MauledAgain

In his Philadelphia Inquirer column this morning, Andy Cassel draws our attention to some significant flaws in the way the nation measures inflation. He explains how the Consumer Price Index (CPI) tracks the cost of an "imaginary basket" of consumer goods purchased by a hypothetical family. He describes a significant criticism, the inclusion of highly volatile items such as food and energy in the CPI basket, a criticism that leads to computation of a "core" CPI that does not include the volatile items. But leaving out energy, for example, is itself misleading. Andy also discusses the use of rent increases to interpolate the housing cost component of the CPI, even though renters constitute only 30 percent of occupied residential housing.

Although this pretty much was not news to me, what was news is Andy's reference to a change made five years ago by the Federal Reserve when it comes to estimating inflation. Instead of using the CPI, the Fed is using something called the Personal Consumption Expenditure Index (PCEI). Similar to the CPI, it includes different data, is computed differently, and is published by a different federal agency. Is it any wonder that measuring inflation isn't as easy as measuring the height of a basketball net?

In his column, Andy mentions what most of us know, that the CPI is used to adjust a variety of economic measures. For example, cost-of-living increases in wages reflect CPI. Many contracts have CPI adjustments drafted into their language, to protect contractors, suppliers, dealers, and brokers, to name a few, from surges in the cost of materials and services.

One major use of the CPI that Andy did not mention, but which immediately popped into my head, is the annual change in a long list of federal income tax amounts. A short list of examples demonstrates the pervasiveness of CPI adjustments in the tax law: the tax brackets in the tax rate schedules, the standard deduction, the personal and dependency deduction amounts, the additional standard deductions, the increase in the earned income cap for computation of a dependent's standard deduction, the threshold at which personal exemptions and itemized deductions begin to phase out, several components of the earned income tax credit, and a variety of other thresholds and limitations. It's not just the income tax that is affected. The wage limit for computation of the OASDI portion of social security also reflects a CPI adjustment. In the gift tax arena, the annual exclusion is adjusted to reflect CPI changes.

When Andy asks, near the end of his column, if "that small difference [between the CPI and the PCEI] matters," he is asking a question that goes far beyond the impact of inflation forecasting on what the Fed does with the funds rate (which in turn affects a variety of interest rates). Suppose someone could demonstrate that using CPI rather than PCEI to adjust tax amounts distorts revenue. Perhaps an economist with access to the appropriate modeling software could run some numbers showing what tax revenue would have been had PCEI been used. Because use of the CPI is dictated by the Internal Revenue Code, any change would need to be made by Congress and not the IRS. As this difference between CPI and PCEI which Andy spotlighted this morning gets more attention, it will be interesting to watch the Congress as it struggles with a need for more revenue and a desire to cut taxes. My prediction is that the current Congress will not change from the CPI even if it is demonstrated beyond reasonable doubt that CPI is less accurate and generates more revenue distortion.

My musings a few weeks ago on "The Law School Curriculum: Ready for a Change?" brought a comment from a CPA practicing in Southern California. A self-described regular reader of MauledAgain, she asked a very sensible question about accomplishing the goal of plugging law students into the realities of transactionally-focused law practice. She asked whether law professors could collaborate and team teach courses with practitioners.

Although team teaching is far from prevalent in law schools, it has happened. Sometimes it works well, sometimes it's adequate, and occasionally it's a disaster.

The advantages of team teaching are numerous, particularly if a practitioner matches up with a full-time academic. The latter brings a sense of pacing, coverage, pedagogy, and an understanding of the context in which the students must arrange their study schedules. The practitioner brings knowledge of current problems in practice, the stuff of which next decade's appellate cases will be made. The practitioner understands the realities of client needs, client reactions, client demands, and client noncompliance. If the personalities and styles of the two teachers blend, the course can be significantly superior to what it otherwise would be. The Villanova Graduate Tax Program has used, and continues to use, team teaching, and it works well. It works well because it's done well, reflecting the careful thought that goes into the selection of the faculty for the Program.

The disadvantages of team teaching are far fewer. The institution needs to come up with additional adjunct faculty stipends, but considering the pittance that is offered by most law schools, adding several practitioners as team teachers will not break the bank. The teachers need to invest time co-ordinating the syllabus, divvying up primary responsibility for the many tasks that must be tackled for the course to be well-prepared, and to discuss in advance how they will hand the ball back and forth. Team teaching does not work quite as well if one person teaches half the classes alone and the other teaches the remaining classes alone. The dynamic of their interaction is a principal source of the additional value added by team teaching.

