MauledAgain

Peter Pappas, of The Tax Lawyer’s Blog, takes issue with a point I made in A Tax Policy Determination Clue. Technically, in Two Professors, an Angry Bear and Hate the Rich Syndrome, Pappas takes issue with the “exuberant endorsement” by Linda Beale, of A Taxing Matter, of my “attack on successful, millionaire Congressmen” in her post, Who's rich? what's going on with those freshwater economists? and more posts Worth Reading. What did she say that was so exuberant? She said this:

Jim Maule takes off on the issue of wealth and the fact that Congress isn't exactly representational on that score (something I've noted in several postings myself). 44% of Congress members are millionaires, compared to about 1% of the American population. Bad news for ordinary Americans.

In my book, that’s not quite exuberant. It’s simple agreement.

Pappas then suggests that

Ms. Beale’s exuberant endorsement of Professor Maule’s attack on successful, millionaire Congressmen compels me to assume that she thinks it is preferable that less successful and less educated people were running the country? I think she has it backwards. I think it is essential that we empower only those representatives who have proven their competency to handle their own financial affairs before entrusting them with care of the nation’s finances.

If Pappas is suggesting that financial competence be a prerequisite to sitting in Congress, I’m willing to go along with that idea. First, considering that the Congresses of the past however many years have failed miserably to handle taxation, economic matters, budget balancing, and every other financial aspect of governance, all members should be removed. Second, require candidates for Congress to undergo rigorous testing. Third, do some investigation into how members of Congress acquired their wealth.

Pappas’ argument rests on a faulty premise. His post presumes that “our legislators” are “ordinary Americans” who are not “incapable of understanding the plight of the average American” because they “know what it’s like to struggle” and because “through diligent study, hard work and intelligence they managed to lift themselves from the ranks of the ordinary and the mediocre.” Pappas, however, does not provide or point us to any statistics that disclose the percentage of Senators and Representatives who grew up in poverty. Nor does he provide or point to information that identifies those members of Congress who were born into, or married into, wealth. Also missing is information on members of Congress who neither grew up in poverty nor were born into wealth who, after being elected to a position in Congress, experienced wealth increases exceeding that which would be expected of someone earning what members of Congress earn. To conclude that Congress is predominantly a group of people who have struggled to pull themselves out of dire straits in some altruistic endeavor to put the nation’s well being above their own desire for power is to give too much credit to political campaign advertising and the self-congratulatory pronouncements of politicians.

Pappas also notes that more than 95% of members of Congress have college degrees whereas fewer than 30% of adult Americans have them. Could that be a consequence of college being more readily available to those who come from economic backgrounds that encourage college attendance and make the opportunity to pursue a college education far less of a challenge? Someone coming out of college with a degree in political science isn’t necessarily more highly qualified to sit in Congress than is someone who finished high school and learned about life as an employee paying close attention to how the life really is.

Pappas asserts that, “We should not elect legislators of ordinary intelligence, education and diligence.” Why not? Ordinary folks tend to bring far more practical experience and common sense to the table than those who have lived inside academia or some other sheltered place before turning to life in the world of politics. The point is that the process, including the need for huge amounts of money, shuts out a lot of people who would do a much better job than Congress has done for the past several decades. Congress should be a representational body. It has become a club dominated by the wealthy. The wealthy members of Congress tend to be those who have been there for a long time, and those holding that sort of seniority are the ones who control the Committees, who dictate the legislative process, who cut the deals in the back rooms, and who run the show.

What really disturbs Pappas isn’t so much the make-up of the Congress, but what he perceives as a “hate the rich syndrome.” He asks, “Why is it difficult for left wingers to acknowledge that wealthy people got that way through perseverance, hard work and sacrifice?” I’ll set aside the hilarity of being tagged as a “left winger,” because most people on the left tend to see me as, at best, middle-of-the-road, and more than a few consider me “too conservative.” I’ll focus on his presumption that the wealthy are wealthy because they persevered, engaged in hard work, and underwent sacrifice. That may be true of some of the wealthy. The wealthy who became that way admirably, that is, by meeting the Pappas definition of wealth acquisition, almost always are the sort of people who stay out of politics, either directly or indirectly, because the same qualities that they manifested in building up a successful business are the same sort of qualities that deter them from wallowing in politics. Their hard work and diligence teach them that modern day politics pose a threat to their value system. The few who do succumb to the temptation, and succeed in getting elected, too often get caught up in the arrogance and self-interest that pervade the halls of Congress.

When Pappas defends the wealthy by assuming that all, or to give him the benefit of the doubt, almost all, of them have taken the high road to success that he describes, he presumes too much. Are those born into wealth necessarily people who exhibit “perseverance, hard work and sacrifice”? Maybe a few. There are far too many news reports of heirs and heiresses behaving badly, born with a sense of entitlement, and accustomed to buying what they want, including politicians. Is every wealthy person who became that way by setting up and running a business someone who demonstrated “perseverance, hard work and sacrifice”? Most of them persevered. Many of them worked hard. A few of them may have sacrificed. But how many mistreated workers? Sold junk products to an unsuspecting public? Exploited the poor, in this nation or elsewhere? Shifted environmental costs and other externalities to society generally? Violated securities and other laws? Cooked books? Stole ideas from others? Raided pension plans? Stashed money off-shore to avoid regulation and taxes, or to facilitate the extraction of assets before putting their companies through bankruptcy so that unpaid debts and unfunded toxic waste site cleanup costs would be a burden on taxpayers?

Branding the wealthy as persevering, hard working, sacrificing individuals is as presumptuous as branding the poor as shiftless. What matters, though, is that my comments focused on the disproportionate number of wealthy in Congress, and the inadequate job Congress has been doing for the past several decades. The connection between money and politics, between money and election, between money and re-election, and between money and what Congress does cannot, and should not, be ignored. It might be defensible if Congressional work product was worth as much as the money that gets pumped into the institution.

It continues to puzzle me that so many people who are struggling economically choose to rush into a defense of the wealthy. The best explanation rests on comments I’ve received over the years from people who claim that repealing the special tax cuts given to the wealthy will somehow prevent the commentator or others from becoming wealthy. Even though the chances of winning the “get wealthy” lottery are extremely slim, there are people who prefer to see the unbalanced economic and taxation systems continue because they’d rather have a slim chance at acquiring huge amounts of money than go with a more sensible plan of increasing everyone’s odds of acquiring a much smaller amount of money that would make their lives somewhat better. It’s almost as though there is a subculture within society that so desperately wants a chance to own yachts, private jets, piles of jewels, and humongous mansions that they reject any sort of system that would provide decent health care, warm homes, adequate food, and quality education to the “masses.”

Pappas closes with the notion that “[e]ntrusting the operations of the government to merely ordinary Americans is a recipe for disaster.” Well, for one thing, the operations of government already are, and long have been, in the hands of ordinary Americans, including high school graduates who serve in the Armed Forces, technical school graduates who work in the bureaus and agencies of government, and the regular folks who are employed by judges and executive branch departments. The people who collect trash and plow snow, who care for the National Parks, who serve as guides at National Monuments, who inspect businesses for OSHA violations, and who otherwise underpin government operations are ordinary Americans. On the other hand, entrusting the determination of tax, economic, health, and other national policies to an overwhelming non-representational and disproportionately wealthy group of individuals beholden to powerful special interests, with a track record that is an embarrassment to a nation that once was a model to which people all over the globe looked for enlightenment and inspiration, already has become a recipe for disaster.

Some people in France don't like the consequences of digital technology and are proposing a tax on advertising revenue collected by Google and other internet enterprises, perhaps coupled with a tax on internet content. According to dozens of news stories, including this one from BBC News, France wants to use the tax to "fund legal alternatives for buying books, films and music on the internet." Another report goes into more detail, explaining that the revenues from the proposed tax would be used to support newspaper subscriptions.

France has a history of chafing at the impact of technological progress, modernization, and globalization. Though it deserves respect for trying to hold on to tradition, there comes a time when it makes no sense to let the world pass one by. Its campaign against illegal downloading of material subject to copyright is understandable, but there's little to recommend its opposition to Google's attempt to make available to the world books on which copyright has expired and other books for which it would be paying royalties. France also has on the table a proposal to permit people to delete digital information about themselves, an idea that would generate outrageous results if applied to the non-digital world. Like most people who "oppose" the internet, the folks coming up with these ideas simply do not understand modern technology, how it works, and, most importantly, how to adapt to it in a symbiotic manner. That is what is killing print newspapers and the culture industries, such as music publishers. As usual, the managers and owners of these failing private industries look to government to help them, instead of going to school to learn about the changes that have taken place in the decades since they last sat in a classroom. And one wonders how much of an impact on the French President's decision to support the proposed tax was made by the fact his wife is a music artist.

So, what the world sees is a proposal to tax Google, Yahoo, and others to prop up print newspapers. Let's see how the world would have evolved had people sharing the mindset of the Google tax proponents been around in years past:

A tax on automobilies to support the dying buggy whip, horseshoe, and stable cleaning industries (and for those who suggest that such a tax would have been wonderful because it would have kept fuel-consuming, pollution-emitting vehicles off the road, picture a large city with several million horses, dumping thousands of tons of "manure" on the street, while farms now growing food for humans would be devoted to generating feed for horses).

