MauledAgain

Last week someone brought to my attention advice being given by Charles Schwab to the effect that one should "prepay" state estimated income taxes due in January by sending the check in December 2008 rather than in January 2009. The same advice has poppped up on many web sites, including Renaissance Tax and Business Service, Joe Kristan's Tax Update Blog, and MDManagement Planners. Joe's site includes a chart that taxpayers can use to help themselves decide if this advice makes sense in their case. Take a look.

Unless the AMT causes this to backfire, or unless the taxpayer is in a very low tax bracket in 2008 and expects to be in a very high tax bracket in 2009, this advice makes sense because it accelerates into 2008 the reduction in federal income tax liability caused by the state income tax payment. Technically, one is not pre-paying the state income tax, because the payment is with respect to 2008, and there is nothing in any state's income tax law requiring that the payment be made after December 31, 2008. The practical challenge is the increased difficulty of estimating state income tax liability in December, when the taxpayer does not necessarily have all the information one needs to make that determination. Yet this concern is deceptive, because it is unlikely that when the January 2009 due date for the state estimated income tax payment arrives the taxpayer will have the necessary information. For example, consider the Schedules K-1 due from partnerships, LLCs, and S corporations, which often bring those amazing April (or later) surprises.

Someone asked if the same outcome would be reached if the taxpayer made payments in December 2008 of his or her 2009 estimated state income tax liability. I think that is very risky, and suggested that the taxpayer simply increase the amount of the final estimated state income tax liability payment for 2008 being made in December 2008. My argument is as follows. The December 2008 payment is an estimate, and it is difficult to know with any degree of precision what will end up being the actual 2008 liability. Any state overpayment will end up being available as a credit for the 2009 liability, so the taxpayer will end up in the same place as if a December 2008 payment were tagged as a payment towards 2009 state income taxes. I then got myself into a bit of trouble with an additional bit of reasoning. I noted that the IRS enjoys dealing with people who over-estimate federal income tax liability because those overpayments are interest-free loans to the government. Do people do that? Yes, there are people that do so, particularly folks who have what I will call a hyper-cautious personality. Thus, I asked, would it not be inconsistent for the IRS to object when the same taxpayer is as cautious with state income tax liabilities?

Well, apparently the IRS is a bit touchy about taxpayers who make state estimated income tax payments that are too high. Someone kindly pointed me in the direction of a revenue ruling and a case. In Rev. Rul. 82-208, 1982-2 C.B. 58, the IRS concluded that no deduction would be permitted in year 1 for estimated tax payments for year 1 that were unreasonably too high for year 1. The ruling involved a taxpayer whose income was salary and for which state income tax withholding was sufficient. Clearly the taxpayer was paying a high estimated state income tax in year 1 in order to benefit from the deduction, even though the payments would either be refunded or credited by the state towards the taxpayer's year 2 state income tax liability. On the other hand, in Estate of Cohen v. Comr., T.C. Memo 1970-272, the court rejected the IRS attempt to deny a deduction for high estimated state income tax payments made in year 1 towards year 1 state income tax liabilities because the taxpayer understood that some or many of the income tax deductions taken on the return might be challenged, and if the challenges were successful, state income tax liability would be increased. The taxpayer made high state estimated income tax payment to cover this possibility. Another reason that a taxpayer would take this approach is the one I've already mentioned, namely, the arrival in April of year 2, or later, of Schedules K-1 reporting far more income for year 1 than was expected, often far more income than the partnership's or other entity's tax advisor estimated when contacted by the taxpayer. Absent precautionary payments of state income tax in year 1, the taxpayer ends up having to pay year 1 state income taxes in year 2, incurring interest and perhaps penalties, and obtaining the federal income tax benefit of the deduction for those payments not in year 1 but in year 2. It's the worst of all possible tax worlds. Well, maybe not the worst, but quite unpleasant.

The most important point is that sometime between now and the end of the year, taxpayers and their advisors need to be thinking about these, and other, issues. No matter what the taxpayer decides to do, the worst thing is to ignore the issue only to discover next year that there was something that should have been done before December 31 of this year. This is one reason why, when people claim that early April is the busy time for tax advisors, I disagree, explaining that December often offers the final chance to get some tax things timed correctly. Only 16 tax planning days left in 2008. Use them well.

Thanks to Paul Caron's TaxProf blog post, I have learned of a proposed user fee for animal-caused air pollution. According to Proposed fee on smelly cows, hogs angers farmers, the EPA has issued proposed rules that would require farmers to pay a fee for the gases emitted by farm animals through belching and flatulence. The so-called "cow tax" would not be limited to cows, but in a gesture of equality, would apply to hogs, and according to some, to chickens and other livestock. I suppose sheep and goats would be in the mix.

Most of the reports alerting people to this proposal state something along the lines of what was written here: "This proposal comes hot on the heels of a U.S. Supreme Court decision declaring that 'greenhouse gasses emitted by belching and flatulence amounts to air pollution.'" With that quotation from the Supreme Court at hand, I ran some searches but could not find it in the text of Supreme Court opinions. What I did find was a 2007 Supreme Court decision, Massachusetts v. EPA, 549 U.S. 497 (2007), in which the court rejected a statutory interpretation that would treat "everything airborne, from Frisbees to flatulence" as an "air pollutant." The Court then noted that such a conclusion would be one that "defies common sense."

Though numerous other stories and articles are reporting the same news, just as I cannot trace the Supreme Court quotation to a Supreme Court decision, I also cannot find an EPA issuance that sets forth the proposal. According to a CBS News report, the EPA denies having made a proposal to tax livestock. It seems that last Friday the EPA issued a technical report on the causes of pollution, and someone who read it concluded that it included the so-called cow tax. The American Farm Bureau Federation claimed that the tax would affect farms with "more than 25 dairy cows, 50 beef cattle or 200 hogs to pay an annual fee of about $175 for each dairy cow, $87.50 per head of beef cattle and $20 for each hog." Though I've looked for the report on the EPA's web site, the American Farm Bureau Federation's web site, and other sources, I've come up empty. I wonder why none of the stories reporting the proposed tax includes a link to the report. Another version of the proposal is a fee on farming operations that generate more than 100 tons of carbon emissions annually, though carbon can be emitted from all sorts of farm activities, such tractors, furnaces, brush burning, and a variety of other air polluting processes.

Assuming that there is such a proposal from the EPA, it isn't difficult to imagine the nonsense that would turn it into something that makes the income tax law seem simple. Would there be credits for expenditures undertaken to reduce the emission of hot air by livestock? Would this tax law spark investment in a "Bovine Beano" production facility for which a credit or deduction would be allowable? Surely there would be rules determining whether farms would be combined for purposes of counting the number of each animal, else the savvy farmer would divide the animals into mini-farms of 20 dairy cows, 48 beef cattle, or 198 hogs. Why those numbers? Well, what happens when the cows and hogs produce the next generation? And when it comes to counting, would the tax be apportioned in some convoluted way if the number of animals on the farm fluctuated during the year from a number below the minimum to a number above the minimum? Would the tax be considered a property tax, raising uniformity clause issues? Or would it be a transaction tax, measured by some presumed number of annual hot air emissions by each type of animal?

Whether or not there is such a proposal from the EPA, it surely has generated some fun commentary. I've tried to be elegant, using phrases such as "hot air" and "emissions." But my attempt to be polite doesn’t deter me from sending my readers to the comment sections at TaxProf Blog's report, or from suggesting they check out this news item from EcoGeek. Next time someone calls you a windbag, try not to remember what you saw here.

When analyzing an idea, it helps to ascertain if anyone else has previously explored the concept. So, has such a proposal ever been made elsewhere? Yes, according to this report, in New Zealand. About five years ago. And perhaps that tax encouraged the research results reported in this article a few months ago. As I tell my students, tax is everywhere, tax affects everything, tax invades every aspect of life, tax is cosmic. But don't get carried away. Tax is not divine.

So, eventually, the entire discussion may or may not end up as nothing more than hot air. But the commentary flooding the web demonstrates that it doesn't take much to get people to raise a stink about an issue. Especially one that has the word "tax" connected to it.

Well, folks, here it is. Post number 1,000. Who would have thought, almost five years ago, that MauledAgain would be around for 1,000 posts? Not me. When I started MauledAgain, I had no idea what would happen. I guessed that I would enjoy blogging. I guessed that people would read what I wrote. But I would never have predicted, in February of 2004, that near the end of 2008 MauledAgain would still be around.

A quick analysis of the posts indicates that the average word count per post is roughly 1,000. That means I've penned, no, I've keyboarded one million words, give or take a thousand or so. And the same analysis suggests that my words average five characters each. I must use "to," "and," "the," and similar words quite a lot, to make up for all of those lengthy tax-related words. Five million pressings of a key? No, far more, because I have backspaced more than once, I've written and deleted thousands of sentences and tens of thousands of words. Too bad the blogosphere doesn't pay by the word or character. Seriously, I'd rather be "paid" by the citations of, and links to, MauledAgain.

