MauledAgain

Julian Block has written yet another book. This time, it's "Ultimate Tax-Saving Resource '08." Like his three books in 2006, reviewed in Tax and Relationships: A Book to Read and Give, A New Book on Taxation of Residence Sales: Don't Leave Home Without It , and A Tax Advice Book for People Who Write and Illustrate Books, and the one from 2007, reviewed in Another Tax Book for Tax and Non-Tax People to Read, this latest volume is ideal for taxpayers who want to understand taxes and their tax advisors without sitting through an LL.M. (Taxation) or M.T. program. Too often, tax practitioners rattle through Code sections and arcane tax language when answering client questions or mapping out tax planning strategies. Too often, to make the explanations comprehensible to the client, the practitioner needs to provide a condensed introduction to taxation course while the client anxiously glances at the professional's billing clock. This book would make a nice handout for practitioners to bestow on their clients. Perhaps when they see in print many of the same things their advisors keep telling them to do, clients will be more likely to keep good records, think about taxes throughout the year, and keep their tax attorneys, tax accountants, and tax return preparers informed of changes in the client's life.

Ultimate Tax-Saving Resource '08 is a hefty edition, exceeding 400 pages. The book is packed full of explanations, tips, warnings, examples, and other resources. Rather than looking at each topic in detail, I've selected the segments that particularly resonated. That's not to say the rest of the book is any less helpful or worthwhile.

The first chapter makes a good first impression. Julian begins with an important point, typically overlooked by all those folks who think federal income taxes are on stage during early April and in the wings the rest of the time. In "Year-End Tax Tips," Julian goes through the decisions and transactions that need attention before the ball falls in Times Square, and that ought not be tucked away until the tax return visit with a tax practitioner in February or March of the following year. It's not that Julian has discovered an array of heretofore unknown planning tips. It's that he makes it clear to the reader why these are important and why they deserve attention while there is still time to do something that is good for the taxpayer's tax health. One segment of the chapter advises the reader to "make tax planning a year-round job." That is excellent advice. If I could quibble, I would have used "Tax Planning is a Year -Round Job" as the chapter title. But for all I know, that's a quibble with an editor and not with Julian.

In chapter 2, Julian turns to one of the most confusing topics in the tax law for the typical taxpayer. It's time to help people understand the rules applicable to dependency exemptions. This area of the law was substantially revised several years ago, and it tossed out many principles and concepts that tax practitioners and taxpayers alike thought they had mastered. It has become time to re-tool. Julian pays close attention to several of the thornier issues in this area, dependency deductions for the children of divorced parents, and dependency exemptions for live-in lovers. It's not just seasoned, and thus cynical, tax experts who will appreciate the inclusion of Charles Osgood's Ode to POSSLQs that Julian has included. When working with taxes, if one does not find time and reason to laugh, one very well may end up crying, and they won't be tears of joy. Humor is a fine seasoning for a tax book or a tax course.

What's next? In chapter 3, Julian addresses the tax consequences of home sales. As is the case with chapter 2, Julian has selected a tax topic that impacts many taxpayers. Do tax practitioners and taxpayers need to read this down-to-earth explication of section 121, its regulations, and the niceties of the many rulings and judicial decisions interpreting them? Yes, indeed. Just the other day, my mother said to me, "I heard some tax advice on a radio news show and I think it was wrong." After listening to what was said, I -- ever the teacher -- asked my mother why she thought it was wrong. It was wrong on two counts, and my mother spotted both errors. The person giving the advice treated the sales price as the gain, and used $250,000 rather than $500,000 as the exclusion for a married couple. So let me add to the list of people who should pick up a copy of Julian's latest book. Yes, people who give tax advice on radio news shows. How my mother has become adept at taxes, and she's not a tax professional or practitioner, is another story. I need to ask her if she's been reading Julian's books.

Subsequent chapters look at the tax consequences of marriage and divorce, travel expenses, moving expenses, and itemized deductions. In chapter 8, Julian explores tax tips for businesses. Though there are many, many taxpayers whose income is reflected on Forms W-2 and perhaps 1099s, there are more than a few who operate businesses, particularly small businesses, and who can learn much from what Julian shares. Ask any tax practitioner or tax return preparer what it is like when a client reveals that during the previous calendar year, the client opened and operated a business. How likely is It that what the client did and did not do is not what would have been advised? Now tax advisors can say to their clients, "If you happen to open a business before we meet again, read chapter 8 in this book. In fact, read the entire book." Similarly, chapter 9 examines investment strategies. Chapter 10 is the chapter every taxpayer hopes is important for someone else. It explains how audits work. Yet it begins with a discussion of record keeping, which in some ways is insurance against adverse audit outcomes that are attributable to the lack of evidence justifying deductions, credits, and exclusions. It certainly isn't in the "I'll read this if I get audited" category. Again, I would have made the chapter title more persuasive and powerful, but that's a minor concern.

The last three chapters address filing tips, figuring and paying taxes, and social security taxes. Many taxpayers need and want to know about extensions, the advantages and disadvantages of IRS advice, adjusting withholding, the AMT, and what is subject to social security taxation. Julian takes the reader through a solid overview of topics that are complicated in their fullness. He does so in the same way he does in the other chapters, by using stories based on actual tax cases. When I noticed that he takes the reader through the Harris case, which I use in my basic tax course, I understood he uses one of the techniques I used to persuade my students that tax is not boring. All I will say here about that case is that it involves a wealthy elderly widower, two twin sisters who were Playboy Bunnies and became the widower's mistresses, payments by the widower to the two sisters, and the arrival on the scene of the IRS, special agents, and the Justice Department, and tax fraud prosecution. How does it turn out? Tax practitioners, read the case. Taxpayers who don't want to slog through the legal analysis, read Julian's book.

What I like about this book is that it introduces readers to tax concepts, tax terminology, and tax principles without compelling them to dig through the Internal Revenue Code, it regulations, IRS rulings, cases, and other legal material. That effort is best left for tax practitioners, and, of course, law students enrolled in tax courses. Someone not educated in tax law but who has read this book will have a more productive conversation with his or her tax advisor. It is also more likely that record-keeping will improve, decisions will be made in timely fashion, advice will be sought before the client enters into transactions, and deeper appreciation for what the tax advisor is trying to do will evolve.

To order a copy, contact Julian Block at 3 Washington Sq., #1-G, Larchmont, NY 10538 or go his website, julianblocktaxexpert.com. Or, as was the case with the previous books, email Julian at julianblock@yahoo.com.

EDIT: To order the book please visit www.nucostore.com
or click on this link.

One of the advantages of blogging is that I learn things I might not otherwise discover. In response to Turnpike Lease: Bad Policy and Now a Bad Deal, Lee Matchett shared what he calls "another twist" to the proposed arrangement. And indeed a twist it is. He noted that as one tries to determine why the lessee would fork over big bucks for the rights to take over what currently is the equivalent of a break-even enterprise, the answer must be found by "think[ing] through the deal from the other side." He asks:

What does the lessee have to gain, and what are the lessee's potential pitfalls?. One obvious potential liability for the operator would occur if there was a decrease in revenue caused by, say, a decrease in the vehicles deciding to use the toll road. What could cause this? Well, perhaps if alternative roads were improved, or if some other form of transportation were made available (mass transit, rail, etc.), maybe drivers would opt not to pay the increased tolls.

He then directed me to Patrick Bedard's column in the February issue of Car and Driver magazine. It's an important read for drivers, taxpayers, citizens, and voters. Not only are lessees extracting promises from state and local governments to refrain from making improvements to highways offering alternative routes to the leased toll road, they are also compelling the governments to make those alternate routes less attractive by reducing speed limits for no sensible reason (other than to steer vehicles onto the lessee's road) and by adding traffic signals and other restrictions that otherwise have no reason to exist.

Lee's point is important. I've consistently warned that the only way for private enterprise, in the business of making profits, to extract profits from a toll road that presently breaks even is to increase profits, cut services and maintenance, or both. So now the nasty twist to the deal is revealed. Revenue can be increased without raising tolls by coercing drivers to use the toll road. To the free market advocates, I direct this question: Is that how a free market works? If so, it's not a free market. Toll road lessees want to use public resources, namely, the legislature and highway department) to crush any opposition (the alternative roads). It's been happening in the corporate world, to no good end, and now invades the public sector through these "privatization" boondoggles.

