partnership and LLC interests, who don’t receive their Schedules K-1 until after the April 15 deadline passed. These are the taxpayers with complicated returns. These are the taxpayers who struggle to gather all the information required to complete the return. These are the procrastinators, about whom I shared some thoughts about three weeks ago.

Six percent of taxpayers providing perhaps 30 or 40 percent of a tax return preparer’s annual workload hopefully provide 30 or 40 percent of the preparer’s fee income. But can that make up for the disappointment of the children who learn that August isn’t the month for family vacations?

So perhaps the six-month extension is a good thing. It means that tax returns not completed by April 15 while the children are in school will be occupying the preparer’s time in October, when the children are in school. It is highly unlikely that the August tax return flood will survive this change. The same few clients who ask that their returns be completed in May or June once the expected K-1 schedules arrive, and whose other return data was probably inputted early in the process, will still do so. The rest of the group, especially the procrastinators, will now wait until October 15 because there will be no reason for them to stop by the preparer’s office on October 14.

Too bad the extension deadline wasn’t changed to October 31. Imagine the glee of a tax return preparer who could greet each client with "Trick or Treat?" After all, there is a scary relationship between Halloween and tax.

It could be worse. Every so often, some clueless member of Congress proposes that tax returns be due on the taxpayer’s birthday. One of my favorite questions is what happens to joint returns filed by married couples who don’t share the same birthday? Of course, I can’t imagine that the proposal would extend the due date for paying any additional tax that is owed. Yes, the proposal, in its many variants, isn’t much more than political grand-standing.

So, next October, be patient with your friends, relatives, and neighbors who prepare tax returns. They’re going to be busy and harried. They’ll be digging through a combination of what had been the "August pile" and the "October pile." But at least, hopefully, they’ll have had a chance to relax in August.

Is that what a tax picture is worth?

This morning's post has inspired a response from Joe Kristan that is well worth, well, I can't say "reading" because that's not the right verb, so, well, it's well worth viewing.

Yes, there are some comments to read (including a good one suggesting use of a corporate dividends paid deduction to work through the dividend issue I discussed).

But there's also something to see. I laughed out loud. You might, too. Or you might scream. In fear or delight.

Joe, good work.

Relax, it's not news. It was the subject heading of an email that I received from a former student, Nakul Krishnakumar, who keeps a close eye on what I write. In his email he sent a request. It's a scary one, but let's go along with him:

If someone were to make you President for a day, what would your tax policy be? In other words, if you were to be tasked with re-writing the tax code, what would our tax code look like? Obviously, I've heard/read various proposals that you have, but I wanted to know what your policy would be if you were given the chance to come up with a comprehensive plan. Would the tax code be progressive or regressive? Would there be a capital gains tax? Would you allow for deductions? How about a national sales tax? I'm pretty sure you would have a fuel tax!

I think that might be an interesting discussion ...

I suppose, since the odds of my being made President are about equal to the odds of my becoming Commissioner of Baseball, there's no harm in responding to Nakul's inquiry. In other words, I doubt anything I say will positively or negatively affect those odds (for either position!)

As I mentioned to Nakul privately, a full and complete response to his questions would require a treatise. I'm not about to do that, even though, as many know, the temptation is strong. Instead, I will try to explain how my taxation philosophy would manifest itself in a tax structure.

I begin with three ideas. First, by taxation I mean government revenue generation. In other words, whether something is called a tax or something else isn't critical, other than, perhaps, in the practical world of politics. So, for me, taxation includes user fees, tolls, taxes, and even, yes, "revenue enhancements" for those who remember how that creative phrase entered the public policy lexicon. Second, there is a distinction between federal and state (and local taxation) and it is important, and necessary, to consider those differences in responding to Nakul's question. Third, government revenue ought to be collected for one purpose, and one purpose only, and that is to fund the legitimate purposes of government.

My first idea probably doesn't trigger much controversy. My second idea is pretty much unavoidable and pretty much states the obvious. My third idea, however, certainly does open up a debate. Until and unless society agrees to the scope of "legitimate purposes of government" there is no firm foundation on which to construct a tax system. Even the purposes that seemingly are "easy" to define can generate disagreement. For example, national defense may not find advocates among genuine "turn the other cheek" pacifists. Environmental protection and regulation by the government does not find 100 percent support among voters. Maintaining the life and health of the economically disadvantaged is viewed by many as a business for the private sector and not government at any level, and some others consider it the bailiwick of state and local governments but not the federal government. I am not going to answer these questions. They are not tax questions. They are public policy questions. They ought not be decided as part of drafting the tax law. In other words, once the people, through democratic processes, agree that a government (federal, state, or local) ought to do X, Y, and Z, then the question of how the funds can, and if so, should, be raised sets up the tax policy issues.

I favor user fees, and thus government functions that can be funded through user fees ought to be so funded. For example, if the nation decides that the government should be responsible for the construction, protection, and maintenance of airports, highways, tunnels, bridges, and other facilities, the cost should be borne by the users. There is one caveat. To the extent that the users are financially disadvantaged, the question of whether they should be exempt naturally comes to mind. The answer is simply this: a user fee is an expense of life, just as the cost of groceries, clothing, and rent are expense of life. If the nation agrees that there is a valuable societal benefit in shielding the financially disadvantages from the ravages of poverty, user fees would be included with the other expense of life in determining how and to what extent society, through government, can and should step in to supplement or nurture improvements in the financial status of the poor, whether through grants, education assistance, job placement, or business development.

One of the tricky parts of user fees is the question of "who is the user?" It's easy when it comes to crossing a bridge. It's far more difficult when it comes to other functions, such as providing a public education. Is the user the child attending a public school? The parents of the child who attends public school? The employees who can hire graduates of the school without needing to provide the training that the school has provided (assuming it's doing its job, which is another, though related, issue)? Is it society, which benefits from the education of the electorate? If it is, as I think it is, society, the second tricky part of user fees arises. It's fairly easy to calculate the cost of crossing the bridge, at least for the engineers and cost accountants who sit down together to do the computations. It's almost, if not, impossible, to calculate the cost imposed by each citizen's "use" of the public school system. Thus, some other form of revenue generation must be found.

And so, leaving out the many chapters of the treatise that would carve citizen-approved government purposes into those sensibly funded by a user fee and those needing to be funded by some other revenue source, I'll turn next to what those other sources might be. In doing so, I am getting a little closer to answering the specific questions in Nakul's inquiry. What I'm also going to omit, for the most part, is the determination of which government (federal, state, or local, or some combination) ought to provide a specific governmental purpose activity and thus seek revenue to fund it. Traditionally, public education is provided by state and local governments, although federal funding is significant. The states use property taxes, income taxes, other taxes, and combinations, whereas the federal financial inputs pretty much come from the federal income tax. Without getting into the debate over the appropriateness or Constitutional legality of a federal property tax, and without trying to lock states into a tax structure that mimics the federal tax structure, I will describe non-user-fee revenue generation in terms not necessarily limited to federal taxation but reflecting federal taxation as the primary consideration.

Once user fees have been determined for those government activities appropriately funded by user fees, the choices left fits into several categories. There are status taxes, such as a tax on wealth (annually or at a specific time, such as an estate tax) or a segment of wealth (e.g., a real property tax). There are transaction taxes, such as a tax on retail sales (either in full or on specified items), a tax on financial transfers, a tax on net increases in wealth (such as an income tax), a tax on the making of gifts, a tax on transfers of property (such as real property realty transfer taxes), a tax on the value added to the economy by a particular activity of manufacturing or providing services (e.g., a VAT), a tax on the transmission of property at death (such as an inheritance tax), a tax on gross receipts (again, on all gross receipts, on business gross receipts, or on specified types of gross receipts). There are consumption taxes, such as a tax on the burning of fuel, a tax on the purchase of items for consumption, or a tax on the disposition of waste into a landfill. Some of these taxes, such as a tax on landfill deposits, are not all that different from a user fee. In many respects, a consumption tax is a user fee, reflecting the cost to society of a person's or a business' use of what ultimately is a natural resource.

As a practical matter, the types of taxes that get the most attention when federal tax reform is discussed are a sales tax, a consumption tax, a VAT, an income tax, an estate tax, and a gift tax. There are hybrids. There are all sorts of variation in the specific details. Selecting one sort of tax rather than another may appear to be a matter of general conceptual policy, but the details are what provide the salvation or the death writ. Details can make a seemingly unworkable tax work, or make a sensible tax a disgrace.

Again, I begin with a basic principle. It makes no sense to adopt a variety of taxes that do not mesh well together. It makes no sense, for example, to tax both wealth and income, because a sensible system either taxes the wealth as it is generated (an income-type tax), or at specified points in time while it is being held or transferred (an estate tax, a property tax, etc.) Combinations become defensible when a flaw in one tax creates the need for a backstop. The gift tax is an example of such a backstop, for it makes the estate tax effective, by foreclosing most tax-free lifetime transfers that would shrink the estate tax base. Unfortunately, imperfections in that meshing is part of what taxpayers pay estate planners to exploit.

