MauledAgain

Advocates of using the tax law to achieve social and other goals at best remotely connected with raising revenue have an excellent opportunity to educate those of us, including myself, who simply don't understand the logic behind enacting tax breaks to encourage or discourage behavior. Currently in my spotlight is the attempt by some members of Congress to parlay a series of mining industry tragedies into tax breaks for mining companies.

What caught my eye was a news item scrolling across the bottom of one of the television screens at the gym this morning. It noted that the operators of the Darby Mine Number One, where five miners were killed in an explosion last week, had been hit with a series of fines for safety violations. News stories such as this one in the Louisville, Kentucky, Courier-Journal, report that Kentucky Darby, which operates the mine, had been cited ten times in May for violations, four of which were serious. Several violations, such as permitting combustible coal dust to accumulate, failing to maintain the water sprinkler system, and defects in a fire warning device, appear to involve problems that could be implicated in explosions. Since acquiring the facility, the current operators have been fined 257 times and subjected to $27,651 in penalties, which can be tracked by using the form at this Federal Mine Safety and Health Administration search page. Some of the more recent penalties have yet to be paid.

When I saw the scrolling news item, I remembered having seen reports about proposals to use the tax law as a means of improving mine safety. Most of these proposals surfaced after several other unfortunate mining disasters earlier this year. I wondered how a tax break would encourage mine operators to improve mine safety. So I hunted for some of the proposals.

Representative Phil English, from Pennsylvania, issued a press release explaining H.R. 4835, which would permit coal mining enterprises to deduct the cost of certain mine safety equipment and the expenses of safety training. The provision would permit companies subject to the alternative minimum tax to claim these deductions even if they otherwise would be precluded by the alternative minimum tax.

Senator Jay Rockefeller, from West Virginia, hailed the inclusion of his mine safety tax breaks in the Senate version of the tax reconciliation bill. Rockefeller's version permitted a deduction for half the cost of certain mine safety equipment and a credit for up to $10,000 of the costs of training mine rescue teams. According to Rockefeller, "Things have to change.....Everyone must work together to make coal mining safer. We all must do more. Companies must do more, and the federal government must do more. In Congress, we have an obligation to help coal companies meet tougher safety standards, and these tax credits should be a big help." It is unclear why tax breaks for mining companies are an "obligation" of the Congress. Rockefeller was joined in his efforts by other Senators, such as Pennsylvania's Rick Santorum.

Legislators advancing these tax breaks were encouraged by testimony from interested parties. For example, the American Society of Safety Engineers proposed tax breaks as a "creative" approach to dealing with the problem, pointing out that many mine operators qualify as small businesses and suggesting that relief from some penalties would encourage investment in new technologies and safer equipment. Similarly suggestions for tax relief came from the National Mining Association.

As cruel as it may appear at a superficial level, I don't buy this "lower tax to save miners' lives" sales job. Closer examination reveals not only the flaws of the argument but the exploitation of tragedy for pocket-lining purposes.

The argument for mining industry tax breaks rests on the proposition that mining fatalities, injuries, and other problems can be attributable, at least to some extent, by the use of antiquated equipment. Companies don't replace this equipment because it is expensive. In a market system, mine operators can choose to update equipment, close the mine, or gamble with the lives of miners by hoping all goes well, running the risk of what appear to be small-change penalty amounts ($27,561 for 257 violations?) In a regulated market system, the penalties for gambling with the lives of miners ought to be so high that companies choose not to do so. If mines close, the price of coal would increase. As the price increases, the additional revenue provides funds for investment in new equipment. Markets ought not support the proliferation of economic inefficient industries. If coal mining is an industry critical to the economic health of the nation, it needs to charge the true cost of mining coal, which includes the amortized cost of new and safe equipment. The tax law ought not to be used to prop up industries that cannot function viably in the economy.

Even if the tax law were used to pay for some of the mining industry's equipment investment, there is nothing to demonstrate that this tax break would alleviate problems caused by employee and supervisor incompetence and laziness, by cost-cutting in other critical areas designed to maximize profit, or by inadequate inspection and other regulatory control within the jurisdiction of federal and state agencies responsible for mine safety. All the tax breaks in the world cannot out-bid certain insufficiencies in character and motivation.

The argument for these tax breaks prove too much, for it can be used to justify similar tax breaks for every other industry in which worker death and injury is a significant risk. Coal mining is dangerous. So, too, is other mining. Why should tax breaks for worker protection be targeted at the mining industry? What about the industries with the top ten occupational death rates, namely, logging, aircraft piloting, fishing, structural iron and steel work, refuse and recyclable material collection, farming and ranching, roofing, electrical power line installation and repair, delivery, and taxi driving? Would not the same "give them tax breaks so they can buy newer equipment and pay for better training" argument apply no less to these industries? The answer, unfortunately, is that deaths and injury in these professions don't get nearly as much headline time.

And that brings me to the sad part of the matter: political posturing. Politicians seem more prepared to make electoral hay from a disaster than they are to work to prevent the disasters. The pattern is becoming routine. A catastrophe occurs, often because of bad planning, insufficient regulation, or simple inattention on the part of public "servants." At that point, the politicians juggle for television face time. The tax-cut advocates among them immediately propose tax breaks to prevent the problem from happening again. Aside from the inescapable conclusion that tax breaks will not prevent future disasters, the proposed breaks add more complexity to the tax law, increase horizontal disequality, reward industries with the best lobbyists and public relations teams, and erode the nation's overall, long-term financial health.

If the Congress truly wants to improve mine safety, it needs to stop with the tax bribes. It needs to enact laws directly related to mine safety, provide for the enforcement of those laws, enact penalties sufficient in deterrent effect, and come clean with the electorate. The same can be said of any other behavior that Congress wishes to encourage or discourage. The pattern into which the Congress has fallen eventually will give us tax credits for coming to full stops at stop signs, deductions for using seat belts, tax breaks for not smoking, and perhaps section 179 coverage for the cost of Mothers' Day gifts. It's time to encourage people, companies, and industries to do the right thing because it is the right thing and not because a parent, a corporate executive, or a legislator pays for the appropriate behavior.

We are too quickly becoming a nation of mercenaries so glued to the almighty dollar that true values (honesty, diligence, perseverance, kindness, and respect) are vanishing under the shadow of stealth values that distract voter attention from the real problems while focusing their anger on trivial matters. I wonder if members of Congress have read the news reports about the results of the Pennsylvania primary election last week. I suggest that they do.

Yes, it is graduation day at the Villanova University School of Law. In last year's graduation post, Far Less "Au Revoir" Than Valediction, I began by brushing aside the temptation to "simply repeat what I said last year" because it "would be boring." In 2004, in a post called And Off They Go!, I had answered the "how can they all find jobs when there are too many lawyers?" question that I hear every May. So rather than re-visit that issue I shared some of my other reflections on graduation.

Every graduation is different and yet some things do not change. Every graduation is different because the students are different, the families and friends in attendance are different, the speaker is different, and there's at least one new item on the post-ceremony buffet table. And it's the twenty-third graduation at the law school in which I have participated as a faculty member.

Though it might be good to have some unchanging indicia of continuity, a few more changes would be in order. Last year I wrote, "And, yes, it is raining. It seems it always rains on graduation." Guess what? It is raining. Supposedly it should clear up in an hour but I would not be surprised to see a sudden downpour just as the crowd is arriving at the Pavilion where the ceremony is held. That has happened, and it will happen again. Hopefully, not this year.

Last year I noted that it "might be the biggest class to have graduated." I think it was. No matter. We were told the other day that this year's class is the largest to date. It will take a little longer to finish the ceremony because we read the graduates' names as they parade across the stage in not five minutes, but five seconds, of spotlight attention. Goodness, those words aren't very different from what I wrote last year.

One statistic has returned to "normal." Last year, 8 of the 23 students in the top ten percent were enrolled in one or more of my classes, a number that I described "as high as it has been for many years." This year? Only three of the 27 students in the top ten percent were enrolled in one or more of my classes. Apparently my approach to teaching, which practitioners tell me is nicely attuned to the practice of law, is something that most students trying to hold a top ten percent ranking find threatening. Interestingly, it appears that some hiring managers are beginning to see through the deficiencies of simple G.P.A. numbers and ranking positions. They are beginning to look at the transcript.

Just as I wrote last year, "I'd like to see all of [the graduates] return five years from now, not merely to attend the evening social event called a Reunion, but to participate in a day-time symposium attended by law students in the Classes of [2011, 2012, and 2013]. At this symposium the alums would describe how their law school experiences did and did not contribute to their successes and shortcomings in practice. Perhaps, one hopes, hearing words of advice and caution from those a few years older, rather than from the chronologically distant faculty, will nudge some of them away from the bad habits and bad decisions that make law school, and practice after law school, tougher than it needs to be."

In the meantime, many of the graduates will do well. I will hear from some of them and read about others of them, and almost all the news will be good. Many others, including some whose names and faces I know, will disappear into that "great beyond" that lies on the other side of graduation, never to be seen or heard from again. Such is the nature of graduation.

Good luck to the graduates. Remember that graduation may end formal learning, but your legal education is just beginning. Clients, partners, and judges, not faculty, will be handing you your grades.