Lee directed my attention to section 14.1(a) of the proposed lease agreement, an almost 700-page compilation of promises, payments, limitations, definitions, exceptions, and similar provisions that make the Internal Revenue Code seem simple. Section 14.1(a), which defines the "adverse actions" in which the Commonwealth promises not to engage, appears to exclude from "adverse actions" any "development, redevelopment, construction, maintenance, modification or change in the operation of any existing or new mode of transportation (including a road, street or highway) that results in the reduction of Toll Revenues or in the number of vehicles using the Turnpike." But at the same time, there does not appear to be any language prohibiting the Commonwealth, or any governmental authority established under its laws, from doing anything that would increase traffic on the turnpike. In other words, where is the promise that speed limits on nearby roads will not be reduced to 25 mph for no good reason or that traffic lights and stop signs won't be installed at every intersection on parallel highways? I wonder what would happen to the deal if the legislature insisted on putting in language that prohibits changes that steer drivers onto the leased turnpike? In fact, I wonder what would happen to the deal if every legislator and voter in the state read the proposed agreement.

Four years ago, Congress added section 409A in order to curtail a variety of abuses that were taking place with respect to deferred compensation. The abuses rested on time value of money principles, in ways that conflicted with the tax principle that a cash method taxpayer must include compensation in gross income when it is actually or constructively received. It's not that deferred compensation violates the tax law per se, as there are all sorts of tax advantages for deferred compensation arrangements structured in ways that comply with the qualifications for tax-favored deferred compensation plans, but that arrangements no satisfying those qualifications were being used to obtain the same, or better, tax breaks.

The provisions of section 409A are extensive and complex. The gist of the statute is that compensation deferred under a nonqualified plan must be included in gross income for the taxable year during which the plan fails to comply with specific rules with respect to distributions, benefit acceleration, and elections. The Congress also delegated to the Treasury and thus the IRS the authority to promulgate regulations "necessary or appropriate to carry out the purposes of this section."

Regulations were proposed, with effective dates that are now beginning to trigger application of the new rules. They also have triggered extensive discussion among members of the teaching profession, including tax and other law professors. Why? Most K-12 teachers and higher education faculty are employed under 9 or 10 month contracts. Some institutions permit these employees to elect to receive their pay over a 12-month period. Other institutions automatically make the payments over a 12-month period. The institution's incentive is the postponement of some portion of the cash outlay to beyond the close of the school year. The employee's incentive to make the election is to have a regular stream of monthly income, for psychological and budgeting purposes. In present value terms, the cost to an employee almost always is less than $100, whereas to an institution with 1,000 employees, the benefit is on the order of $100,000. For this reason alone, most faculty make the election.

Technically, when the election is made, the employee is deferring compensation. For example, if a teacher's salary is $60,000 for a school or contract year that runs from September 1, 2008, to June 30, 2009, the teacher would be paid $6,000 per month in the absence of the election. Thus, $24,000 of the salary would be received in 2008, and $36,000 would be received in 2009. If the teacher makes the election, the teacher would be paid $5,000 per month. Thus, $20,000 of the salary would be received in 2008, and $40,000 would be received in 2009. There is a deferral of $4,000 of compensation from 2008 into 2009.

Under the general principle underlying section 409A, if the salary in the preceding example is paid out over 12 months, the $4,000 of deferred compensation should be taxed in 2008. The Treasury, however, decided that this sort of deferral is not the abuse to which section 409A was directed. Accordingly, the regulations provide that the $4,000 will not be taxed in 2008 if the employee makes the election, makes it before the first day of the academic year to which it applies, makes the election irrevocably, and specifies how the compensation will be paid (e.g., in equal monthly, weekly, or other periods over the 12-month acacdemic year).

For employees of institutions that require the employee to make an election, the institution must check the technical language of the election form to make certain that it complies with the regulations. That is not too onerous a task, though it surely must be an inconvenience, and a trap for employees of institutions that are unaware of the need to do this. For employees of institutions that automatically pay the salary over 12 months, the challenge is much more substantial. Unless the institution creates an election form and an election procedure, the $4,000 in the preceding example will be included in 2008 gross income. Not only is there a burden on these institutions to create the process and formalities, there is a burden on hundreds of thousands of teachers to obtain the election form, fill it out, and return it to their payroll or other administrative officers. Surely, some institutions will overlook this requirement. Surely, some teachers at institutions that adopt election procedures will be confused and some others will ignore it.

During a discussion of the "election exception" in the regulations, someone suggested that it would have been easier had the regulations deemed the election to have been made by all teachers on 9 and 10 month contracts being paid over 12 months, unless they elected to have the deferred compensation taxed in the earlier year. Very few would make that sort of election. In other words, if institutions automatically make the payments over a 12-month period, the teachers should be treated as having elected that outcome. I'm going to guess, but it may be that in school districts whose teachers are members of a union, the 12-month payout is part of the negotiated contract ratified by the teachers, and if so, there's a good argument that the ratificiation constitutes an election to be paid over 12 months. Why, then, require each teacher to make a separate election?

Though the suggestion is overflowing with common sense, it was criticized as running afoul of another tax principle. The Treasury and the IRS, so goes the argument, lack the authority to exempt a group of taxpayers from section 409A without requiring those taxpayers to take affirmative steps, i.e., the election, to escape the rules. Thus, if the statute provides for a silly result, which it does in the instance of teachers being paid over 12 months, the administrators of the tax law have no proper recourse other than to seek a technical amendment of the statute by Congress. The disadvantage to this approach is that it sometimes takes Congress several years to fix its mistakes. In one instance it took three decades. The irony is that when teachers begin complaining to their Congressional representatives, the staff of those representatives will draft "How dare you do this?" letters to the Treasury and IRS. Savvy IRS Commissioners inform the Congress that the IRS simply is enforcing the law Congress enacted.

To me, the provision in section 409A that authorizes Treasury to promulgate regulations "necessary or appropriate to carry out the purposes of this section" shifts the debate over the teacher election provision from one of whether Treasury could take the suggested "deemed made" approach to one of whether the "deemed made" approach makes sense. To me, the proposal makes much sense. Employees who already have made or are making elections in accordance with the institutions' existing policies continue to do so. Life goes on as usual. Employees who automatically receive pay over 12 months, because their institutions decided to take that approach or because the union bargained for that approach, are treated as having made an election without being required to bother themselves with the process. Life goes on as usual. The intrusion of the tax law is negated.

Often, however, there is no such escape clause giving Treasury and the IRS authority to fine-tune the statute. In those instances, consider what would happen if the IRS and Treasury enforced the statute asa written. The combination of poorly drafted statutes coming out of the Congress (due in part to the increasing influence of special interest groups and the drafting of legislative language by members' staffs not expertised in tax) and the foot-dragging on technical corrections (often held hostage for unrelated matters) would create havoc with tax administration.

A classic example is section 102(c). It provides that the exclusion of gifts from gross income does "not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee." Simple enough, isn't it? Yet what happens when Mom, who operates a gift shop, hires daughter to work for her? Along comes daughter's birthday, Mom buys her a gift, and under the literal language of section 102(c) daughter has gross income. It's a ridiculous result. The person or persons drafting section 102(c) should have included the phrase "in connection with the employment relationship" after the word transferred. So why hasn't this absurdity become a problem? The Treasury, in a proposed regulation, provided that section 102(c) would not be applied in that sort of situation. Did Treasury, by doing so, in effect amend the statute? Yes. Should it have? Even the advocates of strict interpretation would be hard-pressed to reject what Treasury did. There are a number of places in the Code where the Tresury and the IRS have "come to the rescue of Congress" or, perhaps, to the rescue of themselves and of taxpayers.

Though it's difficult to oppose Treasury and IRS "bailouts" of Congress in at least some of the situations in which they have done so, the temptation is oh, so strong, to let Congress reap what it sows, just to teach it and the nation that elects it a lesson or two. Imagine if the tax law were administered by the IRS as literally drafted. It could be a nightmare and then some. It might just spark some genuine change in how Congress does business and it might just bring the quality of Congressional work product to a professional level.

I suppose one answer is that the extent to which Treasury and the IRS bail out the Congres depends on the extent to which it is consistent within the guidance coming from the legislative history. That, too, is troubling because it means the staff writes what the law should have been, and that is a very different process from the law being written and enacted by elected officials. If it is wrong for the IRS and the Treasury to "revise" the statute to fix a Congressional error, is it any less wrong for unelected staff to do so in legislative history or even in post-legislative explanations as is currently done?

In any event, if you are employed under a 9 or 10 month contract and are paid over 12 months, you will be well served if you contact your payroll or other administrator to make certain all is at it needs to be so that the deferred compensation is not taxed in the year before it is received. It also would make sense to check your 2008 W-2 form next January to make certain it reflects what it should reflect. Have fun.

EDIT 17 June 2008: OK, joke over, errors removed. No one in the Congress noticed.

On Tuesday, the Senate rejected an attempt to impose a windfall profits tax on oil companies. Why the proponents of such a tax think that it would increase the amount of oil in the ground, reduce the cost of finding and extracting that oil, lower the expense of refining it into gasoline, or improve vehicle energy efficiency isn't clear. The rejected legislation also would have permitted lawsuits against OPEC. And how, if at all, would a successful litigant enforce a judgment against OPEC?