The estate tax, as I've noted in other posts, would not be necessary if the income tax did not permit unrealized gains to go untaxed during lifetime and at death, and if gift transfers did not escape income taxation. The "a little of this" and "some of that" approach to taxation, as in cooking, is just as likely to generate slop as it is to brew up a delightful stew. Perhaps Nakul's basic inquiry reflects his understanding that the odds of getting a tasteful dinner when multiple chefs are messing with the ingredients are slim, indeed.

In the end, the sales tax does not earn points because it imposes the cost of government on the very activities in which people need to engage in order to live the lives that government exists to protect and defend. Existing sales taxes are regressive, and designing them to be progressive, though possible, would be unduly complex. Even as so designed, reliance on a sales tax would shift the cost of government onto those least able to pay, relatively speaking.

The VAT strikes me as ultimately counter-productive. Government and society want citizens and businesses to add to the value of the nation's economy. Because taxes act as brakes on economic growth, it makes little sense to impose a tax on those activities that are building up the nation's economic strength. It is possible for a person to add far more value to the economy through an activity than the person receives from that activity, unless, of course, the VAT is passed along to the next person or business in line. Ultimately, the VAT becomes a differently-measured sales tax, with variances in the timing of the imposition.

Consumption taxes present similar conundrums. Consumption taxes act as brakes on consumption, which isn't good for the economic well being of a nation dependent on the economic well being of its businesses and citizens who produce goods and services for consumption. But, wait, perhaps consumption taxes acting as a brake would be good, because we are told that too much consumption and insufficient savings is bad for the nation's economic well-being. So perhaps a consumption tax could be used not only as a revenue raiser but also as a throttle providing a means to nudge consumption up and down, though that power would be more efficiently exercised by the Fed or a similar board than by a Congress that has demonstrated little, if any, understanding of how public finance can and should function.

But consumption taxes, like sales taxes, are regressive. Perhaps the consumption that harms the economy is not all consumption but excess consumption. So perhaps a consumption tax ought to be imposed on consumption in excess of a particular dollar amount, in the nature of some sort of luxury consumption tax. But that would require record keeping almost as burdensome as that required by the current income tax. And surely consumption of products manufactured outside the country does not return as much to the national economy as does consumption of products manufactured within the country. So perhaps a consumption tax ought to be imposed on the consumption of imported products. Unfortunately, some things necessary for life cannot be consumed unless they are purchased from a person who has imported them because they're not manufactured in this nation.

Another problem with consumption taxes is that it shifts the cost of government away from those who hold investments. Although a consumption tax is an incentive to save, it is not an incentive for someone who inherits wealth without having had to generate it, and who needs to consume only a small fraction of the wealth in order to meet life's needs. The consumption tax entrenches the haves, and leaves economic power in the hands of a few rather than in the hands of the many, where it must be for a democracy to function well. After all, a democracy functions best when each citizen has a stake in the nation's economic well-being and encounters an economic and tax system that fortifies the protection of that stake.

Oh, I'm very good, it seems, at trashing just about every tax that isn't a user fee. But there are two major types of taxes still to consider. One is the income tax. The other is the wealth tax.

Both the income tax and the wealth tax can be designed to provide controlling throttles for consumption and to place the burden of the cost of government on those whose ability to pay reflects the benefit that the nation's economy, as protected and nurtured by the government, has provided to those with ability to pay. The undesirable structure is one that combines a bit of one and a bit of the other.

Using a wealth tax to generate revenue is less attractive than using an income tax. Imposition of a tax on wealth poses the risk that the taxpayer would need to liquidate an investment at the wrong time in order to generate cash to pay the tax. Imposing the tax only at death poses cash flow problems for the Treasury. Imposing the tax annually raises a variety of valuation issues, probably dwarfing those that bedevil state and local governments that impose real property taxes.

Using an income tax makes sense if income is appropriately defined to reflect increases in wealth. Of course, one can measure increases in wealth by measuring wealth at the beginning and at the end of a period, and then comparing the two. That approach, however, poses the same problem as does the wealth measurement aspect of a wealth-based tax. However, increases in wealth can be measured indirectly, by tracking income and what I will call outgo. Of course, this sort of measurement does not account for valuation increases that arise from market changes, at least not until something is done that fixes that increase in value as something more than speculative. If an income tax base is measured by subtracting certain outgo from income, the income tax also can serve as a luxury consumption tax without the need to track consumption expenditures.

So, I'm back at an income tax, though I'd design it very differently. Again, without writing a Code, even though it would be shorter than what now exists, I will outline the main features of such a tax.

Income would include income, with very few exclusions. It ought not matter whether the income is from wages, employment benefits, pensions, annuities, life insurance, dividends, interest, rents, royalties, gains from the disposition of property, or other sources. Taxing dividends means, of course, that corporate income would be taxed twice. Does it make sense to impose a second level of tax simply because the business is conducted in the form of a C corporation and not a partnership, LLC, or S corporation? Perhaps, if one wants to laugh at those who didn't know any better, or dish out "serves 'em right" if there were tax-savings motivations for forming a C corporation that didn't pan out. Unless one imposes a flow-through regime on C corporations, corporate income that is not distributed would not be taxed unless there were a corporate-level tax. Just as important, dividends paid to tax-exempt persons and entities would escape taxation if there were no corporate-level tax. The second problem is more easily solved, namely, taxing tax-exempt persons and entities with respect to dividends paid from income earned by corporations within the jurisdictional reach of the United States government. The first problem is more challenging. Ultimately, so long as the other tax escape routes for corporate earnings are foreclosed, the undistributed income of the corporation will be taxed when the shareholder's stock is sold, redeemed, or canceled upon corporate liquidation. It's a timing problem. Perhaps the solution, a bit complicated, is to impose a corporate earnings tax on undistributed income, and to allow that tax as a credit when the sale, redemption, or liquidation generates income at a later time.

Surely the arguments that taxing interest income, or dividend income, or gains from the disposition of property would hurt the economy or is somehow unfair have been made and would be repeated in response to my approach. Considering that someone once put together the top 80 or so arguments in favor of special treatment for capital gains and the top 80 or so arguments against such special treatment, it would be inefficient to repeat those analyses. Suffice it to say that the only thing of which I have been persuaded is to index basis so that the gain from the disposition of property is real gain and not imaginary inflation reflections. And, of course, the disposition of property at death, by will or otherwise, would be a disposition subject to income tax.

Why include life insurance? Because it is income, at least to the extent it exceeds the amount paid for it. Won't this make life miserable for the "widows and orphans"? No. After taking into account the proposed deduction/credit for outgo required for poverty-level existence (or some multiple thereof), the poor orphans would not be taxed, but the ones hauling in tens of millions of dollars from "super life insurance trusts" would no longer get treated by the tax law as if they were "poor orphans" in need of an exclusion.

What of retirement plans? There is societal value in having a citizenry so financially well prepared for retirement that social security becomes totally or almost totally unnecessary. Rather than encouraging a proliferation of various plans in a complex maze of sometimes inconsistent provisions, the tax law should simply provide that up to $x of contributions to retirement are untaxed (excluded from gross income if done by the employer, deductible if done by the employee). Whether $x ought to reflect income, or, as I prefer, be set at an amount (adjusted for inflation) that will generate a "sufficient" retirement income can be debated. And, yes, retirement income would be taxed because it very well could exceed the "sufficient" level because of additional amounts set aside by taxpayers willing and able to do so.

What of gifts? The transfer of property would be treated as a realization event and thus the gain would be included in income. What of nonrecognition provisions? I'm not yet certain that I would retain more than just a few of them. They are invitations to abuse, to the structuring of transactions that would not otherwise be conducted, and in many instances far more generous than they need to be, offering protection from taxation in instances where the justified rationale does not apply.

As for outgo, there would be two basic deductions. One would be for the expense of producing the income. In other words, I reject gross receipts taxes, which are one of the most perfidious exactions imposed by state and local governments except in those instances where gross receipts is a proper measure of a user fee, but I've yet to see such a situation. The other would be a deduction (or perhaps a credit) that would reflect the wisdom of not imposing a tax on those whose incomes were barely sufficient to live life. Whether that amount should be equal to (or be a credit amount equivalent to the amount equal to) the poverty level or a greater percentage thereof is a detail that I've not yet fully pondered. Perhaps, because all citizens ought to contribute something to the cost of government, a small ($10) tax ought to be imposed on taxable incomes under the cutoff, and a very low rate imposed on taxable income above the cutoff but below, say 125% of the cutoff.

There would be no depreciation on real property. Business real property so rarely goes down in value over the long-term that those few instances where it does so would be taken into account when the property is sold for a loss. Depreciation on personalty used in generating income would be computed over five years. Period. Arbitrary? Yes. Simple? Yes. Sensible? Yes. Most equipment currently is depreciated over a period equal to or nearly equal to five years. Equipment that currently is depreciated over longer periods is heavy duty infrastructure, investment in which ought to be encouraged because it provides the goose that lays the income egg for the national economy.