I've not done a thorough study of law school team teaching. Perhaps someone else has, but I'm not aware of it. What I have are a collection of anecdotal tales about team teaching, along with my own experiences.

My team teaching experiences come from two perspectives. I have been a student in a team-taught course and I have attended team-taught CLE programs. I have team-taught law school and Graduate Tax courses. I have team-taught CLE courses.

From the teaching side of the podium, the experience has been almost uniformly excellent. Having a savvy practitioner or a full-time academic expert in another area of the law contributing to the discussion is not only valuable for the students, but a marvelous enhancement of my own understanding of the subject matter and its application to client realities.

From the student side of the podium, my experience has been mixed. I've attended CLE programs where the concept of "team teaching" simply meant the first instructor did something and then the second instructor did something, creating something almost identical to a sequence of separate topics. I've also attended CLE programs where the panel interacted dynamically, enriching the participants' understanding and making the learning fun in some respects. My one experience as a student in a team-taught academic course was terrible. Each of the two instructors seemed intent on proving that he was more knowledgeable than the other, and by the second class they were arguing with each other in a manner that distracted from the learning goals. By the fourth class, one had left and the other finished the course. I suspect that there was little planning, that the selection of the faculty did not take into account personality and style, and that there was some baggage from some earlier encounters.

Though I can't speak for other law schools, the use of team teaching at Villanova has increased a bit during the last decade. It certainly isn't discouraged by the Administration. The onus is on the faculty to develop team-taught courses, which has happened. Faculty have the option of proposing to invite another member of the faculty or a practitioner to join them in teaching a course, though it is clear to all of us that the full-time academic remains responsible for the course under those circumstances. There have been a few instances in which the Administration has asked a full-time member of the faculty to collaborate with an adjunct teaching in a highly specialized area, creating a technically team-taught course but seeking to have the academic mentor the practitioner for a year or two before the practitioner then flies solo with the course.

The point of this discussion isn't just a brief analysis of team teaching. It's also to emphasize the need for creative thinking about how law schools "deliver their product" to their students. Anything that increases the students' chances of successfully caring for his or her clients deserves at least a try. Law practice is changing, life is changing, and law schools are beginning to realize that they, too, must change. Even Harvard, which is what prompted the posting to which this is a followup.

Thinking about Memorial Day has me thinking about war, helped along by a steady dose of war movies on some of the cable channels this weekend. More specifically, after seeing a few scenes in which decision makers debate the allocation of scarce resources (e.g., aircraft carriers or battleships?), and knowing the bits and pieces I know about the impact of war on taxation, I began to think about the relationship between war and taxation.

Wars consume resources. Wars divert resources. In other words, wars cost money. Wars destroy lives. A life lost is immeasurable, yet economists, lawyers, and juries put price tags on lives, however lost. It is not good for an economy, or for taxation, for lives to end prematurely.

Wars often are fought about resources. Oh, supposedly the Greeks and Trojans had at it because of a woman's beauty, but I suppose in their culture a woman's beauty (or perhaps a woman) was a resource. Here and there wars are fought because of pride. But most wars are about resources. England and Spain, in the sixteenth and seventeenth century, fought over gold and other valuables from the Western Hemisphere. Wars have been fought over fishing rights, water, and trade routes. In the 1930s, Germany wanted "living space," Japan wanted oil and rubber, and the world ended up with war. The Revolutionary War was fought over control of resources and trafficking in resources, some of it manifesting itself in complaints about taxation. The many wars fought over religion almost always disguise a battle for resources, especially when the souls of people are considered a resource, something that a few folks think they can own and control.

The irony, and stupidity, of war is that it often destroys the very resource over which it is being fought. How many barrels of oil, pounds of rubber, or piles of gold have ended up burned, ruined, or at the bottom of the ocean because of war? How many tax revenue dollars end up in materiel that is destroyed, deliberately exploded, or consigned to the scrap heap?