The rapid increase in gasoline prices is a product of several developments. None of the problems each of these developments reflects would be solved by imposing a windfall profits tax or by suing OPEC.

First, worldwide demand for oil has caught up to, and passed, worldwide supply. Persuading OPEC to ramp up production, which for all practical purposes means convincing Saudi Arabia to increase output by a fraction of the world's shortfall, would do nothing but accelerate the day when OPEC would explain that it had no more oil to pump, or at least insufficient oil to pump. The solution is to find ways to replace oil as an energy source, and to find ways to reduce oil use while its replacement is sought, developed, and prepared for market.

Second, speculators, who are nothing more than gamblers, are betting that oil prices will rise, and so they purchase oil futures. That in and of itself drives the price higher. Again, it is a matter of supply and demand. As more and more speculators, including hedge funds, commodities dealers, day traders, institutional investors, and others looking for the "quick and easy" profit try to purchase future oil, the price increases because the amount of future oil is no less constrained than is the amount of present oil. The solution is to examine the extent to which stock, commodities, futures, and other trading should be regulated to remove the element of gambling. The difficulty is that these markets, like most others, involve an element of risk, and thus reflect an element of gambling. To outlaw everything that involved a gamble would be to outlaw life. On the other hand, if the trading in oil futures, or any other stock, commodity, or other item, is adversely affected by manipulation, deliberate mis-information, or other forms of cheating, then intervention is required because those practices make the market one that is not free.

Third, the price of oil, and gasoline, in dollar terms, has increased because the value of the dollar is plummeting. No tax and no litigation against OPEC would solve that problem. The latter course of action might make the weakening of the dollar even worse. The solution to the weakening of the dollar is to lessen or eliminate the things that weaken the dollar. There are two that need significant and rapid attention. One is the federal budget deficit, and the other is the trade deficit. The things that need to be done to fix those aren't as easy as imposing a tax on some "abstract" set of entities, which, when one thinks about it, is a tax on those who own those entities, including investors, pension plans, university endowment funds, and other shareholders. What needs to be done is the opposite of what people suggest is the problem. Consumption needs to be curtailed until it matches domestic production. Those who want to ramp up consumption to "jump start" the economy ought to be putting their efforts into ramping up domestic output. Why cannot American enterprise develop and market renewable energy? Why is this nation so willing to become dependent on other nations for goods and services that are essential to the well-being and survival of the United States? To what extent do government economic and tax policies put national well-being and security in a back seat to the enrichment of the rich?

If oil companies indeed are reaping windfall profits, should not the marketplace react by a refusal to purchase their products? To some extent, that is not possible because gasoline, diesel fuel, and other petroleum products have become an essential commodity. But to some extent it is possible, because these items are being wasted. For example, those who drive at 80 mph in 55 mph zones are not only creating safety risks, they are burning far more gasoline or diesel fuel than they would at 55 or 60 mph. Can there be that many people indifferent to the price of gasoline? A local Lukoil station raised its prices to $4.49 per gallon for regular gasoline, an amount significantly above what is being charged by other stations in the vicinity. Local residents surely are avoiding this station, but out-of-town drivers are likely to stop there because it is close to an Interstate highway interchange. Perhaps competitors can put up signs directing people to their stations, so that eventually the Lukoil station loses most or all of its business or reduces the price.

One issue that doesn't get sufficient attention is the definition of windfall profits. The sound bite gurus harp on the total profits of oil companies. They could just as easily harp on the total profits of Microsoft, a company that delivers a product far less reliable than the gasoline and other petroleum products sold by the oil companies. What matters is rate of return. Consider this example. A company pays $40 for something it sells for $50. It incurs $5 of expenses in doing so. Its profit is $5, which is a 10% rate of return on the $50 of sales. Now suppose what it pays for its product increases to $80. Some might think that it should increase its retail price to $90 to recoup the $40 increase in the wholesale price. At this point, the company would be earning $5 of profits on $90 of sales, a return of only 5.6%. The company, which was expending $45 to make $5, would be expected to expend $85 to make $5. That makes no sense. Instead, the company ought to increase the price of its product to $100. It would then earn $10 of profits, the same 10% rate of return it realized before the wholesaler increased the price. Only if the price is increased to something more than $100, ignoring for a moment increases in the $5 cost per item of operating the business, could one claim that there is a windfall. Any other definition would justify imposing an extra tax on any investor who experiences an increase in the interest rate being paid by the bank or other debtor with which the investor has a deposit or investment. The problem is that this analysis uses numbers, and requires a sequence of reasoning that most people reject as too complicated. It doesn't fit into a sound bite. Unfortunately for sound bite devotees, life does not fit into a sound bite. Nor does the solution to the existing and forthcoming economic crises in housing, energy, and health care. Somewhere, somehow, someone needs to take America past the sound bite and past the "quick and easy" to a place where reward is attained through significant effort. Otherwise, the price of gasoline may become the least of our worries.

The Philadelphia Inquirer Editorial Board, in Take the Next Exit, has taken the same position on the unwise proposal to lease the Pennsylvania Turnpike as I have taken. In Selling Off Government Revenue Streams: Good Idea or Bad?, I pointed out disadvantages to leasing the turnpike, including the decrease in accountability and the dangers of selling off a public revenue stream. About a month later, in Are Citizens About to be Railroaded on Toll Highway Sales? , I criticized the secretive nature of the bidding process and suggested that the matter be put to a referendum. Three months later, in Turnpike Cash Grab Heats Up, I bolstered my opposition to the lease plans with information indicating that turnpike tolls would increase astronomically in order to generate the profits that the lessee would expect to yank out of a public asset. No sooner had the legislature rejected the governor's idea than it resurfaced, necessitating even more criticism, in Selling Government Revenue Streams: A Bad Idea That Won't Go Away, a post whose title summed up the problem. The governor either hasn't been reading my analyses of his turnpike lease proposals or has been reading them and then ignoring them. He's moved ahead, awarded the lease to a company from Spain, and has submitted the deal to the legislature for approval.

In its editorial, the Philadelphia Inquirer Editorial Board highlighted even more disadvantages to the arrangement. As economic conditions have changed, the assumptions used by the lease proponents to make the deal appear to be a "no lose" situation have also changed. Though the governor and his allies claim that the deal will generate $1.1 billion per year, it assumes that the investment of the up-front payment received from the lessee would generate a 12.5% annual yield. There's a phrase for that, even before the economy worsened. It's "wishful thinking." Using a more realistic 8.5% annual yield, which is what the state pension fund managers anticipate when they invest their holdings, the annual revenue stream drops to $800 million. But is 8.5% as realistic as it gets? The only investments getting that sort of return are very risky ones. Can one imagine the outcry if in an attempt to make the deal work, the state puts the money into the stock market and it tanks? Safer investments are generating 1, 2, perhaps 4% yields. That means annual revenue from the lease arrangement of $100 million to, at best, $400 million. And for this the governor wants to give up the right to the Turnpike tolls? Last week, in Is Tax Ignorance Contagious?, I wondered about the governor's tax education. Now I'm wondering about his economics studies.

The Philadelphia Inquirer Editorial Board prefers the imposition of tolls on I-80. This is an idea that I have discussed on several occasions, including Raising Revenue Through Tolls Isn't Simple. I continue to prefer mileage-based road fees. I first advocated this approach more than three and a half years ago, in Tax Meets Technology on the Road. I provided a more detailed explanation of how it works and why it makes the most sense in Mileage-Based Road Fees, Again. I revisited the proposal, which has been implemented in other jurisdictions, in Mileage-Based Road Fees, Yet Again, after support for it began to emerge from some public officials. The governor of Pennsylvania, unfortunately, for some reason is unwilling or unable to make a 21st century proposal to the Commonwealth, and instead insists on embracing a financing arrangement that smacks of the late 20th century business style for which the economy is now paying the price.

I call on the governor to step up with genuine leadership. Put aside the advice of the interest groups, the foreign investors, the deal-makers, and the folks who want to profit at citizen expense, and turn to something that is gathering support and being implemented in other areas. Putting in place a mileage-based road fee system not only provides revenue needed to maintain highways and bridges and not only does so in a fair and rational way that keeps the revenue in the hands of the public, it also will energize Pennsylvania commerce and industry by providing an opportunity for software and hardware developers to create jobs as they manufacture and install the mileage-based road fee system. Pennsylvania deserves better than a deal that sends toll revenue to Spain.

The information that I found most interesting in Friday's Philadelphia Inquirer article about one of state senator Vincent Fumo's confidantes agreeing to testify at Fumo's scheduled trial in the fall was not that fact but the revelation of how that confidante, Howard Cain, managed to escape paying taxes for 16 years. Cain's agreement to testify against Fumo was part of an arrangement by which prosecutors will seek reduced penalties and prison time when Cain pleads guilty to tax evasion charges next week.

