MauledAgain

As I worked my way through a new provision of the Internal Revenue Code, trying to interpret it so that I could add a small discussion of its provisions to the Tax Management portfolio that I am currently in the process of revising, I noticed something that I had never previously seen in the Code. Just as interestingly, I don’t know what to call it.

To explain this, I need to step back a little bit. Then I can create a background against which to describe what I noticed.

The Internal Revenue Code is divided at two levels. One level of division is the separation of the entire title – as the Internal Revenue Code is title 26 of the United States Code – into subtitles, subtitles into chapters, and so on. The other level of division divides Code sections. Why does this matter? As I tell my basic tax students when I take them through this explanation very early in the course, it is impossible to interpret phrases such as “for purposes of this subchapter” or “for purposes of this paragraph,” or to determine what specific provisions are reached by a cross-reference to “part IV” without understanding what subchapters, parts, and paragraphs are.

For my students I prepare a chart that shows the “breakdown” of an Internal Revenue Code section. As some readers know, and as others might not, a code section almost always – there are a few exceptions – is broken down into subsections. These are portions of the text that begin with a small letter in parentheses. Thus, one can refer to subsection (a) of section 71, though one also can refer to it as section 71(a). Technically, “section 71(a)” is an oxymoron, because the section is 71. But it works, at least until one tries to cite subsection (a) of section 280A and ends up, if speaking aloud, referring to “section two eighty ay ay.” So I try “section two eighty cap ay ay.” Fun.

Hang on, the thing I noticed is about to enter. Subsections, when divided, are broken down into paragraphs, represented by numbers in parentheses. In turn paragraphs, when divided, are broken down into subparagraphs, represented by capital letters in parentheses. If divided, subparagraphs break down into clauses and clauses into subclauses. Clauses are represented by lower-case Roman numerals and subclauses by upper-case Roman numerals. Let’s ignore the fact that in ancient Rome there were no lower-case letters, and thus no representation of numbers using what properly are called lower-case Western alphabet characters.

So, in working my way through the new section 4980I, yes, that’s forty-nine eighty eye, I came upon a subclause that was broken down into, into what? Let me show you:

§ 4980I. Excise tax on high cost employer-sponsored health coverage
* * * * *
(b) Excess benefit. For purposes of this section--
* * * * *
(3) Annual limitation. For purposes of this subsection--
* * * * *
(C) Applicable dollar limit.
* * * * *
(iii) Age and gender adjustment.
(I) In general. The amount determined under subclause (I) or (II) of clause (i), whichever is applicable, for any taxable period shall be increased by the amount determined under subclause (II).
(II) Amount determined. The amount determined under this subclause is an amount equal to the excess (if any) of--
(aa) the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan for the type of coverage provided such individual in such taxable period if priced for the age and gender characteristics of all employees of the individual's employer, over
(bb) that premium cost for the provision of such coverage under such option in such taxable period if priced for the age and gender characteristics of the national workforce.

What is this (aa) thing? Why had I never noticed it before now?

So I did some research. I searched the Code for instances of (aa). I found one other one. It’s in section 36B, which was enacted at the same time as was section 4980I, that is, very recently, as part of the health care legislation. The need to break the Code down into yet another level suggests that the degree of complexity in tax legislation has taken an unfortunate logarithmic jump for the worse. Good drafting would find a way to avoid the use of a level below the subclause.

In looking for instances of (aa) in the Code, I learned – though I must have known this without having let it register in my memory – that some Public Laws amending the Code made use of this tag, but in a different manner. What does a drafter do when a drafter reaches the twenty-seventh subsection? The lower-case letters a through z have been used. So, it turns out, the “letter” after z is aa, followed by bb, and so on. We have yet to see what will follow zz. Will it be aaa? Or za? Or something else? Similarly, when a litany of subparagraphs in a Public Law reach (Z), it is followed by (AA), (BB), and so on. It is important to understand that in these instances, (aa) and (AA) do not represent new, deeper levels, but simply extensions of “lettered” segments for which there are, unlike the numbered segments, a finite number of single designators.

Other federal statutes and provisions in other titles of the United States Code are numbered and lettered differently, and often in ways that make the Internal Revenue Code look tidy. State statutes often are modern-day tributes to Byzantine governance, with sections that resemble arrangements such as 40-K-1.3(z)-4.0(7-a,b(2))-5(g)(1.5z).