A tax on cordless and cellular telephones to prop up the dying rotary dial telephone manufacturers (though, to their credit, most of these companies figured out how to adapt, and designed new business plans to cope with change, unlike the "lost in the woods" newspaper, music, film, and other industries that can't seem to get a grip on how to survive in a digital world).

A tax on polio vaccines in order to maintain employment in the iron lung manufacturing industry.

A tax on computer manufacturers devoted to bailing out typewriter manufacturing companies (though, again, some of those companies managed to survive because their operators had the ability to engage in forward-looking thinking).

A tax on the electricity generation industry to maintain the survival of the whale oil lighting industry.

A tax on telegraph equipment to preserve the job of those working in the smoke signal sector of the economy.

There surely are dozens more examples of instances in which progress brought benefits to society that could, and probably would, have been curtailed had those incapable of going along with evolution prevailed in using government to grab profits to make up for the economic setbacks they suffered because they were unable to keep up. Why haven't print newspapers succeeded in doing what online news outlets have done? Why haven't the music and film industries done what Google did? Because they were, and are, too constrained in their thinking, too unable or unwilling to figure out for themselves how to take advantage of scientific and technological advances.

My reaction to the "grab profits from the successful to prop up the obsolete" tax doesn't mean I oppose taxes on successful innovators. To the contrary, a tax that is designed to cause an enterprise to reimburse society for the costs that it imposes on the world makes perfect sense. If Google is causing the cutting down of trees, a tax to provide replacement plantings makes sense. If Yahoo is causing pollution of rivers, a tax to pay for the clean-up easily is justified. But if X invents a practical instantaneous translocation device, a tax on X's business to support the no-longer-necessary passenger air transportation industry misses the mark.

The IRS has announced ”a sweeping new effort to reach tax return preparers with enforcement and education”. The decision follows a multi-month Return Preparer Review. The IRS is focusing on a problem that has been around for a long time. Though many income tax return preparers are competent, honest, and diligent professionals, there are far more than a few who are incompetent, dishonest, lackadaisical, or some combination thereof.

The IRS notes that between 900,000 and 1.2 million individuals prepare tax returns for a fee. Tax return preparers who are attorneys or certified public accountants are licensed by states or state agencies, and as a condition of obtaining the license must demonstrate some proficiency in taxes. More on that shortly. Other preparers are individuals enrolled to practice by the IRS, and they, too, must demonstrate some proficiency in taxes. But a substantial number of tax return preparers don’t fall into any of those categories. In other words, anyone can put up a sign or create a web page advertising tax return preparation services, obtain customers, prepare a return, and collect a fee.

Though penalties and other sanctions exist to encourage tax return preparers to do their task correctly, studies indicate that the error rate among preparers is woefully high. The GAO, for example, went to 19 commercial tax return preparation sites posing as taxpayers. Only 2 of the 19 generated the correct tax liability and refund amounts, and all 19 made errors. Eight of the 19 misreported state income tax refunds. Ten of the 19 did not include self-employment income on the return. None of the preparers whose test clients were eligible for the credit for dependent care included the credit on the return that they prepared. Of the nine test clients who would benefit from itemizing deductions, two had preparers limit them to the standard deduction. Of the other seven, five miscalculated itemized deductions. Of ten test clients eligible for the earned income tax credit, only one encountered a preparer who asked all the correct questions, and all made mistakes. Four of the preparers did not sign the returns and two did not provide their identifying numbers. The Treasury Inspector General for Tax Administration conducted a similar experiment, focusing on 28 unenrolled tax return preparers. Of the 28, 17 did not correctly compute tax owed or refund due. All six preparers asked to do returns with business expenses made errors. One-half properly handled the education credit, and 11 of 12 failed to properly deal with self-employment situations.

The IRS proposes to require all individuals who prepare tax returns for a fee to register with the IRS and obtain a preparer identification number. It also proposes to establish competency testing for all paid tax return preparers who are not attorneys, certified public accountants, or enrolled agents. Paid preparers, other than attorneys, certified public accountants, and enrolled agents would be required, under the proposal, to take 15 hours of continuing professional education in tax law and ethics. The IRS will follow through with studies, visits to preparers’ offices, and other means to evaluate the impact of the proposals, if they are implemented. There are other elements of the proposal, and there’s no substitute for reading the Return Preparer Review.

There are four major reactions that I offer to this proposal. First, it’s about time. Second, though there’s no excuse for someone holding himself or herself out as a tax return preparer without having the requisite competence, surely one of the principal reasons for the error rates that are revealed by the GAO, TIGTA, and other studies is the absurd hypercomplexity of the tax law. That’s not to excuse the preparers who engage in fraudulent activity, but I’m willing to guess that many of the preparers who are missing the mark mean well and are overwhelmed by the unjustified intricacy of most tax law provisions. Third, letting attorneys off the hook by presuming they are competent in tax law is foolish. Enrolled agents and certified public accountants must work their way through challenging tests with respect to taxation before gaining their certification. For the former, it’s pretty much the entire test and for certified public accountants it’s roughly 25% of the exam. Attorneys take bar examinations that devote roughly one to three percent of the testing time to a tax question that is at the most elementary level imaginable. If the GAO and TIGTA took their experiment into law offices, they would discover almost all attorneys in this country who are not tax lawyers and even some who do practice tax would fail miserably when asked to prepare a tax return. Fourth, if adopted, the proposal will cause a shakeout in the tax return preparation industry, pushing out many of the folks who do tax returns because they know a bit more about taxes than do their neighbors and see the opportunity to make some money that tax return preparation presents.

A snippet about a tax return preparer in a story I read the other day about tax return preparers made me laugh. It mentioned a fellow who prepares tax returns during tax season and who works as a clown during the summer. What a combination. "A clown who does taxes" probably does not work well as advertising. Of course, we ought to be worrying about the people in legislatures who have been clowning around with taxes for too long. If the Congress genuinely cares about reducing the number of errors on tax returns, it ought to turn its attention to genuine tax reform, which might not produce a simplistic tax system but surely would generate significant tax law simplification. Unfortunately, the IRS does not have the power to impose on members of Congress the sort of high standards it seeks to impose on tax return preparers.

A column in Monday’s Philadelphia Inquirer by Maria Panaritis, Happy Ending for ‘GenHexed’, caught my eye because it examines a topic that is of interest to anyone looking seriously at the nation’s economic future. Panaritis notes that people in their thirties and early forties have problems. She lists a “trifecta” of “money problems, pension problems, housing problems.” She points out that this Generation, popularly known as Generation X, is “worse off” than their parents’ generation. That’s not good. Wrapped within those three types of problems that Panaritis lists are all sorts of subsidiary difficulties, including an impending Social Security and Medicare implosion, a rapidly escalating health care crisis, looming epidemics, and a variety of political, military, and homeland security miscues waiting to happen.

As Panaritis tries to explain how this unavoidable signal of national decline – a generation being worse off than the one preceding it – came about, she mentions that “Income diminished for most everyone but the wealthy, who became even richer.” Without digging into this critical bit of information, she turns instead to a Congressional Research Service report that discloses the average age of members of Congress is 57, which is “among the oldest of any [Congress] in U.S. history.” She intimates, without being particularly specific, that this may be some sort of ingredient to the disarray into which the nation has slid.

However, for me, an important key to the current and impending crises is the growing chasm between the wealthy and the rest of American society. So I did a bit of research to confirm and get the latest information on something that’s been known for some time. As reported by a CBS Political Hotsheet, in turn referring to an Open Secrets report on the wealth status of members of Congress, 44 percent of members of Congress are millionaires. Some of the other 56 percent aren’t far off the mark. And this is based on information that does not include all of the legislators’ assets. Considering that about one percent of Americans are millionaires, the discrepancy is overwhelming and foreboding. Why? It pretty much means that to be elected, a person must have money and have access to money. That leaves a lot of highly qualified people out in the cold, eligible to serve in theory, but in practice shut out of the political landscape.

The difficulty is that money buys political power. It ought not be that way, but it is. And for it to change, the Constitution needs to be amended, unless Americans somehow independently decide to throw their support to qualified individuals whom they “call” to public service through grass-roots write-in campaigns, something that just isn’t going to happen. Though term limits are suggested as ways to shake up the legislative morass in which Congress is mired, even if such limitations worked, they would work to replace millionaires with other millionaires. Others recommend limits on campaign spending, but there are, according to the Supreme Court, serious First Amendment obstacles to anything that would be effective. Another solution might be some sort of restriction on the influence of money on members of Congress, but one wonders that although it is illegal to purchase votes outright, there’s no pragmatically adaptable means of insulating a member of Congress from the desires of someone who has pumped millions of dollars into a campaign chest.

My New Year’s Day post, A Zero Tax, A Zero Congress, triggered some comments, most of which were generously shared examples of yet dozens of other ways in which the failure of the Congress to deal with the estate tax issue can destroy estate plans despite the most careful of contingent planning. But the best comment came from Steve Odem, who reacted thusly: “If the Founding Fathers could have foreseen what taxation WITH representation would be like, they may have decided the revolution wasn't worth the trouble.” Though we do have taxation with representation, it surely isn’t taxation with representation of all. It’s taxation with representation of those who can afford to pay for the influencing of legislation, including tax legislation, and especially tax legislation.