This time, the great maker of tax charts, known to most of us as Andrew Mitchel, has outdone himself. His contribution to tax practitioners for the month of May is a staggering collection of fifty, yes, fifty, new tax charts. There are 14 charts illustrating examples in Reg. section 1.368-2(b)(1)(iii), which deals with merger definitions. There are 19 illustrating section 367 cross-border reorganizations. There are 17 other charts, covering a variety of merger transactions, most reflecting situations described in revenue rulings. There now are a total of 230 tax charts on Andrew's web site.

It's no small task to generate a tax chart, let alone fifty. As an advocate of the value of visual depictions of the facts underlying tax issues, I salute Andrew's efforts. If you haven't read my previous accolades for Andrew's charts (see here, here, here, here, here, here, here, here), here, and here, take a look.

Andrew welcomes comments on his charts. Visit his site, and contact him through that portal. There are three ways to access the overall chart collection:

By Topic
Alpha-numeric order
Date uploaded

According to this report, a proposed curriculum change at the Harvard Law School curriculum would shift the approach of teaching law from the almost ancient study of appellate cases to one that emphasizes "a more practical, problem-solving approach." Hurray! Well, hurray that Harvard is catching up with what a few faculty at some other law schools have been doing. Presumably, once Harvard puts its imprimatur on what is now the object of more than a few frowns and not-so-quiet criticism, the problem approach will become all the rage in legal education. I've been advocating the problem method since I started teaching, but my name isn't Harvard.

It usually comes as a surprise to people who've not been to law school to learn that what transpires in many law school courses is only remotely connected with what most lawyers do in their daily practice of law. Quoting the report"Many law schools, with their century-old teaching methods, do not prepare graduates for the day-to-day realities of law practice." There have always been exceptions, but those who have tried to turn law teaching from what worked in the late 1800s when the appellate case study method was adopted have consistently encountered resistance. For example, though today most law schools have clinical programs, in which law students assist impoverished clients under the tutelage of faculty members with practical legal experience, the battle to institute those programs was almost literally a battle. The debate over the tenure eligibility of "clinical track faculty" would be humourous were it not so embarrassing. The same sorts of battles have been fought with respect to the creation of legal writing programs, the imposition of a practical writing requirement for graduation to supplement the decades-long theoretical seminar paper graduation requirement, and even the adoption of a legal ethics course requirement. Though seemingly won, attempts to integrate legal ethics and other legal skills into doctrinal courses have been relatively unsuccessful.

For my entire teaching career, I have used the problem method to educate law students. I blend into that approach awareness of overarching jurisprudence, policy considerations, and ethical concerns. In other words, I try to replicate the intellectual challenges that students will encounter when they graduate and enter law practice. Whether they begin or end up in a law firm, a corporation's legal department, a government agency's counsel office, or a judge's chambers, or even in some non-law field, law graduates will be doing two primary tasks: solving problems and preventing problems.

So why are law schools so reticent to synchronize legal education with law practice? Several reasons have been offered at different times.

One explanation is that it is not obligation of law schools to teach lawyers. I've been told that we have an obligation to train "legal philosophers." Why? What do they do and who needs them? How many of the 30,000-plus law students who graduate each year will become legal philosophers? The notion that law schools are not responsible for training law practitioners is a vestige of the days, long gone, when law graduates served in what essentially could be called apprenticeships under the guidance of a practitioner. The economics of law practice and changes in bar admission requirements, chiefly the removal of the apprenticeship requirement, transformed the law practice side of the education equation but law schools did not respond. As a consequence, to quote from the report, "Young lawyers often find that law practice is starkly different from law school, contributing to high attrition at many law firms," and "The cost to firms of associate attrition is substantial: more than $300,000 per departing lawyer in unrecoverable recruiting, training, and replacement costs." Reading between the lines, law firms are bringing even more pressure on law schools to be relevant to law practice. Despite the emergence of "bridge the gap" programs funded by practicing lawyers, the reality is that during the first few years of practice, law graduates are very limited in what they can offer to law firms. Law firms expect something more for the $130,000 salaries they are dishing out to top students than a facility with appellate cases, oral argument (which few lawyers ever do), and legal theories. It is not coincidence that students who manage to get one of the highly coveted and short-supplied clinic positions progress far more quickly early in their practice experience. Again from the report, "'The case method..... falls pretty far short of actually training people to know how to be a lawyer,.."

Another explanation is the long-touted adage that "law schools are not trade schools." Though it makes sense not to worry about teaching law students how to find courthouses, the principal example rolled out by the "we're not a trade school" advocates, how does teaching law students to approach client problems as though they were problems going to turn law schools into trade schools? If by "trade" one means the ability to do something useful, every school should be a trade school. The whole point of the problem method is to teach students how to look at a new set of facts and apply principles in order to solve or prevent a problem. The problem method is not, and ought not be viewed as, the insertion of a "don't think for yourself" list of problems and solutions. The bottom line, again quoting the report, is that "law schools ought to be aware that they're training people for practice."

I don't buy those explanations, though I do understand that some law faculty sincerely believe they are teaching legal philosophers and not legal practitioners. I understand the concern that a focus on the practical might diminish the law school in the eyes of other University departments, many of which are very disconnected from the world beyond education. For the most part, I think those explanations are excuses.

So what do I think is the cause of the disconnect between legal education and legal practice?

The first explanation is what I call perpetuation. Though law faculty technically are hired by deans and University presidents, those officials act on the recommendations of law faculties or law faculty committees. Law faculty look for people like themselves (which is why faculty hiring can be a contentious process at law schools where the faculty is not overwhelmingly of like mind). Thus, hiring law faculty who will reform the curriculum is unlikely, because candidates with such an agenda will be considered too much of a threat to the existing way of life.

The second explanation is what I call faculty experience limitation. Some law faculty have little or no law practice experience. A few have never represented a client. Many have had a law practice experience limited to clerking for an appellate judge. This is what they know, namely, appellate cases and appellate practice. Never mind that the overwhelming majority of lawyers never argue an appellate case. For every trial level course or competition, there are at least as many and usually more appellate level courses and competitions. It's easy to teach that with which one is familiar. My courses, and those of some of my colleagues, are peppered with questions such as, "So what would you now ask of the client?" or "What would you tell the client?" Several years ago a student in one of my courses emailed me, on behalf of the class or at least a substantial number of the students in the course. He wrote, "You are scaring [the daylights] out of us. This is the first time we've heard the word client in a law school class. We don't have a clue what you are trying to get us to do." I suppose he was exaggerating, for surely they had heard the word client in some other course. No matter, the point is that what I was trying to get the students to do was so unfamiliar it was causing stress.

The third explanation is what I call faculty competence limitation. Almost all law faculty have limited competences. By that I mean most law faculty "specialize" in a narrow area of the law. One member of the faculty might teach torts and evidence, the competence of a personal injury lawyer, though perhaps from a jurisprudential rather than practical perspective. Another member of the faculty might teach business organizations and securities regulation. Both would admit that to teach the other's courses would be a daunting challenge. In a world of doctrinal education, this is a wonderful arrangement. Ideally, it permits the faculty member to do his or her "scholarly writing" in the same area. Supposedly there is reinforcement of the teaching by the research, and vice versa, though recent studies cast doubt on that assumption. Years ago, one of my colleagues was asked to teach five courses that had no coherent relationship to one another in terms of area of doctrinal competence. It was far from an ideal situation under the circumstances but yet it had the seeds of where legal education needs to go. The problem method focuses on the reality of what clients bring to their lawyers, namely transactions and events that have occurred or that need to be planned. The expertise required to assist a client in setting up a business ranges from tax law to securities regulation, across environmental and property law, and into employment and discrimination law. The expertise required to handle a divorce includes not only domestic relations law, but tax, business organizations, criminal law, negotiation skills, and familiarity with the law of wills and trusts, to name some. Few faculty have such expertise. Most law schools deal with this situation by hiring adjuncts, who almost always are, not surprisingly, practicing lawyers or judges. As the report explains: ''When a human being walks through a lawyer's door, they don't say, 'I have for you a tort problem' 'They say, 'I was walking to the office this morning and a car came by and knocked over this garbage can and it hit me and I fell off the sidewalk and I twisted an ankle and what are you doing to do about it?'"

The fourth explanation is what I call the invasion of the philosophers. In recent years there has been a rush on the part of many law schools to bring a "multi-disciplinary" focus to legal education. So into the curriculum come courses such as law and economics, law and politics, law and literature, law and history, law and religion, law and music, ok, I haven't seen law and music yet. To teach these courses, law schools are hiring "interdisciplinary scholars" who almost always have a Ph.D. in some discipline along with a J.D., though often with little or no client contact experience. The classroom context in these courses is much closer to that of a graduate philosophy department than to law practice. It's not that these courses are inadequate or inappropriate. They're not. It's that they displace other courses in the students' schedules. Is it valuable to bring a multi-disciplinary focus to legal education? Definitely. Why? Because law students enter law school with so many educational deficiencies that the law schools are compelled to provide remedial education. Good lawyers need to understand economics, history, literature, culture, and similar disciplines in order to understand the context in which law operates. Squeezing this remedial education into an already crowded three-year program is foolish. The addition of a fourth year, with half of it devoted to clinical experiences for all law students, would go a long way in delivering a better law graduate to the practice world.