What I haven't done is to analyze all 1,000 posts in order to classify them by subject. I think it is a good guess to conclude that at least two-thirds involve tax, in one way or another. Legal education surely comes in a distant second. Somehow chocolate didn't get quite the same amount of attention. At least not on the blog. I think chocolate prefers a different sort of attention.

Before I end this relatively short post, thanks to Mark Sargent, the Dean of the Villanova University School of Law, whose immortal words, "What? You don't have a blog? Of all people …." set things in motion. How could I not have a blog? Thanks to those who have encouraged me to continue writing, and thos who have been gracious in naming or nominating MauledAgain for an award. Thanks, also, to all of those who have taken time to read the blog, to those who have sent comments, offered suggestions, and provided material, and special thanks to all of those who, having read the blog, came back for more.

And more there should be. That's in my plans.

The chief executive of a major home builder, Toll Brothers, Inc., has suggested that the government's proposal to guarantee mortgage-backed securities not only should be pursued but should be accompanied by a $20,000 federal income tax credit for persons who purchase a home. According to this Philadelphia Inquirer story, Robert I. Toll explained that the guarantee would reduce mortgage rates to 4.5%, a rate that would make homes more affordable. Presumably, if homes are more affordable, more will be sold, and the housing market would regain some of its vitality. Justification for the proposed tax credit rests on Toll's theory that it is better to "overprime" rather than "underprime" the economic pump.

It makes sense to question whether a tax credit solves the problem, and to question what happens when such a credit, if enacted, expires, as it is highly unlikely that even if enacted, a homebuyer credit would be permanent and eternal. Toll did mention, in his comments, that there exists a "pervading lack of confidence" in the market. The question is whether a tax credit would restore that confidence. My suggestion is that it would not.

Toll is correct that lack of confidence is a significant factor in the troubles afflicting the economy. It's no wonder people lack confidence. Once upon a time, a town's banker could be trusted. Now one deals with an unidentified person in some remote institution, hiding behind an automated telephone system and an unresponsive web page. Once upon a time, a person could trust investment brokers, financiers, and regulators. Now the financial markets are flooded with toxic financial instruments, in which bad assets are hidden inside good ones, products of manipulation by schemers who have made their money, stashed it offshore, and purchased tickets to some hideaway. Once upon a time, business entrepreneurs either did their job well and prospered, or demonstrated incompetence and went under. Now people are being asked to bear the burden of others' mismanagement. Finally, the wrappings have fallen off the postmodern financial culture, and what one sees isn't going to instill confidence. The charade is over, people are frightened, and the economy is spinning out of control. People who stop and think for a moment understand that it's not possible to bail out every failure, every product of incompetence, and every consequence of fraud.

Why do I think that a $20,000 tax credit won't make much of a difference? First, consider the impact of the recently enacted $7,500 homebuyer credit, which I described and criticized in Yet Another Questionable New Tax Provision. Ill-advised for many reasons, it isn't working, and more than doubling the amount and removing the recapture provision amounts to something akin to banging one's head against the wall even more forcefully. Second, an income tax credit won't change the minds of people who can afford to purchase a home but are refraining from doing so because of the uncertain future they, and the rest of us, face. Third, an income tax credit won't make a home affordable for those who cannot afford a home even if the required cash outlay is reduced by $20,000 because people who cannot afford monthly payments, including the increasing number of people without jobs, are less likely to walk into a home they cannot afford than they were two or three years ago, because they've learned some lessons about living beyond one's means. The number of people for whom $20,000 makes the difference between affordable and unaffordable are too few to make a difference, and even many of them would refrain from making a purchase, even if it became affordable, for the same reason people who can afford to purchase a home without the credit are holding back. Fourth, offering a tax credit to encourage home purchases doesn't address the problem, but at best alleviates some portion of a symptom. The problem with the economy isn't the lack of home sales.

What would make a difference is something that deals with the underlying problem, and that means crafting a solution that addresses the underlying cause of the economic turmoil. Assuming that the tax law is the appropriate vehicle with which to tackle the problem is itself a dubious proposition. As I noted three years ago in More on Skyrocketing Housing Prices, "Considering the government's track record using the tax code to "step in" the ideal of using the tax code to tinker with the housing market is alarming." But even if the tax law is to be used to deal with the crisis, ought it not be used to get to the root of the problem? The problem isn't unemployment, reduced housing sales, failing automakers, or credit squeezes. The problem is confidence. The problem is lack of trust on the part of the typical citizen in the machinery of the marketplace and the absence or ineffectiveness of regulatory mechanisms. People now understand that the free market isn't free, except to the extent some people thought it meant they were free to abuse, manipulate, distort, and undermine the market. Perhaps tax credits should be offered to those who produce evidence of how the markets were damaged, information on who did things that contributed to the deceit and mismanagement, and leads to finding the money that has been squirreled away in places hidden from the eyes of tax authorities, supervisory agencies, and victims of the games that people played with other people's money and lives. I'm not convinced that such credits would necessarily or alone restore confidence, but I'm convinced that such credits stand a better chance of doing so that simply throwing more money into the bottomless pit of citizen anxiety. I'm not ready to put faith into tax credits the way others do, and I'm not yet ready to give credit to tax credits.

Speaking from experience, it truly is difficult to resist saying, "I told you so." Yet somehow, according to this report, Paul O'Neill refuses to speak those words. Who's Paul O'Neill? He's the guy who was Secretary of the Treasury when George W. Bush decided that it made sense to reduce tax rates while incurring huge expenditures to fight the war in Iraq. He opposed the notion of huge increases in federal expenditures not only unmatched by tax increases but accompanied by tax cuts. He wasn't Secretary of the Treasury much longer. He was shown the door, and out he went.

I made that same point on several occasions. Though my earliest comments weren't recorded on MauledAgain, as it did not yet exist, eventually my thoughts presented themselves in the world of blogs. More than three years ago, in Does It Matter Who or What is to Blame?, I opined:

Whether or not one supports none, one, or all of the various military actions undertaken in connection with this war, it is inconceivable to me how one can disagree with the notion that if there is a war the war must be funded because wars cost money. Would opposition to specific military campaigns been stronger, or developed sooner, had taxes been increased to fund the campaign, as good fiscal management demands? Maybe. My guess is that those who supported a campaign, or at least most of them, would have acquiesced, reluctantly or otherwise, to a tax increase. The failure to seek a tax increase, or at least to put the brakes on the tax cutting, probably reflected a policy of trying to make everyone happy even though the long-term cost is far higher than would be the cost of an immediate, and thus smaller, tax increase. I've been told, and I've read, that when the nation went to war in 1941, and even as it was preparing to do so in 1939 and 1940, taxes were increased. I don't know if there was much griping, or how extensive it was, but people knew that war means war. It requires sacrifice.

Later, in my May 2006 Memorial Day Essay on War and TaxationI expounded on this analysis, with this prediction:

Politicians have chosen to fight without increasing revenue, imposing rationing, or deferring projects and activities. In their defense, they argue that none of these things are necessary, that a nation can have its guns without giving up its butter. I disagree, and I happen to think that politicians are reluctant to do what needs to be done because they are more concerned about maintaining their position in office than in making the tough decisions that war requires. So our national leaders have chosen to put the cost of the current war on our children and grandchildren. Those who decry the huge deficits, triggered in part by war and in part by the almost insane concept of decreasing tax revenues (mostly for the wealthy) during wartime, pretty much focus on the economic impact. They ask if, or suggest that, our grandchildren will be facing income tax rates of 80 percent in order to reduce an unmanageable deficit. I think it will be worse. I think our children and their children and grandchildren will become subservient to our nation's creditors. The sovereignty of the United States of America is far from guaranteed, and is at risk. Were these considerations discussed when those in power decided that war can be done on the cheap?

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

Just a few weeks ago, in What's Ahead for the Tax Law?, I observed: "The war in Iraq? This is the one major issue that I don't see generating tax law changes. That's ironic, because it's the failure to raise taxes to pay for the war that contributed significantly to the credit crunch."

As the media continues to bring news of job losses, failing industries, companies lining up for federal bailouts and handouts, mortgage foreclosures, and stock market tribulations, I wonder why someone doesn't figure out that Paul O'Neill should be given a chance to put his mind to work solving the problem. No, it's no fun cleaning up the mess that wouldn't be there if one's advice had been taken. Again I speak from experience. But it would be a fine vindication to let Paul O'Neill, not merely for himself but for all of those who share his opposition to reckless federal tax and budgetary policy, to demonstrate that it indeed is possible to exercise public fiduciary fiscal responsibilities in an appropriate manner.

O'Neill acknowledges that returning to a balanced federal budget cannot happen in the short term. It takes time to fix a fiscal mess of this magnitude, and it will take time to get the machinery of the nation's economy humming along in a beneficial way. O'Neill has enough sense to realize that throwing hundreds of billions of dollars at programs that might create a few million jobs is extremely inefficient. His suggestions demonstrate that he understands why it is important to have federal financial assistance flow directly to the people who need help and not to banks, financial institutions, or, worse, the people and companies that caused the problems. Even more impressive is his acknowledgement that the current crisis pales in comparison to what will confront the nation in a decade if nothing is done to deal with the Social Security, Medicare, and health care funding conundrum.