What Cain did to evade paying income tax is fairly easy to describe, but more difficult to explain. Cain arranged for the fees and other income that he received for performing services to be paid to a corporation that he owned. Because he was the sole shareholder, sole officer, and sole director, there was no one to object to his decision to have the corporation fail to provide W-2 or 1099 forms to Cain. Thus, the IRS did not know that Cain's corporation was paying him income.

It is not clear from the story whether Cain’s corporation filed tax returns. If it did, then one would expect the return to show a deduction for the payments to Cain, or distributions to Cain, or some combination of the two. Would that not alert the IRS, or its computers, to the inconsistency between the information on the corporate return and the lack of reporting by Cain because he filed no return? If the corporation did not file a return, why was that not picked up? Perhaps because 1099 forms were not being filed for the payments made to the corporation. If the circumstances are as can be inferred from the story, no obligation to file 1099 forms may have existed.

It comes down to reporting, not just with respect to the taxpayer’s tax returns, but also with respect to information returns, including W-2 and 1099 forms. Unfortunately, every time the IRS or Treasury suggests tightening up the reporting requirements so that the sort of information gap exploited by Cain can be closed, lobbyists appear to explain how the imposition of a reporting requirement on their clients not only would be a huge hardship for their client or the industry in which the client participated but also would destroy the national economy.

I wonder how many people will read about, or have read about, this particular fraudulent stratagem and have concluded that the only flaw is getting caught. I wonder how many people think that they have the skills to avoid getting caught. I wonder how many more people will try. I wonder how many have already tried and have managed not to get caught. I wonder how many will get caught. Hopefully, all of them will be discovered. I doubt that will happen.

Last week, in Honoring Those Who Serve, I explained the mess Congress made with the farm bill. What Congress sent to the President was missing Title III. The President vetoed the bill. On May 22, the Senate and the House voted to override the veto. But because Title III was not in the bill, it was not enacted. Though some have suggested that none of the bill was enacted, others claim that the bill in the form sent to the President, vetoed, and then approved in the override, was enacted. In other words, everything but Title III has been enacted. What will Congress do next to fix this mess?

In Farm Bill Headache May Continue, J. Taylor Rushing reports that the Senate may vote on the entire farm bill when it returns. The House, on the other hand, wants to pass an amendment or some other "small-scale" fix. Yesterday, the Senate passed the entire bill, including the previously omitted title.

Why does this matter? It matters because there are provisions in the legislation that take effect on the date of enactment, or that apply to transactions entered into on or after the date of enactment, or that preclude application of certain provisions to property owned before the date of enactment, or that otherwise refer to the date of enactment. Therefore, it becomes important to determine when the legislation was enacted.

If Congress re-enacts the entire bill, is the date of enactment the day the bill is re-enacted, or is it May 22? Would the date of enactment for provisions in Title III be the day the entire bill is re-enacted? If the provision refers to "the date of enactment of this act" does it refer to May 22 or to the day that the entire act is enacted for the first time? One could argue that "this act" was not enacted on May 22 because only part of "this act" was enacted on that date.

If Congress enacts Title III on its own, or some other "small-scale" fix, is the date of enactment of the bill split into two? What then is the "date of enactment of this act"? Does it depend on whether the provision making that reference is in Title III or in another title? Or would the date of enactment for the entire bill be the date that its last piece is put into place when Title III or the "small-scale" fix is enacted?

If Congress wants to put an end to this nonsense, it could add a provision that specifies that the date of enactment is the date that the President signs whatever is sent to the White House in June, or, if it is vetoed, the date that the House and Senate override the veto. Alternatively, the Congress could replace the phrase "date of enactment…." with a specific date, for example, May 22, so that even if the entire bill is re-enacted, there would not be any disadvantage to someone who takes action or fails to take action between May 22 and the date that the entire bill, in contrast to the bill with the missing title, becomes law.

Otherwise, the question may end up being litigated. Consider someone who makes a purchase or enters into a transaction on May 25. Without an answer in the final legislation, this person may end up in a dispute with the IRS concerning the applicability of the new provision to the May 25 transaction. So although there is no way to sue the Congress or its staff for sloppiness, the gaffe will find its way back into the public spotlight several years hence. That simply cannot be good for the nation, can it?

Joe Kristan, of Tax Update Blog fame, provides me with more fodder for MauledAgain. In IRS - THE UBER-BUREAUCRACY Joe quotes from my Not to Its Credit indictment of what Congress has been doing to the tax code. He notes my exasperation:

I object to the Internal Revenue Service being turned into a institution that is focused more on the technical requirements of energy production activities than on administering revenue laws. I wonder why financial incentives to produce and conserve energy aren't administered by the Department of Energy.

Joe then makes an interesting point, one to which I did not pay the attention it deserved. Joe writes, with regard to the point I made:

This point is almost always ignored in discussing tax complexity. Every specialized tax credit - like the "agricultural chemicals security credit" included in the new farm bill - adds a little more to the power of the IRS. Thanks to these sorts of provisions, the IRS is a powerful public policy player in energy, housing, research and development, charitable giving, regulation of non-profits, employment policy, retirement policy, and now, fertilizer. Congress is well on the way to turning the IRS into a shadow super-agency with influence across the whole range of public policy. The IRS Commissioner is a bigger player in some policy matters than the cabinet secretary nominally overseeing the area.

Joe’s point not only is interesting, it is important. With so much government policy being encoded in the tax law, and with so much delegation by the Congress to the IRS, it’s no wonder that the IRS is on everyone’s radar. Select a business, or activity, or transaction, and what the IRS decides and promulgates is important not only with respect to tax collection but with respect to how one manufactures vehicles, farms land, builds houses, develops medicines, researches energy development, or simply breathes. I hadn’t mentioned the fertilizer issue. But I’m glad Joe brought it up. He expresses a sense of doom not unlike what I have shared on other matters:

It's hard enough for IRS agents to just determine somebody's income. Having them oversee research and development, or fertilizer, isn't very promising.

So true, but let me cast Joe’s concern in even gloomier light.

Before its amendment by the American Jobs Creation Act of 2004, Internal Revenue Code section 45(c)(1)(C) specifically included “poultry waste” as a qualified energy resource for purposes of the section 45 renewable electricity production credit. Section 45(c)(4) specifically defined poultry waste as “poultry manure and litter, including wood shavings, straw, rice hulls, and other bedding material for the disposition of manure.” The 2004 amendment removed the language because it expanded the scope of qualified resources to include “open-loop biomass” which is defined in section 45(c)(3)(A)(i) as including “agricultural livestock waste nutrients.” That term is defined, in turn, in section 45(c)(3)(B)(i) as “agricultural livestock manure and litter, including wood shavings, straw, rice hulls, and other bedding material for the disposition of manure.” Section 45(c)(3)(B)(ii) defines agricultural livestock to include “bovine, swine, poultry, and sheep.” In other words, the chicken and turkey manure tax credit was expanded so that cows, pigs, and sheep did not feel left out. Congress did some equal opportunity shoveling down on the farm.

We’re told, in articles such as Waste Not from Farm Industry News, that chicken manure is a fertilizer. So it turns out that the IRS has been dealing with fertilizer since 1999, when the Tax Extension Act of 1999 inserted former section 45(c)(1)(C) into the Code. Fear not, Joe, the IRS has had almost a decade in which to become expert in fertilizer and manure.

The possibilities are endless, but my mother reads my blog. So I’ll leave to your imagination the word play that is so tempting. Chicken manure is just too genteel a term to use to describe what Congress has been doing to the Internal Revenue Code.

The "friendly debate" between Joe Kristan and myself continues. It has taken on sharper focus, which generally is a good thing in a debate because it opens up more opportunities for communication.

In my latest installment on the issue, Keeping Free Markets Free, I summed up my preferences in this way:

Given the choice between a market hijacked by speculators, cheaters, shoddy artisans, defective manufacturers, cronyism-afflicted traders, and others whose greed surpasses their respect for the market's consumers, and a market patrolled by representatives of the citizenry, I'll opt for the latter.

Joe's response? "Unlike me, Dr. Maule believes that the 'representatives of the citizenry' won't just make things worse. But they pretty much always do."

If what Joe means is that "representatives of the citizenry pretty much always make things worse and will continue to do so if they are selected and do business as they currently are, then I agree. After pointing out that I would opt for a market patrolled by representatives of the citizenry rather than one hijacked by speculators, cheaters, shoddy artisans, defective manufacturers, cronyism-afflicted traders, and others whose greed surpasses their respect for the market's consumers, I explained that my decision was conditional:

Of course, it works only if those representatives are not themselves dishonest, shoddy, and inept.