When people complain that the tax law makes no sense and is too complicated, there is a cynical though defensibly accurate response. When viewed from the perspective of those who can afford to pay to influence the crafting of tax legislation, the tax law makes perfect sense. It helps the rich get richer and it contributes to the accelerating decline of this nation’s economic well-being. By the time critics of Congress will be able to "prove" that there is a need for reform, it will be too late.

Thanks to a tip from Paul Caron's TaxProf blog posting, I turned my attention to a Wall Street Journal Opinion article, Are Taxes the Root of Unhappiness?. The article looks at a new study reported in Science magazine that ranked state populations based on happiness levels. The study reported in Science magazine took data from a recent "Behavioral Risk Factor Surveillance System" and a six-year-old economics paper that explored quality-of-life information, and "regressed the subjective measure of well-being … against the objective measure." To no one's surprise, the objective and subjective measures correlated rather nicely. In other words, "quality of life heavily influences happiness." The study also supports the notion that people pretty much know when they're happy and unhappy, and have good reason for how they feel. So what's the tax angle?

The tax angle is that Allysia Finley, the author of the Opinion article, concludes that there is a correlation between states with high state and local tax burdens and states with high levels of unhappiness, and a correlation between states with low state and local tax burdens and high levels of happiness. Her premise seems to be that people who pay relatively higher proportions of their income in taxes have less to spend on the things in life that make a person happy. There are three major flaws in her reasoning.

The first major flaw is that happiness flows from things that can be purchased. True, accumulation of material wealth and consumption ("vacations, hobbies, home improvements, eating out and child care," in Finley's words) can bring happiness. But there are many other things in life that bring happiness. One excellent example is the satisfaction that comes from helping others and pitching in, experiences that highlight the efforts of those engaged in volunteer work and community service. It may be that those who have not experienced the joy of giving mistake self-serving material acquisition and consumption as happiness. They don't know what they're missing.

The second major flaw is the assumption that correlation implies cause and effect. Finley acknowledges the danger of making that leap but notes that "but there's something going on here." My suggestion is that what contributes to unhappiness or lessens happiness is the frustration arising from watching politicians, namely legislators, executive branch officials, and even judges, fail to use taxes in ways that enhance quality of life for a wide swath of the population. Taxes are high in states that tend to have more need for public intervention. States are not equal in this respect. Consider several of the examples highlighted by Finley. She notes that unhappiness levels in California are high despite its presumably fine weather. Yet California's weather includes Santa Ana winds that fuel wildfires, mudslides triggered by the torrential rains that fall upon land left barren by those fires, earthquakes if I can be so bold as to include that phenomenon in the category of "weather," avalanches, snowstorms, droughts, and a wide variety of meteorological mishaps that belie the myth of California being a fair weather paradise. If those tribulations don't bring unhappiness, consider the position of California as a state that must absorb and deal with hundreds of thousands of immigrants, both legal and illegal, who arrive with almost nothing and put burdens on the state until such time, if at all, they become self-sufficient and contribute to the economic well-being of the state. The same challenge afflicts New York and New Jersey, two additional states to which Finley points in trying to persuade us that taxes cause unhappiness. A significant proportion of immigrants arriving on the East Coast end up in those two states. Wyoming, South Dakota, Nebraska, and Kansas don't face the sort of challenges faced by New York, New Jersey, California, and many of the other "high tax" states.

The third major flaw is that the correlation between high taxes and unhappiness advanced by Finley isn't borne out by the information available. Paul Caron's TaxProf post includes a chart that's worth examining. True, California, Connecticut, New York, and New Jersey score high in unhappiness and in taxes. But how does one explain Indiana and Michigan, which also score near the top in unhappiness but are average in terms of tax burden? Could it be that insufficient tax revenues contribute to the factors that generate the unhappiness? Or consider West Virginia, a state with a tax burden exceeded by 44 other states, yet only 34th in happiness. On the other side, yes, Louisiana ranks first in happiness, and has the next-to-lowest tax burden, but what about Hawaii, coming in second in the happiness scores, and yet having a tax burden higher than 36 other states? Tax burdens in Florida and Arizona are average, and yet they claim third and fifth place, respectively, in the happiness sweepstakes.

It's not the tax rate or tax burden per se that contributes to unhappiness. If tax dollars were used properly for the improvement of quality of life, happiness would increase. Perhaps there are lessons to be learned from studies, if those studies were to be undertaken, between levels of happiness among those contributing to charities that efficiently and properly use the contributions that they collect, and those who contribute to charities that misuse the funds that they raise. What's needed is some sort of corruption and inefficient government index that can be plotted against the tax rank and happiness score sequences.

Finley's premise suggests that if all taxes were repealed, happiness levels would approach infinity. I suggest the contrary. If all taxes were repealed, happiness levels would plummet to near zero. The flaw in the sort of analyses of which Finley's is one example, is that they plot data on a linear basis rather than a logarithmic or differential calculus basis. In other words, the relationship is best portrayed by U-shaped curves and not straight lines. Mathematics aside, perhaps imbuing the culture with a better sense of the meaning and worth of giving, in contrast to the greed of getting, would bring significant changes to the underlying information that Finley and others use in their anti-tax campaigns. Doing that would require a change in education processes and values. That's an issue that reaches far beyond taxes.

The other day when I was at the gym, a retired fellow asked me what was going to happen with the estate tax, which as of today has become a zero tax. As we conversed, a crowd grew. Clearly it's a topic that interests people. What impressed me was the depth of knowledge that several people demonstrated about the issue. At least a few have been paying attention. I told them, of course, that no one knows what's going to happen. The fellow who started the conversation with me told us several times that he really wanted and needed to know. So do the rest of us, someone noted. But they made a good point. The taxpayers of this country deserve to know what's going to happen, which means, of course, that they deserve to have had a Congress deal with the matter long before now.

Much has been written, and I have no intention of repeating it, about the various issues that must be confronted because of the failure of the Congress to do its job. Should people make more gifts this year than they planned to make? Should people amend their wills? Should people make transfers to grandchildren? A long list of commentators have mapped out some strategies, though all admit that at some point it becomes a gamble. During the conversation at the gym, I repeated something I've noted to others in earlier conversations, and that's the possibility of drafting tax-contingent clauses in the will. One could set up a will so that different dispositive provisions were triggered depending on the estate tax situation at the time of death. It's not perfect, but it gives the decedent-to-be a little bit of control that otherwise would be lost.

One of the vexing issues is the possibility that when, or perhaps if, Congress gets around to doing something with the estate and other transfer taxes, it will make the changes retroactive to today. Pity the person who dies today, without having had the benefit of mapping out an estate plan that could take into account a tax situation unknown until weeks, months, or even years after death. It is wrong for the Congress to put someone in that position, but that is what the Congress has done. Someone at the gym commented to the effect that retroactivity would be unconstitutional, but I pointed out that although there is some debate about the matter, it appears very likely that a challenge on that basis would fail, unless the lag time were quite long, and even then there's no guarantee.

Thousands of commentators have shared their predictions of what Congress might do, though few go out on a limb and pick one specific possibility, and no one wants to project a timeline for Congressional action. Don't expect me to add to the list of possibilities or to make a projection as to what Congress will do or when it will deal with the matter. I simply don't know. Meteorologists do a better job with weather forecasts than anyone can do reading the Congressional crystal ball.

What I can offer is my condemnation of the Congress for putting America into yet another economic mess. Several commentators have noted, cynically perhaps, that members of Congress benefit from having the estate tax issue held open because it encourages lobbyists for the various positions to rustle up more cash for the campaign coffers of members of Congress. Far be it for me to criticize a cyncial observation. Truth be told, I think these commentators are making a valid point. It's not unlike members of Congress to put personal objectives, including raising re-election funds and grabbing power, ahead of what needs to be done for the national economic good. One look at the bribery involved in crafting a health care bill tells us quite a bit about the value system in play on Capitol Hill.

Almost nine years ago Congress enacted tax legislation but subjected most of it to a cut-off date in 2010. Absent Congressional action, in 2011, these changes will disappear and the pre-2001 tax law will spring back into force. Actually, it's more complicated. During the past eight years, Congress made some of the 2001 changes permanent. Some expired by their own terms. Many were themselves amended, in ways that will cause the pre-2001 law that returns to be a modified version of what it was. Why did Congress impose this strange sunset provision when it enacted the changes? The answer is simple. Congress did so in order to make the cost of the tax cuts for the wealthy appear to be less than what it would have been had there been no expiration date. Ultimately, it made the upcoming federal deficits appear smaller, though as reality was encountered as the decade progressed, the deficits went through the roof.

Almost nine years ago, Congress knew it had to deal with this estate tax question. Each year, it put the matter on the back burner. What's the rush? This is the sort of thinking that brings students into faculty offices begging for extensions of time, that causes partners to demand midnight work from associates, that even causes some law school faculty to run around in a frenzy on the morning of the first day of a semester's classes trying to photocopy materials for an imminent class session. To all of this, I often remark, admittedly with sarcasm, "What a surprise it must be to discover that a paper is due tomorrow, that a meeting with a client in the morning has been scheduled for weeks, or that a class is scheduled for the first day of the semester." And so the Congress neglected its responsibility to take good care of the nation. It let the issue rest until there was no time to deal with it, and then, because there was no time to deal with it, the Congress decided it would not deal with it.