The fifth explanation is what I call the curse of the J.D. degree. The J.D. degree is the only doctorate that is awarded to students who lack both a bachelors and a masters degree in the discipline. The fact that a J.D. degree is a prerequisite to the LL.M. degree, and that the LL.M. is followed by the S.J.D. degree is proof enough of the distortion. The distortion arises from a surrender to the demands of law students in the late 60s that their degree be a doctoral degree because "our college classmates are getting doctorates and we're only getting this lousy LL.B. degree." Pressed to explain, the argument was made that "after spending seven years of post-secondary education we deserve a doctorate just as our friends are getting." Rather than offending anyone, law schools gave in to these demands. Why law schools did not respond, "Ah, but your friends earned bachelors degrees in their discipline and entered the combined masters-doctoral program already educated in their discipline. You, however, aren't yet ready for a doctoral program." Well, there's no turning back from this supposedly "change in the letters" but there needs to be a turning back from the impression many law faculty have that because the principal programs at law schools are "doctoral" in nature, the education should be doctoral. Accordingly, much of what one would expect to be done in an S.J.D. program is being transferred into J.D. programs, at the expense of the LL.B. education that is being eroded. In the rush to make up for doctrinal deficiencies and to inculcate multi-disciplinary features into the J.D. programs, little time is left for problem solving and problem prevention.

The sixth explanation is what I call the downside of passive learning. During the past few decades, more and more law school courses have come to resemble the "feed and regurgitate" courses prevalent in many undergraduate programs. Whether so designed, or a consequence of faculty acceptance of student pressure for lectures in order to obtain favorable evaluations, the concept of passive learning is wholly inconsistent with the active style of law practice. I annoy my students, and even fuel dislike, when I ask a question and in response to quiet say, "So you're going to stare at the client and say nothing? Look in a book to see what I told you to say only to discover I didn't tell you because the client has told you one of the ten million possibilities we didn't have time to cover in this course?" Some faculty avoid that approach because they didn't like it, or the faculty member using it, when they were in law school and they have resolved to avoid using it because they don't want to be disliked. I'd rather be liked by my students after they graduate. Using the problem method triggers active learning because it puts the student into a real, rather than theoretical situation, where the constraints of practice must come to bear on the analysis. Students quickly learn that there are more questions than answers, and that the demand for "telling us what the law is" can accordingly be muted.

Note that these explanations are not separate and distinct features, but feed one upon the other. Experience limitation feeds perpetuation. The curse of the J.D. degree contributes to the invasion of the philosophers. The downside of passive learning reflects in part an attempt to deal with the curse of the J.D. degree. And so on.

Introducing the problem method into law school education isn't the issue. It has been introduced. The challenge is making it ubiquitous. Encountering the problem method in one or two courses does not change the way law students think, because they see those course as aberrations or, for some, as models of what they'd like to see in the rest of their course load. Only by making the problem method an every-day experience throughout all three years of law study can law schools attain the goal that one person quoted in the report said, ''If we get them to think of themselves as problem-solvers, that brings them closer to the realities of law practice." That, of course, requires law faculties to become convinced that the goal is to get their students "closer to the realities of law practice." That's one reason it will be interesting to see what the Harvard faculty does when the proposal comes to it for approval. I wonder how many will think, "Sure, I don't mind other faculty doing this, but I'm not going to change" (something I've heard spoken aloud more than once). The risk to those who think in that manner is that once a critical mass of law faculty adopt the problem method, students will wonder why the rest of the faculty isn't getting with the program.

But even a pervasive adoption of the problem method is insufficient. Faculty who use the problem method well will discover that it requires them to bring other areas of law into their discussion. I find it useless to teach the law of wills and trusts without considering the impact of divorce, or the general effect of taxation. Ultimately, the problem method will cause too much overlap between courses with an unavoidable decrease in depth and scope of coverage. That result would be no less counter-productive to the goal of preparing law students to be lawyers. What needs to happen is another of my favorite proposals, namely, the realignment of law school curriculum along transactional rather than doctrinal lines. Why not a first-year course that focuses on signing a lease and purchasing real property? At present, the applicable rules and analytical processes necessary to handle a real property purchase in practice are spread throughout courses in property, contracts, income taxation, state and local taxation, domestic relations law, wills and trusts, environmental law, torts, jurisdiction, remedies, negotiation, modern land transactions, drafting for real property transactions, secured transactions, and a few others. Rarely can the combination of requirements and course scheduling permit a law student to enroll in all those courses. Imagine the preparation for practice-world client assistance that can be provided by a course that integrates all the relevant doctrine. The problem? Who would or could teach it? The tax component alone deters almost all faculty. Or consider a course that dealt with the purchase and ownership of a boat or vehicle. Again, the lawyer needs to consider a wide range of issues that are not confined to one of the traditional first-year doctrinal courses that made sense when they were constructed in the late nineteenth century. But again, who would or could teach it? The proposal to arrange law curriculum in a transactional manner is a threat to many law faculty. Some would take it as a welcome challenge and bring themselves up to speed. Some.

All in all, bringing the problem method into its course array is, to paraphrase my email to my colleagues a few days ago, "a brilliant strategic move because it doesn't let anyone else take over as lead dog." Although other schools have been increasing the use of the problem method, Harvard is positioned to take credit for making it the wave of the future. That's the advantage of being Harvard. It's also the responsibility of being Harvard, and it's nice to see that school, after several decades of turmoil and false starts into other changes, live up to that responsibility.

The cynic in me must note that what ultimately will drive curricular change is the U.S. News and World Reports ranking. If the editors see fit to make use of the problem method and even transactional-focused curriculum positive factors in its convoluted equation, the bandwagon will fill rapidly. Can that happen? Yes. U.S. News surveys judges and practitioners, many of whom, because of their post-law-school client experiences, are supporters of the problem method and transactional-focused curriculum. How do I know? I communicate with law graduates almost every day. That's what I have heard and continue to hear. Harvard, it seems, is listening, too. Are the others?

The Congress sure knows how to sneak in the tax increases while trumpeting tax reduction. The recently passed legislation awaiting the President's signature not only reduces the tax burden of a select group of taxpayers, it affirmatively increases the tax liability for a different select group.

The only precise way to determine the impact of the legislation on a particular taxpayer's tax liability is to "run the numbers." That is, determine tax liability using the tax law as it exists before the legislation is taken into account, determine tax liability using the tax law as it exists after the legislation is taken into account, and compare the two. For those who don't have the time or the inclination to wallow in numbers, the "quick and dirty" approach is to find one's income bracket on this chart to figure out the likelihood that the legislation will generate a tax savings.

This legislation, which has been named the Tax Increase Prevention and Reconciliation Act of 2005, not only fails to provide tax reduction for many taxpayers, it also increases the tax liabilities of some taxpayers. For example, getting very little attention is an increase in the age limit for application of the rule that requires minor children to pay taxes on their unearned income at the highest marginal rate applicable to the parents' income. The cut-off of 14 has been increased to 18. Why? So that Congress could reduce the revenue cost of the tax breaks put in place for the wealthy.

Aha, one might ask, isn't the rule that taxes the unearned income of minor children at their parents' highest rate designed to prevent the wealthy from shifting investment income into the otherwise lower tax brackets of their children? Yes, it is so designed, but as modified it goes wider of the mark than does existing law.

How so?

Most children under the age of 14 who have investment income generate that income from wealth transferred to them by parents or, occasionally, other family members such as grandparents, uncles, or aunts. When the minor child unearned income tax rate rule was first proposed, there were objections raised on behalf of the very few children under the age of 14 who generate investment income from saving amounts earned through providing services. The classic example was the child who earned a modest salary doing commercials or appearing in a movie and who stashed his or her income into a bank account. Rather than enacting a complex tracing rule, Congress chose the sweep all unearned income of minor children (after carving out a very small exception) within the rule.

But by raising the cut-off to 18, Congress now brings within the ambit of the rule a significant group of teenagers who are working and saving their money for college or other laudable pursuits. For a Congress that defends tax breaks for the wealthy by arguing that savings are "good for the economy," isn't it more than a wee bit hypocritical to penalize teen-agers who are working and setting aside funds for college? A youngster who goes to work at 14 and steps up to a higher paying job at 16 can save enough by the time he or she is 17 or 17 years and 11 months to generate more investment income than is "spared" by the limited threshold.

In other words, the justification for rejecting a tracing rule, namely, that children under 14 rarely generated investment income from saved earnings, disappears when the age cut-off is increased to 18. If Congress wants the minor child unearned income tax rate rule to apply to unearned income generated by parental and other family wealth shifts, then enact a tracing rule that spares the hard-working teenager. Whether the teen's parents are rich or poor, in other words, whether the teen is working because of economic necessity or because the teen's parents are among those very few wealthy Americans who believe it builds character to insist that a teenager hold a job, taxation ought not be based on the economic status of the parents.