Oh, wait, cry the charities. With no deduction for charitable contributions, people will give less to charity. Well, if that's true, it tells us a lot, doesn't it, about the American people. Of course, the allegation is not true. People give to charity because they are theologically driven, morally compelled, or just flat-out nice. Think of all the charitable contributions that are made by people who don't itemize deductions and get no tax benefit. If, in fact, the government needs to bribe people with tax deductions in order to get them to give to charity, perhaps we should just close up shop and go home. With this plan's reduction in tax rates, people may "feel" more generous and even increase giving.

Of course, no surprise, when it comes to rates, all taxable income is taxed under a rate schedule. There is no special rate for capital gains. That alone takes about 30 percent of the current tax law and trashes it. Also trashed are all the social policy provisions that ought to be in some other law, if indeed the citizens think that the federal government should be providing financial assistance to particular individuals or communities or to those who engage in particular activities. I understand that the Congress, which consistently criticizes the IRS, has a habit of demonstrating its true thoughts about that particular federal agency by putting into the tax law provisions that deal with matters that are within the purview of other federal agencies because the IRS appears to be more capable of administering these programs, but it's time for Congress to demand of the other agencies the same sort of competence that it attributes to the IRS when it turns to the IRS to handle its pet project of the week.

This approach permits lowering the tax rates. The base would be broadened, and thus rates could be reduced. I would not make the plan revenue neutral for the simple reason that doing so would perpetuate the current revenue shortfall built into the federal budget by the deficiencies of the current income tax law. Thus, the budget deficits that have arisen could be reduced, perhaps with a trigger that lowers the income tax rates when the deficit is eliminated. Even so, the rates would be so much lower that there would be much less incentive to play tax shelter games. When's the last time someone trying to work around a 5 or 10 percent state income tax made the news?

Finally, there is the matter of credits. Of course the credits for taxes withheld (and I'd withhold on all income payments exceeding $500, not just wages and certain other payments) and estimated tax payments would be retained. The "poverty level" deduction probably would end up as a credit, because the arguments for making it a credit rather than a deduction are very strong. Should that credit be refundable? Yes, and it could serve therefore as an expanded version of the current earned income tax credit, which ought not be as limited as it is (for under present law it has become an incentive for fraud, is difficult to administer, and baffles almost all the taxpayers it is designed to assist).

This is a fairly straight-forward plan. Granted, I've not jumped into a lot of issues that would need further discussion, such as international transactions. The point of this already-too-long essay is to give Nakul (and others) a big picture of how I would approach the tax reform question. It should be rather apparent that I'd come at this with a totally different perspective than did the Tax Reform Panel, even though it was operating under stated (but unfulfilled) objectives that are the same as those that energize my approach. And thus I reach a different result, one far more simple, imbued with far more fairness, and with at least as much a chance, if not more, to maintain a healthy economy.

However, like the Tax Reform Panel report, this short essay serves as a nice catalyst for conversation and discussion, but is otherwise worth little, if anything. Neither will get to, or through the Congress in any form, other than Congressional cherry-picking of revenue raisers in the Tax Reform Panel report. Both, if introduced in some legislative form, would attract every tax-seeking "I'm special" hornet intent on stinging it with its particular "my tax break cannot be touched" venom.

Remember, Nakul asked what I would do if I were President for a day.

He didn't ask what I would do if I were Emperor for a day.

My posting about the Supreme Court’s refusal to hear the telecommuting income taxcase brought an excellent response from Jeff Jacobs, adjunct professor of law at Quinnipiac University's School of Business:

I agreed with your analysis last year of the New York Court of Appeal's decision allowing the state's taxation of telecommuter income. The case was incorrectly, and parochially, decided by a home-town judiciary against the "visiting team" (despite able representation from home-town counsel). And I agree with you that it is a further shame that the Supreme Court, whether because of "reduced caseload" or because of an inherent bias against taxation cases, declined to enter the fray.

But, even if the Supreme Court "got it right" in the case of Thomas Huckaby, would the matter be settled? Unlikely. You will recall that, even after the High Court decided in favor of Paul Davis and federal/military pensioners in 1993, the states refused to take corrective action in the area of nonresident pension taxation. We witnessed the painful deliberations affecting Henry Harper (Virginia), Charles Reich (Georgia), and countless other "victims" of state source taxation marching through their state judicial systems, patiently waiting for Supreme Court relief.

The only message that the states appear to heed is congressional preemption of their taxing authority. The practice of taxing nonresident pension income did not completely end until the enactment of the Pension Income Taxation Limits Act (P.L. 104-95) at the end of the 1995. In a similar vein, I do not believe that states will foresake taxing of telecommuter income without direct legislative intervention from Congress. After all, telecommuters share a common characteristic with nonresident pension recipients: neither group is eligible to vote in state legislative elections.

There is unlikely to be one Supreme Court justice from Tennessee "squaring off" against another justice from New York. But there are elected Senators and Representatives who do represent those constituencies and who do square off in legislative debates. From my perspective, there will continue to be "source" taxation of telecommuter income until Congress enacts the Telecommuter Tax Fairness Act (H.R. 2558/S. 1097) or a similar prohibition on current state practices.

I recall a text in law school (Charles E. McLure, Jr. and Walter Hellerstein, "Congressional Intervention in
State Taxation: A Normative Analysis of Three Proposals,") that concluded: "As the national economy became increasingly integrated, the U.S. Supreme Court found that diverse and complex state law can impose an unacceptable burden on interstate commerce, and it explicitly invited Congress to forge more comprehensive measures to alleviate such burdens than those it was capable of providing through case-by-case adjudication." I would submit that this situation cries out for a legislative, rather than judicial, solution.

I responded to Jeff: “Indeed, I am probably a wee bit too naive thinking that the Supreme Court's resolution of the matter (as you and I think it ought to be resolved) would bring the states into line. You've made a good practical point.”

Jeff shared his comment with Ed Zelinsky, who is on the faculty at Cardozo Law School, and who has had his own well-publicized disputes with the same New York taxing authorities who went after Mr. Huckaby. Ed commented:

Jeff-- I think your analysis of the need for legislation is well taken for another reason: At this point, I think it is highly unlikely that another telecommuting case will reach the Supreme Court anytime soon.

That seems to be the situation. So now the question is: What are the chances of Congress stepping up and dealing with yet another of its responsibilities?

Although I have been criticizing the Tax Reform Panel for its proposals, I will give credit where it is due. The Panel’s report does contain some very useful illustrations of current law. My favorite, which ought to be required reading not only for law students, tax practitioners, and citizens, but also for high school seniors, is a flow chart of the forms and schedules that link to the Form 1040. As an advocate of the principle that a picture is worth many words, this multi-page schematic is impressive. Take a look at Chapter Six of the report, on pages 146 and 147, Figure 6.11. Don’t do this at bedtime. You might end up dreaming about it. Or worse yet, wake up screaming from a nightmare.

The Tax Reform Panel has formally issued its report, most of which had been informally released, leaked, or otherwise revealed during the past several weeks. Although there were some previously unannounced recommendations and some changes to ideas previously floated, the report cannot be characterized as a surprise.

The proposal is given very little chance of adoption. The San Francisco Chronicle headline, "Tax Plan Hasn’t a Prayer" says it all. Of greater concern is the risk that the Congress will pick and choose, enacting provisions that increase taxes on unfavored taxpayers while omitting the counter-balancing proposals, and adopting changes that decrease taxes on favored taxpayers while omitting other counter-balancing proposals. Think of Congress as engineers remodeling a vehicle by increasing the engine size while removing the brake system.

Reactions to the specifics of the report are quickly filling up print and on-line publication space. Paul Caron has prepared a nice list of links to commentary from various think tanks. He also has reproduced the report so that it is easier and faster to download. Thanks, Paul.

Today is not a day when I will pick apart the report. Having already reacted to much of what had already been made public, I want to share some interesting information in the report that confirms a conclusion I shared a few days ago. In discussing the proposal to reduce the mortgage interest deduction and convert it into a credit, I stated: It's also important to understand that the proposal is not an elimination of the mortgage interests subsidy but a curtailment that affects the upper middle class more than it affects the wealthy.” In the Tax Reform Panel’s report there are several charts that illustrate the impact of its plan.

In Chapter Six of the report, on page 139, in Figure 6.9, the Panel shows this information, using 2006 income levels:

* Taxpayers with income under $30,000: 41.6% would have a decreased tax liability under the proposal, and 15.2% would have an increase.

* Taxpayers with income from $30,000 to $75,000: 58.8% would have a decreased tax liability under the proposal, and 35.9% would have an increase.

* Taxpayers with income from $75,000 to $200,000: 68.2% would have a decreased tax liability under the proposal, and 31.1% would have an increase.

* Taxpayers with income of $200,000 and over: 68.52% would have a decreased tax liability under the proposal, and 31.4% would have an increase.