There are a variety of words to describe the manner in which the Congress has handled the estate tax question. Irresponsible is my favorite. Short-sighted is another good one. Unwise, incompetent, and outrageous also come to mind. There also are some phrases that can be used. Derelict in its duty. A breach of its fiduciary obligation. Perhaps there's a new game here. The winner is the person who, in 10 minutes, can come up with the most words describing this mess. Would people play? They already are. One thing that struck me during my conversation at the gym on Wednesday was the intensity of the criticism levelled at the Congress. Do its members get out and meet with people or are they surrounded by their posses and moneyed interests? Are members of Congress so clueless that they think they're earning points by chucking aside their obligations? Someone suggested that Congress ought not be permitted to return to Washington, because it's either not doing what it should be doing or is doing something in a manner that makes things worse. I would not so easily let the Congress off the hook. My inspiration comes from the Emperor Frederick II, who barricaded the cardinal electors (though after making certain that a select few did not make it in), until they reached a decision. Perhaps the Congress ought to be sequestered until it fixes the estate tax issue. Perhaps if its members are unwilling to go to the people and listen to everyone, rather than to their patrons, the people will need to bring their frustration to the Congress.

There may not be any constitutional requirement that Congress do its job properly and in a timely manner, nor a provision that prohibits the Congress from creating the mess in the first place. Nor is there any statute that can be invoked to compel the Congress to live up to its responsibilities, particularly when the responsibility is one of its own making. But there is more to law than just a constitution and statutes, regulations and cases, rulings and decrees. There is a moral imperative, an overarching array of dedication to the national interest, respect for the citizens, decent treatment of the taxpayers, adherence to diligence, integrity, common sense, and fiduciary duty, and a deep understanding of the difference between the good and the expedient. Whether the Congress ever had or exercised this set of values is debatable, but what's not in dispute is the conclusion that the current Congress fails miserably in this regard. It is morally bankrupt. It earns a zero.

I noted previously, in New Jersey to Follow in California’s Tax Footsteps?, that New Jersey faces some difficult decisions if the intentions of its governor-elect are to be accomplished. The governor-elect, along with his political allies, want to cut taxes. To do so, they would need to cut spending, because New Jersey cannot print money and there are limits on its ability to continue borrowing. I pointed out one disadvantage to its practice of "borrowing" from the state unemployment insurance compensation fund in Monday's A Tax Lesson to Be Learned.

According to a recent article in the Philadelphia Inquirer, the chair of the New Jersey Senate's Budget and Appropriations Committee wants to review the budget impact of the various deductions, credits, exclusions, and exemptions available to taxpayers in New Jersey. This legislator pointed out that each of these items represents forgone revenue. Of course, revoking any of these items would be interpreted by the governor-elect's party, to which the Budget and Appropriations Committee chair does not belong, as a tax increase. The interesting twist is that the legislator proposing this review has introduced legislation that would require the governor to come up with the list of tax deductions, credits, exclusions, and exemptions. Hello? Why should the governor be required to generate the list? Did the governor impose these various tax breaks? Of course not. Every one of these tax breaks was enacted by the legislature. Why can't the legislature maintain and generate the list? Is it the same incompetence that led a member of the House of Representatives, many years ago, to write to the IRS asking for a copy of recently enacted legislation because he could not find a copy and did not understand a question from a constituent? Why is that incompetent? Surely he had a copy, and if he lost it, surely his staff should have been able to find a copy, considering he was a member of the legislature that enacted the legislation. What made it worse was that this member of Congress had voted in favor of the legislation. Legislators, do your own work and stop foisting your work, and blame for your mistakes, onto the executive branch.

It gets better. The interim president of a group that has lobbied for disclosure of the tax expenditures points to a tax compact between New Jersey and New York as an example of a tax expenditure. It should be noted that the compact is something to which the legislature agrees. Under the agreement, each state absolves its residents from income taxes on compensation earned in, and taxed by, the other state. According to this person, the agreement costs New Jersey $1.5 billion a year. It is unclear whether this amount represents wages earned by New Jersey residents in New York, multiplied by the appropriate New Jersey income tax rates, or a more sophisticated determination that in the absence of the compact New Jersey revenues would increase by that amount. Why the difference? If New Jersey chose to tax its residents on New York compensation, its law would also provide those residents with an income tax credit for the income taxes those residents paid to the city and state of New York. Considering the relative tax rates, those credits would wipe out the putative New Jersey income taxes. It appears that this lobbyist doesn't quite understand the impact of the tax credit because, to quote this person, "Most of the people who live in New Jersey but work in New York pay more to New York than they would to New Jersey, which means that if New Jersey could end or rework the agreement, the state could receive more in income taxes while its individual residents would pay less." That sort of analysis would not earn a passing grade in a state and local taxation course. Moreover, the tax compact is designed to achieve administrative efficiency, because the cost of administering and auditing the credit would otherwise add to New Jersey's spending. If the suggestion to rework or eliminate the tax compact implicity includes a proposal to eliminate the credit for income taxes paid to other states, aside from a variety of constitutional, policy, and statutory arguments that might foil such a move, as a political matter it is foolish and would have the effect of encouraging New Jersey residents working in New York to move to New York. The net effect would be to banish to other states individuals who pay other taxes to New Jersey.

It boils down, once again, to a legislature being quick to dish out tax breaks, quick to spend money, but slow to take on responsibility for its actions, slow to keep track of what it does, yet quick to ask others to do its work. Ought not legislators be held to the same standard of expertise that applies to people working in other occupations and jobs? Do not the taxpayers deserve better?

Imagine. A fund designed to make payments to those in need. A tax levied to put money into that fund. In good years the fund balance grows. In bad years the fund balance decreases as payments are made to those whom the fund assists. The level of taxation is set to keep the fund solvent. That's how it should work.

Imagine. When the fund, in good years, has a high balance, politicians seeking to increase spending in other areas of government without raising taxes, see the fund, flush with cash, and dip into it. Whether they intend to "repay" what they pilfer isn't known. But if they don't, the taxes levied to put money into the fund will need to go up when the fund balance dissipates.

Imagine. Times turn tough. Legitimate claims against the fund increase. The fund balance disappears. The fund then tries to borrow, but from whom and at what cost? Ultimately, the fund faces the prospect of showing its empty pockets to those with legitimate claims.

Is this some sort of end-of-the-year parable? Is it a re-hashing of the warnings periodically issued about the sorry financial state of the Medicare and Social Security trust funds? No.

Stop imagining. It's not fiction. It's a real story, with tax lessons for all.

According to this Philadelphia Inquirer story, this is what happened to the New Jersey unemployment compensation insurance fund. When the economy was going well, the taxes levied on employers and employees caused the fund to grow, even as it took care of the unemployment compensation claims made by those who lost their jobs. Unemployment was low, so the funds outlays were less than the taxes being collected on employers and employees. The tax rate on employers fell, as the legislation setting up the fund was designed to let the employer tax rate "float" depending on the fund balance. The arithmetic was done in a manner that let the fund hold reserves so that if unemployment increased, which would cause both an increase in unemployment compensation claims and a decrease in tax collections, the fund would be in a position to meet its obligations.

Unfortunately, New Jersey politicians eager to spend money without raising taxes looked at the fund balance and decided it was theirs to use for purposes other than unemployment compensation. So they took $4.7 billion from the fund. Their short-sightedness, a terrible lack of ability or willingness to look ahead, backfired.

The economy took a tumble. Unemployment skyrocketed. So, too, did legitimate unemployment compensation claims. The fund dried up. It dried up much sooner than it would have had the $4.7 billion not been pilfered. If the fund were a private trust, the trustees would be nailed for breach of fiduciary obligation. Unfortunately, there's no such fiduciary obligation imposed on politicians. In the meantime, the fund borrowed almost $1 billion from the federal government so that it could continue to pay claims.

Consequently, the "floating" tax rate mechanism is set to trigger an increase in the employer portion of the unemployment compensation insurance tax. Set to occur on July 1, it's a whopping increase. The rate would move to the highest permissible rate. Employers who at the moment are collectively paying $1.7 billion into the fund each year would pay $2.7 billion. Some employers are facing a tax increase of $270 per employee and others as much as $700 per employee, with rates varying depending on the particular employer's employment hiring and firing history. It will take several years of increased taxes and presumable declining unemployment compensation claims, to restore the fund to financial health. As early as April 2009, the state's labor commissioner disclosed the fund's condition and the looming tax increase.

New Jersey Republicans, however, consider tax increases to be evil upon evil, and want to block the automatic tax hike. So they are considering other options. One option is to have the state put money into the fund. The fund needs $2 billion in order to prevent a tax hike this July, but that would not prevent the tax hike trigger from kicking in on July 1, 2011. The difficulty with this option is that the state's general fund faces an $8 billion deficit, so there's no reasonable expectation that the state can come up with money that, in effect, would repay some of what the politicians "borrowed" -- or should we say "stole" -- from the fund in years past. Another option is to amend the tax rate trigger legislation so that the tax increase is reduced or eliminated. The foolishness of this idea is that the fund deficit would continue to grow, and the situation would compound itself in upcoming years. For example, if $2 billion is not made up during the next fiscal year, the following year would bring a $4 billion shortfall. Yet another option put forth by the Republicans is to ask the federal government to forgive the almost $1 billion that the fund has borrowed from it. This approach is doubly flawed. First, eliminating the fund deficit does not generate cash that can be used to pay pending and forthcoming claims, unless the unspoken aspect of this option is to borrow even more from the federal government with the intention of having that amount also forgiven as a debt. Second, shifting the burden onto the federal government shifts the burden onto taxpayers throughout the country, which is problematic in and of itself but worse, impractical because at least half of the states are in the same position of owing money to the federal government to repay loans undertaken to fund unemployment compensation insurance fund deficits. Still another option is to cut unemployment compensation benefits, but as the article puts it, this "could created a fierce backlash." Indeed.