Congress enacts so much inappropriate, unwise, thoughtless, and procured legislation that it would be foolish to conclude that Congress has reached a new low with this latest stunt. But how about a little truth in advertising? Years ago, when Congress passed what it called the "Tax Reduction and Simplification Act of 1978" I amused a lot of my colleagues in Washington by noting that the new law did not reduce taxes and surely did not simplify things. Rather than calling this latest bill the "Tax Increase Prevention and Reconciliation Act of 2005" Congress can fix both the year in the title and the message by renaming it the "Tax Reduction for Our Friends and Tax Hikes on Working Teens Act of 2006." Wouldn't that give the political campaign advertising folks some interesting material for November? To say nothing of a new acronym, TRA having become over-used, namely, TROFTHOWT. I particularly think the sound of TROF is most revealing.

On the way to the gym this morning I heard a report on KYW, the area's news station, that a member of Philadelphia's City Council has come up with an idea to break the logjam on a proposed bill to prohibit smoking at bars and restaurants. A similar proposal took effect in New Jersey a few weeks ago amid a whirlwind of controversy, contributing to the controversy that has overshadowed the smoking ban proposal since its introduction into City Council.

So Jack Kelly (yes, from the same family as came the princess) has introduced a bill that provides a tax break to any business that owns a liquor license and chooses to prohibit smoking. The bill would reduce the amount of business privilege tax paid by the enterprise. Under the bill, the average tax savings would be approximately $1,000.

Wow. Is this material for an essay or not?

Let's ignore the silliness of a business privilege tax in Philadelphia. Considering the business climate in Philadelphia, I'm not so sure it's a "privilege" to do business in that city. Awash in crime, filth, dirty politics, and incompetence, it's a wonder there are any businesses still operating there. Just this morning, I heard another report, that Philadelphia business icon Tastykake, is considering moving its operations out of the city.

Let's focus instead on whether it makes sense to offer incentives (translate, bribe) business owners to prohibit smoking. There are a variety of problems with the idea.

First, on the technical legal side is the question of the uniformity clause of the Pennsylvania Constitution. It is impermissible to single out one group of people for a tax break that is not generally available to others. In other words, the owner of a nightclub or a person who runs a restaurant without a liquor license have a valid complaint that they are being shortchanged on the proposed tax break.

Second, looking at the practical side of things, how many business owners would grab a $1,000 tax break if it means they lose smoking customers to a competitor? Only those who would lose less than $1,000 worth of net profits. If the flap in New Jersey over this issue is any indication, I get the sense that smokers are a disproportionately higher portion of bar patrons than they are of the population. If short television interviews with unhappy smokers are any indication, bars may be the last weather-protected venue for smokers to use because they've been banished from home, school, church, and stores. Few, if any, business owners would see the $1,000 as a sufficient financial "incentive."

Third, there is the serious tax policy question of whether tax laws should be used to manipulate people's behavior. I belong to the school of thought that taxation should be designed to cover costs, in the form of user fees, to raise revenue, and to maintain economic equilibrium by dampening economic polarization. That's why I oppose special low tax rates for capital gains an dividends, income tax credits for adopting children, and a long list of other provisions that have far more to do with social engineering than revenue collection.

Fourth, there is another, related tax policy question that deals with the scope of behaviors to be encouraged or discouraged by the tax law. If Philadelphia City Council decides to offer business privilege tax savings to selected bar and restaurant owners for prohibiting smoking, then should it or will it offer tax savings to people who stop at red lights? That is, by the way, another problem for the city. How about a tax credit to gunshops for not selling guns? Gun-related crime is a very serious, and growing, problem in the city. How about a tax credit for bars and restaurants that remove high-fat, high-cholesterol food from their menus? How about a tax credit for business owners who send gifts or visit their mothers this coming Sunday (which, for those who have forgotten, is Mother's Day)? Is smoking that much worse than running red lights and killing people? Than using guns to commit crimes and kill people? Than eating poorly and killing one's self? Than forgetting mom on Mother's Day?

Fifth, there is yet a third tax policy issue. Although most people would agree that smoking is far more harmful than beneficial, there are some who consider it necessary or at least no more a risk than other activities, such as drag racing. They point to the folks who make it to 95 and tell reporters that they had an after-dinner cigar for decades. But if tax incentives are to be used to discourage smoking, what happens when they are proposed to discourage other behaviors or activities which some people think are horrible and others find harmless or at least harmless when done in moderation? A tax credit for bars to stop serving alcohol, considering all the travails that can be traced to alcohol? What about a tax credit for refraining from gambling, which a significant number of people consider unwise, immoral, or decadent? Oh, wait, isn't Pennsylvania banking on gambling revenue to solve its tax revenue problem? Maybe a tax credit for people who do go to the planned casinos? Or perhaps for the people who would not otherwise have gone but who do so once the tax credit is made available? I guess the free roll of quarters from the casino bus tour operators isn't quite the incentive? What of tattoos? Tax incentive to get them or to refrain from getting them? Piercings? Drinking coffee and other caffeine? Eating chocolate? Should the tax law discourage these behaviors? Encourage them? Yes, I am being a bit sarcastic. Anyone who reads MauledAgain, has listened in class, scanned a listserv posting, or chatted with me knows that I think the answer is "neither." The tax law ought not be used to influence personal behavior.

For all I know, the bill will go nowhere. It was just introduced and the reaction from business owners hasn't yet made the press. In the meantime, I might propose legislation to give me a tax credit if I decide to not take up smoking, another one if I continue going to the gym, yet another if I continue to minimize the high-fat, high-cholesterol portions of my diet, and, hey, maybe another one if I decide not to acquire heavy weaponry.

How sad. It reminds me of the parents who pay their children to do what the children should learn to do because it is the right thing to do, not because it has an economic value. Paying a youngster to eat vegetables is about as sensible as paying bar owners to prohibit smoking. I know people who do the former. I'm beginning to understand why politicians do some of the unwise things they do. Perhaps they are more a reflection of society than I, or most others, care to admit. Yes, how sad.

My response to the Wall Street Journal editorial alleging that the Bush tax cuts have been disadvantageous for the wealthy has generated some interesting responses. It's not worth saying much about the claim that because the statistics come from the IRS that my analysis is wrong. My analysis addressed the editorial's interpretation of the statistics, and thus the source of the statistics is irrelevant. It's amusing to see how edgy the defenders of the unfortunately-to-be-extended special low tax rates become when the holes in their theories are exposes.

A very important observation came from Michael E. Kitces of the Pinnacle Advisory Group. His credentials are numerous and a challenge to letterhead design: MSFS, CFPR, CLU, ChFC, RHU, REBC, CASL. But I don't need to rely on his qualifications to see the sense in his contribution to the analysis. I had pointed out that comparing statistics from 2002 with statistics for 2004 was misleading, and that it would make more sense to compare 2004 with, say, 1994. Michael Kitces provided another explanation of why the 2002-2004 comparison is skewed:

I just read through your latest blog comments on the Wall Street Journal editorial (which I note I haven't had a chance to read), but in my role
for a private wealth management firm, I would note one SUBSTANTIAL difference between the typical tax burden in 2002 versus 2004: investment returns.

In 2002, clients were facing the tail end of market declines that began in 2002. MANY clients had substantial losses or loss carryforwards, and still had little or no gains to recognize. By 2004, on the other hand, the markets had rebounded 25-50% (depending on your index du jour) off the Oct. 2002 lows, and many clients had absorbed some of their capital loss carryforwards in 2003 and started recognizing real capital gains in 2004.

Even more notable is the fact that stock market rebounds disproportionately affect the sampling group. Individuals with AGI in excess of $200,000/year in 2004 were far more likely to have substantial portfolios to experience the losses-in-2002-and-gains-in-2004 scenario, relative to a lower income group that would have far fewer individuals with substantial investment portfolios.

As I wrote to Michael, this is a very important consideration. It's not that capital gain income increased from 2002 to 2004 as much as the statistics appear to say. The impact of the capital loss carryforwards cannot be overestimated.

Michael also noted: "I would certainly agree that the inflation adjustment you pointed out is highly relevant, but I believe the impact of capital gains (since the benchmark for measuring income was not EARNED income but simply AGI) might even have had MORE of an impact, particularly given the sampled 2002-2004 time period." In other words, it may be that adjusted for inflation, people with AGI in 2004 exceeding the equivalent of $200,000 in 2002 did not see an increase in the proportion of income tax liabilities.

Michael pointed out another interesting aspect of the capital loss carryforward phenomenon:

I've observed the substantial shift in tax burdens from 2002 to 2004 amongst our higher-taxable-income clients due to investment returns not only on an individual basis, but on a wider scale as well. There were several local counties in our area that were also severely impacted by the effect, as local tax revenues (calculated for many Maryland counties as a percentage of Federal AGI with minor adjustments) dried up from 1999 to 2002 as capital gains income recognition disappeared, only to find tax revenues blossoming forth again by 2004 as capital gains re-appeared on many tax returns (particularly those who have higher incomes, who are disproportionately more probable to hold large portfolios).

I am, and should be, chagrined that I didn't pick up on this, considering that I've invested a meaningful portion of my professional writing career investigating the relationship between changes in federal tax law and the impact on states of those changes. It's even more proof that the changes in tax revenue at all levels of government have less to do with shifting tax burdens from the wealthy to the middle class and more to do with other economic factors, such as interest rates, international events, and natural disasters. Incidentally, though I'll probably be having more to say later, note that the Congress has decided to provide only one year of alternative minimum tax relief to the middle class while tacking two more years onto the special low tax rates for capital gains and dividends. In other words, the AMT mess will rear its ugly head again very soon but the wealthy will sit back with a presumed four more years of special low rates. I say presumed because I can't imagine those rates surviving 2008 if control of the Congress shifts.