O'Neill summed up his approach in a sentence almost short enough to qualify as a great soundbite, and we know how oxymoronic a concept is "great soundbite." Said O'Neill, "The leaders of this country need to educate people and deal with it, or we'll all pay the price." I'll go along with that idea, provided the leaders of this country are in a position to educate people. In other words, the leaders of this country have an obligation to get smart about federal budgets, taxes, monetary policy, and markets. Just because someone is among the leaders of a country doesn't mean that he or she is qualified to educate, or should be educating, the people. But perhaps that soundbite works better if we define leaders not as those who manage to get elected, but as those who step forward with positive ideas for rehabilitation of a broken nation. It's not difficult to think of elected officials who demonstrated little, if anything, that would make people want to be educated by them. Woven into the definition of leader is the ability to lead a nation out of messes rather than into them. Sometimes leading people out of messes requires the leader to persuade people to walk where they don't want to go, by getting them to understand why they simply don't realize that they, in fact, do want to go there. Thus, there is hope in President-elect Obama's statement to the governors convened in Philadelphia earlier this week: "We are not, as a nation, going to be able to just keep on printing money. So at some point, we're also going to have to make some long-term decisions in terms of fiscal responsibility. And not all of those choices are going to be popular."

The key will be getting people to admit that though a measure is not popular, it is necessary and needs to be undertaken. Goodness, that's not unlike what teachers do when they educate students. Again, I speak from experience. It's time for the nation to go to school.

Eighteen months ago, in An Unconstitutional Tax Assessment System, I commented on the decision in Clifton v. Allegheny Co., holding that Allegheny County's decision to determine the value of all real property as of 2002 for real property tax purposes violated the uniformity clause of the Pennsylvania Constitution and ordering the county to do full reassessments in 2008 and 2009. The decision was appealed and the state Supreme Court is expected to render a decision sometime in 2009. Now comes news that last week a judge in nearby Washington County has ordered that county to "initiate and pursue a program of countywide reassessment and to proceed diligently" before the current terms of the county's commissioners expire in January 2012. The last reassessment in the county took place in 1979.

Unless the state legislature deals with the issue, a suggestion I made in An Unconstitutional Tax Assessment System, or unless the Supreme Court reverses the Allegheny county case, Washington County will incur millions of dollars in expenses bringing its assessment rolls up to date. Would it have been cheaper to comply with the state Constitution through annual maintenance of those rolls? I don't know. Apparently the county would need to borrow money in order to perform the reassessment, but the current constriction in the municipal bond market makes that prospect not very promising.

The chair of the county commissioners claims that the reassessment was sought because the plaintiff, a school district, wants to increase taxes. However, there is a law that caps increases on account of reassessment, and consequently, the effect of a reassessment is that some property owners will see increases, some will see decreases, and others will be unaffected. In other words, the total tax imposed on county property will be re-allocated so that taxpayers with properties assessed proportionately higher than other properties will benefit from a tax reduction, whereas those whose properties are under-assessed will incur a tax increase. Is that fair? The answer is in the response to a more telling question. Is it fair that without reassessment property owners are taxed at different rates in violation of the state Constitution?

One wonders how long before similar decisions in other counties are added to the list. Will there be, throughout the Commonwealth, a uniform rejection of these non-uniform real property tax assessment practices?

Several news stories during the past few days have caught my attention. Tax is involved in some indirect way.

According to a KYW News Radio report, Atlantic City Electric Company is giving people the opportunity to give a gift that consists of paying some or all of a person's electric bill. Under the "Gift of Energy"program, a person visits one of the company's courtesy centers, provides the name and address of the donee, and pays a selected amount to be credited toward the donee's utility bill. The company requires that a specific recipient be selected. It will not accept gifts simply for "someone in need." Here's the tax angle. A gift to a specific person, even if that person is economically distressed and in need, does not qualify for a charitable contribution deduction. In contrast, a cash gift for the relief of poverty, that does not name a specific person, and that is made through a qualified charitable organization, does qualify for a charitable contribution deduction, provided appropriate record keeping requirements are satisfied. To take the latter approach, Atlantic City Electric Company directs people to New Jersey Shares, "the only statewide, nonprofit 501(c)(3) organization which provides grants to pay the utility bills of households in need through a statewide network of more than 173 community-based social service agencies operating out of 225 sites." PECO Energy, which is my supplier, uses a similar program called the Matching Energy Assistance Fund.

According to a number of reports, including this one, security guards aboard a tanker seized by pirates in the Indian Ocean do not carry weapons. Though they are former Royal Marines and are aboard ship specifically to deal with the piracy risk, having been provided by a company called Anti-Piracy Maritime Security Solutions, for some reason they are unarmed. Hello? Are they to use spitballs? Talk the pirates into somnabulence? Make scary faces at them? Is the company waiting for a chance to make a pitch that the cost of weapons is such that only a tax credit for ocean-going security guard weaponry will make it possible to give the guards some reasonable chance of success? The three guards in question jumped overboard when the pirates boarded the ship.

Speaking of security, there surely was none present when an unruly crowd of undisciplined shoppers crashed through a Wal-Mart door, trampling a worker to death. According to many reports, including this New York Times story, the crowd surged over and around the body of the worker who died from his injuries. They even ran over the EMT folks who were trying to save the man. Even when asked to leave the store on account of the tragedy, most refused to do so. It is only a matter of time before someone proposes a tax credit or tax deduction as a solution to the problem. I can imagine someone arguing that tax incentives to acquire an education that helps a person's common sense overcome the greed instinct would be helpful in this context, and in others. I also imagine stores arguing that a tax incentive to hire security guards for the Black Friday madness that grips America's materialistic society would eliminate the chances of this catastrophe happening again. Would the guards be armed? If not, what would they do when the crowd begins to chant, as happened in this instance, "Push in the doors"? Perhaps retail executives need to re-think the entire notion of a day when one or two items are sold at a deep discount in order to bring tens of thousands of people into their stores. Maybe some sort of tax credit will get their brains to function in a manner that they currently do not demonstrate.

Finally, recall that in A Truly Frightening Halloween Candy Bar and in Happy Halloween: Chocolate Math and Tax Arithmetic, I lamented my inability to find the 4-pack version of Reese's Peanut Butter Cups to distribute at Halloween. Over the weekend an email arrived from my sister in Massachusetts, with the subject "4-pack." She has found a place to purchase those 4-packs online. She offered to send some. NO! Please, I'm drowning in 2-packs. There was a reduction in the turnout of trick-or-treating youngsters this year, perhaps because the Phillies Championship Parade was held that same afternoon. The last thing I need, oh, ok, one of the last things I need, is another bundle of Reese's Peanut Butter Cups. I continue to give them away. Perhaps they will make nice holiday gifts. I would give them to a charity but the paperwork now required by the tax law is a bit much, and the appraiser's fee is prohibitive.

It's easier to go up steps than to go up cliffs, and it's easier to go down steps than to go down a cliff. This is true in both the literal and figurative senses. The tax law provides many examples of why steps are both more equitable than cliffs but also more complicated than cliffs.

Consider vesting, that is, the determination of when a person has a nonforfeitable right to the amount credited to his or her account in an employee retirement trust. One approach is to require an employee to remain employed for a certain period of time, say 5 years, at which point the employee becomes fully vested. This is cliff vesting. It's a simple rule, but it has an unfortunate effect on the employee who leaves four years and eleven months into the job. A less harsh rule is more complicated. This is stepped vesting. One could provide that the employee vests in one-third of the account after three years of employment, in an additional one-third after the fourth year of employment, and in the entire account after five years of employment. Though still disadvantageous to someone who leaves before completing three years of employment, it permits someone who stays that long to acquire at least something even if he or she doesn't remain for five years.

A story in Wednesday's Philadelphia Inquirer, A Fall Through Insurance-Coverage Gap, caused me to think about cliffs and steps in another, but similar, context. According to the story, a man named Phil Venezio became disabled after struck by an illness. Because he could not work, he lost his health insurance. He receives $1,988 each month in Social Security disability, but after paying other expenses, he has insufficient money to purchase health insurance. When he sought Medicaid, he was denied because his income of $1,988 exceeded the maximum income limitation for Medicaid qualification in New Jersey, namely, $1,911. So, because his monthly income is $77 more than the limit, he cannot get any health insurance. In other words, Phil Venezio goes over the cliff. A person with disability income of $1,912 per month gets nothing, whereas someone with monthly income of $1,911 qualifies. What a difference a dollar makes!

Surely there needs to be some sort of limitation. A person with monthly income of $30,000 ought not receive Medicaid assistance. Is there some alternative to letting one additional dollar of income put a person in a situation of no assistance whatsoever with respect to health insurance? Yes, there is.

Suppose that the rule were revised as follows. A person whose income exceeds $1,500 a month obtains 100 percent of the available benefit. A person whose income exceeds $1,600 a month obtains 70 percent of the available benefit. A person whose income exceeds $1,700 a month obtains 60 percent of the available benefit. A person whose income exceeds $1,800 a month obtains 50 percent of the available benefit. A person whose income exceeds $1,900 a month obtains 40 percent of the available benefit. A person whose income exceeds $2,000 a month obtains 30 percent of the available benefit. A person whose income exceeds $2,100 a month obtains 20 percent of the available benefit. A person whose income exceeds $2,200 a month obtains 10 percent of the available benefit. A person whose income exceeds $2,300 a month obtains no benefit. The numbers can be adjusted, but the point is that an increase in income causes a more manageable impact on the benefit that the person is qualified to receive.