Looking ahead, two politicians have proposed an amendment to the New Jersey Constitution prohibiting the sort of "borrowing" from the fund that caused this crisis. Voters will make a decision on that proposal in November. For the moment, though, the only viable choice is to let the automatic tax increase kick in. This will drive the newly elected governor crazy, considering he got himself elected on a campaign promise that benefits of all sorts from the state could be increased while taxes were not just being held steady, but cut. Cut! Welcome to reality, Mr. Christie.

Among the lessons to be learned from this mess, aside from the stupidity of eating next year's seed corn, is the prospects that lie ahead for the Social Security and Medicare Trust Funds. For years, federal politicians have used these funds to finance the deficits arising from cutting taxes for the wealthy while simultaneously increasing federal spending, chiefly to finance a war. When claims against those funds begin to increase and the funds begin to call back the loans made to the Treasury general fund, a crisis orders of magnitude bigger than the one facing New Jersey -- and several dozen other states -- will paralyze the nation. Consider the options. Unlike the New Jersey unemployment compensation insurance legislation, there is no automatic tax hike trigger that would increase social security and Medicare taxes on employers or even employees. So one option is to have the federal government put money into the fund, that is, to pay back the money borrowed from the funds. Where does the federal government, already wallowing in astronomical deficits, get that money? Increase taxes? Consider the hue and cry over that one. Perhaps the federal government could print money. That would cause inflation, devalue the dollar internationally, and probably trigger another economic collapse. Another option is to ask the trust funds to forgive the debt. Wait. That won't work. Perhaps the federal government should ask China, Japan, Saudi Arabia, and the other nations that financed the "raised military spending while cutting taxes for the wealthy" stupidity of the past decade to forgive the debt. Ha ha ha. One can imagine what would be asked in return. Think about an IRS with its headquarters in Beijing, Riyadh, or Tokyo. Yet another option is to cut Medicare and social security benefits. Expect yet another "fierce backlash."

As many predicted, beginning almost ten years ago, the ultimate price to be paid for the "we want it all and we want it now" screech of the wealthy who didn't want to pay taxes, joined by those who did not benefit from the tax cuts but imagined themselves someday being among the lowly-taxed economic elite, is soon to be paid. Now that the promised economic paradise offered by the tax-cuts-for-the-wealthy advocates has not materialized, a surprise and disappointment to some but a totally expected outcome to those who understand economic reality, the pain of foolish choices is going to afflict the entire nation and, quite possibly, most of the planet. It's time to set aside the false promises, the deceptive arguments, and the selfish motives of those who put individual greed above collective good, and to take the difficult and agonizing steps that need to be taken if unemployment, social security, and Medicare trust funds, let alone the nation, are going to survive and prosper.

Earlier this week, along came the news that Pittsburgh’s mayor has abandoned his effort to have the city enact a tax on tuition. This decision was announced during the height of the holiday season, and it surely is a welcome gift to those students and parents who are footing the bill for their undergraduate and graduate education. When the proposed tuition tax was first made public, I ripped into the idea in Funding City Services to Tax-Exempt Schools: Impose User Fees, not Taxes.

In my critique of the tuition tax proposal, I stressed the advantages of imposing user fees for the specific services provided by the city of Pittsburgh to the schools and other tax-exempt organizations carrying on activities within its limits. Not that I am under any illusion that Pittsburgh’s mayor, his staff, or executives at those tax-exempt organizations read MauledAgain or took note of my suggestions, but it is interesting that part of what persuaded the mayor to ditch his goofy idea was a pledge made by those organizations, along with some for-profit businesses, to come up with increased transfers to the city in the form of payment for services rendered by the city. The mayor’s decision may also have been influenced by the widespread outcry against his idea, as at least one of the positions I’ve taken on MauledAgain happened to correlate with those taken by the overwhelming number of people who commented on the issue.

The mayor also explained that he is forming a coalition to develop a plan that it will take to Harrisburg in search of state help for the city’s financial problems. Considering the financial mess in which the state finds itself, Pittsburgh won’t be coming away with state cash. Instead, the best for which it can hope is legislative approval of other money-raising plans, such as an increase in the annual per-capita tax imposed on people working in the city, or broadening the payroll tax to include those working for tax-exempt employers.

Whether the tuition tax proposal has been terminally set aside is questionable. Although the tax-exempt organizations in Pittsburgh pledged to contribute more money, they did not sign up for as many dollars as the mayor had requested as a price for dropping his tuition tax initiative. Nor, it seems, did they bring their pledges up to the amount that they had been contributing a few years ago. So long as the city needs money to deal with its financial problems, much of which is the same sort of seriously underfunded public employee pension plan disaster facing the state and many municipalities, it’s risky to conclude that a money-raising idea, even one as ill-advised as a tuition tax, has been relegated to the dustbin of history.

That said, for the moment, at least, students attending Pittsburgh schools, and their parents or other tuition providers, can breathe a sigh of relief and enjoy their holidays without worrying about scraping up money in January that they didn’t plan to spend and might not even have. Like some holiday presents, this one may not last into perpetuity. I know of only one gift for today that does, and it’s not one that a mayor or legislature can duplicate. To all those for whom it matters, Merry Christmas.

The area where I live has been clobbered with a snowstorm that comes in second on the "inches piled on" list. I'll spare everyone my bewilderment at the way snow shoveling reveals the existence of muscles that no machine in the gym seems to recognize and my desire that the phrase "global warming" be forever shelved in favor of the more believable "climate change." Instead, I want to share how even a near-blizzard snow storm gets me thinking about tax.

Twice on Saturday, once on Sunday, and once on Monday, township plows came down my street and cleared away the snow. I think that on Sunday they also dropped some cinders and salt or salt-like substance. The result was a street that was pretty much passable almost the entire time, and certainly since early Sunday morning. When the plows went by -- I was out there shoveling on several of the occasions -- what passed through my brain was the thought that my township property taxes were funding this service. As I drove to Swarthmore on Sunday morning, I noticed several PennDot plow trains on I-476, and again thought about the various taxes that paid for the equipment, supplies, and labor. Actually, I was beginning to draft this blog post in my head.

When someone complains about paying taxes, one of the questions I pose is this: "Who will plow the streets?" The smart-alecks from places that it doesn't snow, a rapidly diminishing list of locales, can reply, "Who cares?" but most of the anti-tax crowd goes quiet and some begin to modify their stance with some sort of "We're not against all taxes" explanation. I've yet to hear any sort of workable alternative arrangement to see to the removal of ice and snow from public highways.

Proof of the value of taxes in providing services to the citizenry can be found in the experience of Philadelphia residents and businesses. Once again, most streets remain choked with snow. Before using the size of the storm as an excuse, this problem occurs every time there is a snow of more than a few inches. The city has insufficient equipment and labor to get the job done. It's not even a matter of needing three or four times as many days to clear out the streets. Some years, the arrival of spring is what solved the problem. In the meantime, God have mercy on those living on snow-clogged streets who need an ambulance or the services of the fire department. It's one thing for emergency crews not to be able to respond during the height of a storm, but when the period of inaccessibility reaches a matter of days, it becomes downright dangerous. This is especially so when the problem is insufficient tax revenue to fund the work. It also appears as though some towns in New Jersey also are suffering similar problems. What I do not know is if this is a "first" for them or a common experience.

If Philadelphia had available funds, it could reach into the ranks of the unemployed, buy some shovels, and put these folks to work clearing out the streets too narrow for plows, and perhaps rent some plows and put those who are capable to work driving some extra equipment. Is this feasible aside from the funding issue? Certainly. The proof is what the Philadelphia National Football League franchise did to get ready for the San Francisco 49ers-Philadelphia Eagles game on Sunday. True, game time was postponed from 1 p.m. until 4:15 p.m. to buy some time, but the organization went out and hired 1,700 people and put them to work clearing the stadium and the parking lots (and apparently, neighboring streets that the city had not cleared). Though some of the 1,700 were folks with jobs taking on contracts with the Eagles, many others were folks looking to make some money. Reports are that many of them were paid $10 an hour to shovel and otherwise move snow out of the seating areas at the stadium. The Eagles could do this because they had some cash in reserve. The city of Philadelphia doesn't have the money. Its revenue shortfalls are a combination of yielding to pressure for reduced taxes, hordes of people not paying taxes, serious problems with its tax assessment and collection systems, and tax breaks dished out to corporations not in need of social welfare payments. One argument for reducing taxes, an argument that Philadelphia accepted to some extent, is that higher taxes deter people and businesses from settling in the city. Today's question is what effect do days and days of unplowed streets have on people and businesses thinking of moving into the city.