War, though stupid, tragic, and an indictment of a species that dares call itself "sapiens sapiens," unfortunately is necessary when there is no other recourse and the cost of no war, particularly in lives, is greater. War is the consequence of decisions, decisions that require the utmost care and consideration. One of the most important questions, aside from "should it be done?" and "can it be done?" is "how will it be done?" All three questions are tangled together, for if it cannot or ought not be done, there's no point in asking how, yet seeking the answer to "how will it be done?" might answer the question of "can it be done?" and "should it be done?"

War is such a collective expression of the ultimate essence of life and death that it ought not be undertaken half-heartedly, experimentally, impetuously, or foolishly. War requires commitment, and without it there ought not be war. War requires resources, and without a commitment to expend those resources, it ought not be undertaken.

The last half-century has brought a concept of "limited war," a buzz phrase that I think is more about the commitment side than the implementation side. True, in a world with nuclear weapons, a war fought without their use is in some way "limited," but I doubt that the victims of every other sort of weapon, including those that cause entire cities to burn, find much comfort in the notion of "limited" war. The concept of "limited war" is like the concept of "limited pregnancy," whatever that means.

The resource commitment problem with "limited war" is significant. The notion that a country can fight a war without general sacrifice of resources is mind-boggling. Our nation is at war. War has been declared on our nation, not by some relatively harmless but disturbed individual, but by an organization and movement that presents a genuine threat while changing the rules of war. Yet too many of us continue to think that war is something going on somewhere else, fought by others, and beamed into our homes by all sorts of spontaneous communications technology. But for that technology, the funerals of fallen heroes, and the fact today is a day we are reminded to stop and meditate on these matters, one might not know that a war, a global war, is underway. Televisions can be turned off, few visit the maimed veterans undergoing treatment at military hospitals here and abroad, and life pretty much goes on as it otherwise would.

I wasn't around during the last full-fledged, unlimited global conflict. Yet I've listened to as many tales as were shared with me by those alive at the time as I could find, and I've read and watched a lot. So I've heard and read about rationing, double shifts, postponed plans, substituted products, and sacrifice. Every tax practitioner, and every citizen, should understand that during World War Two income tax rates skyrocketed, wage withholding was introduced, and the entire revenue-expenditure structure was altered. War hung as a cloud over every life, and over every dollar. Is that good? I think so. Why? Because war is so serious and so terminal a course of action that it should not be permitted to recede to the background.

Yet the current global war has not been managed in the same manner. Politicians have chosen to fight without increasing revenue, imposing rationing, or deferring projects and activities. In their defense, they argue that none of these things are necessary, that a nation can have its guns without giving up its butter. I disagree, and I happen to think that politicians are reluctant to do what needs to be done because they are more concerned about maintaining their position in office than in making the tough decisions that war requires. So our national leaders have chosen to put the cost of the current war on our children and grandchildren. Those who decry the huge deficits, triggered in part by war and in part by the almost insane concept of decreasing tax revenues (mostly for the wealthy) during wartime, pretty much focus on the economic impact. They ask if, or suggest that, our grandchildren will be facing income tax rates of 80 percent in order to reduce an unmanageable deficit. I think it will be worse. I think our children and their children and grandchildren will become subservient to our nation's creditors. The sovereignty of the United States of America is far from guaranteed, and is at risk. Were these considerations discussed when those in power decided that war can be done on the cheap?

War cannot be done on the cheap. War is not free. War ought not be purchased on a credit card. War is a national commitment. Hiding the true cost of war in order to influence a nation's willingness to engage in war is wrong. Ultimately, the price to be paid will be dangerously high.

Let us not forget those who have paid the price, with their lives. Some have died. Others have been maimed and their lives will not be what they once were or what they would have been. Many have been psychologically scarred. Some are disillusioned. Bitterness, anger, and resentment percolate among those who fight and those who continue with their lives as though there were no war. It is tragic that some of the deaths and injuries have occurred because of insufficient resources for the appropriate armor and equipment. War should not be managed by the corporate cost-cutter types.

To all those who have served, and who serve, I and every other citizen owe thanks. Here it is. Thank you. Now let us go and do what needs to be done to put meaning into those words. Let us make a collective investment in our appreciation, and provide the full revenue support that is required for whatever it is the nation decides to do.

Round and round we go. It spins and spins. Why?