Finally, Michael posed a related tax and budget question to me:

PS- I just spoke with a reporter about the budget bill apparently anticipated to come out of committee tomorrow, which is rumored to be raising or eliminating the AGI limitation threshold on Roth conversions (possibly with an a-la-1998 four-year averaging provision) to encourage Roth conversion as a means to raise revenue to offset other revenue costs and keep the overall bill revenue neutral. I hope your blog will express some
comments about the wisdom or concerns of making a budget bill that is balanced over the requisite 10-year period at the cost of not actually creating revenue raisers, but merely revenue "acceleraters" at the cost of future revenues when that deferred IRA tax liability would have otherwise been paid.

This sort of revenue gerrymandering is not new. The games played by Congress with the budget and tax revenues make the NFL's capologists look like amateurs. Whether it's "robbing Peter to pay Paul" or a matter of smoke and mirrors doesn't matter. What matters is that the practice of hoodwinking people continues unabated. It's a sad reflection on the shortcomings of modern American politics and the culture that tolerates and enables these practices.

Last August, I explored the fuelishness of Hawaii's attempt to cap gasoline prices. Called stupid by some, I tried to be diplomatic and called it "ill-advised." I predicted that it would not solve the core problems.

Now comes news that Hawaii has given up on its experiment. Ironically, one reason is that the cap led to higher prices. One study showed that motorists paid almost $55 million more for gasoline than they would have without the cap. Why? The price of gasoline rose to the cap. Cap supporters claim the cap saved motorists $33 million. Yet somewhere along the line some cap-supporting legislators changed their mind. They joined with cap opponents to give the governor power to suspend the cap. She did.

Bottom line: "It was a failure." So say more than a few experts. Giving credit where credit is due, at least the legislators (or some of them) recognized the mistake and fixed it. Congress, are you paying attention? It's not impossible to fix legislative bad judgment.

Back in October I commented on the remaining vacancies in the Treasury Department after having previously analyzed the issue. I wondered why it was taking so long.

Yesterday, the President announced his intent to nominate Eric Solomon to the post of Secretary of the Treasury for Tax Policy. It has been vacant since December 2003. Finally.

I continue to wonder. Have they been unable to find anyone until now to nominate? Have they found people whom they've been unable to persuade to accept the nomination? Did the background check require two years? Did they forget that there was a vacancy? Was the "remember to fill the vacancy" reminder note lost in a pile of papers?

Former student Nakul Krishnakumar directed my attention to a Wall Street Journal editorial by Stephen Moore, "How to Soak the Rich (the George Bush Way)." Moore's message is the usual supply-side argument that cutting taxes increases tax revenue. The question is whether this counter-intuitive assertion can be proven. Nakul essentially asked that question, in a rhetorical sort of way, in his latest missive to me.

The problem with real-life proofs is that they usually don't provide the control group or placebo effect alternatives that laboratory testing permits. Even if tax revenues increase after a tax cut, there's no way to demonstrate that they would have increased even more without the tax cut, or that they would have increased less or possibly decreased in the absence of the tax cut. There's no way to go back with a "redo" in the manner researchers in the hard sciences can attempt duplication. In fact, one of the hallmarks of research in the hard science is the opportunity to replicate an experiment.

Moore drags a pile of statistics past his readers to make his point. He explains that "between 2002 and 2004, tax payments by those with adjusted gross incomes (AGI) of more than $200,000 a year, which is roughly 3% of taxpayers, increased by 19.4% -- more than double the 9.3% increase for all other taxpayers."

My response: Comparing 2002 with 2004 makes no sense. Better to compare 2004 with, say, 1994. That would highlight the impact of the rate changes.

Moore next asserts that "[b]etween 2001 and 2004 (the most recent data), the percentage of federal income taxes paid by those with $200,000 incomes and above has risen to 46.6% from 40.5%."

My response: Because the population grows and because of inflation, there will be more taxpayers and more income in the over $200,000 category. Thus, there will be more tax liability for people in that category. Better to adjust the $200,000 for inflation. Better yet to compare tax liability as a percentage of income rather than look at total taxes, which standing alone is a meaningless number. Remember that most of the folks newly joining the "over $200,000 club" aren't any better off in terms of what they can buy because they are simply walking the inflation treadmill. If the trend continues, by 2035 ninety percent of the population will be earning more than $200,000 and paying 95% of federal income taxes. Of course, bread will be $20 a loaf and gasoline $50 a gallon. Using this sort of data to defend tax cuts for the wealthy is nonsense. It works only to the extent Americans don't understand economic analysis, statistics, and tax policy. Moore claims that the reason more Americans have moved into the "over $200,000 AGI" category is the Bush tax cut, and though admitting that inflation has not been taken into account, he claims it "wouldn't alter much" the analysis. Hogwash. Adjust for inflation and there's not much left to Moore's numbers. Moore's similar point about the tax share paid by millionaires is no less flawed.

Moore continues: "In other words, out of every 100 Americans, the wealthiest three are now paying close to the same amount in taxes as the other 97 combined."

My response: It might sound so heart-breaking to say that out of every 100 Americans, the wealthiest 3 (technically, the 3 with the highest income, as wealth and income don't line up) pay as much as the other 97. But consider that the wealthiest 3 have income that is many times what the other 97 earn, and have wealth that is many many times what the other 97 earn, and it isn't the bleak thing Moore tries to make it appear. Moore's point would be well taken if the wealthiest three earned half of what the other 97 earned. That's not the case. Does it make sense for the wealthiest three to earn (or have wealth) that is 2 or 5 or 10 or 20 times that of the other 97 and pay the same amount of tax rather than 2 or 5 or 10 or 20 times the amount of tax?

Moore then turns to the main objective of his editorial, defense of the special low tax rates for capital gains and dividends. He presents statistics that explain "capital gains receipts from 2002-04 have climbed by 79% after the reduction in the tax rate from 20% to 15%. Dividend tax receipts are up 35% from 2002 to 2004, even though the
taxable rate fell from 39.6% to 15%." and relies on this data to conclude that the supply side Laffer Curve effect has been vindicated.

My response: The data on dividends and capital gains don't tell us what really matters: that more and more of the dividends and capital gains are earned by those top 3 of 100. Tax receipts are up because dividends and capital gains are up, a consequence not of tax policy but of world economics. They'll be collapsing soon as the energy disaster takes full effect, low tax rates notwithstanding.

Anticipating the argument that the wealthy pay more taxes because "they have hoarded all the income gains," Moore claims that the share of total income earned by the "richest 1%, 5% and 10% of Americans is lower today than in the last years of the Clinton administration."

My response: Is that the case if tax-exempt interest, untaxed foreign investment, and income from other "loopholes" is taken into account? Where are the statistics on the other income classes? Their incomes have fallen when adjusted for inflation.

Moore attacks the unassailable fact that the richest one-tenth of one percent of Americans received a tax cut five thousand, yes, five thousand, times the tax cut received by those earning less than $50,000. He claims that this fact "can only be true if one assumes that there were no economic benefits from the tax cuts whatsoever." He points out that the tax cuts generated increases in stock values, increases in business spending, increases in employment, increases in capital flow into the country, increases in corporate dividend payments, and increases in venture capital funding.

My response: Capital flow into the country? Is he referring to the dollars flowing to China like the water from a broken dam? Increases in employment? Is he referring to those still looking for work? Why doesn't he refer to what really has taken off? Yes, compensation for corporate executives, who justify the increases by pointing to the very same things that Moore claims are the result of tax cuts. If all of those wonderful things have happened, then perhaps Moore should be arguing that corporate executives should reduce their salaries and benefits to an inflation-adjusted 1995 amount. Even to the extent that some of what Moore claims has happened is in fact the case, the cause is the combination of federal budget deficit spending and the Federal Reserve's monetary policy.

Moore closes with a reference to tax collection data for the twelve months ending March 2006, which shows a 14.4% increase over tax collections for the twelve months ending in March of 2005. He claims this proves that the Bush tax cuts "have been among the most successful policies to soak the rich in American history."

My response: Let's see how much of the increase arises from some combination of a delay in tax payments in the spring of 2005 from March to April and an acceleration of payments in 2006 from April to March. Let's see how much of the tax collections reflects the settlement of amounts due from previous years, the closing of some international taxation loopholes, the crackdown on corporate tax shelters, and the infliction of the alternative minimum tax on more and more middle-class American taxpayers.

Take a look at Currents and Undercurrents: Changes in the Distribution of Wealth, 1989–2004, a report by Arthur B. Kennickell, Senior Economist and Project Director, Survey of Consumer Finances for the Federal Reserve Board. It's long, it's technical, it's one of a long series, and it's proof that a short editorial and a short blog post cannot do justice to a complex topic. But if simplified information is useful, the report shows that between 1989 and 2004, the percentage of the nation's wealth held by the top 1 percent grew from 30.1% to 33.4%. At the same time, the percentage of wealth held by the those in the bottom half of wealth ownership dropped from 3% to 2.5%. In fact, no matter how sliced, the top 1% got richer, and everyone else got poorer, measured in terms of proportion of wealth ownership. There's nothing wrong with short editorials and short blog posts, provided they don't distort the facts. And when they do, silence is not an appropriate response.