So which group of taxpayers has the highest portion facing increased tax liabilities? The group with income between $30,000 and $75,000.

A similar chart, on page 140 of the Report, in Figure 6.10, shows the same analysis with respect to the law in 2015, as proposed, and as applied to 2006 income estimates. Under this analysis, the group with the highest portion facing increased tax liabilities is the $200,000 and over group, followed not by the $75,000 to $200,000 group but by the $30,000 to $75,000 group.

Do these outcomes make sense? Only if this group has too much of an “advantage”under current tax law that somehow, following the Tax Reform Panel’s thinking, “needs to be removed.” I wonder what this chart would look like if true reform were pursued. For example, what happens if the reduced capital gains tax rate was eliminated, and income was taxed at the same rate regardless of its character?

There is no question that the Tax Reform Panel wants to move the nation to a tax on wages. Can anyone suggest who would prefer that sort of tax system?

[Edit as of Nov 18, 2005: Gee, no one mentioned the typo in the headline, where I left out an l and referred to the Tax Reform Pane instead of the Tax Reform Panel. Hmmm. Perhaps everyone thought it was a clever pun. No lies. No, it wasn't. Only after I saw the typo today did I see the pun. Not intended, and the headline has been fixed.]

No, I did NOT dream about taxes last night. But although Halloween may be two days behind us, when I opened this morning’s Philadelphia Inquirer business section, I thought I had fallen into a tax nightmare, or perhaps had pulled a Rip Van Winkle.

The inner page headline: “Interest Deduction Revised” WHAT? They changed the tax law? They revised the deduction? I'm in the middle of teaching the interest deduction ... started yesterday, will finish it in tomorrow's class. WHOA! Then I read the story. WHEW!

I suppose it was a matter of headline space constraints. What is meant is that the Interest Deduction REDUCTION PROPOSAL was Revised.

Words. Talk may be cheap, but words can be valuable. Especially the ones that are missing.

More thoughts on the Tax Reform Panel’s report later. There’s lots to absorb.

Yesterday, a student emailed me a question about section 267. The student offered an apology in the event the answer was clear from the statutory language, noting that he did not have his Code with him because, "[b]elieve it or not I actually dreamt of this hypo."

It was a good question, and I answered it as best I could. I then shared it with the tax law professorate, one of whom noted, after agreeing with the analysis, that "The real
question, though, is whether it is good or bad to be dreaming tax hypos."

I repsonded that "When our students begin dreaming in tax, we have done our jobs well." If we can get our students to dream tax, "[i]t could revolutionize romance, poetry, and song."

So consider how we want out tax law students to think, as I share here evidence of why I did not major in English Literature and am no threat to be Poet Laureate of any country:

Oh dear Code how sweet thou art
Your tax rules rest near my heart
At night tax hypos fill my dreams
Cites come dancing by in streams

Oh that lovely Treas'ry reg
For its logic I do beg
Rulings, rev procs, cases too
Tax has become my life's glue

Aren't I glad I took that class
I want more than just to pass
Let me make this my life's work
Starting as a Tax Court clerk

Then to practice in a firm
Only for a time short term
Lastly law school where I'll teach
To my students one dream each

When my life on earth dost cease
And my tax dreams I release
I'll speak this with my last breath
To the end, taxes and death.

OK, someone write the music, and we've got the theme for the next highly rated reality competition television show, "Can You Tax THAT?" Hosted by guest tax law professors, and evaluated by a panel of celebrity judges who are eligible to serve if they have been the subject of an IRS audit or Tax Court litigation.

Oh, by the way, I don't dream of taxes. Nor are they the central focus of my life. If they were, do you think I'd be smiling in that picture at the top left of the page?

Back in January I shared my analysis of a case involving New York's insistence on taxing a Tennessee resident, a fellow named Huckaby, who is not a New York resident, on the income he earns in Tennessee doing computer work for a New York organization. He lost at the trial court level. He appealed, but by a 4-3 vote the New York Court of Appeals rejected the taxpayer's appeal. The taxpayer followed through on a promise to take the case to the Supreme Court. Yesterday, the Supreme Court declined to hear the case.

In my commentary on the New York Court of Appeals decision in the matter, I said, "I hope they [the taxpayer and the taxpayer's attorney] decide to do that [appeal to the Supreme Court], and I hope the Supreme Court gets it right." Well, the Supreme Court won't get it right. Or wrong. It dodged the issue.

The Court's decision is all the more puzzling because several months after prevailing in Huckaby, New York was rebuffed in a similar case. Clearly there are competing views of the Constitutional issues involved. Considering the impact of a state the size of New York, the likelihood that higher energy costs and public transit strikes will increase the number of telecommuters, and the public inefficiencies of having unsettled issues of interstate taxation percolating beneath the tax planning and compliance surface, it is disappointing that the Supreme Court has chosen to include this case in the long list of cases shunned in interest of a reduced workload. It is no less disappointing that the Supreme Court has shunned an important tax case. Sure, tax cases are challenging, and occasionally boring, but duty is duty. So what that tax cases aren't popular with members of the Supreme Court? As TaxProfBlog phenom Paul Caron wrote a few years ago, and here he quotes himself: "The view that tax law is less interesting or important than other areas of law pervades even the Supreme Court....[W]hen asked why he sings along with the Chief Justice at the Court's annual Christmas party, Justice Souter replied, 'I have to. Otherwise I get all the tax cases.'" Surely the Justices have time for another song.

So, perhaps the answer to another of today's hot news stories is lurking in this one. Perhaps the President should nominate a tax expert to the Supreme Court. Just like a balanced law firm, there ought to be someone on the Court who can competently and enthusiastically take on tax issues worthy of national importance. And wouldn't it be fun to watch the pundits analyze the nominee's tax writings?

All joking aside, the nation and its taxpayers have been deprived of a resolution by the only Court with no interest in the issue. Isn't it an interesting feature of the political construct and judicial jurisdiction that the decision on New York's "right" to tax a Tennessee resident has been made by New York, not Tennessee, courts? Isn't this sort of inter-state competition for tax revenues one of the reasons that a Supreme Court exists?

It would be nice if someone questioned the nominee, whoever that may be by the time hearings are held, on his or her views about taxation and the role of the Supreme Court in interstate tax issues. Surely, when it comes to matters of government revenue, there will be Senators with at least some interest in the matter. Maybe one from Tennessee, and one or two from New York. They've had a lot to say recently about Supreme Court nominations. I wonder if they're aware of this particular difference between their two states.

It's Halloween. Even though April 15 gets all the attention, there's good reason to declare October 31 "National Tax Fright Day." I suppose one could dress up as a tax collector and go door to door giving the "trick or treat" option, but there's probably some statute criminalizing the impersonation of a federal revenue official. Anyhow, who wants to do that and end up getting tagged by the neighbors as the town eccentric.

Halloween and tax go together well. Think of the hallmarks of Halloween: fright, horror, monsters, goblins, cauldrons, skeletons, disguises, and witches. Think of the hallmarks of tax: fright, horror, monsters, goblins, cauldrons, skeletons, disguises, and witches. Don’t agree? Keep reading. It’s worth it. No trick, just a treat.

Tax and fright? Of course. Consider this on-line advertisement: "So, You got a letter from IRS. Tax Moms can help. Letters from IRS are scary. Tax Moms will answer your questions at no charge. Questioning answering Tax Mom is available at web site 24/7" Whew. I'm not sure which (AGH!) is scarier: the ad or the thought of someone being called Tax Mom.

Tax and horror? It deserves, and has, its own web site: Tax Horror Stories. Until he resigned from Congress when nominated to the SEC, former representative Christopher Cox maintained a web site of Internet Tax Horror Stories, as described in a wonderfully headlined article, House of Tax Horrors. Why is the idea of a Tax Amusement Park wandering around my head? Ticket takers dressed as tax lawyers, guides dressed as IRS agents, and a "fun house" of Tax Spectres.

Tax and monsters? Take a look at Monster Tax Hike in Massachusetts to see how easily the two words meet up.

Tax and goblins? Apparently in Ireland, October 31 is the deadline for filing 2004 income tax returns and 2004 capital gains tax returns, for paying the balance of 2004 taxes, and for paying preliminary 2005 taxes. No wonder that reporters choose headlines such as "Halloween Brings the Tax Goblins". I don't think they mean gobbling, but perhaps they do. After all, what's a "money-eating tax goblin"?

Tax and cauldrons? Indeed. About 12 weeks into a basic tax course students are introduced to section 1231, the one with the main hotchpot and the firepot. How else to graphically illustrate the point than with a cauldron? The term tax cauldron gets used to describe the entire tax system by this commentator, and in this global relocation warning about "jump[ing] out of the U.S. tax cauldron and into another country's tax fire."