Speaking of resources, I have neither the time nor the money to do a study that analyzes the correlation between the taxation policies and tax rates of the governmental entities on which snow fell last weekend and the quality of snow removal and street clearing that those entities offer. Though such a study might plow away my suggestions, I suspect that it would demonstrate the value of taxation and the risks presented by the objectives of the anti-tax advocates.

Too often, the only people who get to vote on taxes are legislators. Granted, citizens can vote on taxes indirectly by making choices among those running for a seat in a legislature, but there’s no guarantee that a candidate will vote on taxes in a manner consistent with what the candidate claims he or she or do. However, every once in a while, in some states, citizens get the opportunity to vote directly with respect to a tax proposition. That is going to happen in May of 2010. According to this Philadelphia Inquirer story, the vote was 15 to 2 in favor of the proposal to put a tax issue directly to the voters.

On Thursday, Philadelphia City Council voted in favor of legislation that will place on the ballot a referendum to amend the City Charter. The amendment will terminate the Board of Revision of Taxes as of the end of September 30, 2010, and create an Office of Property Assessment and a separate Board of Property Assessment Appeals as of October 1, 2010. The proposed appeals board would consist of seven people appointed by the Mayor, but the Mayor would be required to select from a list of nominees prepared by an independent panel. City Council would then vote to confirm or not confirm the Mayor’s appointments.

One of the two members of City Council voting against explained that the legislation “does not ensure job protections for those least able to protect themselves,” namely, the patronage employees. One of the dissenters thinks it is “unfair, unconscionable, dishonest, and immoral” to require BRT employees to pass a test demonstrating that they are qualified for their jobs and to stop engaging in political activity, proposed requirements the merits of which I discussed the other day in Testing Tax Bureaucrats Just Part of the Solution.

The text of the referendum is as follows: “Shall the Board of Revision of Taxes be abolished, and its powers, functions, and duties be reassigned to a new Office of Property Assessment (with respect to the making of assessments) and to a Board of Property Assessment Appeals (with respect to appeals from such assessments), with the members of the board appointed from nominations made by a Board of Property Assessment Appeals nominating panel?”

If I were a Philadelphia citizen voting on the referendum, I would vote in favor of it. That ought not be a surprise to anyone who has followed my commentary on the BRT’s shortcomings, which began with An Unconstitutional Tax Assessment System, and which was followed by Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, and Testing Tax Bureaucrats Just Part of the Solution.

But the fact that I would vote for the referendum tells us nothing about its fate. Will Philadelphia voters go to the polls intent on ridding themselves of the afflictions they have suffered as property owners under the BRT? Will they instead feel sorry for the patronage employees, many of whom probably will end up with jobs with one or the other of the new entities? Will Philadelphia voters know that the referendum is on the ballot? Will there be highly visible debate and unavoidable publicity as there has been for referenda touching hot-button issues? My guess is that as the April and May approach, various public interest groups, bloggers, reporters, and some politicians will make a big deal about what some are calling the biggest reform in Philadelphia government since the watershed changes of the 1950s. Trying to predict the outcome is like trying to predict a Super-Bowl winner immediately after NFL draft day. That said, I’m guessing – not predicting – that the referendum will pass. I think not only that too many Philadelphia citizens are aware of the special deals the BRT cut with its friends and the wildly inconsistent assessments causing many people to be overtaxed and some people to be undertaxed, but also that they will select “yes” when they enter the voting booth in May. We will see. At the very least, there will be yet a few more chapters in the Tale of the BRT.

As expected, the tale of Philadelphia’s Board of Revision of Taxes continues to grow. My commentary began with An Unconstitutional Tax Assessment System, which was followed by Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, and, most recently, earlier this week, Tax Bureaucrats Lose Work, Keep Pay. Now comes news that the Mayor of Philadelphia has ordered the BRT’s patronage employees to do two things if they want “a chance at keeping their jobs.” First, they must abandon their political activities in the same manner as all other city workers do. Second, they must pass a civil service exam. Those who pass the examination will be put into the same pool as other applicants who pass, and hiring will take place based on the ranking attained by the test takers. The Mayor explained that making these changes will “impact all homeowners, all property owners throughout our city by creating a more accurate, more equitable, and more fair property assessment system in Philadelphia."

The test that the BRT patronage employees will be required to take will be limited to persons with clerical experience “supporting real estate appraisers for a governmental entity.” That means the BRT patronage employees who choose to take the exam will constitute most, if not all, of the applicants. The Mayor and his staff justify this limitation as a way of reducing the risk that the BRT would lose all of its patronage employees overnight only to see them replaced with individuals lacking experience. As a practical matter, as pointed out in comes this Philadelphia Inquirer article, the Mayor is being careful to protect the patronage employees in a manner that doesn’t guarantee them job retention but makes it likely enough so that City Council members who threatened to block the BRT reform legislation if the employees were not protected would be placated.

Despite a test design that almost ensures job retention, BRT’s patronage employees griped about the changes. One employee, who is the Democratic leader of the 33rd Ward and who will need to resign that position if she wants to remain employed by the BRT and its successor, explained, “I’m totally disappointed. We’re all totally disappointed.” She asserted that she and the other clerks “are not responsible for the inaccurate property assessments” that triggered the outcry for reform. She offered, “"If one person can show me a property I've assessed, I'll plead guilty. We're tired of hearing we're the scum of the earth. Look, it's almost 5 o'clock and I'm still at work. We're not the assessors. We're the ants at the bottom of the hill. Why are you killing the little ants at the bottom of the hill?" The answer raises several issues. Are all of the assessment mistakes on account of what the assessors do? Or could it be that some are the consequence of erroneous database entries, typographical errors, omitted information, and other glitches arising during the time that patronage employees are handling data? We simply don’t know. A bigger problem is the notion that the patronage employees should be treated more favorably than other city employees. For good reason, city employees – like government employees at every level of government throughout the country -- are barred from engaging in political activity. Why should the BRT’s clerical employees get special treatment? For good reason, most city employees – like most government employees throughout the country – cannot be hired until they pass an exam that tests their qualifications. Why should the BRT’s clerical employees get special treatment? Why the disappointment? “I’m disappointed that I’m going to be subject to the same rules that apply to other city employees” isn’t a reaction that will gather much sympathy among other city employees or city taxpayers. Considering the manner in which applicants for the exam are being limited, the patronage employees ought to be thankful that they’re retaining an inside edge that should not be taken for granted.

Unfortunately, though intervening with requirements to put an end to the patronage arrangement, the Mayor did not liberate the School District from the roughly $4 million it contributes each year to the BRT. The Mayor directed that the money go into the city’s general fund rather than being used to compensate the BRT’s patronage employees, but there still remains the question of why tax money collected to fund public education ends up paying for something else. Perhaps it’s because public school students aren’t eligible to vote. It may be that because the school district is funded by taxes computed with reference to property assessed values, that it ought to be charged a fee for the services rendered to it by the assessors. Aside from the fact that no other county in the state charges its school boards for the services of its assessors, the $4 million fee appears to be a product of over-reaching. It is doubtful that it arises from arms’ length bargaining between the school district and the BRT. Philadelphia’s public schools and their students need all the help they can get. Reducing or eliminating this fee is a good place to start.

A colleague passed along some very important news about chocolate. According to this report, chocolate is pretty much a "superfood." The report shares "three more reasons" not to "break that chocolate habit," though it advises that it's the dark chocolate that should be consumed.

Chocolate, we're told, makes us smarter because "the flavonols in dark chocolate increase cerebral blood flow, which in turn may trigger the creation of new blood vessels and brain cells." There is a study indicating that eating a bit of chocolate before taking a cognitive test improves results.

Chocolate, we're told, increases the survival rate of heart attack victims. More research is needed to explain why this seems to be the case.

Chocolate, we're told, reduces cavities. There is a chemical in chocolate called theobromine which appears to "be just as good as fluoride at hardening tooth enamel." Chocolate-flavored toothpaste, anyone?

So here's a substance that improves health. The tax law is filled with incentives designed to improve health care. Ought not the growth, manufacture, sale, purchase, and consumption of chocolate be within the scope of those incentives or the ones being proposed as part of a solution to the healthcare crisis? It's also a substance that improves intellectual performance. Ought not the growth, manufacture, sale, purchase, and consumption of chocolate be included as something within the scope of the education credits?

Those familiar with my position on using the tax code for purposes other than raising revenue can understand that I am being facetious. Even though almost every other allegedly good idea, and a lot of bad ones, end up as the targets of tax credits, exclusions or deductions, there's no justification for making the situation worse. And worse it would be. If dark chocolate is the beneficial chocolate, how would it be defined? Would it include 40% dark? What about the 99% dark that I purchased in New York several years ago and that is edible only in very small bites. No, my point is not to advocate for a chocolate tax break but is to demonstrate the inanity -- or is that insanity? -- of turning to the tax law every time a new discovery or solution to some problem makes the news.

The report also notes that chocolate reduces blood pressure. So I suggest having some on hand when you sit down, in a month or two, for your annual tax return preparation routine. Nibble on chocolate as you gather up relevant financial and other records. Munch on high-quality chocolate as you crank up Turbotax or sit in your preparer's office. Savor some chocolate when it's time to look at the tax return's bottom line.

Chocolate might not get a tax break, but it makes a good break from taxes.