To keep up with this unnecessary inconsistency, years ago the Treasury Department came up with a different way of designating regulations segments. I bring this up, not only to demonstrate the arbitrariness of it all, but also to see if there are any ideas for naming the new (aa) thing in the regulations arrangement. Regulations sections are divided into paragraphs – there are no subsections – and paragraphs into subparagraphs. Paragraphs are designated not by numbers but by lower-case letters, so that a Regulations paragraph is equivalent in appearance to a Code subsection. Subparagraphs use numbers, thus taking on the characteristics of Code paragraphs. Subparagraphs are divided into subdivisions, designated by upper-case Roman numerals. There are no clauses or subclauses. Internal cross-referencing is a nightmare. We end up with citations such as 1.704-1(b)(2)(ii)(i). Say that out loud. Try explaining to a law review student editor why that is not a typographical error. I’ve yet to find anyone who claims to have an explanation for why Treasury chose to use a different – and arguably less refined – breakdown method.

So, perhaps the Treasury Department unwittingly provided a name for the new (aa) thing in the Code. Is it a subdivision? Until there are cross-references to an (aa) level text segment, we won’t know for certain. Even if people offer ideas or claim it is one thing or another, until its name is inferentially codified, almost anything is possible.

What I do know is I now need to go back to the materials I have been preparing for the upcoming fall semester offering in Introduction to Federal Taxation and change one of the items I share with the students in digital format using the Blackboard classroom. I need to add the (aa) level to the chart depicting Code breakdown, and I also need to change the slide for that part of the course. But what label will I use for it? “No Name” as I use for the deep levels in Regulations? “Don’t know”? “To be determined?” I wonder if I will hear someone ask, “Will this be on the exam?” The answer is no.

Because tax law affects people’s decision making, it makes sense for people to know what the tax law is and how it affects their decisions before they make those decisions. It doesn’t always work that way. Sometimes a tax law change takes effect as of the day it was adopted by the House Ways and Means Committee. Only an avid follower of the many bills introduced with proposed tax law changes, few of which go anywhere in the legislative process, would be aware of some changes before the effective date, but how would someone plan based on a pending bill that might or might not be enacted?

Retroactive changes are even more troublesome. Telling taxpayers in October that the tax rate for the entire year has been increased causes havoc not only with estimated tax payment planning but with planning generally. Not that long ago, the estate tax was increased retroactively, affecting taxpayers who had died and no longer had the chance to change their wills or engage in any other sort of planning. Though there are ways around this dilemma, such as conditional will clauses that are triggered by different states of the tax law (e.g., “If the maximum estate tax rate applicable to my estate is x%, then . . . , else . . .), it can get cumbersome, and not every possibility can be anticipated.

Sometimes legislatures pass tax breaks to encourage people to engage in activity in which they might not otherwise engage. Most are in the form of “If you do x, then you will get a credit of $y or a deduction of $z.” If a taxpayer accepts the government offer and does x, is the government contractually bound to provide the enacted tax break? The Pennsylvania legislature thinks not.

According to this story from a few days ago, the funding for a state income tax solar energy credit was removed from the state budget in the fall of 2009. The effect of this decision is that taxpayers who invested in alternative energy sources because the credit made the decision economically feasible are now left with the tax credit rug pulled out from under them. Although, according to the article, only 110 taxpayers are affected at the moment, it’s no excuse for justice to claim that only a few are suffering from what must be considered a breach of contract.

If there were a true fiscal emergency, one might accept the idea that the state would postpone the credit. Under those circumstances, interest on the credit should accrue just as it does when a taxpayer’s fiscal problems cause the taxpayer to postpone paying an income tax to the state. The chances of that happening are slim to none.

But is there a true fiscal emergency that justifies reneging on the tax credits after taxpayers made the investments that the tax credits were designed to encourage? Legislators explain that the credit was axed in order to provide funds “for public education, prison systems, and Medicaid,” but the same legislators are determined not to impose taxes or user fees on the extraction of Marcellus shale gas even though taxes are imposed on lottery winnings. The difference between the two for most people getting wealthy from shale gas they’re not responsible for creating is difficult to identify.

Readers of MauledAgain know that I’m no fan of tax credits to encourage behavior that ought to be encouraged, if at all, through grants made by the appropriate agency. Shifting to that sort of system would not change the problem, though, because the same “caught holding the bag” effect would be triggered by the legislature’s elimination of funding for the grant program.

Here’s the long-term consequence that legislators probably didn’t consider in their short-term perspective on life. The next time the legislature tries to encourage taxpayers to do something with the promise of a tax credit, or even a grant, taxpayers are likely to disregard the offer. Most taxpayers are not Charlie Brown, and aren’t going to get fooled twice when the legislature comes along with another football and a fake smile on its face.