The tax law has many examples of stepped adjustments. Most phase-outs of deductions or limitations apply incrementally, or in steps, rather than in one single drop over the cliff. For example, the reduction in the amount of the personal and dependency exemption is increased by 2% for each $2,500 increase in the excess of adjusted gross income over the threshhold amount. The phase-out of itemized deductions is computed in a similar manner. There is a phase-in for the inclusion of social security benefits in gross income. The $25,000 active management exception to the passive loss limitation is phased out $1 for each $2 increase in the excess of adjusted gross income over $100,000. Numerous other phase-outs and phase-ins follow similar patterns. They make the tax law more complicated, but if they serve a defensible purpose, they arguably are more equitable. Of course, some of the phase-outs are nothing more than disguised tax rate increases and serve no defensible purpose other than deception of the public.

Something needs to be done. Venezio's appeal of the decision certainly will be rejected, because the limit is "hard and fast" according to a state official. It's worse. His income is a bit too high to permit him to qualify for pro bono legal representation from the Community Health Law Project. His medical bills continue to pile up.

Venezio is not alone. Hundreds of thousands are in similar straits. And as they become eligible for Medicare after waiting for the specified two years, others join their ranks.

It could happen to anyone. For Venezio, it was back pain that turned out to be an infection that had created a mass on his spine, eating away at the bones. Though doctors performed surgery, it wasn't enough to prevent him from ending up in a wheelchair with a 30 percent chance of regaining the ability to walk and from suffering other side effects.

Most likely, if Venezio is thinking about steps and cliffs, they're not the sort of steps and cliffs that should be considered for addition to the Medicaid law. But if something can be done to remedy the crushing impact of $77 "too much income," perhaps he'll have a better chance of again climbing steps and perhaps even scaling cliffs.

Thanks to a link that the Wandering Tax Pro included in What's the Buzz? Tell Me What's a Happennin', I found my way to Typealyzer, a web site that analyzes a person's personality characteristics by doing some sort of review of the person's blog. I typed in the URL for MauledAgain and within a fraction of a second the following result popped up:

INTP - The Thinkers

The logical and analytical type. They are especialy attuned to difficult creative and intellectual challenges and always look for something more complex to dig into. They are great at finding subtle connections between things and imagine far-reaching implications.

They enjoy working with complex things using a lot of concepts and imaginative models of reality. Since they are not very good at seeing and understanding the needs of other people, they might come across as arrogant, impatient and insensitive to people that need some time to understand what they are talking about.

Though there's not to question about what's said in the first four sentences, somehow my criticism of the Congress ended up as the bellweather for how I deal with people generally. Oh, well, the truly bizarre aspect of the outcome is the P in INTP. My Meyers-Briggs tests, though sometimes generating an I and sometimes generating an E, always turn up with NTJ. The J is so strong that it amuses me to discover that someone (or is it someTHING) brands me as a P. Anyone that reads MauledAgain knows that a good chunk of my "J" side turns up.

And thanks to a link from Joe Kristan's Tax Update Blog, specifically, his Macho Macho Tax Blogs post, I found my way to Genderanalyzer. This site doesn't profess to identify four personality traits as does Typealyzer. It's content with trying to identify the gender of the blog's author. It fails miserably. Joe's post is hilarious. I quote a bit. In response to the site's conclusion "We think http://www.taxgirl.com is written by a man (80%)," Joe notes, "Hmmm. Artificial intelligence has a ways to go. You'd think 'TaxGirl' would have some weight in the analysis, though technically Kelly can be a boys name too." When Genderanalyzer concluded, "We think http://www.taxguru.net is written by a woman (62%)," Joe commented, "It must be that picture of Kerry Kerstetter holding a cat (the full beard notwithstanding)." So although Joe had already cranked MauledAgain through the site and reported the results, I did for myself. The result was the same: "We think http://mauledagain.blogspot.com is written by a man (81%)." So I join the 53% who reported that Genderanalyzer correctly identified their gender. That's not much better than a coin flip. And what's this 81% factor? The site doesn't explain what the number represents. Is the site saying that it is only 81% confident of its conclusion?

Over at the Blog Readability Testsite, MauledAgain gets a "GENIUS" label. I can live with that, ha ha. Last year at this time, in Clients to Lawyers: We Don't Understand You, I mentioned that I had put MauledAgain through that site, obtaining "COLLEGE (UNDERGRAD)" after someone else had used the same site to get a "HIGH SCHOOL" outcome. The blog has surely evolved during the past year! At the same time, I put MauledAgain through the tests at Readability.info and obtained these results:

readability grades:
Kincaid: 9.6
ARI: 10.7
Coleman-Liau: 11.3
Flesch Index: 63.6
Fog Index: 12.6
Lix: 43.5 = school year 7
SMOG-Grading: 11.1
sentence info:
37605 characters
8177 words, average length 4.60 characters = 1.44 syllables
392 sentences, average length 20.9 words
51% (201) short sentences (at most 16 words)
18% (74) long sentences (at least 31 words)
5 paragraphs, average length 78.4 sentences
11% (44) questions
45% (178) passive sentences
longest sent 146 wds at sent 384; shortest sent 1 wds at sent 33
word usage:
verb types:
to be (261) auxiliary (141)
types as % of total: conjunctions 5(419) pronouns 7(590) prepositions 11(906)nominalizations 2(167)
sentence beginnings:
pronoun (77) interrogative pronoun (18) article (57)
subordinating conjunction (19) conjunction (12) preposition (36)

Now, a year later, here is how MauledAgain is measured:

readability grades:
Kincaid: 11.8
ARI: 13.4
Coleman-Liau: 12.1
Flesch Index: 55.3
Fog Index: 15.3
Lix: 49.1 = school year 9
SMOG-Grading: 12.9
sentence info:
80744 characters
17033 words, average length 4.74 characters = 1.49 syllables
681 sentences, average length 25.0 words
50% (346) short sentences (at most 20 words)
21% (148) long sentences (at least 35 words)
30 paragraphs, average length 22.7 sentences
9% (65) questions
53% (367) passive sentences
longest sent 167 wds at sent 674; shortest sent 1 wds at sent 77
word usage:
verb types:
to be (556) auxiliary (274)
types as % of total:
conjunctions 5(936) pronouns 8(1286) prepositions 12(2063)
nominalizations 3(469)
sentence beginnings:
pronoun (153) interrogative pronoun (30) article (101)
subordinating conjunction (36) conjunction (35) preposition (58)

According to the info page on the site, the Flesch Index uses a 1-100 scale, with "standard English documents" averaging 60-70. SMOG-Grading and Fog Index scores are school grades.

So it seems that my writing has become a bit more complex and more difficult to read, but that the posts have become much longer, with many more paragraphs containing many fewer sentences. According to the Flesch index, my writing is slightly more difficult to read than the average document. In both instances, the Fog index puts my writing at the "too hard for most people to read" level. Yet if the Lix and SMOG outcomes are accurate, they suggest that most people find material written at high school reading levels to be too difficult. Can that possibly be true in a country with so many college graduates?

So, it appears that my MauledAgain persona is a thinker who writes complex stuff. Oh, and apparently he's a guy.

Last week, the Philadelphia City Council approved Mayor Nutter's proposed legislation to deal with impending budget deficits caused by the worsening international economy. The debate was quite sharp, as reported in this story, but the plan consists of two major elements. One is a suspension of tax cuts scheduled to go into effect in 2009 and thereafter. The other is a cut in spending for city services. Of all the cuts, the ones that would shut down several fire houses, as described in Fire Department Plan Causes Worry, and close eleven branches of the Philadelphia Free Library, the full impact of which is examined in this story, have generated the sharpest criticism and concern.

The planned suspension of tax cuts does not appear to have triggered the same level of opposition or alarm. The issue, though, demonstrates the conundrum in which state and local governments find themselves as they try to deal with huge deficits. Philadelphia's projected deficit, for example, is close to a billion dollars. By keeping taxes at current levels, about half of that deficit can be avoided. Or can it? Will businesses and residents leave the city to avoid tax burdens higher than those for which they had planned? Empirical data on this question does not appear to exist, though one can make arguments based on analogies to behavioral patterns during previous economic crises. The difficulty with these analogies is that the present economic disequilibrium isn't necessarily in the same ballpark as have been those of the past. One of the factors on which proponents of the city tax cuts relied when advocating for the gradual reduction in business and other taxes was the willingness of other municipalities to encourage businesses to pack up and relocate in their areas on account of lower tax burdens. In the present economic climate, though, are there any municipalities in a position to offer tax breaks? If suspending the planned tax cuts indeed does cause businesses and residents to leave, will that not further reduce tax revenue, thus contributing to a reduced deficit shrinkage or even a larger deficit?