Addendum: No sooner had I posted this than Paul Caron's morning email with annotated TaxProf Blog posts turned my attention to the CBO's monthly budget review. It appears that some of the surge in revenues are the result of "calendar-related shifts in the timing of certain payments." What a great guess. On the revenue side, the most notable increase was in corporate income tax revenues. Could the crack-down on corporate tax shelters be a factor as I suggest? The report does not say. This sentence, though, was as reassuring of my position as it was discomforting in its implications: "In addition, growth in incomes in 2005 may have been concentrated more than expected among higher-income taxpayers,"

My colleague, Mike Carroll, who teaches contracts and intellectual property courses, has entered the world of law professor blogging. He is set up at Carrollogos, and has been at it since April 27. He's been contemplating this move for a while, and I'm delighted to see him take the plunge.

Mike has a special interest in copyright law, especially as it relates to music. He's also into music. So am I, as you'll note from my blog description. So this is very good news.

I've put a link to Carrollogos on the main page so that even as this post slips down and eventually to an archive page, you'll still find it easy to visit Mike's blog. Do that.

In my post about the good and bad in yesterday's flurry of tax news, I wrote:

Good news: The Pennsylvania Senate voted 40-9 yesterday for approval of a tax reform plan that would open property-tax rebate check relief to many more over-65 taxpayers, and that eventually would use slot-machine revenues to reduce property taxes for all homeowners.

No news (yet): The House votes on the proposal today.

I should have written "The House is expected to vote on the proposal today."

Why?

Because the House never voted! According to this report, the House Republican leadership refused to bring the proposal to a vote. I'm sure it all has to do with Parliamentary procedure and Roberts Rules of Order, but it seems to me that the essence of a democracy is free voting. So why not let the House members vote?

Apparently the Republican leadership doesn't like the proposal because "[t]he true majority in the House feels we can do more and can do better." Isn't that something for the full House to decide? If that is what the "true majority" thinks, then it can so vote. As I pointed out in yesterday's post about the proposal, it has its flaws. But it's a start. If the members of the House didn't think it was good enough, fine, but say so with a vote and not with an autocratic dictatorial decision. If one waits for perfection, one will do nothing, accomplish nothing, go nowhere, impress no one, fulfill no duties, and die as a cipher. Crafted by a bipartisan committee with unanimous approval, the bill was far better than the long parade of failed ideas tossed about in Harrisburg for the past several decades.

With the primary elections days away, it appears to be a political move. House Republicans, describing the bill as inadequate and meaningless for most of their constituents, have kept the bill's passage off the Democratic Governor's "things accomplished" list. I suppose re-election to seats in the legislature is far more important than responsible governance of the Commonwealth. Pennsylvania's track record on tax policy and tax legislation is embarrassing, and this latest maneuver does nothing to change it.

Charges are flying from Republicans, Democrats, incumbents, challengers, and everyone else with an interest in politics and taxation. The proposal, the first unanimous bipartisan report to be rejected in more than three decades, likely will not resurface. Perhaps some of its provisions will show up in another bill, but the odds are that such a bill would end up in the same place as its predecessors: nowhere.

If this is any preview of what federal tax reform efforts face, one wonders whether the open voting of democracy will ever trump the back-room power addiction and hallway gossip methods of running things. There's a phrase for legislative "leaders" who pull the plug on a legislature's right to vote: arrogant fools. Considering citizen discontent with the Pennsylvania legislature's "sneak" pay raise, per diem games, and a variety of other perks that have offended more than a few voters, the November elections could get very interesting.

Bad news: Republicans in Congress have reached an agreement to extend the special low tax rates on capital gains and dividends. The cost? $70 billion for two years (2009, 2010).

Hilarious news: This is all very meaningless if Republicans lose control of the Congress in 2008 (or even in 2006), because there is nothing that would prevent the next Congress or the one after it from eliminating the special low tax rates for poor rich investors.

Not-so-bad news: Congressional negotiators on the tax bills have agreed to reduce the number of taxpayers who otherwise would be hit by the alternative minimum tax in coming years.

More bad news: Unlike the two-year extension of the special low tax rates for capital gains and dividends, the alternative minimum tax relief would be in place for only one year. So everyone gets to go through this inefficient process yet again, very soon.

Great news: Republicans in Congress are giving up on their $100 rebate plan to placate voters unhappy with gasoline price increases. Maybe they are reading my criticisms of the rebate plan, or perhaps those who did read it are among the people sending Congress the many negative reactions it has received. The House majority leader, a Republican not in favor of the plan, explains that his constituents had spoken and "They thought it was stupid." No kidding. A spokesperson for another legislator quoted a voter: "Do you think we are prostitutes? Do you think you can buy us?" Wow, I thought I could be intemperate. Give that person a blog.

Still more bad news: Republicans by the chamber-load are claiming never to have supported the idea. I predict that by the end of the week there will be no one in the Congress who owns up to having floated or supported the idea. Why bad news? Somewhere along the way honesty got lost, and now it's being buried.

More great news: Republicans, to quote this report, are "tr[ying] instead to convince voters there was no immediate remedy for the pain at the pump." No kidding.

Good news: The Pennsylvania Senate voted 40-9 yesterday for approval of a tax reform plan that would open property-tax rebate check relief to many more over-65 taxpayers, and that eventually would use slot-machine revenues to reduce property taxes for all homeowners.

No news (yet): The House votes on the proposal today.

Yet more bad news: Most of the changes won't happen for several or more years. It is unlikely that slot-machine revenues will being flowing any sooner than 2008.

Even still more bad news: For some retired homeowners, the property tax relief is too little, and may be too late.

Worse news: The plan requires each school district to hold a referendum on the question of whether additional property tax relief should be funded through an earned income tax or an income tax. Why would anyone continue to advocate earned income taxes? Oh, wait, they're imitating the Congress.

Horrible news: The planned back-end referendum, which would permit voters to approve or reject school district spending increases exceeding the inflation rate, is so riddled with exceptions that it is for all intents and purposes useless.

Pile-on the bad news: The Governor of New Jersey, a state mired in budget deficits, has proposed a hospital tax. The tax would be a $1,424 monthly fee on each hospital bed. Let's see. If hospitals add this fee to the cost of services, health insurance premiums will rise, and some uninsured people who might otherwise cover the cost of their hospitalization will be unable to pay. Unlike most activities on which user fees are levied, getting sick is not a voluntary choice. Unlike most user fees, which transfer from a user to the provider of a service some or all of the cost of providing that service, the Governor's plan permits the state to charge a fee without providing any sort of service to the hospitals for which they are not already paying. Many hospitals assert that they would be forced to close.

A bit more good news (I think): Most states don't use New Jersey as their role model for state and local taxation and spending.

This morning I learned that the folks at Jurist are in a tight race for the award in the LAW category of the 10th Annual People's Voice Webby Award. Jurist, which is the brainchild of Bernard Hibbitts at the University of Pittsburgh School of Law, is the ONLY entry in this category which is sponsored by a law school, moderated by law faculty, and staffed by law students. They work hard and do a great job. Check out the Jurist site and you'll see what I mean.

Hopefully the fact that Jurist picked up my comments on the Social Security debate back in early 2005 and my comments on net-literacy for lawyers aren't impediments to electoral success for Jurist! Seriously, here's a chance to express an opinion without having to write a blog commentary, pen an op-ed piece, or grab a soap-box.

You can vote at the People's Voice web site. Easy to do. Voting ends on Friday, May 5. Results are announced on May 9. Good luck, Jurist.

Thanks to Albert S. Golbert for passing along this tip: If you are curious about what the federal government does with the taxes that you pay, take a look at the Where, oh where, will my money go? FEDERAL BUDGET CALCULATOR.

Remember to enter you total tax liability, not the additional amount, if any, that was due with the return. And, no, I haven't yet discovered web sites that do this with state and local taxes. If you know of any, send along the URL. Thanks.

They're at it again. Members of Congress, that is. Here come more ideas to add to the long list of "are you kidding me?" proposals to deal with the inevitable run-down of worldwide oil and gas supplies showing up in the widely-reported gasoline price increases. The latest "solutions"?

Sen. Bill Frist wants the government to send a $100 cash "rebate" to unmarried taxpayers earning less than $125,000 and married taxpayers earning less than $150,000.

From Rep. Steve Chabot comes H.R.5203, intended "[t]o amend the Internal Revenue Code of 1986 to allow individuals a credit against income tax of at least $500 to offset the cost of high 2006 gasoline and diesel fuel prices."

How does either one of these proposals do anything to increase the supply of oil and gasoline or decrease demand? If anything, these proposals mask the crisis, and lull people into thinking that there's no need to take seriously the growing chorus of warnings about the energy supply disruptions looming ahead. The rebate proposal makes even less sense because it will be sent to people who don't purchase gasoline and thus don't have any purchase price to be rebated. It also makes no sense because it would provide the same amount to someone facing $200 of additional annual gasoline costs and someone facing $500 of additional annual gasoline costs. Frankly, it appears to be nothing more than a bribe, an attempt by nervous politicians facing elections in November to win votes from an electorate they have served poorly with respect to the energy issue for quite some time. The credit proposal is worse, in terms of dollar amounts and in terms of creating another tax return "entitlement."