At present, the choice is between an market that is not free and representatives of the citizenry who are effectively representing selected special interests. That's a terrible choice, and so it should be no surprise that the economy is a mess. The combination of a warped market and special interest politics has enabled bad decisions, such as borrowing beyond one's means, and had widened the gap between the haves and have-littles. So I return to my conclusion:

So if and when the people mobilize to deal with the current mess, one of the things that must be done is a reformation of government so that those in government, elected or not, who are more like those infecting the free market, are tossed out as quickly as their comrades should be tossed out of the market place.

If things don't change, the economy won't improve. It might stumble into a few short-term gains, but in the long run, the looming social security crisis, the ballooning federal deficit, the massive debt held by foreign nations and investors, and all of the other systemic flaws will prevail. The unholy alliance between politicians and lobbyists brought market deregulation. Is the economy so much better? Ask someone who is in bankruptcy, looking for a job, trying to obtain health care or medical insurance, or attempting to make ends meet. Talk with people who must function within or with an industry that is monopolized or virtually monopolized by an enterprise that has no competition to push it to achieve higher quality. Is it any wonder that confidence in the warped market is no more than confidence in government? I wonder if Joe disagrees with how I concluded Keeping Free Markets Free:

Reform of government and reform of market are necessary, they go hand-in-hand, and if either fails to happen quickly, the issue is going to become much more serious for all of us than is this friendly dialogue between Joe in Iowa and Jim in Pennsylvania that gets the attention of perhaps several hundred readers.

Whether these reforms will occur is a different issue, and I'm not convinced that they will happen.

Last week, in Tax Ignorance, I criticized Senator Salazar of Colorado for not understanding the very basic tax concept of adjusted gross income. It's covered in the basic tax course, a course I think should be taken by any law student who intends to seek public office. Dealing with taxes is an inescapable part of holding office, and no public official should take the oath of office without understanding the basics.

Now the governor of Pennsylvania has jumped on the tax misunderstanding bandwagon. A few days ago, as reported in Hidden Costs Will Make Turnpike Deal a Bad One, Ellen Dannin and Phineas Baxandall explain that Governor Ed Rendell, in pushing for his turnpike leasing plan, "called for using a 'tax-exempt, public benefit corporation under IRS code 63-20.'"

Simply put, there is no such thing as "IRS code 63-20." First, there is no such thing as an IRS code. There is an Internal Revenue Service. There is an Internal Revenue Code. The IRS does not create nor does it own the Internal Revenue Code.

But even if the governor had referred to "Internal Revenue Code 63-20" he would have missed the mark. There is no section 63-20 in the Internal Revenue Code. There is a section 6320 in the Internal Revenue Code. No hyphen. It deals with notice and opportunity for a hearing when the IRS files notice of a lien or files a lien. It has nothing to do with the financing of public projects with tax-exempt, public benefit corporations.

The Governor is not alone in using the incorrect "tax code 63-20" reference. In the Recommendations portion of what appears to be a report by some unidentified agency or official of Washtenaw County, Michigan, the drafters use the phrase "tax code 63-20." The only other similar reference identified through a google search is found in an untitled report apparently issued by an unidentified agency or official of Ypsilanti Township in Michigan, that refers to "tax code 63/20." Unfortunately, replacing the hyphen with a dash does nothing to make the citation any less incorrect.

It took about 30 seconds to identify the source of the "63-20" term. It comes from Revenue Ruling 63-20. The hyphen is correct, the slash is incorrect, and the phrase "tax code" is not an acceptable substitute for "revenue ruling," and neither is the phrase "internal revenue code." A revenue ruling is an opinion issued by the Internal Revenue Service. The Internal Revenue Code is legislation enacted by the Congress. A ruling is not legislation, and legislation is not a ruling. The Congress is not the Internal Revenue Service and the Internal Revenue Service is not the Congress. These are fundamental concepts that are grounded in Constitutional law -- think separation of powers -- and that are or should be injected into the cerebral processes of every law student, every lawyer, and ideally, every citizen.

Most practitioners, when referring to this form of financing, refer to 63-20 bonds, 63-20 corporations, or 63-20 financing. There's nothing wrong with those terms. So how does the governor of Pennsylvania end up using the phrase "tax code" when referring to something that is not legislation? My guess is that someone wrote the governor's speech. I can't imagine the governor wrote it, because he is a lawyer, he went to law school, and I'd venture to guess, knowing something about that law school, that he took the basic tax course. Was he too busy to go over the speech? Perhaps. Ultimately, though, his speech is his responsibility. If someone else wrote the speech, as I think was the case, they did not serve the governor well. I wonder if the people advising the governor on his turnpike proposal, which I have severely criticized in Selling Government Revenue Streams: A Bad Idea That Won't Go Away, are doing any better of a job of serving the governor and the people of Pennsylvania. Suppose the financial figures being tossed about have been derived with as much care as went into formulation of the phrase "tax code 63-20." How much confidence should citizens have under these circumstances?

It is not uncommon for law students to conflate legislation, regulations, and rulings. When I insist they demonstrate understanding, and push aside ignorance, some of them have argued that my call for precision is unwarranted, and that what they have done is acceptable. My rejection of imprecision, by students and by others, at times has been derided as picky or worse. But I usually quiet the complaints by asking if people want neurosurgeons operating on them, their children, or their parents to be imprecise. I wonder if people want engineers building bridges to be imprecise. I ask whether the folks making pet food, medicines, and other products should be imprecise. Perhaps speech references aren't as life-and-death as neurosurgery, bridge building, food manufacturing, or pharmaceutical formulation, but when dealing with billions of taxpayer dollars, precision is no less a sign of the care and attention to detail that should be demanded of public officials. If public officials are going to talk about taxes, they should make certain they know what they're discussing and take steps to make their words correct and precise.

Surely the Congress cannot truly think that the American nation will give it credit for its recently enacted Heartland, Habitat, Harvest, and Horticulture Act of 2008 This is the bill that was sent to the White House with one of its titles missing, as I described in Honoring Those Who Serve. Once again, in an effort to acquire votes during an election year, the Congress has packed legislation with all sorts of provisions that defy justification. Some of the provisions, though hyped as good for the country, surely benefit a very narrow group of taxpayers.

For example, section 15344 of the legislation extends the benefits of three-year depreciation to all race horses placed in service before January 1, 2014, even if the horse is not more than 2 years old. Under current law, and for race horses placed in service after December 31, 2013, three-year depreciation for race horses is limited to those that are more than 2 years old. What vital national security issue or economic crisis does this provision address?

The legislation adds even more credits to an Internal Revenue Code already bursting at the seams with credits that have nothing to do with how much a taxpayer has paid in taxes. There will be a new section 45O, allowing an the agricultural chemicals security credit. There is a new section 54A, allowing a credit to holders of qualified tax credit bonds. Only by digging more deeply into the text does one discover that these bonds should be called qualified forest conservation bonds. The legislation extensively amends the alcohol fuels credit, and makes numerous changes to the biodiesel and renewable diesel fuels credit and the qualifying advanced coal project credit.

I wonder how many taxpayers benefit from these credits, and whether making tax credits available for the activities that permit the credit to be claimed is the most effective and efficient way of encouraging people to engage in those activities. It's not that I object to the goals. I object to the Internal Revenue Service being turned into a institution that is focused more on the technical requirements of energy production activities than on administering revenue laws. I wonder why financial incentives to produce and conserve energy aren't administered by the Department of Energy. Well, I know the answer. The Congress, though every now and then publicly trashing the IRS and characterizing it as harmful, then turns to the same agency to administer its favorite incentives programs. Which should speak more loudly to America? What Congress says when it grandstands or what it does when it overburdens the tax law and the IRS because it apparently doesn't trust other agencies to administer laws relating to agriculture, energy, employment, or health?

On this Memorial Day, perhaps we should honor those who serve by taking steps to serve well. Not everyone observes Memorial Day for what it is, as many turn their attention to the "traditional" start of the summer season. Fortunately, others do invest some time in remembrance, in prayer, and in quiet contemplation. But are parades and speeches enough? I think not.

All of us serve or can serve in one way or another, and perhaps, for those who are gifted, in two or more ways. But if we serve we should serve well. We should put into our efforts the care, the preparation, the attention to detail, the dedication, and the courage that mark the actions of those who have committed themselves to protecting the nation and going wherever they are commanded to go, regardless of the risks or their personal perspective on the matter. They are heroes and heroines.

Those who are called to serve, or have campaigned to serve, in positions of high responsibility and in the halls of power have an even greater obligation to serve well. They have an obligation to serve with no less care, preparation, attention to detail, dedication, and courage than do those who serve and have served in the Armed Forces.

So it is deeply troubling to observe the Congress strike out in the space of a few days. Last Wednesday, in Tax Ignorance, I commented on the thoroughly incorrect articulation of a basic tax law principle offered by Senator Ken Salazar in defense of subsidies to wealthy farmers. Now two more embarrassing episodes in the adventures of the Congress have made the news.