The condundrum is not unlike that facing the nation and its citizens. Consider the following dialogue. The first person opines that people ought not spend beyond their means, because that is what contributed to the problem, namely, a run-up in credit and the massive debt loads borne by consumers. The second person points out that if people follow this advice, they will reduce consumer spending, which in turn would reduce business receipts and compel businesses to cut back hiring, reduce purchases, lay off workers, and pay fewer taxes because of diminished profits. The first person agrees, but suggests that infusions of money by the federal government into state and local government programs, unemployment, industry bailouts and other stimulus programs would trickle down to consumers and fund continued purchases. The second person explains that in order to fund this infusion, the federal government would need to print money, thus triggering inflation, raise taxes, thus negating the impact of the stimulus, or borrow more money, thus pouring more gasoline on the raging credit crisis fires. The first person voices a thought that has popped up in more than a few places, namely, that the crisis is unmanageable and because no one knows how to deal with it, the economy will continue to roll down the hill until it tumbles over a cliff.

At the root of the problem, of course, is something more profound than living beyond one's means. It's the disequilibrium caused by consumption exceeding production. Ultimately, if prices, that is, what people pay, exceed incomes, causing people to incur debt, it is because demand exceeds supply. If people reduce what they pay to what their incomes permit, it causes the incomes of other people to decline, and if those people reduce their spending, the downward spiral deepens and accelerates. Rather than spending money in futile efforts to balance something that cannot be balanced, perhaps governments ought to be taxing, and even regulating into oblivion, consumption that does not generate production. This requires an examination of the extent to which the so-called free market genuinely measures the value added by those who are paid for goods and services. It's one thing to produce value or to move goods from where they are produced to where they are needed, but it's an entirely different thing to move assets from place to place as a part of complex schemes to make money on someone else's back, to hide assets in order to avoid taxes and creditors, to milk the market for more than the value of what is being inserted into the marketplace, or to shift economic burdens onto consumers and other purchasers by selling products that perform inadequately because money was pumped into profits rather than quality research.

Can government regulation and taxation remove the factors that fetter the free market and that prevent the market from self-correcting? I suspect not. More regulation invites more scheming by the self-anointed privileged who through questionable means take more than they give. We're told the credit markets aren't working because banks don't trust most loan applicants, and even other banks. It's no wonder, isn't it? The cultural tones of a nation define and shape the depth and breadth of the trust that is required for a free market to be free. Let's face it. Compared to the situation six months ago or even two years ago, the amount of raw material, manufactured goods, and other tangible items on the planet hasn't changed very much. Nor has the population changed very much. Yet somehow, owners of stock are 30 to 40 percent poorer, some retirement plans are worth half what they were worth six months ago, the value of real property has dropped, and yet pretty much all the buildings still exist and corporations still own their assets. What's the problem? The problem is that value reflects not only supply and demand but perception of the future. At the moment, collective perception of the future is dismal, and nurtures an environment friendly to pessimists.

It will take a different sort of government function, namely, leadership, to get the nation and the world past this greed-is-good culture and into an economic system that fairly values the contributions of all productive individuals rather than one that permits redistribution in favor of those who have taken advantage of deregulated markets, consumer ignorance, government lethargy, and cultural inequity to shift value from production to consumption. It will take a strong, articulate, intelligent, and persistent visionary to convince the nation and the world that if we don't play and work fairly we may end up neither playing nor working. Or perhaps it will take thousands of such leaders, in city and town across the country, doing in neighborhoods and organizations what needs to be done throughout the globe. It will take more than curtailment in spending and freezing tax cuts to make the Philadelphia budget rescue plan succeed. It will take leadership to persuade businesses and residents that leaving the city would be a long-term futility hidden inside a short-term mirage.

A few days ago, I received an email from a reader, and with the reader's permission, I share it:

I enjoy your commentaries; keep them coming.

Twice this week, I found myself apologizing to clients for bad tax law written by Congress.

The first was a client who is an employee with no company-paid health insurance. He asked why the insurance he bought on his own was not an adjustment to income rather than a deduction like his self-employed neighbor. I shrugged and said "bad law."

The next was a couple who received a CP-2000 notice reporting a $3000 gambling winning that was not listed on their tax return. Several apologies here: "I'm sorry you cannot deduct your losses since you don't itemize." "I'm sorry you have to pay tax on $4500 since you are in the Social Security phase-in range." "I'm sorry Social Security is taxable since I don't think President Roosevelt intended it to be." "I'm sorry that the 25000/32000 threshold has not been indexed."

Last tax season I had a client who was furious that her U. S. Civil Service disability pension did not quality her for the stimulus rebate while others with Social Security disability pensions did. I apologized and said "call your Congressman."

The list could go on and on.

If Congress passes laws which I have to apologize for, I submit that they are not doing a good job (maybe I am stating the obvious).

Once again, I learned something from a reader. Though I would have guessed that many tax advisors share with their clients the disappointment and frustration triggered by the mess that is the Internal Revenue Code, it was the first time I encountered a tax advisor who apologized on behalf of the Congress for the thoroughly unacceptable job that it has done with the tax law. In my reply to the reader, I shared this opinion: "It's quite noble of you to apologize on behalf of Congress." It ought not surprise me that as increasing numbers of people look to blame everyone but themselves for their own mistakes and failures, the task of apologizing falls on someone else. I'm not focusing on the standard "I'm sorry" that is offered when someone mentions that they have been the victim of another person's ineptitude or malfeasance. That reaction amounts to "I'm sorry that you are hurting" and not "I'm sorry for the wrongdoer's idiocy or evil-mindedness." It's one thing to commiserate with the client by saying, "I'm sorry that your tax liability is higher than you thought it would be." It's quite another, and very admirable thing, to offer to the client an apology for the way in which Congress has treated the tax law. For someone who is enduring a wrong or a hurt, the "I'm sorry" reactions can come from everyone, but only the true apology can, and should, come from the person or persons who caused the pain.

Indeed it is noble for someone not a member of the Congress to extend a "mea culpa" on behalf of the Congress. I confess that my reaction when students groan in reaction to the bewilderment and frustration sweeping over them as the course works its way through just a small bit of the tax law surely is not an expression of remorse on behalf of the Congress. No, I yield to the temptation to criticize the consequences of the inattention, the ignorance, the vote-grabbing, the currying of favor with special interests, the sloppiness, and the last-minute rushing on the part of Congress that causes the nation to have such an abysmal tax law.

For example, every time I teach the course, students ask me why certain fixed amounts in the Code are indexed for inflation and others are not. They deal not only with the personal exemption and the standard deduction but also the social security taxation threshholds, the capital loss limitation, and the limitation on the active management exception to the passive loss limitation. The former are indexed for inflation. The latter are not. Why? It probably has something to do with budget games being played at the time of enactment, but it surely doesn't reflect any sense of a coherent wholeness to the Code. When students suggest that they could write a paper, I tell them that it would not be particularly difficult to identify all of the fixed amounts in the Code and then to classify them as indexed or not indexed. But, I warn them that such an effort simply gives them the first part of the paper. The second part of the paper would be an explanation of why there is this difference, how it could be justified, and why the arguments for eliminating the difference should or should not be rejected. In other words, they would be asking "What were members of Congress thinking?" And the answer is my favorite response to that sort of question, namely, "Why do you assume they were thinking?"

For those who think tax law is boring, there's nothing like an interesting tax case to dispel that notion. Last week, in Langer v. Comr., the Tax Court rejected a most creative argment by the taxpayers.

First, the legal background. Under Internal Revenue Code section 262, personal, living, and family expenses are not deductible. In contrast, under section 162, ordinary and necessary expenses paid or incurred in carrying on a trade or business are deductible, subject to a variety of limitations and exceptions. Under section 212, ordinary and necessary expenses paid or incurred for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income are deductible, also subject to a variety of limitations and exceptions. Under section 280A, if a person uses his or her residence for trade or business purposes, only the portion of residence expenses properly allocable to the trade or business are potentially deductible. The deductions are disallowed to the extent they exceed the gross income generated by the trade or business.

Second, the factual background. A married couple purchased a home and used it as their principal residence. The property included a swimming pool. The wife is a piano teacher, and gives piano lessons at the home. The husband is a former IRS agent, and operates a financial investigation business from the residence. The couple's tax return included a Schedule C for each business. Each Schedule C included deductions related to the operation of a trade or business in the residence. Among those deductions on the Schedule C for the piano lesson business were "swimming pool supplies and maintenance."

Third, the proceedings. The IRS disallowed these, and other, deductions. The dispute ended up in the Tax Court.

Fourth, the outcome. At this point, it makes little sense to try to paraphrase or improve on the Tax Court's reaction:

Mr. Langer testified and attempted to explain how these items were related to the piano teaching business. His arguments are beyond belief and contrary to all reason. We need not address each of the disputed items, but we give one illuminating and representative example. Petitioners argue that $2,446 spent for pool supplies and maintenance are related to Mrs. Langer’s piano teaching because the parents of the students would sit by the pool while waiting for their children to finish a lesson.