Notice how, once again, Congress turns to the tax law to deal with a problem. One proposal would add yet another credit to the Internal Revenue Code, but because no bill language is available at the moment, it's tough to say how complicated it would be. The other proposal uses tax return information to generate the list of those who would receive rebates, and, again without specific language available, probably will use the IRS to administer the program.

If the tax law must be used to "solve" the problem, why not attack the causes? There already exist a variety of credits in the tax law for doing things that conserve fuel and energy. Expand those provisions. How about a credit for the purchase of a bicycle, manual push-mowers (provided the gasoline mower is traded in), or even brooms (if the gasoline-powered leaf blower or snow blower is surrendered)? How about a credit of $5 for every 100 miles of reduced driving, measured by comparing 2005 mileage with 2006 mileage and verified by the odometer readings taken by states for purposes of vehicle inspections? Indeed these could be complicated provisions, but so are the rebate and credit proposals, and if there's going to be complication, it ought to be for something worthwhile that mitigates the demand for energy rather than enable the addiction, to borrow a word from the President's State of the Union speech in January.

I shared some of my other ideas in Wednesday's posting. Strange, isn't it, that politicians aren't paying much attention to it. It makes sense, but it might not win votes. [begin sarcasm]Proposals that make sense but don't win votes? That's no way to run a country, is it? [/Sarcasm over]

The recent furor over rapidly escalating gasoline prices, which has been widely reported in stories such as this one, has generated an interesting assortment of "solutions" none of which address the underlying problem and none of which will make a difference. Not surprisingly, the word "tax" pops up in many of these fanciful schemes.

The core problem is fairly simple. Gasoline is refined from crude oil. There is a finite supply of crude oil, and as the easiest-to-extract oil is rapidly exhausted, the remaining oil becomes more expensive to find and to extract. Many of the places on the globe where oil is abundant are beset by political and military unrest that interferes with the exploration, drilling, and extraction functions. There is a shortage of refinery capacity. Demand for oil and oil products is rising, in part because the economies of developing nations are shifting to oil-fueled activity and in part because the population of the planet is increasing.

None of this is or should be a surprise. I provided a lengthy analysis back in October. I even predicted that gasoline prices and related issues would be factors in the 2006 and 2008 elections. Yes, I admit, that wasn't a difficult prediction, nor have I been alone in making it.

Before looking at the proposed solutions and explaining why they won't work, I want to ask a question. Why are people angry about rising gasoline prices? I can understand worried. I can understand anxious. I can understand puzzled. But anger? My only sensible guess is that people who think they are entitled to cheap gasoline feel offended because someone, somewhere, somehow, is trampling on their entitlement right. The irony in all of this is the fact that gasoline prices in this country are cheaper than they are in most other countries, the gasoline tax is lower than it ought to be because it has not been adjusted for inflation, and the real-dollar inflation-adjusted price of gasoline is not at an all-time high. What we have here is further proof of what happens when people are spoiled and then reality crushes the pretensiveness of fantasyland.

So let's examine the "solutions" being tossed about. Do they work or are they simply soundbites with emotional appeal? These are in no particular order.

Solution number one is the imposition of a windfall profits tax. This is a counter-productive measure and there is a track record to prove that assertion. Every dollar taken in a windfall profits tax gives energy companies an excuse to invest one less dollar in exploration, drilling, extraction, or development of alternative fuels. The tax would also mean lower investment returns for pension and profit-sharing funds holding energy stock, and for retirees living on the dividends paid by energy stocks. There was a windfall profits tax in the late 70s and it is one of the reasons that today there is insufficient refinery capacity, insufficient refining reserves, and less exploration and development than there could have been. Perhaps if "profits" were defined to include a reduction for these expenditures the perception that energy company profits are "too high" would shift to something more reflective of an understanding of basic accounting.

Solution number two is to pressure Saudi Arabia to release more oil. Unless the proponents of this solution have information not available generally, Saudi Arabia not only is pumping oil at a maximum rate, it faces the prospect that one of its major fields is on the brink of "pumped almost empty" collapse. Take a look at the many discussions of this issue on The Oil Drum, a peak oil site with one of the highest signal-to-noise ratios of any public forum website I've visited.

Solution number three is to open up drilling in the Arctic National Wildlife Refuge. Even if environmental damage can be minimized, and it almost surely can be, this is the equivalent of putting a band-aid on a heavily bleeding gash. Who's to guarantee that opening up ANWR or drilling in the continental shelf areas presently closed by law will not trigger output reductions by Venezuela, Russia, Saudi Arabia or other producing countries?

Solution number four is to boycott Exxon-Mobil. This is one of the most ridiculous ideas circulating on the Internet, unless the boycotters plan to reduce their gasoline purchases rather than buy at another supplier. What happens if no one goes to Exxon-Mobil stations? They go to other stations, those stations raise prices because demand at their sites has increased, they purchase the gasoline that Exxon-Mobil has available, and prices go up even more. When I read things such as the "boycott Exxon-Mobil" proposal it causes me to wonder not only about the widespread ignorance of economic theory prevalent among the citizenry, caused, of course, by deficiencies in high school and undergraduate education systems, as discussed in this previous post, but also about the dangers inherent in a democracy that theoretically permits a population to vote for policies that constitute national suicide.

Solution number five is a proposal to increase competition in the oil and gas industries. Legislation to this effect has already been introduced in the Congress. The end result, I suppose, would be the dismantling of large energy companies. We would be left with many small energy companies. Could these companies bring sufficient resources to explore and develop high-cost deep-sea fields, which are one of the last frontiers in the search for conventional oil sources? I don't know. Years ago, it was decided to break up AT&T. What happened? It has re-emerged.

Solution number five is a proposal to authorize an FTC investigation to determine if there has been price gouging and price fixing. This is a recycled idea. None of the previous investigations turned up any evidence of price fixing. I doubt this one would. Gasoline stations operate on a narrow margin. The truck arrives, drops its load into the tanks, and gives the owner an invoice. The owner looks at the price, figures out the fixed costs of running the station, and increases the retail price. If asked why the price increased, the wholesaler points to the mandated use of more expensive ethanol, the costs of cleaning tanks and tankers so that the ethanol, which is highly prone to water and dirt absorption, is not fouled. And no matter the outcome, these investigations would do nothing to increase supply or reduce demand, or to generate production of alternative fuels. Nonetheless, the President has ordered the investigation to proceed.

Solution number six is to take oil out of the Strategic Reserve. Here's another absurd idea. There's a saying among farmers, probably lost in a post-modern world in which too many people think food is "made" at the grocery store: "don't eat the seed corn." What's the point of exhausting the reserve when doing so might reduce prices by a penny or two per gallon for a short period of time? Other than, of course, getting attention for the politicians who spout this nonsense. Perhaps this is why the President has ordered a suspension in replenishment deposits to the Reserve, a move that does little to affect the supply, does nothing to reduce demand, and will do nothing to affect prices. Yes, it looks good. So does a painted-over rusty pipe.

Solution number seven is to suspend the gasoline tax. Yes, yes, finally, it's a tax issue. I've explained the counter-productivity of this idea so many times that I will simply point to my previous posts on the subject: September 2005, March 2005, another one from March 2005, May 2004, and March 2004.

Solution number eight is to cap sales taxes on gasoline, a proposal already underway in New York. Yes, another tax matter. This one is interesting. If gasoline prices rise 50 percent, the sales tax increases by 50%, creating windfall revenue for the state. Holding the sales tax at the amount payable on the lower, pre-increase, price would not deprive the state of tax revenue as would a suspension of a fixed gasoline tax. Of course, this solution only works in states that have a percentage-based sales tax on gasoline. My guess is that because it involves a few cents, it won't cool down the anger that many drivers are feeling about gasoline prices.

Solution number nine is to require auto-makers to manufacture fuel-efficient vehicles and alternative fuels vehicles. This is a wonderful idea, ten years ago. It might make things easier ten years from now, when gasoline is at $23 per gallon. As a short-term solution, it is useless. As a long-term solution, better late than never. Of course, where are the almost-bankrupt American automobile manufacturers going to get the capital to invest in making these changes?

Solution number ten is to repeal the recently-enacted tax breaks for energy companies. This is an appropriate thing to do because these companies don't need tax breaks. So it should be done. But let's not fool ourselves into thinking that it has any effect on supply, demand, or price.

Solution number eleven is to temporarily set aside EPA requirements, presumably to mitigate the impact of the switchover to ethanol. This action, already ordered by the President, will alleviate the spot shortage problem, but won't do much to change the price. It's a stop-gap and a band-aid. And, of course, it means somewhat dirtier air.

If it seems as though there is no easy solution, that's because there isn't. I'm not alone in reaching this conclusion. Folks posting at the Oil Drum have been pointing this out for quite some time. And at least one politician, Representative Bob Beauprez, even so stated, a remarkably honest and courageous but politically risky comment.