Back in May of 2004, in a Memorial Day post that focused on the relationship between gasoline and war, I noted that "The reason oil prices are rising is primarily the increased demand from China. Back we go to Economics 101. Demand rises, and prices follow." Later, in August of 2005, I returned to the issue and repeated what I had written in an earlier May 2004 post titled "Gasoline Prices":

Supply and demand is easy. If demand goes up, or supply goes down, or both, prices go up. That's Economics 101, which ought to be taught in high school, and perhaps it is, here and there. Demand is going up at a phenomenal rate, on a global basis, particularly because China is growing and its need for energy is skyrocketing. Total miles driven by Americans has increased at rates far beyond the rate of increase in the population. Supply has been decreased, but will be tweaked up a bit in the near future, for a complex array of economic and political reasons.

I have previously discussed the rather sorry condition of Americans' understanding of economics.

So when gasoline prices skyrocketed after Katrina took numerous refineries off-line, many Americans reacted to those prices not with a calmly reasoned exploration of the laws of supply and demand and the alternatives to solving an increasingly serious energy problem, but with emotional cries of price gouging and market manipulation. Politicians, never failing to grab an opportunity to find the spotlight and rustle up some votes, decided that the price gouging allegations deserved a full-fledged investigation. Congress ordered the Federal Trade Commission (FTC) to examine the evidence.

Nine months after the catastrophe in the Gulf States, the FTC issued its report. The conclusions?

On the price gouging assertions, the FTC analyzed financial data for 77 establishments (30 refiners, 23 wholesalers, and 24 single-location retailers) and determined that 15 (7 refiners, 2 wholesalers and 6 retailers) "had higher average gasoline prices in September 2005 compared to August," that "these higher prices were not substantially attributable to either higher costs or to national or international market trends," but that "additional analyses showed that other factors, such as regional or local market trends, appeared to explain the pricing of these firms in nearly all cases."

On the market manipulation assertions, the FTC found

* No evidence to suggest that refiners manipulated prices through any means, including running their refineries below full productive capacity to restrict supply, altering their refinery output to produce less gasoline, or diverting gasoline from markets in the United States to less lucrative foreign markets. The evidence indicated that these firms produced as much gasoline as they economically could, using computer models to determine their most profitable slate of products.

* No evidence to suggest that refinery expansion decisions over the past 20 years resulted from either unilateral or coordinated attempts to manipulate prices. Rather, the pace of capacity growth resulted from competitive market forces.

* No evidence to suggest that petroleum pipeline companies made rate or expansion decisions in order to manipulate gasoline prices.

* No evidence to suggest that oil companies reduced inventory to increase or manipulate prices or exacerbate the effects of price spikes generally, or due to hurricane-related supply disruptions in particular. Inventory levels have declined, but the decline represents a decades-long trend to lower costs that is consistent with other manufacturing industries. In setting inventory levels, companies try to plan for unexpected supply disruptions by examining supply needs from past disruptions.

* No situations that might allow one firm – or a small collusive group – to manipulate gasoline futures prices by using storage assets to restrict gasoline movements into New York Harbor, the key delivery point for gasoline futures contracts.

The FTC determined that the impact of Katrina on refinery output and pipeline capacity and the continued demand for gasoline in spite of higher prices generated "post-hurricane gasoline price increases at the national and regional levels [that] were approximately what would be predicted by the standard supply-and-demand model of a market performing competitively.

There doesn't seem to be any available information on the cost, in dollars or diverted FTC staff hours, of researching these issues and preparing the report. The FTC has a long list of tasks, most of which are more important than once again disproving the allegations of price gouging and market manipulation that are tossed about the moment people discover that they cannot get what they want for free or for an artificially deflated price. I wonder if Congress will direct a federal agency to divert funds and staff time into a special investigation the next time someone complains that a conspiracy is trying to discredit the flatness of the earth.

Yet, according to this report, despite the FTC's findings, the attorney general of Connecticut claimed, "Our evidence and common sense suggest a vastly different picture of unconscionable profiteering by Big Oil." What evidence? Was it presented to the FTC? Was there anything different from what happens if news reaches retailers that a fire has destroyed a Bobble-Head factory? Prices of Bobble-Heads go up. There is no reason to require people to sell products for pennies more than they paid for the product. If circumstances cause the value of an item to increase, the owner has every right to sell it for its value. Some of the same people who scream about price gouging were more than happy to up the asking prices for their homes, as were all the other people marketing their properties, during the housing boom of the past few years. Would they be happy to find themselves the object of a price gouging investigation triggered by complaints from people who had been priced out of the housing market? Hardly.