Though the argument may seem "beyond belief and contrary to all reason," consider the expenses incurred by a health care professional to provide amusement to patients who are waiting to be seen, or waiting for their child or elderly parent to finish with a physical examination or other medical care. Is the cost of the television in the waiting room deductible, either as a section 179 first-year expensing deduction or under sections 167 and 168 through depreciation deductions? What of the amounts paid for books purchased for children to read? What of the amounts paid for the magazines purchased for patients and their parents or adult children to read while in the waiting area? Are these various amounts in fact deducted? I think so. So why the difference in outcome? One difference is that the expenses of maintaining a swimming pool are not affected by the presence of people sitting near it from time to time. Another difference is that the swimming pool is used for personal purposes whereas the television and reading materials in the health care professional's reading room are used by the patients or their family members and not by the professional who is working in some other area of the office. There is one wrinkle in this analysis. It is not uncommon for health care professionals to subscribe to various general magazines, to read them, to put them in the waiting room when they're finished with them, to pay for them through the business, and to deduct the expense. Technically, the cost of these magazines is not deductible, but it is doubtful that very many, if any at all, of these deductions get attention from the IRS.

I suppose one could say that Mr. Langer's arguments supporting the pool maintenance expense deduction were all wet. One might say they did not flow logically from the Code and regulations. But they have at least made a splash on this blog.

Here's an interesting tax story that I discovered over the weekend. Apparently, back in 1940, New Jersey enacted a law that permits municipalities to collect a tax from certain utilities based on their ownership of personalty used in doing business. For a telephone company, the tax would be imposed on utility poles, wires, and other land-line equipment. The tax is imposed on a utility only if it is the dominant provider of the service it renders. I have not been successful finding the text of the law, because it apparently has not been codified.

Now, along comes Verizon, which has decided it no longer is the dominant provider of telephone service. It points out that it has been losing more than 35,000 customers each month, as people turn to cable providers and the Internet for phone service. The state attorney general has undertaken to review Verizon's decision to stop paying these local taxes. Considering the impact of the current economic downturn on town finances, this news could not have come at a worse time.

One wonders why a tax would be imposed only on the dominant provider. Was it an attempt to disadvantage the market leader in order to boost the competition and level the playing field? It is a rather interesting way to spread the wealth. Imagine an income tax imposed only on the largest software company, the biggest bank, the top-paid baseball player, and so on. If the tax is intended to put costs on those enjoying the benefits, it ought to be imposed without regard to the market position of the company. If the tax is a charge for the "ugliness" of telephone poles and overhead wires, it ought to be imposed on all companies that have poles and wires. That would include all land-line telephone companies and all cable companies, except to the extent the equipment was underground. But I suppose a user fee could be invented to cover the costs of dealing with the inconveniences of underground wires.

But it gets even more interesting. In digging through title 54 of the New Jersey Annotated Statutes, I discovered some taxes that I've not seen on other lists of taxes (one such list being republished in Deconstructing Tax Myths). In chapter 47B, there is an excise tax on white potatoes. Chapter 47C brings us a tax on asparagus. There is a tax on apples in chapter 47D, and a tax on sweet potatoes in chapter 47E. It appears that these taxes are imposed in order to provide benefits to the industries growing and selling these items. I doubt these are taxes designed to discourage consumption of these products. Nor could they be considered "sin taxes" such as those imposed on cigarettes and alcohol, because I did not see a tax on brussel sprouts. Imagine, eating baby cabbages. For shame! But I suppose there's no tax on those delicacies because people who eat them are doing a favor for those of us who are more than happy to sacrifice brussel sprout consumption for the nutrition of others.

Four different news items coming along during the past two days have coalesced into a strange thought. All three stories involve the financial relationship between government and business.

The first story broke on Wednesday. In a press release, the Department of Justice announced the indictment of Raoul Weil, a senior executive of an international Swiss bank, for allegedly conspiring with other persons to assist approximately 20,000 taxpayers conceal $20 billion of assets from the IRS. The indictment charges Weil with ordering his employees to enlarge this line of business, even though he knew it would cause them to violate the law. These practices generated annual income of $200 million for the bank. Weil and others at the bank used nominee entities, encrypted laptops, and counter surveillance techniques. More than 3,800 trips to the United States were made by the bank's employees to assist the U.S. taxpayers in dealing with their Swiss bank accounts. Those clients filed false tax returns, omitting the income earned on those accounts and failing to disclose their existence.

The second story has been developing over the past several weeks, and every day brings a new wrinkle. In Potential grows for lame-duck session of Congress, three CNN correspondents explain the twists and turns through which proposals to provide additional assistance to domestic auto manufacturers have journeyed. Though the proposals are as varied, ranging from funding the Big Three's health care costs to supporting a re-tooling to manufacture energy-sensible vehicles, the reaction has generated a divide between those who see additional assistance as opening the door to a bailout of every industry and those who see financial failure of even one of the manufacturers as the trigger for a catastrophic economic collapse.

The third story also broke on Wednesday. As reported in numerous places, including this report, the Secretary of the Treasury announced that none of the $700 billion provided by the bailout legislation would be used for the purposes for which the bailout legislation was enacted, namely, the purchase of mortgage loans and mortgage-linked securities. Instead, the money has been used to purchase stock in banks and to assist AIG. The Secretary of the Treasury noted that perhaps non-bank financial institutions not currently within the scope of the program would be assisted through capital acquisition, including life insurance companies, and property and casualty insurance enterprises. Other plans include some ill-defined concepts of increasing liquidity for certain areas of the credit markets and for supporting new securities lending.

The fourth story, Nutter Goes After Top-50 Business-Tax Ddelinquents, reports that the largest unpaid Philadelphia business tax bill is owned by a defunct medical business, one of whose principals is now practicing through a separate entity. In Physician Says He's Trying to Heal Himself of Tax Mess, Gregory Nelson explained that the former business ceased to exist because of tax problems, though it is unclear if it declared bankruptcy. He attributes the failure to pay taxes as the outcome of trying to provide medical care to patients in poor areas of the city, to the consolidation of the health care industry, to reduced insurance reimbursements, and to higher medical malpractice insurance premiums. In addition to the city taxes, Nelson and his former business have both been named in filings by the federal government for failure to pay over employee withholding taxes. According to the article, the government produced evidence that Nelson earned $800,000, and after Nelson pleaded guilty to wilful failure to pay taxes, he continued to spend money on a center city apartment, a fur, and overnight stays at one of Philadelphia's best hotels. Evidence also showed that he owned more than $300,000 in commercial real estate, an automobile worth more than $50,000, another costing roughly $80,000, and a family home worth roughly $600,000, which eventually was sold in a sheriff's sale. The court had ordered Nelson to live on a set allowance and use the rest of his income to reduce his tax debt, but he did not do so. The city of Philadelphia put his business into receivorship in order to obtain some of the unpaid taxes. At present, the unpaid balance exceeds two million dollars.

When these four stories are considered against the backdrop of how citizens relate to the government in a financial sense, it is not difficult to see how that relationship has gone awry. Some industries that mismanage themselves or that make bad decisions, such as the mortage lending business and the automakers, find ways to get back from the government amounts that are sufficient to eliminate tax liabilities and to cause cash paid by other taxpayers or borrowed from abroad to flow into these industries. This encourages other large industries to jump onto the bailout bandwagon. Other businesses, generally much smaller, convinced that they are not in a position to lobby for similar breaks, take it upon themselves to engage in self-help bailout by ignoring their tax liabilities. Facing what they claim are adverse conditions, they choose to put governments at the bottom of the list of bills that they plan to pay. Their claims of adverse conditions are not unlike those made by the industries that have obtained and that are seeking bailout money, both in terms of the nature of the circumstances and in the inability to accept blame or responsibility for their own actions. In this respect, all of them mirror modern culture, in which the game is to blame everyone but one's self. The mortgage industry blames Congress for the fraudulent and irresponsible lending practices in which it engages. The auto industry blames consumers for its decisions to manufacture vehicles that are energy inefficient even though somehow the Japanese and certain other car companies managed to avoid taking the same path.

Yet another similarity exists between the taxpayers who choose to evade taxes by hiding assets and income or by ignoring tax payment obligations and the industries that claim receipt of bailout money is essential not only to their survival but to the economic health of the nation. Somehow, though presenting a picture of financial misery, the captains of these industries enjoy the same luxurious life style as that in which the tax evaders engage. Executives of AIG were enjoying visits to a high-end resort while present and future taxpayer dollars were bailing out the company. Taxpayers stashing assets in secret Swiss bank accounts continued to enjoy the good life. Someone who chose not to pay federal and city taxes because of alleged financial difficulties managed to own multiple commercial properties and to make high-end purchases.

All of this suggests to me that the problem isn't financial, economic, or monetary. The problem is cultural. The "me generation" has taken root deep within society and most of its institutions. The same mentality that lets some people think they can jump the line by going straight out of the left turn lane causes too many people to think that they are entitled to whatever they can grab and to hang onto it despite laws requiring true freedom in the markets, the payment of taxes, full disclosure, and honest transaction structuring. It's too easy for those acquiring wealth to overlook the contributions others have made to their so-called success. None of this should be surprising. The professor who taught my American Civilization course when I was at Penn, whose international stature escaped me until I read his obituary a few years ago, predicted this outcome. There is a sadness in how quickly the nation evolved from one in which its greatest generation, sacrificing to ensure the nation's survival through depression and world war, predominated to one in which a the country is overshadowed by so many who did not learn the value of sacrifice and the long-term disadvantages of greed.