The first gaffe is a serious one that some commentators think raise yet unanswered Constitutional law issues. Somehow, after Congress passed the farm bill, which is the legislation containing the farm subsidies to wealthy farmers that Senator Salazar tried to defend with erroneous tax law explanations, as I described in Tax Ignorance, it sent to the President a version that was missing Title III. So, technically, the President did not veto Title III, and arguably the veto override has no veto to override with respect to Title III. That leaves the question of whether Title III was enacted in the first place, or whether it remains in limbo. More details and analysis of the legal issues are in this story. Members of Congress from both parties are trying to use the goof as a way to position themselves advantageously. My concern is that someone goofed, no one picked up on the goof, and rather than fixing the problem, the politicians are trying to gain advantages from what could be a serious legal matter. Look, we all make mistakes. We can reduce mistakes by exercising more care, more attention to detail, more preparation, and more dedication. The more serious the matter, the more intense should be our commitment. I don't worry all that much about the few typographical and punctuation errors in this blog because those errors do little harm. At worst, they remind me I'm not perfect. On the other hand, a neurosurgeon doesn't have the sort of leeway I give myself. Nor should the Congress. Granted, it wasn't a member of Congress but surely someone on staff who made the initial error or failed to catch an error. Is there someone in position to review that person's work? As a matter becomes more important, and the consequences of error more serious, the number of layers of review need to be increased. If there is no one in place to review one person's work on the legislation, then fingers point to Congress, for it bears ultimate responsibility. If someone was in place, then TWO people goofed, and questions begin to arise as to how that can happen. One answer may lie in the way Congress operates. Things are left to the last minute, proceedings become chaotic, stress pervades the chambers and drafting rooms, and communication breaks down. Could the fact that this is an election year have something to do with staff attentiveness?

The second episode is even more troubling, because there is no mystery as to what happened. During a hearing held by the House Committee on the Judiciary with respect to gasoline prices, Representative Debbie Wasserman-Schultz said to the panel of oil company executives, "I can't say that there's evidence that you are manipulating the price, but I believe that you probably are." She then challenged the executives to prove that they were not manipulating prices. That sort of questioning is not what one would expect in a nation that is based on the rule of law, rather than the tyranny of sound bites. A good lawyer would know that one does not admit to not having evidence for a point that he or she is trying to prove. In Wasserman-Schultz' defense, unlike Senator Salazar, she does not have a law degree and has not had the benefit of a law school education. According to her official biography, Wasserman-Schultz has a bachelor's and a masters' degree in political science.

Had she offered evidence of price manipulation, she would have been in a good position to challenge the oil company executives to explain why that evidence meant something else. Even circumstantial evidence, though weaker and less persuasive, would have been better than a confession that she has no evidence. Surely she could have pointed to the rates of increase in oil company revenues as compared to the rate of increase in oil company profits. She could have put forward facts and charts illustrating crude oil price hikes, refinery capacity changes, oil industry labor cost increases, internal rate of return analyses, and other financial data from which logical analysis must begin. Gathering that information requires care, preparation, attention to detail, dedication, and courage. Walking in and asking witnesses to prove a negative after admitting an inability to offer any evidence is sloppy and disrespectful.

Imagine if someone turned to Wasserman-Schultz and said, "I can't say that there' evidence that you are taking bribes , but I believe that you probably are, so prove you are not." I am certain she would be outraged. Yet how is that any different from what she did? There's no question she was playing to the cameras, seeking to tap into the emotional reactions that people have with respect to gasoline prices. Perhaps her constituents think she is going to bat for them when she tosses out accusations and demands for negative proofs without having done her homework. As a leader, she owes her constituents more than playing to their emotions. She owes them quality representation, and that requires taking the initiative to become educated not only with respect to the facts but also on how to work with facts. Had she done so, she surely would have been quite effective, because there exist facts which when put to those executives would require them to respond with facts rather than with the general statements that most of them offered most of the time.

Yes, I'm picking on the Congress. It's a high profile body of politicians who actively seek the power and the attention. No one compels them to serve. They voluntarily seek the positions they hold, and they should be held to the same high standard to which people in other professions, including the Armed Forces, are held. Members of the military are dying, and have died, to protect what this nation represents. Surely this nation and its elected leaders must act in a way consistent with the principles for which so many have sacrificed. Offering erroneous statements of tax law, losing a title of a bill, and tossing illogical questions at witnesses are so very inconsistent with those principles. Is it any wonder that calls for change resonate throughout the nation? One thing that must not change is the deep appreciation and respect that this nation holds for those who have served well and who have sacrificed much, holding fast as careful, well prepared, dedicated, and courageous defenders of the freedoms we cherish. The best way to show that appreciation and respect is to emulate those values.

In reaction to my If Only It Were Prices Getting Depressed post, Joe Kristan, in Good on Taxes, Not So Good on Economics, takes issue with my position with respect to the present economic mess, in these words:

Dr. Maule worries about future resource scarcity, and he thinks the government should mobilize to do something about it. He says that the market can't be relied on to provide "essential" items.

I do think that the market is not providing sufficient quantities of necessary goods, and explained in If Only It Were Prices Getting Depressed how shortages in various items were causing shortages, food riots, hoarding, and other behavior adverse to the well-being of the species. But I have not advocated the sort of government intervention that Joe seems to think I support.

In the post that started this debate, Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, I argued that the tax rebate, now with the fancy name of stimulus payment, wasn't going to do much of anything to fix the economic mess. If anything, my argument objected to the government rebate intervention in the markets. I pointed out that the rebates would make the situation worse in the long run, by increasing the federal budget deficit and the amount of debt owed to foreign investors. I then directed attention to the root cause of the current economic mess:

The impending shortages of critical goods and materials, including oil, clean water concrete, steel, natural gas, health care, copper, agricultural products, and similar life-essential ingredients, will only worsen the problem. An ever-increasing world population, seeking more and more quantities of these and other items, coupled with the emergence of a small creditor group and massive hordes of debtors, is a recipe for disaster. Somewhere along the way, these conditions will trigger armed conflict, pestilence and pandemics, civil disorder, and breakdowns in societal structures. No one ever promised that the Dark Ages were a one-time event.

Nothing in that observation advocated government market planning of the sort Joe fears when he quotes an instapundit poster who argues "The last thing we need is the know-nothings in Congress pretending they have the expertise required to plan the future of a market segment as huge and critical as energy."

In response to Joe's Good Morning! We're All Doomed response to Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, I explained, in Can Tax Rebates Help Prove Malthus Wrong? that there are shortcomings to the supply-demand curve theory of economics. I argued that if the government is going to borrow money to spend on fixing the economy -- and note that I was not advocating that it do so -- that distributing that money as tax rebates was far inferior to using it to deal with the underlying problem. I then suggested that "people and governments mobilize to deal with these issues while there still is time." To me, there is a huge difference between government dealing with the issue and "people and government" dealing with the issue. I know that, at least in theory, government IS the people, but as a practical matter, government has become an entity unto itself and those who control its powers. Thus, people alone cannot solve the problems if government stands in the way. Government alone ought not be entrusted with solving the problem, because government in its present state ought not be trusted. But someone must deal with these problems before they overwhelm the nation.

Joe, and others, think that the answer is in the market. I agree, but with a qualification. Only a FREE market can solve the problem. An unfree market, which is what currently masquerades as the market in our so-called "free market economy," cannot get the job done. The market is unfree because there are biases, there is corruption, there is bullying, there is cheating, there are monopolistic practices, there are all sorts of behaviors, characteristics, and practices that are inimical to the notion of "free."

My position, that the market is not a free market and that this condition is responsible for much of what plagues the economy and society in some direct or indirect way, is not a new one. Over the years I have repeatedly pointed out the shortcomings of the modern economic marketplace, and the need to restore its freedom. Who, I ask, protects the freedom of the free market?

For example, in Greed, Stupidity, Poor Judgment, and Taxes, I argued that much of the problem with the current housing crisis arose because "a free market was enslaved by the greed of speculators and gamblers who call themselves investors." In A View from Down Under, I responded to a respondent's observations on free market issues with this observation:"My concern is that influence has been flowing the other way, as the sort of entrenched, safe-from-dismissal public employee mindset has infiltrated the management levels of some private enterprises operating in a so-called free market that no longer is truly free. At least it's not free of incompetence, greed, cronyism, politics, and excuse manufacturing." In Can Tax Cuts for Shareholders Increase Employee Wages?, objecting to proposals to lower taxes on corporate owners and managers, I remarked, "To suggest that the corporate executives of the Fortune 500 should have even more after-tax money with which to control the economy is the very antithesis of a 'free' market."