A few days ago, the IRS released proposed and temporary regulations addressing mostly procedural issues with respect to the new excise tax on indoor tanning. The Patient Protection and Affordable Care Act added section 5000B to the Internal Revenue Code. Surprisingly, the statutory provision is relatively easy to read and understand. It states:

There is hereby imposed on any indoor tanning service a tax equal to 10 percent of the amount paid for such service (determined without regard to this section), whether paid by insurance or otherwise.

The fun begins when someone asks for a definition of indoor tanning service. According to the statute:

The term “indoor tanning service” means a service employing any electronic product designed to incorporate 1 or more ultraviolet lamps and intended for the irradiation of an individual by ultraviolet radiation, with wavelengths in air between 200 and 400 nanometers, to induce skin tanning.

The statute also provides an exception for “any phototherapy service performed by a licensed medical professional.”

The theory behind this new tax is that indoor tanning increases the risk of skin cancer, and that a tax will deter people from using indoor tanning services. Accordingly, indoor tanning has now been added to a list that includes the smoking and chewing of tobacco and the use of alcohol. At least three flaws in this hastily-enacted provision deserve attention.

First, whether a 10 percent tax on indoor tanning will cause a meaningful decrease in its use is debatable. Some, such as Solmaz Poosattar argue that “[a] tax on tanning can effectively change unhealthy and costly behavior. The argument rests on the hypothesis that “the tobacco excise tax has been the most effective intervention at reducing rates of smoking” and that “[it] can be assumed that a tanning tax would be even more successful at deterring excessive UV light exposure.” Yet studies, such as those summarized in this report, attribute a significant portion of smoking reduction on the growing number of smoke-free zones put into place during recent years. Similarly, alcohol taxes don’t seem to have made much of a dent in alcohol use, although other measures, such as increased penalties for drunk driving, do appear to have been productive. Seriously, is a youngster in search of a tan in order to “look good” at an event going to be deterred by an increase in the price from $50 to $55? Hardly.

Second, nothing in the enacting legislation appears to funnel the expected revenue into skin cancer prevention programs or skin cancer treatment provision. When the effects of indoor tanning undertaken in 2010 shows up in 2030, will there be funding available to pay for the costs of curing or mitigating the cancer?

Third, why stop at indoor tanning, tobacco, and alcohol? Why not impose a tax on other goods and services that pose high risks to human health? Riding a motorcycle poses a significant increase in risk of injury than does riding in a car – I’ve yet to see a motorcycle with airbags – so would it make sense to impose a 10 percent tax and use the proceeds to fund emergency rooms that treat uninsured motorcycle riders injured in accidents? Should there be a tax on beach access by persons insufficiently protected against the sun’s UV rays?

Because most users of indoor tanning services are young people – and often surprisingly young people, including pre-teens and teenagers – why not prohibit people under 18 from using or purchasing indoor tanning services in the same manner they are prohibited from using or purchasing alcohol and tobacco? Whatever arguments exist for banning the use and purchase of tobacco by minors can be applied with equal force to the use of tanning beds. But ought this be a task for the Internal Revenue Service or another burden on the tax law?

For what it’s worth, I have never used an indoor tanning facility, and because I burn too easily I avoid unprotected sun exposure, even though now we’re being told that insufficient vitamin D increases the risk of skin, colon, and other cancers. No matter, I have no personal financial stake in the existence or non-existence of a tax on indoor tanning. But I suppose I do have a stake in the eventual public cost of dealing with the rapidly rising number of skin cancer cases. I just don’t think a 10 percent tax is going to make much of a difference.

For many decades, CCH has published a weekly update on taxation called Taxes on Parade. It’s a clever title. Sometimes it causes me to think of a parade in which each code section is represented by a float. I chose not to ponder the computation of how long it would take this parade to make its way past the Capitol or the IRS building on Constitution Avenue. The thought of a tax parade can be alarming, if not unsettling.

What’s not only alarming and unsettling, but frightening and dangerous, is the parade of lobbyists going into the offices of legislators – or, as is more often the case – offices of legislative staff, dragging their latest proposals for a special tax break to benefit the people who can afford to hire them. Although exclusions and deductions are well-known tax benefits, the emphasis is on credits because credits reduce tax liability dollar-for-dollar.

At present there are almost one hundred income tax credits in the Internal Revenue Code. Go ahead, try to name all of them without looking. I know I cannot, and I’ve authored the BNA Tax Management portfolio that overviews tax credits. It says something about each one, sometimes in detail, and sometimes in summary fashion with a reference to the portfolio giving it full-fledged analysis. Every time I sit down to generate the latest edition of the portfolio, the list grows as I write. Indeed, a parade.