The solution isn't one of bailouts, tax law changes, or government purchases of ownership in private enterprise. The solution is one of education, the teaching of lessons about short-term and long-term analyses, about the benefits of sacrifice and the evils of greed, about the complex interconnections that make personal wealth accumulation futile in the long run, about the values of cooperative endeavor, about appreciation for how no one succeeds without the assistance of others, about the benefits of truth and the dangers of manipulation, and about the inadequacy of money grabbing as a solution for psychological insecurities. Where and how that gets done is a challenging question. Whether it could be done with sufficient alacrity to avert the next economic manifestation of the underlying problems is problematic. But someone, somewhere, somehow, needs to step up and persuade the American nation that bailout after bailout isn't going to have much more beneficial effect than putting band-aid after band-aid on a stab wound. Slowing the bleeding isn't enough. Stopping it is necessary. And that cannot happen if knives continue to be plunged into the national fabric.

Talk of a second stimulus package is making the rounds on Capitol Hill. The first stimulus legislation, originally marketed as a tax rebate endeavor, had a negligble effect on the economy. A second package, passed by the House in October but dying in the Senate, has been brought back to center economic stage. This time, unlike its predecessor, it's not a vehicle consisting chiefly of tax rebates. Into the mix has been thrown not only tax reductions in the form of tax and withholding reductions rather than rebate checks, but also, according to this story, "extensions in unemployment insurance, food assistance for impoverished Americans and healthcare assistance for seniors and children." In earlier reports, such as this one, the package would include financial assistance to state governments and money for rebuilding the nation's infrastructure. According to this report, some members of Congress want to include money for improving the infrastructure of America's ports of entry. Not unlike tax legislation that grows and grows until every legislator's favorite tax break is included, this package could become a comparable collection of favorite spending measures. Would this work to solve the problems?

When the proposal to issue tax rebates first emerged, before the arrangement was renamed stimulus, I questioned whether it was the appropriate response to what ailed the economy in late 2007. In Who Should Get a Tax Rebate?, I suggested that funneling money to taxpayers made sense only if taxpayers would make better use of the money than would non-taxpayers. That concern eventually went away, when the legislation was modified to funnel the rebate checks in ways that included people without tax liability. I expressed a reservation that the rebate or stimulus program would increase and already bloated federal budget deficit. I noted that the proposal did not address the underlying problem:

So long as consumption exceeds production, so long as more wealth, particularly dollars, flow out of the country than flow into the country, so long as certain items remain in short supply and project to remain that way, the nation's economic and financial health will worsen. Tax rebates will not increase the supply of clean water, oil, natural gas, or any of the other resources mismatched to the demands of the world population.

Unfortunately, the during the ten months since I posted that observation, the nation's economic and financial health indeed worsened.

In Something Better Than a Tax Rebate?, I explored Len Burman's proposal to deal with the financial mess by accelerating the termination of the 2001 federal income tax cuts. The theory is that investors, facing higher capital gains taxes, would sell their assets in 2008 in order to avoid the higher taxes, and would use the sales proceeds to make purchases of what I call high-end assets. I explained my reticence to endorse the proposal for this reason:

My hesitation is that I'm not convinced there is a net long-term benefit from increases in the sales of high-end consumer goods, or perhaps even from increases in the sales of consumer goods generally. Increases in the sales of consumer goods translates into more energy use, more demand for increasingly scarce resources, and more dollars flowing out to the countries producing these consumer goods. Aren't these included among the things causing the lack of confidence that has triggered the recent stock market slide? In the long-term, can the planet handle a never-ending, sometimes slowed upward spiral in the consumption of its resources? At some point, the combination of the federal deficit, the trade deficit, the ensuing decline in the value of the dollar, the declining supply of oil, clean fresh water, copper, and similar resources, the growing world population, and the widening gap between haves and have-nots and the concomitant disappearance of the middle is going to cause something in the highly tensed global and national economic systems to snap. When something snaps, there's no easy prediction as to where the pieces land or what else gets broken. The scary question is whether something already has snapped and we're just now beginning to realize it.

It turns out something had snapped. And it turned out that investors did sell, but for a totally different reason, and under circumstances that did not generate much in the way of capital gains.

Eventually, in Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, though expressing a preference for Burman's idea over the legislation that was crafted, I continued to criticize the tax rebate plan because it would, and it did, increase the federal budget deficit, probably would not be used to make retail purchases but would end up in banks and with creditors as people either saved the money or paid off debt, and predicted that banks and creditors would then loan those deposits in ways that increased consumer debt, which I tagged as a "one of the glaring imbalances in the national economy." Imbalance, indeed. I predicted that it would become much more difficult to borrow, asking, "From whom will they borrow?" I also predicted " the emergence of a small creditor group and massive hordes of debtors" and characterized it as "a recipe for disaster." What I failed to recognize was the extent to which the creditors in that situation would be no better off than the debtors, for there's no economic advantage in being a creditor whose debtors are totally tapped out.

What seems undeniable is that simply transferring cash to individuals, whether through rebate checks or reduced tax withholding, will have the same insignificant impact on the economy as did the earlier stimulus package. Having the money end up in banks, through savings or loan repayment, simply makes the ocean of bailout money flowing to bank shareholders somewhat, and unnecessarily, deeper. Having the money end up abroad to the extent it is used to boost the consumer goods production in other nations does little to create jobs in the United States, one of the few specific goals mentioned by advocate of a second stimulus package. Transmitting the money to state governments simply removes the question to the next level but doesn't address its ultimate disposition.

If direct tax reductions are set aside, there are two core questions that must be addressed. One is whether it makes sense for the federal government to increase its budget deficit by spending money. The other is whether the money, if spent, should be focused on one or more projects at the expense of others.

My thoughts about the infusion into the economy of money borrowed by the federal government need not be repeated. Just as it makes no sense to ask one bankrupt corporation to bailout another, it makes no sense to have a government itself in serious debt borrow more money in order to assist an economy that is debt-stricken. The catch in this reasoning is the assumption that the economy is in debt. It's not. Some segments are in debt, some people are in debt, and some companies are in debt, but the economy still has net positive wealth. Its distribution is awry, and the more skewed that distribution has become, the more the economy has failed to function properly. On a global scale, and on a national scale, the shift of resources from the have nots and the have lesses to the have even mores has been accompanied by a long list of economic ills. This isn't a new phenomenon. Consider the points made in John Steele Gordon, "The Great Crash (of 1792)", in which speculation, credit squeezes, greed, and double-crossing corrupted the economy and, as pointed out in the print version of the story, promises of job creation through the floating of debt failed to come to fruition.

As for spending money, if it's to be spent, does it not make sense for the government to spend its money in ways that permits it to acquire public assets? Is there some sense in funding public works undertakings, through which the nation's bridges, highways, tunnels, libraries, recreation centers, public health facilities, port security assets, firehouses, and other infrastructure is repaired and improved? Would this not create a substantial number of jobs in this country? Would this not increase state and local tax revenue?Would this not put the government in a position, when the economy recovers, to impose user fees on those who benefit from use of these facilities? Would it not amount to a loan by the government, not to bank shareholders and wealthy investors through a bailout plan, but to the American public in the form of useful assets? Is it not better to build and repair tangible assets than to chew through wealth in the form of consumption?

Put to a choice between, on the one hand, tax reductions in the form of rebate checks or withholding reductions, and on the other hand, investment in national infrastructure with future user fee cost recovery, I would select the latter. It will be interesting to see what, if anything, the Congress does.

For tax practitioners, tax is a rational subject. So, too, is tax law. Occasionally afflicted by illogical provisions, it nonetheless contains a variety of rules, marked by definitions, computations, and limitations, that can be applied, in most instances, by that most rational thing, the computer. Where objectivity fails, it involves issues such as valuation and purpose, raising questions that can be resolved through objective analysis of facts and circumstances.

For many taxpayers, tax appears to be an irrational subject, one that triggers emotions in a serious way. The recently concluded presidential campaign demonstrated that tax is no less a hot-button topic as are the several other issues that can polarize discussion and threaten to polarize a nation. Though it may appear that the principal emotion evoked by the mention of tax is anger, the underlying feeling almost certainly is fear.

Last week, I responded to a request to share my views for a TaxProf Blog post on "Tax Policy Under President Obama." I did so, and my short essay appeared with those contributed by 14 other tax law professors in Tax Policy in the Obama-Biden Administration. Some of the essays attempted to predict what that administration would offer in terms of tax legislation, while others, and some of those that attempted to make predictions, also contained suggestions and discussions of tax theory. In my essay, I emphasized that much of what was promised during the campaign by President-elect Obama would not be enacted or would be significantly modified, that the dire predictions fears made by Senator McCain and his supporters would not come to pass, that the tax law would remain complicated and become even more so, and that changing circumstance would derail some of the campaign proposals. In short, the essay was a preface to my What's Ahead for the Tax Law? post of last Friday. I also noted that the tax law would not change into what I would want it to be, that it would reflect compromise, and that it would continue to generate griping. Though making some rather safe predictions, I also peppered the essay with words such as "perhaps" and "possibly."