The tale of Philadelphia’s Board of Revision of Taxes continues. A little more than a week ago, in This Just Taxes My Brain, I commented on what was then the latest chapter in the BRT saga. Members of the BRT expressed outrage that anyone dare criticize the job that they and the Board’s employees were doing, and offered all sorts of excuses for why the BRT continues to fail in its charge to assess Philadelphia real property according to law. My previous commentary can be found in An Unconstitutional Tax Assessment System, Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?.

In the latest installment of this long and far-from-over journey, according to City Takes First Steps to Abolish BRT, Philadelphia City Council voted 12-1 to move out of committee a bill that abolishes the BRT. Under the proposal, there would be an agency that did the property assessments and an agency that functioned as an appeals board. The former would report to the mayor, and the latter would be independent. Responsibility for most of the BRT’s work has been shifted, for the time being, to the mayor’s staff. Dozens of BRT employees are patronage employees, namely, people being rewarded for their services to city politicians. The funding for their salaries comes from the school district, which continues to face financial pressures and can ill afford to have tax revenues collected to fund education siphoned off for the benefit of these patronage employees. The salaries are paid by the school district to avoid the prohibition against political activity by city workers. It says a lot about what the politicians think of the citizenry and the significance of law when they flout the rules so openly and brazenly.

The first question that popped into my mind is whether the BRT employees, whose work for the most part is being done by others, will continue to be paid. The answer is yes. What a deal. It gets better.

The first question that popped into the minds of some other people was a related, though different, one. What happens to the BRT employees after the BRT is formally abolished? The Philadelphia Inquirer article cited above reports that one member of City Council warned, "I can't support any BRT legislation if we don't protect employees. If you don't commit to that, then I can't commit to you." According to the article, this particular member of City Council has at least one patronage employee placed at the BRT. The mayor’s finance director promised to produce a plan for dealing with the patronage employees, but won’t reveal what it is. I have a suggestion. Fire them, and let them find jobs on their own by relying on their skills. Let’s see what they would earn in an open market. Will that happen? I doubt it, because after the quoted warning from one member of the council was uttered, eight others jumped in with pleas to “preserve the patronage workers.” Don’t these politicians get it? Don’t they listen to the people? One member of council argued, “Those are 85 real people that pay for their groceries and heating bills with those jobs.” The problem with this argument is that these are jobs in name only, but in substance are hand-outs, because if there were jobs being done, and being done properly, the assessment system would not be the mess that it is. There’s nothing wrong with using tax revenue to hire people who need income to do jobs that need to be done, provided those who are hired perform the work, and provided the government stands ready to dismiss those who don’t do the work. Everybody has a need to pay for groceries and heating bills, but that doesn’t justify drawing a salary without doing the job for which the employee is being paid.

What needs to be done is a complete and accurate assessment of all city real property that conforms to state law. Whatever the BRT and its employees were doing for the past however many decades, they didn’t accomplish what they were paid to accomplish. According to the Philadelphia Inquirer article, it “could take years” to adopt a more accurate assessment system. Years? And then more years to do the actual assessing after the “system” is adopted? The nation put people on the moon in less time, and although Rome wasn’t built in a day, one can imagine that a good chunk of it was built in the amount of time that has been squandered by the BRT since forever. And now there are people who want to continue finding ways to compensate those who failed to deliver? This sort of mentality, and consequent behavior, is the very sort of thing that fuels the anti-tax crowd. Those interested in the maintenance of government providing services to its citizens and funded by tax revenues do not do their cause any justice when they tolerate the BRT approach to government tax assessment, tax collection, and spending of tax revenue.

Soon, City Council is scheduled to deal with the bill that abolishes the BRT. However, the BRT’s demise needs approval by the voters, who would have the opportunity to vote on the question in the May 2010 primary election. If it passes, the BRT would terminate on September 30, 2010. We’ll see what happens. It seems as though there will be a steady supply of discussion points for MauledAgain to consider.

The tax law is complicated. Attempts to simplify it encounter opposition from the special interest groups who gain an edge by reason of their particular special, but complicated, provision. This situation encourages others to seek their own special interest provision. Over the years, tax breaks have been put in place for real estate, the oil and gas industry, energy developers, the timber industry, homeowners, charities, those adopting children, professional sports franchises, banks, domestic corporations doing business abroad, recipients of dividends, investors making money through capital gains, and owners of race horses, to give but a few examples.

Now another group has taken a step to put yet another ill-advised tax break into the Internal Revenue Code. Representative Thaddeus McCotter of Michigan has trotted out introduced the “Humanity and Pets Partnered Through the Years (HAPPY) Act.” He did so on July 31, but I didn’t become aware of it until very recently. Before ripping into it, I will share the language of the bill:

To amend the Internal Revenue Code of 1986 to allow a deduction for pet care expenses.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Humanity and Pets Partnered Through the Years (HAPPY) Act'.

SEC. 2. FINDINGS.

The Congress finds the following:

(1) According to the 2007-2008 National Pet Owners Survey, 63 percent of United States households own a pet.

(2) The Human-Animal Bond has been shown to have positive effects upon people's emotional and physical well-being.

SEC. 3. DEDUCTION FOR PET CARE EXPENSES.

(a) In General- Part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to additional itemized deductions for individuals) is amended by redesignating section 224 as section 225 and by inserting after section 223 the following new section:

`SEC. 224. PET CARE EXPENSES.

`(a) Allowance of Deduction- In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the qualified pet care expenses of the taxpayer during the taxable year for any qualified pet of the taxpayer.

`(b) Maximum Deduction- The amount allowable as a deduction under subsection (a) to the taxpayer for any taxable year shall not exceed $3,500.

`(c) Qualified Pet Care Expenses- For purposes of this section, the term `qualified pet care expenses' means amounts paid in connection with providing care (including veterinary care) for a qualified pet other than any expense in connection with the acquisition of the qualified pet.

`(d) Qualified Pet- For purposes of this section—

`(1) QUALIFIED PET- The term `qualified pet' means a legally owned, domesticated, live animal.

`(2) EXCEPTIONS- Such term does not include any animal—

`(A) used for research or owned or utilized in conjunction with a trade or business, or

`(B) with respect to which the taxpayer has claimed a deduction under section 162 or 213 in any of the preceding 3 taxable years.'.

(b) Clerical Amendment- The table of sections for part VII of subchapter B of chapter 1 of such Code is amended by striking the last item and inserting the following new items:

`Sec. 224. Pet care expenses.

`Sec. 225. Cross reference.'.

(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2009.

McCorter claims that the legislation would give pet owners tax relief while strengthening the human-animal bond. According to a Parade Magazine article, animal-rights activist Leo Grillo claims that “a tax break for the 60% of Americans who own pets will help keep pets in the home, where they contribute to the emotional well-being of families,” adding, “If Americans are happy and emotionally stable, they are going to be more productive, and that helps the economy.”

It is unlikely that someone who does not have a pet is going to run out and get one on account of this sort of tax break, for the same reason no one decides to adopt a child because there is a tax credit for doing so. People who do not own pets have reasons for not owning pets, and those reasons are not going to change because of a tax break. Some people are allergic to pets. Some people have schedules that don’t leave them time to care for pets. Some people live in places that don’t accommodate pets. Some people don’t have room for pets. Some people would make bad pet owners because they lack the skill, the commitment, the responsibility, or the maturity to handle the non-monetary burdens of pet ownership. If there is someone who doesn’t own a pet because he or she cannot afford to own a pet, the tax break isn’t going to solve that problem because it’s a deduction, making the tax savings insufficient to fund the cost of having a pet. All that is happening with this legislation is that a very well-organized group of people who are into owning pets have rallied to try obtaining for themselves a tax break that shifts some of the cost of their avocation onto other taxpayers.

Without a doubt, enterprising and clever people would turn this tax break into a tax shelter. If this proposal is enacted, it will encourage professional animal breeders to increase their output, advertising their wares with a “tax deductible” flag. How many people would be enticed into buying a pet only to turn it loose or turn it in to a shelter when they discover the “impositions” pets put on their otherwise carefree lives? People who want pets have pets, except for children whose parents are putting a veto on the idea, and if the proposal is designed to increase the number of people with pets, its success would mean a further incursion into limited global resources that should be used for assistance of humans who are barely, if at all, surviving.

Please don’t interpret my objection to this proposal as some sort of anti-pet or anti-animal position. I expect some people will start barking at me because of my criticism of this bill. I like animals. I’ve had pets and I’ve cared for others’ pets. Though I’ve not had the experience of tending snakes, horses, or alligators, I have learned how to see to the needs of cats, dogs, fish, birds, and turtles. Never did I, or any of the owners, dream that other taxpayers should foot the bill.

Because of my schedule and activities, I don’t currently own a pet. But I do have my own avocations. One of them, for example, is genealogy and family history research and publication. That activity makes me happy, contributes to my emotional well-being, and makes me more productive. It surely helps the economy, because dollars are flowing every time I subscribe to a research site, purchase a book, pay a researcher to help me, or invest in the publication of a book. Should there not be a deduction for the costs of maintaining this activity? What about the person whose “pet” is a motorcycle? Motorcycles require money, and time. They make their owners happy, contribute to their emotional well-being, and make their owners more productive. Motorcycle ownership helps the economy. How about a tax break for motorcycle enthusiasts? Or we could consider cosplay, another activity that makes people happy, contributes to their emotional well-being, and makes them more productive. The costs of costumes, travel to conventions, and other expenses help the economy. Is it time for a cosplay deduction? I could add dozens more to the list, but the point ought to have been made. Incidentally, I don’t own and have never owned a motorcycle. Nor do I participate in cosplay, unless showing up years ago at a law school Halloween Party in jeans and a flannel shirt claiming to be a lumberjack, and getting a ton of grief from everyone else for being lazy, counts as cosplay.