On Friday, in Lining Up for Tax Breaks, I described and critiqued a proposal to “[p]rovide a tax credit to news organizations for every journalist they employ.” A little more than four years ago, I explained the why a proposal "[t]o amend the Internal Revenue Code of 1986 to allow individuals a credit against income tax of at least $500 to offset the cost of high 2006 gasoline and diesel fuel prices" would do nothing to cut demand or increase supply of oil and gasoline.

Several days ago, tax reports brought me news of yet two more credits being suggested by members of Congress. Senator Lugar of Indiana has introduced a bill, S. 3464, that would include a multi-level income tax credit “with respect to any new qualified fuel-efficient motor vehicle placed in service by the taxpayer during the taxable year.” The computations requires 35 new lines of text in the Code, and the definition of “new qualified fuel-efficient motor vehicle” requires 20 lines. Simplification it is not. Over in the House, Representatives Blumenauer and Brady have introduced a bill, H.R. 5478, that would provide a tax credit for building new railcars that improve fuel efficiency by at least 8 percent.

Here’s one issue I have with Lugar’s proposal. The Internal Revenue Code already has a qualified electric vehicle credit, an alternative motor vehicle credit, a clean-fuel vehicle refueling property credit, and a new qualified plug-in electric drive motor vehicle credit. Are we on our way to a separate credit for each model vehicle sold in this country? Jack up the gasoline tax to a level equivalent in real dollars to what it was when it was last increased, and people and businesses will have all the incentive they need to move to vehicles that are less reliant on foreign oil. As for the Blumenauer – Brady idea, is the railcar industry unable to manufacture more efficient railcars that offer potential purchasers fuel savings that make the purchase worthwhile? If not, is the problem the existence of subsidies for inefficiency, such as fuel taxes that are too low and user fees for fuel inefficiency that don’t, but should, exist?

The parade of tax credits is getting longer. It’s only a matter of time before some or all of the sarcastically suggested credits that I put forth as examples of the absurdity end up becoming reality. For example, in Where Are the Discounts for the Poor?, after explaining why senior citizens do not have some sort of inalienable right to discounts as suggested by a person who wrote a letter to an advice columnist complaining about a business that did not offer such a discount, I noted, “And so, the frightening thought occurs to me, that someone like the letter writer will start a campaign for yet another income tax credit, this one for businesses that offer senior citizen discounts.” In Should the Tax Law Provide a Fix for this Looming Catastrophe?, I sarcastically observed that “It isn't too difficult to imagine the CMA or chocolate manufacturers not members of the CMA asking the Congress for a tax credit to subsidize the increased costs of cocoa. There are tax credits for all sorts of activities and expenditures, ranging from energy-related products to the rehabilitation of buildings and the adoption of children. Is the tax law going to be the answer to yet another problem? I hope not.”

One of my objections to the use of credits is the fact that almost all of them have nothing to do with revenue and much to do with shifting to the IRS programs that should be, but for some reason are not, administered by other federal agencies. Another objection is the creation of more opportunities for mischief. As I noted in Congress and Tax Audits: Criticizing Others for Its Own Mess, “Each time the geniuses in the Congress adds another credit or deduction to appease some special interest group or to reward some constituency, it adds another opportunity for tax cheats, con artists, and tax shelter designers, who are not the intended beneficiaries of this legislative largesse, to siphon tax revenue from the system.”

Eighteen months ago, in Cutting Up the Economic Distress Remediation Pie, I offhandedly predicted what would happen when the “onslaught of special case pleading” flooded into the tax law drafting process. I concluded with these words:

The economic collapse is due in part to the refusal of Congress to provide a tax credit for building sports stadia in cities and towns across America so that they can invite the Arena Football League to put new franchises in those locations, so to restore the economy and create jobs Congress should enact a tax credit for the construction of Arena Football League facilities."

But here's my favorite:

"The economic debacle is due in part to the refusal of Congress to provide a refundable tax credit of $50 billion per year to all law professors who write tax blogs the names of which begin with the letter M, have an upper-case A in the middle of the name, and end with the letter n, and that first appeared in 2004 because the law professors who so qualify know how to use refundable credits in a manner that is beneficial to the economy, and so to revive the national economy Congress should enact such a credit, making it retroactive to 2004."

Yeah, ok. Hurry and get in line before it gets too long.