Many of the comments that were posted in response to the collection of essays were generally disappointing, though not surprising. It wasn't difficult to pick out the people whose unhappiness at Tuesday's election results and whose apprehensions of impending doom came through loud and clear in their postings. The overused and disproven canard of "socialism" showed its face, as did the assertion that the next administration would steal all the wealth. The essays were described as "a crock" and "embarrassing," threats of tax fraud and voluntary unemploymet were offered, and the fifteen law faculty who contributed were accused of doing nothing more than "discussing their pet peeves and wish lists." One post rested on the assumption that Obama promised to repeal all of the 2001 tax cuts. Another poster advised one of the essay writers to "lay off the meds." The anger is obvious, the fear isn't well hidden, and the ignorance that fertilizes those emotions isn't difficult to find.

The temptation to respond was too strong to resist. I pointed out that someone closely reading my essay would understand that it was not a wish list nor a collection of pet peeves. Though such lists and collections may have surfaced in some of the posts, lumping all of them together as sharing that characteristic is ignorant nonsense. My response also replied to the inquiry, "Does the fact that not one of these experts have any idea of what a President Obama would do, in spite of his innumerable promises, not give a moment's pause?," by explaining that the words "perhaps" and "possibly" were intended to reflect that unpredictability, and by wondering if those words showed up in invisible ink. I closed by sharing the thought that inspired today's post: "Sometimes I wonder whether rational analysis will ever trump emotional reaction."

The fear that taxpayers demonstrate, chiefly through angry comments, is thoroughly disproportionate to the disadvantages that they might face. Joe the Plumber became famous because he expressed his indignation at the very idea that if he managed to generate $250,000 of income -- presumably taxable income -- that his tax bill under Obama's stated plan would be more than that under McCain's stated plan. Had Joe bothered to do his arithmetic, he would have discovered that if his taxable income increased to $260,000, he would pay approximately $400 more under Obama's plan than he would under McCain's plan. Had he thought more, he would have had to admit that in order to make that sort of money he would be taking advantage of employees billed out at rates much higher than their salaries, and that Obama's response was an attempt to instill in Joe the Plumber some sense of obligation to pay back to society a very small portion of the largesse Joe could acquire by conducting business in a nation that protects him, his employees, his contracts, his suppliers, and his business. In other words, Joe, if you do manage to make that sort of money, you can't claim you did it on your own.

Yet somehow, significant numbers of taxpayers, almost none of whom would be disadvantaged by Obama's tax plan, became distressed, angry, and fearful that their wealth would be seized. Almost all of these taxpayers, and perhaps all of them, rallied to the defense of the taxpayers who supposedly would suffer when the tax cut enacted for them eight years ago was revoked or permitted to expire. Why would members of the middle class rush to the defense of the upper class, when the upper class surely won't go bankrupt on account of Obama's tax plan, and when the current economic travails of the middle class are attributable, in no small part, to the stock market and loan-making shenanigans in which those with excess wealth have engaged? Why does it seem so difficult or impossible for the middle class to understand that they are not targets of some wealth confiscation plan? Could it be that clever manipulators have taken the combination of ignorance and fear percolating in the collective subconscious of the middle class and whipped it into a frenzy that makes rational analysis impossible? As many intelligent tax experts, and others, have noted, Joe the Plumber was used.

The appeal to emotion is usually dangerous. It can be effective, but that effectiveness is almost always a short-term phenomenon and a long-term catastrophe. The appeal to emotion underlies most advertising, too much of political campaigning, all hate crimes, and most rumor-mongering. The appeal to emotion is everywhere. It pops up constantly in law school, where students too often begin their arguments or responses to a question from a moot court judge with, "Your Honor, I feel that…" rather than with "Your Honor, careful thought suggests that …" or "Your Honor, sequential analysis of the facts compels a conclusion that …" Though feelings may have a role to play when juries consider punitive damages or the death penalty, it makes little sense to argue that "I feel that section 163(h) allows the deduction." I truly hope that the student, the attorney, the tax practitioner, and the taxpayer would *think* that section 163(h) allows the deduction. Whether section 163(h) allows the deduction is a matter of rational analysis, not of emotional reaction.

The key to muting the anger about tax proposals that has become so rampant in recent weeks is to defuse the fear that fuels it. Fear is broken by knowledge and understanding. Knowledge and understanding are transmitted and acquired through education. The education need not be formal. It is the moral obligation of every educator, whether holding a formal position on a school's faculty or writing a blog, whether teaching a regularly scheduled class or dispensing information on a talk show or news network, to disseminate truth, to refrain from exaggerations and half-truths, to encourage rational discourse and discourage emotion-laden soundbites, and to realize that until fear is dispelled, knowledge cultivated, and understanding acquired, the nation's ability to restore itself, an effort that will involve the tax law in no small part, will be impeded.

Trying to predict what changes will take place in the tax law as we approach 2009 and the commencement of the Obama Administration is a fool's errand. No one knows. Barack Obama does not know. Members of Congress do not know. Tax experts, tax practitioners, tax law professors, and tax return preparers do not know. There are two principal reasons that no one knows. First, legislative proposals get modified, adjusted, expanded, narrowed, and reconstructed as they go through the legislative process. Second, events will take place between now and the date or dates in 2009 when amendments to the Internal Revenue Code are enacted that will influence or even compel changes that had not been contemplated or that had been considered and rejected.

None of that, however, is getting in the way of web site after web site, columnist after columnist, pundit after pundit from venturing into the risky world of making predictions. Although there is some information to be gleaned from party platforms and campaign speeches, there really isn't enough information to make the predictions anything more or less than educated guesses. Many prognosticators simply are presenting what they would like to see happen, even though some of the proposals have very little chance of finding a home in the Code. Others are zeroing in on one or two narrow provisions or proposals, leaving the overall crystal ball analysis to others. I've read enough of these commentaries to conclude that if a tax proposal exists, someone somewhere has come forth with an assurance that it will find life in the Obama Adminstration and the next Congress.

So I'm going to play it safe. Though some have said that other issues will occupy the Administration and keep it from focusing on tax law changes until 2010, I disagree. With one exception, no matter what major issue facing the nation is tackled, the tax law will be amended. In no particular order, because I have no clue as to what the priorities for solving these these problems will be:

Health care? Even the simplest of tweaks will involve changes to at least a handful of Code provisions dealing with medical expenses, health savings accounts, and the like. In Obama's plan is a health care tax credit.

The impending crises in social security and medicare and the shaky status of retirement plans? Much attention has been given to Obama's suggestion that a tax be levied on high level incomes to fund the social security and medicare trusts, and there also are proposals to change the rules currently applicable to private retirement plans, such as eliminating required minimum distributions from plans for taxpayers 70.5 years of age and older.

Energy independence? I guarantee that any program designed to encourage development of alternative energy sources, energy conservation, and similar initiatives will be done principally through the tax law. The precedent is entrenched.

Environmental issues? As is the case with energy independence, proposals being floated will increase the size of the Internal Revenue Code, just as the ideas already enacted have done. Increased credits for clean-fuel vehicles can be found in Obama's tax plan.

Economic downturn? There will be some sort of stimulus payment or, in lieu thereof, some sort of incentive to increase investment, perhaps in the form of an income tax credit for businesses and indivduals making certain types of acquisitions. There will be changes to the taxation of American business activities abroad and to the tax treatment of asset transfers to foreign tax havens.

Fixing problems in the education systems? Obama's plan includes, among other things, an American Opportunity Tax Credit.

The war in Iraq? This is the one major issue that I don't see generating tax law changes. That's ironic, because it's the failure to raise taxes to pay for the war that contributed significantly to the credit crunch.

And whether anyone likes it or not, there are all sorts of tax provisions expiring in 2009 and 2010, some of which, if left alone, would create all sorts of havoc for taxpayers, including the surreal decision facing terminally ill taxpayers facing an estate tax if they survive from December 31, 2010, into 2011. In other words, there will be no choice but for the Obama Administration and the Congress to do something with the tax law.

What won't happen is simplification. There's very little, if any, attempt to remove or consolidate existing provisions. There will be more credits. The actual tax liability computations will become more complicated. The AMT will continue to star in its own horror movie as the once sensible but no longer viable abuse remedy that will not die.

People will continue to complain about the existence of taxes, the amount of taxes that they pay, and the complexity of taxation. Bickering on Capitol Hill will continue, as members of the House and one-third of the Senate begin to focus on the 2010 elections, with tax policy again finding a spot in the center of the stage.

TurboTax will not go out of business. Tax return preparation and tax advising will continue to be growth industries, though whether that will increase employment here or abroad depends on what changes are made to the tax law.

For me, the basic tax course will not become any easier to teach or to take. The same can be said, to a lesser extent, of my other tax courses. There will be even more tax portfolios and book chapters for me to modify and create. There will be no slowdown in the flow of questions posted to the ABA-TAX and similar listservs.

And I will not run out of material for MauledAgain.