Tax and skeletons? Words of caution are consistently offered to folks with "tax skeletons" in their closets, such as this advice to avoid taking certain deductions if those tax skeletons exist. It even found life in Daniel's Daily Tax Pulp Fiction, not as an opening line eligible for the Bulwer Lytoon Fiction Contest, but as a closing line that fits the horror film: "Ian began reflecting on the tax skeletons in his tax closet … his heart started racing at the thought of a lifestyle audit …"

Tax and disguises? Oh, my. The tax law is replete with disguises. Tax provisions often are masked by catchy titles, something I learned when I figured out that the amendments enacted by the Tax Reduction and Simplification Act of 1977 increased taxes for some taxpayers and surely did not simplify anything. This was the legislation that removed the standard deduction from the Code, replaced it with a "zero bracket amount" but then had to created an "unused zero bracket amount," affectionately know as UZBA by tax law students until Congress mercifully jettisoned an implemented theory gone bad and restored the standard deduction. So, tonight, when you can't figure out the kid's costume (happens sometimes), ask, "So are you dressed as an UZBA?" If the youngster goes fleeing while screaming, you'll know at least one of child's parents is a tax practitioner and they must have interesting dinner conversations. Not that the 1977 legislation was the first, last, or only tax disguise. The phaseout of itemized deductions and personal and dependency exemptions was a blatant maneuver to increase taxes without raising rates so that the public could be told that taxes had not been raised.

Tax and witches? Indeed. This is what inspired this Tax and Halloween post. Yesterday, thanks to an ABA-TAX message from Martin L. Bearg of New Jersey, I followed a link to this ABC News story, and learned that a Dutch court had upheld the right of Dutch witches to take a tax deduction for the cost of witchcraft schooling. The Dutch income tax, summarized here, contains an education deduction not unlike the one allowed under Regulations section 1.162-5 of the United States income tax. The deduction is allowable if the education is a requirement for a present or, unlike the U.S. income tax deduction, a future occupation, or if the study is intended to "upgrade" the taxpayer's "position in society in a financial or economic way," or if the eduction is to "maintain or improve [the taxpayer's] knowledge or capability in order to maintain [the taxpayer's] level of income in [the taxpayer's] present occupation." Thanks to the folks at the University of Liverpool Online Higher Education site, who spared me the experience of translating the Dutch income tax information from the Dutch Tax Authority's website, which is, of course, in Dutch. Now THAT would have been a bit of a nightmare.

Although the ABC News story was datelined October 30, the issue had been percolating for about a month. According to a News24 story, at the end of September a court had reached the same decision. The Tax Foundation, following a BBC News story, report this news at the end of September, and followed up two weeks later.

The News 24 story explained that the course lasts for one year and a day, and that "students are instructed in casting spells, magic, preparing potions, working with herbs, prophesying and divining." Upon completing the course, the students can hold themselves out as “qualified witches.” In mid-October, Bloomberg reported that the ruling has caused a huge surge in student enrollment in the only course in the Netherlands that certifies qualified witches. This story explained why the course lasts for one year and a day: it covers 13 full moons.

The decision has caused a stir in the Netherlands, or, as the ABC News story puts it, "a political fury." The political party holding the most seats in Parliament, the Christian Democratic Appeal, intends to address the issue. It questioned how a course for witches could be useful for employment purposes. Spells on the boss when it’s time for raises? Seriously, because the Dutch income tax allows a deduction if the education is a requirement for a present OR future occupation, certainly because one can earn money as a witch, the ruling is, to quote a tax expert from Leiden in the Netherlands, “logical.” In fact, the plaintiff in the case intends to teach in schools about the Middle Ages and witchcraft. She also is an actress who role-plays a witch at an old castle.

According to the woman who operates the school, previous students have included psychologists and accountants. I wonder if they were TAX accountants?

What better training? Goodness, even I have been likened to Professor Snape, he from the Harry Potter tales, which, coincidentally, have been attributed as the cause in the increase in interest in witchcraft. Goodness. No, folks, it’s only serendipitous that I wrote a book called "Better That 100 Witches Should Live." That’s a biography about a fellow acquitted of seditious libel charges after he castigated the Puritans of New England for conducting the witch trials and executions. Yeah, ok, so his name was Thomas Maule and he was my 7-great grandfather. He lived at a time when there was no such thing as an income tax.

So, yes, it is not unusual for someone to use the phrase "scary tax law". Nor am I the first to make the Halloween and Tax connection. Consider this news, also reported in a a Tax Foundation story, It seems that just in time for Halloween, the New Jersey sales tax is being removed from some candy bars and store-bought Halloween costumes. The change makes the New Jersey sales tax on these items similar to what is done in most other states.

But here’s the trick part of the treat: The sales tax exemption will apply to candies made with flour. Flour? In candy? I learned something. Flour is used in candies such as licorice, KitKats, and Nestle’s Crunch. But other candy, made without flour — think Hershey’s Chocolate bars — remains subject to the sales tax. The author of the a Tax Foundation story suggests, "Robert Frank of the New York Times told us yesterday that children learn best through story telling. Maybe the best way to teach children about poor tax policy is to tell them about the scary tax man who wishes to complicate their Halloween fun by taxing their snickers bars but not their twix bars."

I have a better idea. When I hand out the Reese’s Peanut Butter Cup 4-packs, which usually has the youngsters running back down to the street screaming, "He’s giving out big packs of Reese’s PBCs" (I kid you not, hee hee), I might add this year, "And I paid sales tax on these things." Perhaps that will blunt their excitement and lessen the alarm that usually registers in their parents’ minds as they wonder what sort of neighbor would dish out chocolate in such large doses.

Easy. A guy who thinks peanut butter, being a protein, and chocolate, which is medicinal, combine together to enhance the intellectual skills of those who devour those tasty treats. When those children grow up, they’ll need all the well-nourished brain cells they can muster to deal with what will be one horrific witches’ brew of a tax law.

Or at least they’ll learn to reach for a PBC when tax time stress begins to take over. And, no, this is no buzz. The makers of Reese’s PBCs haven’t compensated me to say anything nice. They don’t even know I’m saying anything at all. Let’s leave it that way. After all, if they tossed me a bone of a token stipend, I’d be required to pay tax on it. And to that, we can say, "Boo!"

The third of the famous three lies (only one of the other two of which, involving checks in the mail) came to mind as I read through some recent commentaries about tax reform proposals that involve government preparation of the taxpayer's return. The same concern that makes the third famous lie part of a joke that works hovered in my brain as I pondered this idea.

A commentary offered by the Office of Tax Policy Research at the University of Michigan's Ross School of Business on the President’s Tax Reform Panel Report notes that "under some reform proposals, including the national retail sales tax, individuals would never again have to file tax returns. Under another prominent proposal, no one with an income less than $100,000 would have to file. Some other proposals offer most taxpayers a no-return option, akin to the ReadyReturn program piloted in California last year. Even if most people will still have to file a return by April 15, the filing process could be greatly simplified."

What's a ReadyReturn? As explained by Joe Bankman in Simple Filing for Average Citizens: The California ReadyReturn, ReadyReturn refers to a concept that was the subject of an experiment by the California Franchise Tax Board (FTB) to prepare income tax returns for taxpayers whose only income is wages and interest. The FTB selected 50,000 taxpayers out of the many more who fall into that category, prepared their returns using the W-2 and 1099 forms that it had received from employers and interest payors, and mailed those returns to the taxpayers. Taxpayers could file the return, correct it, use it as a guide in doing their tax return in the traditional manner, give it to a preparer, or toss it.

Arguments in favor of ReadyReturn abound. It's easier. It requires less time for taxpayers. It saves taxpayers the cost of hiring a preparer. For example, some advocates equate it to receiving a tax bill in the mail. See, e.g., "What if IRS tax bill came in mail?". Others point out that it is a wonderful solution for helping the many taxpayers who cannot read.

Arguments opposing the ReadyReturn program are numerous. Before summarizing them, it's worth looking more closely at the arguments made in favor of ReadyReturn.

Although it appears to save the taxpayers time and money, that conclusion rests on the assumption that the ReadyReturn is correct. Any taxpayer who wishes to confirm that the return is correct must invest no less time or no less in preparer's fees than is invested in the absence of ReadyReturn to audit, in effect, the government-prepared return. The program shifts the burden to the taxpayer. Thus, the time and cost savings is a mirage.

Comparing the ReadyReturn program to something resembling the receipt of a tax bill, as happens with most real property tax systems, is misleading. When a property tax bill arrives, there are only two things to check. One is the assessment, and the other is the multiplication of the assessment by the tax rate. The assessment is made not on the bill but in a separate proceeding, and taxpayers have the opportunity to challenge. More important, they can learn what their neighbors' assessments and tax bills are, because those are a matter of public record. Even without going online or heading to the assessor's office to get the information, neighbors can learn much by chatting with each other. There is no equivalency in an income tax ReadyReturn. The government does not and would not issue a separate document with a determination of income, followed by a chance to appeal, and eventually capped with a tax bill. The assessment is buried in the ReadyReturn. No one knows how the billing process has impacted neighbors. A critical element in the "check and balance" present in the local property tax mechanism is and would be lacking.