A Parade Magazine article quotes William Ahern, director of policy and communications at the Tax Foundation. He puts it nicely: “The tax code should not be used to make people ‘happy.’” He notes that the proposal is “just another snowflake in the blizzard of unjustifiable tax deductions, exemptions, and credits that congressmen propose to curry favor with a particular group of voters.” Amen.

It’s high time that members of Congress stopped using the tax law as a pawn in their trolling for votes. It’s tawdry. It’s offensive. It’s wrong. It endangers the republic. Congress needs to reject this latest attempt to monkey around with the Internal Revenue Code.

With my curiosity tweaked by a TaxProf Blog posting, I took a look at the OECD’s recently issued Revenue Statistics 1965-2008, 2009 Edition. That report contains, among other things, a comparison of the “total-tax-to-gross-domestic-product-percentage” for 26 countries. What sparked my curiosity was the relatively low percentage for the United States. With the anti-tax crowd and the “reduce taxes now” advocates painting a picture of overtaxed Americans, I thought it would be interesting to look more closely at the OECD information.

In Denmark, total taxes in 2008 equal 48.3% of gross domestic product. That figure tops the list. At the bottom is Mexico, where total taxes equal 21.1% of gross domestic product. In the United States, total taxes equal 26.9% of gross domestic product. The only countries with ratios less than that of the United States were Mexico, Korea, and Turkey. In 2007, only those three countries and the Slovak Republic had lower ratios, and Japan had the same ratio.

This information casts doubt on the argument that the United States needs to reduce its tax rates to remain competitive and to attract business activity. If entrepreneurs are avoiding the United States because its taxes equal 26.9% of its gross domestic product, surely they are not heading for nations where the ratio is 32.2%, 34.5%, 43.1%, or 47.1%, which are the ratios for Canada, New Zealand, France, and Sweden, respectively, let alone Denmark. Even Ireland, a nation which has attracted significant business development during the past several decades, comes in at 28.3%.

If those advocating reduction or elimination of taxes are correct in describing United States taxation as too high, what descriptor is available to describe taxes in almost all other industrialized nations? What does it mean when the United States has one of the lowest ratios? Does it mean that the United States is under-taxing itself? Does it mean that the United States has more in common with the tax havens of the world than it does with the countries with taxes set at amounts sufficient to pay for the nation’s endeavors?

But we know that statistics are boring. Sarcasm aside, when was the last time OECD studies were mentioned by the folks who want to reduce taxes but who scream whenever any program is nominated for the tax cut axe? Their bluster suggests that the ratio for the United States is way above 50%. The facts tell us something very different.

Last week, an article in the Philadelphia Inquirer, that in some versions was accompanied by a “Yankees Lose” tagline, suggested that professional athletes were getting a bad deal and that Philadelphia and Pennsylvania were getting good deals because the latter impose income taxes on the former when the former come to town to play games. The article noted that the New York Yankees probably paid more than $300,000 to the state and the city on account of playing World Series games in Philadelphia. The article also noted amounts paid by players for visiting teams in other sports.

The article explains that the players and the tax return preparers dislike what “they see as tax lunacy.” An attorney for player associations in at least three major sports says that “It’s a painful issue for athletes.” The article claims that “some tax experts” consider the athletes to be “victims” and then quotes the policy director of the Tax Foundation who calls the taxation of professional athletes “an inexcusable money grab.”

What nonsense. It doesn’t take much ignorance to stir up a lot of indignation.

The first thing that needs to be understood is that there are no legal barriers to imposing an income tax on a nonresident individual who performs services in the jurisdiction imposing the tax. All sorts of taxpayers throughout the country experience the consequences of this principle, even if some of them don’t quite understand it. People who live in New Jersey or Connecticut and work in New York City pay income taxes to New York State and New York City. So the claim by the policy director of the Tax Foundation that professional athletes are “targeted” is nonsense because 99.9% of the nonresidents paying income taxes to New York, for example, are not professional athletes. Let’s not think that there is some sort of tax imposed solely on professional athletes, and let’s resist this public relations campaign to stir up sympathy for a group of employees whose salaries are far higher than those of the typical person paying income taxes to the jurisdiction in which he or she performs services.

The second thing that needs to be understood is that with two exceptions, the imposition of an income tax on a nonresident does not increase the tax burden of the nonresident. The reason for this outcome is that the individual’s state of residence – and city of residence if it has an income tax -- allows a credit against the income tax that it imposes for the income taxes paid by the individual to the other jurisdiction. For example, assume X is a resident of New York who earns $10,000 in Pennsylvania. X pays an income tax of $307 to Pennsylvania, and then subtracts $307 from the New York income tax liability. One of the exceptions applies when the geography is flipped. If the individual lives in a state, or city, with a lower income tax rate, then there is an increased tax burden. That happens because the credit for taxes paid to another jurisdiction is limited to the amount of tax that the crediting jurisdiction would impose. For example, if Y, who lives in Pennsylvania, earns $10,000 in New York, Y’s Pennsylvania credit is limited to $307. If the tax paid by Y to New York exceeds $307, which it almost certainly will under most circumstances, Y ends up paying more tax than if Y had earned the $10,000 in New York. The second exception is an extension of the first. For individuals who live in the few states without an income tax, when they pay income tax to another state there is no state-of-residence income tax against which to claim a credit for the income tax paid to another state. So, for the most part, the winners and losers in this game are the states and cities, who, through the mechanisms of nonresident taxation and income tax credits, shift tax revenues from one jurisdiction to another.

The third thing that needs to be understood is that states and cities pursue enforcement against noncompliant nonresidents in a selective manner because of limited resources allocated to tax enforcement, a problem that mirrors the underfunding of the IRS with respect to federal income tax enforcement. Certainly states and cities will invest limited enforcement resources in ways that maximize collections, and accordingly will pay more attention to those earning higher amounts within their borders than those earning a few hundred dollars. Certainly athletes, along with celebrities and highly compensated corporate executives, will be targeted, but so, too, are individuals who aren’t in the national spotlight, at least until they become famous because they’re a party in a tax case arising from enforcement efforts. For example, consider the Tennessee resident who spent only 25% of his time in the New York offices of his employer, and the Connecticut resident who did not even have a physical presence in New York, but who were both pursued by New York City; it’s a long story recounted in a series of MauledAgain postings: State Taxation of Nonresidents, Another Setback for the Telecommuting Nonresident Taxpayer, New York Takes a Strike in the Tele-commuter Tax Game, Supreme Court Refuses to Resolve Interstate Tax Dispute, If the Supremes Won't Sing for the Taxed Telecommuters, Will the Congress Dance?

The fourth thing that needs to be understood is that the states and cities imposing income taxes on nonresidents aren’t simply grabbing money for nothing. They are providing services, though there is a good argument that nonresidents should be taxed at lower rates because they don’t consume as many state services as do the residents of the state. Philadelphia, for example, indeed has a lower rate of tax for nonresidents. Visiting athletes, as well as the other nonresidents who come into Pennsylvania or Philadelphia, benefit from roads maintained by the state and city, police protection provided by the city and, yes, the state, trash collection provided by the city, and so on.

These rejoinders to the tenor of the Philadelphia Inquirer article and the positions taken by the policy director of the Tax Foundation and counsel to several professional athlete player associations ought not be taken as an endorsement of unlimited state and city taxation of nonresidents. In that series of postings with respect to the Tennessee resident pursued by New York City, I noted the absurdity of New York City’s claim that because the Tennessee resident could have worked in New York City, he should be taxed as if he had done so. New York City tried to tax all of his income even though he was present in New York City for only 25% of the time. Determining how much of an individual’s income is treated as earned in a city or state in which the individual is not resident is an arithmetic endeavor, but not terribly difficult. For any employee, including professional athletes, it’s a matter of determining how many days the person performed services anywhere and how many days the person performed services in the state or city imposing the income tax.

These rejoinders also should not be taken as a dismissal of the compliance complexity faced by taxpayers who work in multiple jurisdictions, most of whom end up paying professional tax return preparers to deal with the various filing requirements. Is it complicated? Yes. Is it aggravating? Yes. Could it be simplified? Yes. I wrote about this issue in Curtailing Multistate Tax Filing Burdens, in which I examined the Mobile Workforce State Income Tax Fairness and Simplification Act, H.R. 2110, a noble but flawed attempt to deal with the complexity. That bill, incidentally, has not been enacted into law.

Though there is room for improvement in how nonresidents are taxed, those are principally matters of procedure and refinement. The notion that taxation of nonresident professional athletes is “an inexcusable money grab” and the notion that these players are “victims” is utter nonsense. Perhaps these wealthy employees have decided that they, too, deserve some sort of special treatment in addition to and along the lines of the tax breaks afforded to wealthy individuals generally. The only barrier to this nonsense and this play for special treatment is education of the citizenry. Hopefully this posting has contributed in a positive way to that effort.