The underlying problem was highlighted by another respondent, whose explanation I adopted in More Gasoline Tax Increase Chatter:

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

Every tax is a government intervention in a market. The notion that a society without government, or a totally unregulated market, can provide for the welfare of society is a proposition that has never been successfully applied in life.

In Planning: It Can Be Taxing, I shared a more extensive analysis of market freedom:

Before the "it's a free market" object is raised, let's examine the market and see how "free" it is. Is it a free market when the same folks sit on corporate boards, playing round-robin games with executive appointments, as insiders move from boardroom to boardroom? Is it a free market when labor and management conspire to portray a pension plan soothing to the union but in reality a paper configuration? Is it a free market when pension plans fall short of funding goals because the accounts are not invested consistent with secure long-term pension funding growth?

A market is not, and cannot be, free in the absence of truth and candor. Otherwise the market is deceptive, and deception is not free. That's the truth of this entire mess. And truth hurts. In this instance, it's going to hurt a lot. The debate will be intense, shrill, and frightening. Let's hope it gets straightened out before American industry crashes and tens of thousands or even millions of retirees are left on the very short end of a poorly planned stick.

That was back in 2005. Nothing that has since transpired has changed my outlook on the issue.

I am not advocating government management of the markets. But I also do not support a "hands off" approach. As I explained in Using Taxes to Rescue a Non-Drowning Film Industry?, government market intervention is, at times, necessary and helpful, and defining those times is a delicate but essential task:

Conceptually, governments ought not to engage in business engineering. They've done enough damage and made enough mistakes with social engineering. The free market principle means "free of government interference" even if government involvement would be beneficial to some citizens. Only when business or other activity threatens the health or welfare of the jurisdiction should a government step into the market. So, if legislatures are looking for opportunities to interfere in the free market, they ought to stick to important safety and health concerns such as development of pharmaceuticals for avian flu, assistance to local transit authorities for security planning and operations, regulation of the sale of alcohol to vehicle drivers, and similar matters that concern the population and not a specially selected segment.

Thus, though I object to government intervention to help professional sports owners build stadiums (see Tax Revenues and D.C. Baseball), and to rescue a film industry segment, I think it is necessary for a government to step into a market and preserve its freedom when the market fails to deliver food, fuel, and other essential goods. Given the choice between a market hijacked by speculators, cheaters, shoddy artisans, defective manufacturers, cronyism-afflicted traders, and others whose greed surpasses their respect for the market's consumers, and a market patrolled by representatives of the citizenry, I'll opt for the latter. Of course, it works only if those representatives are not themselves dishonest, shoddy, and inept. So if and when the people mobilize to deal with the current mess, one of the things that must be done is a reformation of government so that those in government, elected or not, who are more like those infecting the free market, are tossed out as quickly as their comrades should be tossed out of the market place. Market deregulation became a fashionable trend during the past several decades. "Trust us," said industry and commerce. Well, they had their chance. Short-term advances are now fading in the face of structural long-term disaster. Reform of government and reform of market are necessary, they go hand-in-hand, and if either fails to happen quickly, the issue is going to become much more serious for all of us than is this friendly dialogue between Joe in Iowa and Jim in Pennsylvania that gets the attention of perhaps several hundred readers.

Tax ignorance weakens the civic bonds that constitute the fabric of our nation's democratic and constitutional principles. In an ideal world, all citizens would understand the tax law, including not only the technical application of its substantive and procedural provisions, but also the policies that shape its existence. Because our world is far from ideal, it is asking too much for all citizens to understand the tax law, but it surely isn't asking too much for all public officials whose hands and votes touch the tax law to understand it. Yet an incident last week demonstrates why it has been so easy for special interest groups and people with the power of money to hijack the tax law.

Last week, Congress passed and sent to the president a farm bill that is packed full of goodies for constituents whose votes are sought by the legislators voting for the bill. Though the president has stated his intention to veto the legislation, it passed by such wide margins that a veto override is very likely.

Under current law, farmers can receive subsidies no matter their income. The administration proposed limiting subsidies to farmers with adjusted gross incomes of $200,000 but the Congress rejected that proposal. Eventually the administration modified its position and indicated it could live with a limit of $500,000 in adjusted gross income. The legislation that was enacted disqualifies individuals with more than $750,000 of adjusted gross income from farming, married farmers with more than $1,500,000 in adjusted gross income from farming, individuals with more than $500,000 in adjusted gross income from sources other than farming, and married individuals with more than $1,000,000 in adjusted gross income from sources other than farming. In other words, there will continue to be people with incomes higher than most Americans' incomes getting subsidies from the government.

Earlier last week, mainstream media picked up on the language of the bill and began to question the sense of handing out tax dollars to farmers with six and seven figure incomes. According to Plowing into the farm bill, a Denver Post article that came my way thanks to Paul Caron's TaxProf blog, one member of Congress defended the legislation in a very disappointing manner:

Sen. Ken Salazar, a Denver Democrat who supports the bill, disputed the idea that it pays rich farmers. The bill allows payments to farmers with adjusted gross incomes of $750,000 or less.

That number doesn't take into account deductions for the cost of running a farm, Salazar said.

"A farmer with an adjusted gross income of $750,000 might be losing his shirt" after paying for fuel, a new tractor and other expenses, Salazar said.

Putting it simply, the Senator is flat-out wrong. The concept of adjusted gross income is so foundational in the tax law, and so easy to understand, that it is one of the benchmarks that I build into my exams to determine whether a student understands tax law well enough to earn a passing grade. Adjusted gross income DOES take into account the cost of running a farm, because farm expenses are business expenses deductible in computing adjusted gross income.

According to his biography, Senator Salazar is a lawyer. He has a law degree from an elite American law school. And he doesn't understand adjusted gross income? I don't know who's to blame, and I'm not sure it matters. Was he permitted to graduate without learning something that pervades all areas of law? Did he skip classes? Did someone do the unthinkable and teach the course without referring to adjusted gross income? According to the same biography, the senator has been a farmer. I'm going to guess he didn't do his own tax returns, or, if he did, he didn't pay close attention. Did someone on the Senator's staff misrepresent the bill? Did some special interest group or groups take advantage of the situation and circulate misinformation about what adjusted gross income represents? Considering that adjusted gross income is used in hundreds of legislative provisions each year to measure qualification for one or another benefit, it is not some obscure concept that pops onto the legislative stage every once in a while. No matter, when someone is elected to Congress, that person has an obligation to understand at least the basic principles applicable to the legislation on which they vote. We, the citizens, deserve no less.

In an ideal world, the tax law would be much less complicated than it is. But what tripped up the Senator isn't one of those obtuse, overly complex provisions that infects the Internal Revenue Code. I doubt I would have much sympathy even if it were one of those horrific provisions that did in a politician, because they're the folks who have allowed those terribly drafted provisions to become law. I'm sure my outlook is affected by the fact I'm currently writing about tax credits, and the new ones that have come into the Code during the past five years include some of the most abysmal drafting I've ever seen. There are terms that are not defined, and definitions for terms that are not used. Calling it sloppy would be too kind.

Someone on the ABA-TAX listserv called the entire situation outrageous. I am going to repeat my reply:

What should be outrageous isn't that this is being proposed.

What's outrageous is that this is just yet another in a very long line of subsidies to the wealthy, either direct (as this one is) or indirectly (through "tax expenditures").

Perhaps the difference is that this one is (a) getting attention, (b) isn't as well disguised behind smoke and mirrors as are most of the others, (c) was defended in a totally ignorant way (literally), and (d) is sufficiently understood by the mainstream media to get attention.

To leave Americans with the impression that the subsidies are going to poor farmers, when in fact farmers with six and seven digit incomes are getting them, simply is wrong. Either the Senator knew what he was saying or he spoke in ignorance. Neither explanation does anything to restore public trust in the American political process. Is it any wonder that calling for change attracts voters?

The tough question is the one I posed the other day:

Ultimately, a simpler tax system requires a less tainted political system. That's a choice for citizens to make, but will they ever get the opportunity?

Indeed, whether we will get the opportunity remains to be seen, but there's no question America wants that opportunity.

Last week, during a conversation among a group of people at the gym about taxes, someone turned to me and said, "OK, expert, wouldn't the flat tax solve all these problems?" My answer came in a sentence as short as I can make one. "No," I replied. "Why not?" was the rejoinder.

Why does a flat tax not make tax simple? A flat tax, that is, a tax imposed at a flat rate rather than multiple rates, makes the computation of tax liability easier, but that computation contributes little to the complexity of the tax law because once taxable income has been computed, the tax liability can be found in a table or generated by tax software. It is the computation of taxable income that is complicated, and playing with the tax rates does nothing to alleviate that complexity. A flat tax does not make any simpler the complex rules that determine what receipts are included in gross income, and thus taxed, and what receipts are not. A flat tax does not reduce the complexity in the numerous provisions that allow deductions and that impose limitations on otherwise allowable deductions. A flat tax does nothing about the impact of money's time value, which generally encourages attempts to delay income and accelerate deductions. All of the statutory, regulatory, administrative, and similar provisions, and all of the case law, dealing with these timing issues would be no less voluminous nor any less complicated.