What's at work here is the all too common approach of demanding and excusing high prices for what one owns and sells while insisting on low prices for what one wishes to buy. That's the market. People are free to buy and sell and negotiate price. What's also at work, that is objectionable, is the whining to the politicians to "do something" when the market plays out as it ought to play out. If Congress wants to do something useful, it could required that Economics 101 and Household Budgeting 101 be taught in the nation's school systems. There's a risk, of course, that having taken such courses, Americans would then turn their newly-acquired economic analysis skills to what Congress does with the nation's economy and budget.

So what does a gubernatorial candidate do in Pennsylvania to respond to the public pressure for tax reform, something the state's politicians have been unable to deliver for decades? Why, toss out a plan. Better yet, toss out a plan that has something good for everyone and something bad for those not yet in the game.

According to a story in this morning's Philadelphia Inquirer, Lynn Swann, the Republican candidate for governor, has proposed tax reform the principal feature of which is "tax reductions for everyone." It also includes a uniform property tax rate for each county in lieu of the current system under which the county, the township (or borough), and the school district each impose property tax at a rate each jurisdiction determines. Swann's plan would limit annual property tax increases by localities and school districts to 3 percent, but tied to a complex formula that tracks school employee salaries. The property tax would be imposed, not on the value of real estate, but on the value it had when it was last sold. Thus, when a house is purchased, the new owners' taxes could be anywhere from 2 to 10 times what the sellers were paying. Asked to explain how the revenue shortfall would be made up, Swann pointed to the state's general fund surplus, savings from consolidating school district employee health plans, and, the old chestnut, slot machine revenues.

The only thing that is right about Swann's plan is the value to a politician of promising everything to everybody. Many tax-unwise voters will give a good reception to Swann's siren song. Swann, a former Pittsburgh Steeler wide receiver, is accustomed to playing to the crowds. Back then, he was getting good coaching. This time around, he's not.

The general fund surplus is an unpredictable phenomenon. Just because there is one this year doesn't mean there will be one next year or the following year. Then what does Swann do under his plan? Cut spending? Increase taxes? Unlike the federal government, the state can't print money and it can't adjust interest rates.

I don't know if there are savings in consolidating school health plans. If there are, they surely are insignificant. Consolidating those plans does not change the number of people who are getting sick or in need of medical care, nor does it change the cost of medical equipment, prescription drugs, or medical care generally. At best, it's a gadget play. Or should I say, gadget ploy.

So that leaves slot machine revenues. Everyone's tax reform plan in Pennsylvania counts on slot machine revenues. Perhaps these will exist someday, if the legislature ever gets around to granting licenses. But they aren't doing that because they're fighting over who gets the revenue.

The idea of locking assessments in at the sale price of real property is silly. It shifts the tax burden to home buyers. The market being what it is, home buyers will look for homes, and jobs, in Delaware, New Jersey, and other nearby states. Employers will follow. It's a recipe for economic downturn. After years of litigation to compel tax authorities to comply with the requirement that property taxes be levied based on market value, along comes Swann's retro policy. Back to the past. A similar approach in California has been anything but successful. Did Swann not notice that the Pittsburgh Steelers did not achieve glory by imitating failure?

Limiting tax increases to 3 percent per year means limiting school expenditures to annual increases of 3 percent. If the number of students in a district increases from 1,000 to 1,040, are the last 10 turned away? If the number of special education students increases by a handful, does the district stop purchasing books? Stop buying fuel for school busses? Terminate other programs? Hmmm. Maybe they'd need to shut down their football operations. During the past few years, school district costs have been increasing at almost 6 percent per year, in part because of state-mandated expenditures. Swann's cap pretty much would end all school construction, rehabilitation and expansion.

One observer called Swann's plan "thinking outside the box." That over-used phrase covers too many mistakes. Has the child who adds 3 plus 4 and answers 8 to be earned an A because she is "thinking outside the box." Some boxes ought not be vacated.

After reading this nonsense, I wondered if Swann had been tackled a few too times too many. Aside from the fact he brings nothing to the table other than having been a great NFL player, a sportscaster, and a motivational speaker, there's nothing in his biography to suggest he has even an inkling about taxation, public finance, or the other realities of governing a state. He knows how to give a good speech. Talk, however, is cheap. So, too, is Swann's tax plan.

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:

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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.