The silliest argument is the benefit of the program to people who cannot read. If they cannot read, what will they do with a ReadyReturn? Is it simply a picture? When it comes to sighted people who cannot read, the problem is illiteracy, not the tax system. Isn't it an appropriate role for government and public schools to teach people how to read? Ought not we ask why that task is not being accomplished? I'd rather have a nation of literate people reading about and "seeing" the tax mess that the politicians have created than to have a nation of illiterate people "saved" by a government that does their tax and financial work for them. Can anyone spell Big Brother?

A variety of objections and concerns have been expressed with respect to ReadyReturn. Some could be resolved with modifications to the program. Others are far more serious.

What happens to taxpayers who move and thus do not receive their ready return? One solution proposed by the FTB is to take the system on-line. This shifts the burden back to taxpayers, all of whom would need to go online to find out if a ReadyReturn had been prepared for them. Yes, the FTB could send a postcard to the selected taxpayers, instructing them to go on-line, but those who have moved might not receive it. Think this is an insignificant problem? The IRS recently announced that it is looking for 84,000 taxpayers for whom it has a refund check. Oh, by the way, how is taking ReadyReturn on-line going to help those folks who can't read? Perhaps an audio file of some sort can be played?

What happens if the ReadyReturn is incorrect and the taxpayer simply accepts it because it is "from the government"? It is too easy to dupe people, and though it happens, governments ought not be doing so, whether intentionally or, as so often is the case, negligently. COULD the government be wrong? Mistakes by government employees in the area of taxation are legendary. According to this report, in a 2003 test of the IRS assistance system by the Treasury Inspector General, 30% of answers were incorrect, IRS employees incorrectly prepared 19 of 23 returns in a December 2003 survey of assistance sites around the country, and in a 2004 test, 38% of the answers provided by customer service representatives were inaccurate. Relying on people to read the ReadyReturn information (assuming that they can read) is no guarantee that they will do so. Will ReadyReturn become the "EXTAX" of taxation the way one politician's clever manipulation of absentee ballots has been peddled as an EZVOTE (which, incidentally, is a fiction)?

On the other side of the spectrum, what about taxpayers who deliberately or negligently accept the ReadyReturn even though it does not reflect additional income that the government does not know exists? After all, the government selects taxpayers for ReadyReturn because it assumes that a person with only wage and interest income in one year will be in the same position the following year. But certainly some not insignificant number of those taxpayers will start a business, or otherwise take in other types of income. Yes, instructions could be added to the ReadyReturn (as it inches closer to looking like the existing process), but will this matter to the folks who cannot read and who might be among those who are taking in cash income for which no W-2 or 1099 is issued? Of course, the underlying problem is not caused by ReadyReturn. But will ReadyReturn exacerbate it?

In "Reform and Modernization of the Tax Compliance Process, William J. Kambas notes that the ReadyReturn process poses question about how the government mines for tax data and the extent to which the confidentiality of taxpayer information would be compromised. He explains that this is not a reason to oppose the project, but requires careful scrutiny and insertion of data privacy protection safeguards. Government experience on this score is far from ideal. Do you remember this flap? Or the one about the IRS contracting taxpayer information out to a company whose databases had been compromised?

ReadyReturn does nothing to reduce the complexity of the income tax. What it does is to make the problem "go away" for some taxpayers, whose voices will be removed from the chorus of cries for income tax reform. William Kambas makes this "Chaos and confusion may be mitigated by hiding the complexity. If hiding complexity is the goal, the ReadyReturn program, as it stands now, may be the answer." Hide the complexity from enough people, and it no longer is an issue. So what? The so what is that behind the smokescreen, who knows what's going on? One opponent of ReadyReturn, who surely is not alone, sees it as something that will be required of more and more taxpayers, and that it will give the government an opportunity to hide tax increases. That might be pushing it a bit much, but democracy requires transparency in taxation. That is why I suggested that, instead, all taxpayers should be required to plow through, or pay someone to plow through for them while they watch, their tax return preparation, not as numbers being entered into a computer program, but with a running commentary from the preparer. For example, "The reason it is taking so long to put in all these numbers is that there are many, many steps to be computed. Notice that I am taking information from 12 different pieces of paper, and I asked you 25 questions." "OK, so why does the government need to know all of this?" "Because ......." This would permit them to see how dangerously convoluted the government revenue generator has become, and it is probably the only way that a strong chorus of cries for tax reform can be orchestrated. Yes, being required to watch a tax return being prepared may be cruel, but considering that taxpayers are among those who voted into office the people who created the mess, it's a deserved consequence. After all, we do too much "hide the problem" papering over in this country, be it energy shortages, military mistakes, international embarrassments, economic ignorance, or tax nonsense. Instead, it is better to remember that an educated citizenry is far more valuable to democracy than a pacified (or numbed) citizenry. Or perhaps it should be stated an educated electorate is far more valuable to democracy than a pacified electorate.

Yet another issue is conflict of interest. The government and the taxpayer are on opposite sides of the tax computation issue. If there is a question, for example, about an entry on a W-2 other than wages, will the ReadyReturn system resolve the issue in favor of the taxpayer? Will it disclose the issue to the taxpayer? Or will it resolve the matter applying the government's position on the issue? It has been suggested that the ReadyReturn process could be contracted out to a third party, but that would require taxpayer information being given by the government to a third party. Under current law, only with taxpayer permission could that be done. So one can contemplate a legislature reducing taxpayer privacy rights in this respect, or a system that sends a "request for disclosure" form to ReadyReturn participants, who, well, at least those who can read could stumble through the legalese and boiler-plate.

Speaking of interests, for-profit preparation companies oppose the idea. Recently, Intuit (probably in concert with other tax preparation companies) persuaded Congress or the staff to insert a clause in the IRS funding legislation that prohibits the IRS from adopting a federal equivalent of the ReadyReturn. This follows a similar successful effort in California, resulting in legislation holding the FTB's funding to last year's amount and requiring that the FTB not expand the program beyond last year's scope nor alter its format. The FTB had planned to expand ReadyReturn to approximately one million taxpayers, for roughly the same cost, by making it an on-line program.

For years, the IRS does arithmetic computations for taxpayers who choose to put their information on the return and leave the tax computation mechanics to the IRS. From what I understand, few taxpayers do so because return preparation software takes care of that issue. Many decades ago, I am told, taxpayers could go to an IRS office with their proverbial "shoebox" of bag of receipts and the IRS agent would assist in the return preparation. Those were the days when the tax law was much simpler, far fewer issues existed, far less money was at stake, and there was much less over which to disagree.

Though there is something "noble" about helping folks with simple returns escape the trauma, confusion, and agony of tax filing season, in the long run, ReadyReturn poses a great danger. Even ignoring the other problems, such as privacy protection, conflict of interest, mistakes, fraud, and logistical foul-ups, the major disadvantage to the ReadyReturn is that it will entice tens of millions of taxpayers into thinking that the federal income tax no longer is a problem in need of a solution. Why should the complexity of the Internal Revenue Code be a concern for taxpayers whose returns are relatively simple but yet a challenge for them to prepare? The answer is that the complexity of the Code has become a mask behind which hides the skewing of the revenue in favor of the wealthy and ultrawealthy. Consider the tens of millions of social security recipients whose benefits are taxable, not in full, but in an amount derived from a convoluted set of equations that appear to most folks as something out of a quantum physics textbook. Only by going through, or watching a prepare go through, these gymnastics might the person ask why, and then get the honest answer that the multi-tier mess in section 86 reflects the need to raise revenue to pay for someone else's tax break in the Code. Does anyone think Congress really wants taxpayers to know that? And even many of these taxpayers with so-called simple returns in California get dragged into complexity when one considers the various education deductions and credits, the child credit, the earned income tax credit, and the many other provisions targeted toward low-income taxpayers.

The "here, let us take care of it for you, don't worry, be happy" message of the ReadyReturn drowns out the "and you'll never feel a thing as we extract a wee bit more" part of the script. Why create tax zombies? There's enough of that already in a nation that so quickly seeks to be numbed. What's next? "Just let us tap into your bank account and we'll do EVERYBODY's return .... no more agony for the taxpayer"?

When tax compliance gets so complicated that the government must prepare the returns (even assuming they're better at doing so than are the taxpayers), the tax law surely has become not only too complicated but also inefficient and surely unjust. Government preparation of tax returns in an unnecessarily complicated system opens a door to government control beyond reasonableness. The ReadyReturn may in and of itself be not only harmless but helpful, but it's too close to "Big Brother finally took over."

I prefer to make the filing easier by simplifying the regulation. In other words, don't mask the complexity problem. Have courage. Fix it.

Today's TaxProfBlog news carries a report on a paper by Jonathan Gruber of MIT's Department of Economics. He has just released "Religious Market Structure, Religious Participation, and Outcomes: Is Religion Good for You?" on the National Bureau of Economic Research web site.