Why is it risky? Americans don't want to hear bad news. Perhaps that's why Americans are angry. Deep down they know that upheaval looms. It will not be life as usual. Gasoline prices, like oil prices, are not going to return to 1995 levels. Or 2002 levels. They are going up, up, and away. When one considers the changes that must be made, it's no wonder many Americans are distressed, frustrated, scared, and thus, yes, angry.

What are those changes? In other words, what are the near-term solutions? Forget about hydrogen cars available in 2012, or some alternative fuel developed for production in 2015. Forget about coal-to-liquids that might be feasible by 2014. Focus on 2006. On 2007.

Let's start with the easy ones. The ones many people don't do because they don't think of it, don't have time, are too lazy, or otherwise don't think it matters. Perhaps if people understand that the fewer easy steps that are done the sooner the more difficult steps will be compelled, they will pay attention to these things.

First, cut back on speed. I'm not talking the 40 mph on an Interstate nonsense or the people doing 50 in the left lane of a 65 mph highway. I'm talking speeds of 60, 65, 70. Yes, at 65 and 70 fuel economy generally is not the best for many vehicles. I'm talking about the clowns who go by at 80, 85, 90, not on wide open western highways but on urban freeways. Not only are they a safety menace, they are squandering a scarce resource. For what? To go 15 miles in 42 fewer seconds? And where are the highway troopers? Is there a shortage of police? A shortage of radar? Huh?

Second, properly inflate tires. Easily done, though I do know more than a few people who do not know how. Sad. Here's another "subject" that should be taught in high school. The 10-minute, no-credit course.

Third, keep the car engine properly tuned. Most vehicles have sufficient warning lights and other indicators to alert the driver that something is wrong or that it's time for maintenance. With gasoline prices at $3 a gallon and headed higher, the cost of the maintenance will pay for itself.

Fourth, fix traffic signals so that they are fuel-efficient. What's the point of stopping traffic when there is no cross-traffic? What's the point of stopping traffic when the vehicle that triggered the "turn the light" sensor has already made a right turn on red and is no longer in need of a turn in the light? What's the point of programming a light to stay green for at least 90 seconds when there is no traffic needing the green and there are cars sitting at red lights? Remember, most vehicles get 20 to 30 miles per gallon when they are moving. The reason many vehicles get overall mileage ratings of 16 or 18 or 22 is because EVERY VEHICLE GETS ZERO MILES PER GALLON when sitting at a red light.

Fifth, combine errands. Eliminate the impulse, one-item rush to the store trip.

Sixth, let the children ride bicycles to soccer practice, and to school. Walk where possible. This will require installation of sidewalks and bike paths in places that are dangerous for bikers and walkers, but let's get it done.

Seventh, use manual lawn mowers instead of gasoline-powered machines. Use brooms, not gasoline-powered leaf blowers, to clear leaves from driveways. Use snow shovels, not snow blowers. And welcome the beneficial side effects of exercise, weight loss, and the good feeling that comes from natural endorphins.

Eighth, turn up the thermostat when using air conditioning and turn it down when using heat. The savings in natural gas and electricity consumption will translate to lower oil prices.

Ninth, for those understandably upset with the huge amounts of compensation, pension, and severance payments made to energy company executives, write to Congress and urge it to pressure the IRS to enforce the "reasonable" part of the restriction on business expense deductions for compensation. I wonder if the amounts being paid will change if they are not fully deductible. Of course, this isn't going to make a difference in supply, demand or price, because the compensation of Exxon-Mobil's CEO, apportioned over the gallons of gasoline it sells, is a fraction of a penny.

So these are the things that can be done in the short-term, without the need for legislation, government investigations, or other "let someone else fix it" approaches to the problem. There's a very good analysis of these and some not-so-short-term lifestyle changes (such as moving closer to work) that's well worth the read.

I conclude with a challenge toward those who think that windfall profits taxes on energy companies is the answer. Are you willing to apply the tax to all companies? Will the measure be profit percentage? In 2005, Exxon-Mobil earned a whopping 36.1 billion dollars of profits on 328.2 billion dollars of revenue, for a net profit margin of 11%, as reported by MSN Money Central. By comparison, also according to MSN Money Central reports, Microsoft earned a "mere" 13.1 billion dollars of profits on 41.4 billion dollars of revenue, for a, yes, 31.6% net profit margin. Folks are upset about a company earning 11 cents on the dollar, while another company earns 31 cents per dollar? The irony is that the gasoline supplied by Exxon-Mobil almost always works as promised. The stuff supplied by Microsoft is buggy, security-deficient, poorly planned, and poor in quality. Does Microsoft escape scrutiny because it "buries" the cost of its product in the cost of a computer? Maybe Exxon-Mobil ought to work out an arrangement with the car dealers: buy a car, gasoline comes with it. The cost? Oh, an additional $7,000. Clever, no? Note that Microsoft is not the only non-energy company hauling in profits at rates multiple the Exxon-Mobil rate. Microsoft, though, is a good counterpoint because it's big, it's intrusive, and its products are far from excellent. So why are people yelling about Exxon-Mobil and the other energy companies and saying so little about Microsoft? Are the folks who want to break up the half-dozen large oil companies that dominate the domestic gasoline market willing to break up the only large software company that dominates, no, totally controls, the domestic software market?

What a marvelous test of consistency, logic, and common sense. It will be interesting to watch this story develop. Trust me, it's still in the first chapter, and it's going to get much, much worse.

Oh, and just to add fuel to the fire (ha), let me propose another way to reduce demand. It's one of my favorites. Impose a user fee on energy users for the cost of using the energy. Translated, increase the gasoline tax to reflect inflation since the last time it was increased. Then let the market adjust. Otherwise, it won't be too long before there is rationing, empty gasoline stations, stranded motorists, and chaos to make the crisis of the late 70s look like a mere warm-up.

A little more than a year ago I shared an analysis of the tax consequences of home makeovers experienced by families whose applications were accepted by one of the several network television home remodeling and reconstruction shows. Some of my arguments were responses to contrary or alternative analyses offered by subscribers to the ABA-TAX listserv. Two days later I posted a follow-up to respond to questions posed directly to me by a nearby CPA.

Here's the gist of what I concluded: The recipients have gross income because (1) it is income, (2) no exclusion, including the section 102 gift, and section 280A(g) de minimis rental, and section 109 leasehold improvement exclusions, applies, and (3) it is a prize, the value of which is expressly included in gross income under section 74. I noted that it was unlikely the networks would pass up a substantial advertising expense deduction in order to preserve a gift exclusion for the recipients even if the networks could bring about such an outcome. I also noted that it would not be all that surprising if the IRS pursued the tax issues with the recipients, especially if the networks issued Forms 1099 and the IRS computers detected a mismatch. I also predicted that "politicians, especially the 'eliminate the IRS' crowd, would jump all over this" issue.

Thanks to Paul Caron's TaxProf Blog, I've become aware that the IRS recently released a September 2005 letter it had written to Representative Marsha Blackburn in response to her inquiry about the issue. The letter's release comes months after its transmittal because of the process required to delete taxpayer identities and other information.

It seems that a constituent of Rep. Blackburn wrote to inform her that the network producers were telling the makeover recipients that the value of the improvements and the cash paid by the networks are excludible under section 280A(g) and to request that Congress "close this loophole." Rep. Blackburn, as members of Congress often do in these instances, wrote to the IRS asking for an explanation.

The IRS response is a more succinct version of what I posted back in March of 2005. The letter states:

Section 61 of the Code provides that, except as otherwise provided by the Code, gross income means all income from whatever source derived.

Section 74(a) of the Code specifically provides that gross income (as generally defined in section 61) includes amounts received as prizes and awards. Under section 1.74-1 of the Income Tax Regulations, prizes and awards includible in gross income include, but are not limited to, amounts received from radio and television giveaway shows.

Section 280A(g) of the Code provides, in part, that if a d welling unit is used during the year by the taxpayer as a residence and is actually rented for less than 15 days during the taxable year, then the income from such rental is excluded from the taxpayer’s gross income.

To the extent that the value of the improvements constitutes a prize or an award, however, it cannot also be considered rent, and therefore could not qualify for the exclusion from gross income under section 280A(g) of the Code.

What the IRS did not ask is how the transaction could be anything other than a prize, as I pointed out in my earlier post. Nor did the IRS disclose if it has audited any taxpayers on this transaction, though it did point out in the letter that it is prohibited by law from disclosing that sort of information.

The temptation to gloat is real, but I'm trying to shove it aside. I'm more concerned about the bad tax advice that network producers are giving to the prize winners. Actually, I'm even more concerned about the bad tax advice the network producers' attorneys or other advisers are giving to them and, directly or indirectly, to the prize winners. If the networks want kudos for doing the wonderful things they are doing for the folks in need of home makeovers, they should be thorough and make certain that the winners have sufficient cash with which to pay the federal and state income tax liability arising from the prize. Anything less would make the seemingly marvelous gesture somewhat hollow.

And here's a wish that none of the folks telling the winners that they have no gross income are former students of mine. Maybe they're graduates of law schools higher in the U.S. News rankings and next year adjustments will be made to reflect this impact on law school reputation? Yes, that was sarcastic, it was intended, but in light of Friday's post too difficult a jibe to resist.