The phrase "flat tax" makes for a nice soundbite. It serves well those politicians who seek votes by misrepresenting the impact of a flat tax, trying to sell it as a solution to a genuine problem when, in fact, it is at best the equivalent of using touch-up paint on an automobile that has been totaled in a wreck. What goes unsaid is what some mean by the phrase "flat tax," namely, a flat rate tax on wage and salary income. Yes, that would be a much simpler system, though not without complications. Think of the game by which investment bankers use partnerships to convert compensation for personal services into capital gains taxed at special lower rates. Worse, it would shift the burden of taxation even more heavily onto workers and give investors a free pass. The fact that something is simpler is insufficient to make it the chosen path to simplification. Have you seen the joke Form 1040 with two lines? The first one asks what the person received. The second one instructs the person to "send it in." Simple? Yes. Good policy? No.

The federal income tax can be simplified greatly without shifting the tax burden solely onto workers. All that needs to be done is to remove the special interest giveaways and the government grant programs that are hidden in the tax code but should be restructured as expenditures administered by the appropriate federal agency, where the nation can see them for what they are. Ultimately, a simpler tax system requires a less tainted political system. That's a choice for citizens to make, but will they ever get the opportunity?

In Why I Don't Write, Geoffrey Rapp explores the decision by some law professors to stay away from writing and to focus on the teaching and service components of the three principal components of law faculty hiring and tenure decision making. Geoffrey wrote his blog piece partly in response to the Why I Write blog posting that Paul Horwitz shared a few years ago.

Geoffrey notes that law faculty write all sorts of things, though he doesn't mention books or, to appease those who consider Tax Management portfolios something other than books, monographs. But his explanation on this point makes sense. Writing, particularly so-called scholarly writing, but often other legal writing, is rewarded. Deans approve research assistance for writing projects. Merit compensation committees take writing into account, though the pecuniary reward is far more symbolic than economically powerful. Writing brings attention to the author's law school, which affects rankings, and which accordingly makes deans happy. It is always good to have a happy dean.

So, asks Geoffrey, why do some law faculty choose not to write? He concludes that they are not lazy, and that the non-writers tend to contribute disproportionately more time and effort to committee work, other university service, additional classes, and even CLE program participation. Geoffrey explains why the usually reasons that are provided by non-writers don't justify the lack of writing:

1. I have nothing to say that would re-invent my field.

2. No one will read it anyway.

3. I object to student-edited law reviews.

4. I get more satisfaction out of service and teaching.

Though Geoffrey makes good arguments - read his posting - I'm not unsympathetic to the claims of the non-writers. Law reviews are saturated with articles exploring all sorts of things, even issues of little practical use. Outside of the academy, most law review articles get little attention, as even judges are ignoring them in increasing numbers. There are all sorts of valid criticisms that can be leveled against student-edited law journals, particularly by those of us who write in time-sensitive areas where the usual student lag in getting things published turns great articles into yesterday's headline. And surely there are good teachers, and great teachers, who just aren't writers.

I'm going to focus on the second and third reasons. After all, if someone isn't a writer, or as once was said to me, "some people just HAVE to write and those are the people we want to hire," then that person isn't a writer. Writing something without having the desire to write is a recipe for a bland, weak, and sad work product. It is so true that great writing rests on the enthusiasm and energy that flows from that need to write, that desire to express one's ideas. I'm not convinced that everything that could be said has been said, else I'd be quite quiet, and so I'm in agreement with Geoffrey that it isn't a very strong justification.

For those who want to be read and who want to avoid the pitfalls of student-edited law journals, opportunities to write are plentiful. I've mentioned books and monographs. For example, there are several areas of tax law for which portfolio authors are needed. Professional journals pepper my in-box, both digital and postal, with requests for articles. Some CLE enterprises seek authors to write explanations and examples that can be used for educational purposes. As Geoffrey notes, blogs are open to anyone, and I add that well-written scholarly posts, or series of posts, are beginning to find acceptance and recognition in some circles as worthy writing. Often, the number of people reading portfolios and blogs are orders of magnitude larger than the number of people reading traditional articles published in student-edited law reviews.

The underlying question isn't why does someone write or not write. It is why the institution wants its faculty to write. Though it is claimed that writing makes a person a better teacher, there are people who contest that assertion. The reason institutions so value writing, particularly law review writing and traditional legal texts, is that it brings the school to the attention of faculty elsewhere, which theoretically boosts the institution's rankings. Law faculty at school A might know enough about the writings of faculty at schools B, C, and D, to mention one or another of them. How many faculty at school A know anything about the teaching quality at schools B, C, and D? In other words, when law faculty respond to the U.S. News questionnaire, their placement of a school is affected by that school's faculty scholarship and not by the reputation of its teachers. There is no question that law schools, when hiring, seek people who have published or who demonstrate significant potential when it comes to writing. Is this a good thing?

For me, it isn't essential that a school's faculty consist solely of people who are legal scholars, whatever that means. A faculty is not unlike a baseball team. It is impossible, I think, to field a lineup of players all of whom are base-stealing threats and 50-homers-a-season sluggers. A law faculty needs great teachers, and if the price that is paid for having them is to have a few who don't write, so be it. Similarly, among the writers on the faculty, it is beneficial to have not only those who pen law review articles, but others who produce books, write monographs, post blog pieces, and contribute editorials and essays. If a school is fortunate, it might have writers who do two or more of these things, and if a school is truly exceptional in its recruiting, it finds some writers who are also great teachers. The risk is that an institution which seeks only those who are great writers and teachers, it will struggle to find the balance that is required for a faculty that excels as a team.

The true concern is when a faculty member who does not write anything also does little beyond the usual teaching. Though Geoffrey claims that laziness is not an issue, there indeed are instances of law faculty who teach their classes, server on several committees as do other faculty, and don't do much else in terms of professional activities. Fortunately few in number and increasingly rare, they are the ones who fuel the popular misconception that law faculty "have it easy" because they're only in the classroom a few hours each week.

Geoffrey concludes that perhaps the reason some law faculty do not write is the avoidance of rejection and the need for "more immediate affirmation of worth." Yet, for me, that does not answer the question. One does not need the approval of a law student editor to publish a blog. Professional journals and publishers seek writers. The opportunities exist to make one's mark. I think it's something different. It could be that some law faculty don't want to publish because they don't want what they say to be criticized. They prefer a low profile. They feel safe in the classroom, because they are at the podium and the students are not, and because they are good or great teachers they know that student evaluations will be fine, or they adjust their teaching so that the evaluations are fine.

But as lawyers, why not run the risk of being criticized? There's always the opportunity to respond. Done well, and with respect, it is enriching, enjoyable, and enlightening. If that were not so, would I be blogging away? Nah.

Twenty-five years ago, I taught my first class at Villanova. It was in the Graduate Tax Program. Because the school needed me to teach a course during the program's summer session, it was arranged that I would begin in May rather than at the usual August start date.

Two and a half years ago, as I wrote in Happy Silver (Teaching) Anniversary to Me, I marked 25 years of law teaching. The first two and a half years were spent at The Dickinson School of Law, now part of Pennsylvania State University. Thus the two and a half year lag between the silver anniversary of teaching and the silver anniversary of teaching at Villanova.

And this year marks the thirtieth anniversary of my post-law school professional writing career. So although it is almost impossible for me to reach 50 years in law teaching, chiefly because retirement is around the corner if I have my way, it is not unlikely that I will continue writing for another 20 years.

When I noted my 25th teaching anniversary, I compiled some interesting but useless statistics about the number of courses and students that I had taught. For whatever it's worth, here is comparable information with respect to my teaching tenure at Villanova. I have taught the basic income tax course, under several names, 25 times. I have taught Partnership Taxation in the Graduate Tax Program 50 times, and in the J.D. Program 10 times. I have taught Introduction to Taxation of Business Entities 15 times. I have taught Decedents' Trusts and Estates 12 times. I have taught Digital Legal Practice Skills or its predecessor Computers and the Law 6 times. I have taught the J.D. Estate and Gift Taxation course once. In the Graduate Tax Program, I have taught the Taxation of Property Disposition course several times, the Taxation of Real Estate Transactions course several times, the Tax Policy course once, and several other courses once or twice. Between 4,000 and 5,000 Villanova University School of Law and Graduate Tax Program students have been enrolled in my courses.

This year, the Law School administration decided to initiate a program whereby they confer academic cords - part of the academic regalia worn at graduation and other academic convocations - on members of the faculty with at least 25 years of service teaching at the law school. Good timing, yes?