Prof. Gruber explored previous findings of "striking correlations between religion and various measures of well being" to determine which was the cause and which was the effect. One interesting and previously identified correlation is that "attending religious services weekly, rather than not at all, has the same effect on individuals' reported happiness as moving from the bottom to the top quartile of the income distribution." But, as Prof. Gruber sought to determine, does attending religious services make a person happier or are happier people more likely to attend religious services?

To solve "the problem of estimating the effects of religious participation on earnings and other economic measures," Gruber "draws on the fact that individuals are more likely to attend religious services if they live near others of their religion." He uses census data to "measure the effects of co-religionist density on economic outcomes such as education, income, employment, welfare participation, disability, marital status, and number of children." His results "suggest a 'very strong positive correlation' between religious market density, religious participation, and positive economic outcomes.'" He concludes that "People living in an area with a higher density of co-religionists have higher incomes, they are less likely to be high school dropouts, and more likely to have a college degree" and that "[l]iving in such an area also reduces the odds of receiving welfare, decreases the odds of being divorced, and increases the odds of being married." He demonstrates that "[d]oubling the rate of religious attendance raises household income by 9.1%, decreases welfare participation by 16% from baseline rates, decreases the odds of being divorced by 4%, and increases the odds of being married by 4.4%."

Finally, Gruber concludes "that being in an area with more co-religionists leads to better economic outcomes through the channel of increased religious participation." Although his paper does not explore how these results come to be, he suggests "four possibilities: that religious attendance increases the number of social interactions in a way peculiar to religious settings; that religious institutions provide financial and emotional 'insurance' that help people mitigate their losses when setbacks occur; that attendance at religious schools may be an advantage; and, finally, that religious faith may simply improve well-being directly by enabling the faithful to be 'less stressed out' by the problems of every day life."

Although Gruber's paper interests me for many reasons, including my theological and church service interests, my focus at the moment is the impact of religious service attendance on economic outcomes. For several decades, different Administrations of both parties and the Congress, no matter which party has been in control, has used the tax law in efforts to increase income, to decrease reliance on welfare, and to encourage behavior that is "good" for the economy. And now, it appears, attending religious services may have similar consequences.

And thus arises a conundrum. If attendance at religious services is good for the economy and financial status of the citizenry, and if a good economy benefits the national interest, ought the nation, through government, be encouraging attendance at religious services? Well, even if it should, would such encouragement run afoul of the First Amendment? Surely a law mandating, or even encouraging, attendance at religious services would be struck down. What about the typical backhanded tax approach, such as a deduction or credit for attending religious services? No, that won't fly. Charitable contribution deductions already exist for taxpayers who make contributions to the religious institutions that they are attending, or perhaps are not attending, but that deduction is not limited to religious donations. That's why the charitable contribution deduction survives attacks based on the First Amendment, because the deduction encourages charity and other socially desirable activities without being limited to religious institutions.

But I'm going to make a prediction. Someone, somewhere, whether in all good faith seriousness or simply to make headlines that will play well with particular constituencies, will propose legislation to create a deduction or credit for attending religious services. Legal scholars, commentators, and others will buzz for a few days about the proposal, and it will then fade into the background as something else takes center stage.

Here's my take: the decision to attend, or not attend, religious services ought come from within. It ought not be mandated, dictated, or required by government. It can be the result of private invitation, but it should not be the consequence of literal or figurative arm-twisting by anyone. The irony in this position is that it reflects a particular theological perspective, namely, that compulsory attendance at religious services lacks the essential characteristic of free and willing worship. Even though many, perhaps most, theologies are in accord with that perspective, nonetheless it conflicts with certain traditions that take the opposite position. Does that mean the rationale for opposing a tax credit or tax deduction for attending religious services is invalid because it reflects a theological perspective? No, because there are non-theological reasons for opposing such a tax credit or deduction.

Now I'll wait to see how much coverage Prof. Gruber's paper receives in the mainstream press. And then I'll wait for the almost inevitable legislative proposal. Stay tuned.

Proposals to increase the gasoline tax are back in the news. They've been percolating through this blog for many months. I made the suggestion back in May of last year, long before anyone had met Katrina or Rita. I made it again in January of this year. I repeated my suggestion for increased taxes on the use of non-renewable energy in March of this year, and defended my position in two follow-up posts (here and here). I revisited the issue last month, and extended the discussion a few days later in a post responding to a criticism of my position.

The topic moved into the spotlight even earlier, as I argued against proposals to DECREASE the gasoline tax. I explained the silliness of these proposals in March of 2004 and I attacked a similarly ill-conceived plan in Hawaii to cap gasoline prices back in August of this year.

I suppose I could write a book. In the meantime, others have been keeping the gasoline tax increase proposal fires burning (oh, well, sorry). An editorial in Sunday's New York Times advocating an increase in the gasoline tax to encourage conservation and to wean the nation from dependence on foreign energy sources has generated an interesting set of reactions from subscribers to the Oil Drum web site. Many of these subscribers are expertised in the energy industry, or are close followers of energy policy issues, so it makes sense for a tax person to pay attention to their perspectives.

The Times editorial doesn't raise any new arguments. The ideas that energy conservation is a good thing and that dependence on foreign energy is not have been around for much longer than the most recent news panic about oil, gasoline, natural gas, and diesel shortages. What may be new is that some folks who had not been paying attention now are paying attention. What's not new is that most folks still don't get it.

Conservation with respect to non-renewable resources is good not only because of the limited supply of energy, but also because oil-based energy contributes to environmental degradation. Shipping American dollars abroad to purchase oil from the Middle East puts financial resources into terrorist pipelines. The impact of higher energy prices on the economy is just beginning to be felt, and it will become worse.

The principal argument in favor of a higher gasoline tax is that it would cause the same sort of "demand destruction" as did the higher gasoline costs that showed up in the aftermath of Katrina. The current federal gasoline tax, unchanged for the past 12 years, is a mere 18.4 cents per gallon. Yet raising this tax is nearly impossible from a political perspective. The gasoline tax is regressive, because it takes a proportionately higher percentage of lower income taxpayer's income than it takes from the income of the wealthy. One problem with this perspective is that the word "tax" triggers issues that aren't triggered by the word "toll" or the word "fee." Bridge and highway tolls are regressive, but they're not regressive taxes. They are user fees. Someone suggested that the difference between a tax and a user fee is that the latter purchases the payor a direct benefit whereas a tax doesn't necessarily return to the payor an equivalent benefit. I'm not certain I agree with that definition, except to the extent taxes are used as wealth transfer mechanisms. But, for the sake of argument, using that definition convinces me that the gasoline tax is a user fee and not a tax. Other arguments lead me to the same conclusion. Persons who burn gasoline, or any other petroleum derivative, impose costs on the maintenance of highways, the retention of clean air, the safety patrolling and emergency servicing of roads and highways, and other social costs. What I cannot answer at the moment is whether these costs are somewhat more than or much more than 18 cents per gallon.

One tough issue is how to mitigate the impact of higher gasoline user fees on the poor. Although not much is done with respect to highway and bridge tolls paid by the poor, there are models that can provide guidance on alternatives available to prevent increased gasoline user fees from shutting the poor out of participation in the economic market place. Some cities and states provide reduced price public transportation to low-income individuals. The earned income tax credit is designed in part to offset the "cost of having a job" that might deter people from entering the work force at an entry level pay scale. Some of the commentators on the Oil Drum site supported some sort of give-back to the economically distressed.

According to the Times editorial, and this appears correct, each one cent increase in the gasoline user fee would raise approximately one billion dollars. What should be done with this revenue? Making highways more energy efficient is one possibility, which hopefully would include the elimination of poorly designed and horribly programmed traffic signals that compel every vehicle to get zero miles per gallon often while waiting for non-existing traffic on the cross street. Rewarding people who purchase energy efficient vehicles, or manufacturers who design and build them is another possibility. Investing in a renewable energy source "Manhattan Project" to deal with the inevitable drying up of non-renewable energy sources is yet another possibility.

The editorial concludes: "Cheap gas is no longer compatible with a secure nation, a healthy environment or a healthy economy - if ever it was. The real question is whether we should continue paying the extra dollar or two per gallon in the form of profits to the Saudis and other producers, or in the form of taxes to the United States Treasury, where the money could be used to build true energy independence." Put in those terms, it shifts the burden of the argument to those who oppose gasoline (and, seriously, petroleum consumption) user fees.

An Oil Drum poster noted that the previous day an editorial in the New York Times had advocated subsidies for heating oil for the poor. How could that be consistent with a call for an increase in the gasoline tax? The answer, another commentator said, is that "without gas, people whine, moan, and generally stay inside all day" but "without heating oil, people die."

Some of the comments on the Oil Drum site were practical. The chances of such a proposal getting support from the current Administration and Congress are slim. Though true, the importance of that comment is not to render the discussion irrelevant but to refine (sorry) the proposal so that it can be made politically acceptable. One suggestion was to use at least some of the revenue to cut income taxes. Hmmm. I wonder if the Tax Reform Panel is tuned into this discussion. Well, I say I wonder. I don't. I know. It's not. Too bad. As for the Congress, one commentator pointed out that Senator Harry Reid, who, I must add, claims he wants to make America energy independent, is singing the "let's reduce the cost of gasoline" song and dance on his website, but he seems to forget the "that will make people use more gasoline" dance that goes with that song.

Someone pointed out that the standard argument against taxes seems to be "I can spend more wisely than the government; the government will just fritter money away or hand it to the rich." Other comments certainly support this position. The fear that government corruption and incompetence and the resulting lack of confidence in government stewardship over any revenues is evident in some of the posts. Another commentator claimed that it's not the politicians who are at fault but the people who have unrealistic expectations. In some respects that's true. There are people who think there exists an infinite supply of petroleum products, and there are many more, surely a majority, who don't know what "peak oil" is. That's like not knowing what wasps are. Eventually they get stung.

The commentator who suggested the standard argument against taxes then pointed out that failure to regulate one's self invites regulation by others, and the government is quick to step in when the market place fails. But, I ask, who is to determine when the market place has failed? Is the market place for operating systems working well because Bill Gates has made money or is it failing because Windows crashes and security lapses require the inefficient expenditure of huge amounts of time by the consumers in that market? The conundrum, as one poster noted, is that a free market does not necessarily support "fairness" unless one considers the outcome of a market to be per se fair, yet supporting government intervention in a market because the outcome does not meet some other definition of "fair" suggests that something is fundamentally wrong with the free market model. The gasoline user fee, however, is not, as this poster seemed to imply, a "fairness tax" designed to make the price of gasoline fair, but a charge for the imposition that gasoline use makes on public goods such as highways, bridges, and clean air. After all, governments intervene in markets because markets do not reflect the theoretical rational person contemplated by Adam Smith but the practical modern American consumer enticed by advertising and peer pressure to react with emotion "thanks to the dumbing down of our nation's school system." Gee, there's another person who's with me on that point.

One argument against increasing the gasoline tax, or at least against increasing it significantly, is that it would thoroughly disrupt the lives of the tens of millions of Americans who are locked into their suburban lifestyles, living far from work, or working on farms that are miles from the nearest town. The idea of "moving close to work" seems sensible until one considers the two-earner family with jobs that are tens or more of miles apart. But others claimed that some people live "out in the country" for reasons other than economic necessity, as they are not farmers but simply folks who prefer to live in wide open areas.

Another comment claimed that even a 50 cent per gallon increase would trigger a recession. My question is what happens if gasoline consumption continues to increase, perhaps fueled (sorry again) by efforts to lower gasoline prices. Will that not accelerate the impending recession caused by energy shortages? What happens if natural gas shortages force manufacturing plants to close or move abroad, as already is beginning to happen? What happens when diesel fuel is rationed, as already is beginning to happen, and the trucking industry cannot ship goods that need to be shipped? My answer is, yes, a recession.

Someone asked why bother increasing gasoline prices through a gasoline tax increase when it is apparent that gasoline prices will increase on their own because of supply problems. The answer, provided by another poster, is that an increase in the tax (or user fee) will focus consumer attention NOW on planning for higher prices in the future, to "capture some of the demand in our own economy instead of sending it to OPEC," and to reduce demand and create more time for development of alternatives and to decrease vulnerability to shortages. Well put by someone named "Engineer Poet."

Should an increase in user fees be phased in? Perhaps. As one commentator noted, a small annual increase would give people time to prepare and plan, replace vehicles, perhaps move, and perhaps organize support for more efficient mass transit.

Should there be exemptions for individuals who have no choice but to use petroleum-based fuel? How should such an exemption be defined? Does it matter if the person must consume gasoline or diesel in order to do a job, such as a traveling sales representative, or should it matter if someone is "stuck" by gasoline user fees because he or she decided to live in a suburban development far from the work place? Notice how a discussion of a tax (or user fee) triggers questions about why people live far from their work places? Is it the attraction of the open country (which, ironically, then fills quickly with more shopping malls and many more homes)? Is it the supposedly better school system? Is it the cheaper cost of homes that are further from the work place? If so, does this mean that finding a cheaper home and thus incurring lower monthly housing costs puts the person in a no-win situation because commuting costs gobble up the savings?

Someone presented a problem with a per gallon gasoline tax (or user fee). Revenues would decrease as vehicle fuel efficiency increased. So perhaps the user fee should be a percentage of the retail price?

Some commentators proposed alternatives. One suggested a "feebate program" which would rebate monies to manufacturers whose manufactured fleets exceeded standards and which would collect those monies from manufacturers who did not do so. What happens, I ask, if most or all manufacturers exceed the standards? Someone suggested that the administrative costs would cause the rebates to be less than the collections. Another reaction was that the rebates ought to go to the construction of renewable facilities. Another pointed out that as those who could afford to buy the more efficient vehicles did so, their older vehicles would be the ones purchased by the poor.

Another commentator proposed a road usage tax. Ah, the semantics. You mean road usage user fee, correct? The difference between a gasoline user fee and a road usage user fee is that the latter takes into account the weight of the vehicle and thus the damage or wear and tear it imposes on the highway infrastructure. Because fuel use, though, is roughly proportionate to ton-mile, the gasoline user fee would be easier to administer. This poster noted that the per-mile tax that has been proposed in Oregon is a step backwards because it ought to be a per-ton-mile tax. After all, the idea that all vehicles impose the same burden on public goods when they travel a mile defies logic. I discussed these proposals back in November of last year.

Another commentator suggested the implementation of "tradeable quotas." Everyone is entitled to purchase a certain amount of fuel (whether gasoline or all petroleum products wasn't specified). Those who want to use more fuel either can purchase unused quotas from those who don't use all their allocable untaxed fuel or can pay a high tax on the excess fuel that they consume. The government would regulate the process but not collect revenue, as the system would move funds from fuel users to fuel conservers. Yes, this poster admitted, this is close to rationing, but doing nothing is putting the nation into a de facto rationing system that afflicts the poor more than the wealthy. I like the general idea, but I think that even the allocated quotas should be defined in terms of taxed fuel, set at a rate lower than the much higher rate on excess fuel consumption.

Another commentator suggested that because volatility in the gasoline retail price market is bad for the economy, the tax (or user fee) ought to be a fixed per gallon amount reduced by a percentage of the pump price. Thus, the tax would be dampened somewhat as retail prices increased, yet the total pump price would not drop so low as to encourage a spike in consumption. This is an interesting example of using a tax, or a user fee, to regulate a market, because the tax or user fee would be changing even though the impact on public goods per gallon of gasoline consumption would not be changing in the same manner. For that reason, I don't favor the idea. If the retail price increases because of supply and demand shifts, then the true price of gasoline usage ought to reflect that increase, without some sort of user fee reduction to cushion the cost and thus bias the consumer's decision making.

Yet another commentator suggested a return to the subsidization of ethanol production. This triggered an amusing exchange. A critic characterized ethanol as a very bad idea, and claimed that making ethanol rather than feeding people was selfish. The proposal's advocate replied that we have more than enough food in this country, as evidenced by the fact we are the most obese population in the world, and that farmers are having a tough time selling in the global market because of subsidized exports from the EU and cheap food from other countries. In response, another commentator claimed that what keeps American farmers from being competitive is high energy costs, which include, by the way, fertilizer and pesticides (which are made from and using non-renewable fuel). I learned that 13% of the corn crop is used to create enough ethanol to replace 1% of the nation's gasoline consumption.

So, the next commentator saluted biodiesel, but then described the adverse impact of modern agriculture on the environment, suggesting that solving one problem creates another. And, as expected, and as I've predicted, someone asked if there was a "peak water" website, because water supply would be the next natural resource crisis after peak oil. I disagree. I still think water will trigger a world war before oil does.

Still another poster claimed that the government should "help fund" the massive infrastructure projects that are beyond the ability of the private sector to risk, such as nuclear, biomass, oil shale, and mass transit. Again, it would be the tax law, I am certain, that already serves, and would continue to serve, as the vehicle for this government support. We're talking credits and deductions, such as those already in the tax law that I reviewed in March and to which a few more have since been added.

Finally, support was expressed for increasing the gas guzzler tax before increasing the gasoline tax. Support also was expressed for eliminating the "truck" tax break that treats SUVs and other vehicles as trucks.

What a mess. Ultimately, the question is whether the Congress, encouraged by the American public, takes control of this situation before this situation takes control of us. What a scary thought. What's even scarier is that most Americans don't realize the scope of the energy problem, don't understand the economic and political contexts in which the energy problem exists, surely don't comprehend the challenges of using the tax law or even user fees to deal with the problem, and who find planning for the future too difficult if the future means any time after the end of the next weekend.

As I asserted last month, "All of this will require leadership. It will be a factor in the 2006 and 2008 elections. I continue to scan the potential candidates and I continue to feed my pessimism."