It turns out that my sarcastic advice and prediction became an increasingly frightening reality. Perhaps I should have claimed, untruthfully, that I support an endless parade of tax credits. Perhaps my endorsement would spell their demise. I wonder if that sort of reverse psychology works in the tax world.

The Federal Trade Commission has been studying “the challenges faced by journalism in the Internet age,” to quote from a discussion paper released earlier this month. Although the paper clearly is flagged as “solely for purposes of discussion” and as a document that “does not represent final conclusions or recommendations by the Commission or FTC staff,” it provides an interesting insight into how pervasively the tax law is viewed throughout government, and not just the private sector, as the magic key to solving all sorts of problems.

The issue addressed by the FTC paper arise from the realization that “[j]ournalism is moving through a significant transition in which business models are crumbling, innovative new forms of journalism are emerging, and consumer news habits are changing rapidly.” The paper released by the FTC is designed “to prompt discussion of whether to recommend policy changes to support the ongoing ‘reinvention’ of journalism, and, if so, which specific proposals appear most useful, feasible, platform-neutral, resistant to bias, and unlikely to cause unintended consequences in addressing emerging gaps in news coverage.”

One of the proposals for assisting journalism in some sort of transition to a new form is set forth in the FTC paper as follows:

Provide a tax credit to news organizations for every journalist they employ. This could help pay the salary of every journalist. Although the proponent of this idea died before it had been fully developed, one speaker noted it is one way to subsidize journalists without the government picking one paper over another.

Nothing in the paper appears to explain why employers who hire journalists should get a tax break, whereas those hiring primary care physicians, who are in short supply, or oil spill clean-up specialists, or derivatives fraud forensic experts, or any other sort of employee would not be similarly treated. Nor is there any persuasive explanation of why the government needs to intervene to assist one particular segment of the private sector that appears, on the whole, to be thriving, even if certain antiquated forms, business models, and approaches to news gathering and dissemination are on the wrong end of the “evolve or die” reality of change.

This idea is yet another manifestation of the delusion that throwing a tax break at something will solve a problem, sometimes even problems that don’t exist and problems that ought not to be solved. The price for handing out tax breaks to special interest groups is growing exponentially, as every interest group in the country is lining up to get one. It’s not that I have anything against journalists – to the contrary, I read their product, whether in newspapers, magazines, or on blogs, web sites, or listservs – it’s just that I don’t see a long-term benefit to complicating the tax law even more when the solution, assuming there is a problem, is already underway.

And how would this tax break be funded? By increasing the deficit? By cutting back on a tax break for some other group? By raising taxes on the wealthy? By raising taxes on the middle class? The FTC paper, in a separate section, provides some tax revenue ideas, not merely to pay for the proposed tax break, but to fund other ideas – such as increased postal rate subsidies for newspapers and magazines, vouchers, a federal media fund -- designed to help journalism deal with the impact of Internet technology. Among the proposed taxes are a tax on revenues generated by broadcasters who hold monopoly rights to portions of the broadcast spectrum, a tax on consumer electronics, a tax on the amount paid on successful spectrum auction bids, a tax on advertising, requiring spreading the tax deduction for advertising expenses over a 5-year period, and a tax on “monthly ISP-cell phone bills.”

Though journalism has been significantly altered by the advent of internet technology, so, too, has every other profession, industry, business, and activity. The internet has changed, for better or worse, the way in which real estate agents, libraries, musicians, appliance manufacturers, and retail outlets do business. They faced choices. They could ignore the changes. They could learn about the changes, adapt them to their enterprises, and thrive. They could dabble with the changes, try to maintain “life as usual,” and face financial disaster. Though there may be some private sector industries that the nation cannot afford to let fail, and that’s a big “though,” it makes for bad tax policy to worsen the tax code for the sake of an industry parts of which are thriving and parts of which haven’t learned to adapt. The nation has more pressing needs and better things to do with its tax law.

Last Friday, as more fully reported in this Philadelphia Inquirer article, the idea of raising state gasoline taxes resurfaced in Harrisburg. Though legislators hesitate to raise taxes the way indulgent parents hesitate to discipline ill-behaved children, the unpleasant facts include a $472 million deficit in transportation funding, a long-term $3.5 billion, yes, that’s Billion, annual short-fall in highway and bridge maintenance budgets, at least $1.5 billion in Philadelphia-area highway improvement projects on hold, $2.3 billion in transit projects on the shelf, and the likelihood of bridge collapses throughout the state. During hearings held by the House Transportation Committee, an unusual conglomeration of diverse interest groups all spoke in favor of increasing the tax. Among those acknowledging the problems and hailing a gasoline tax increase as the solution were officials of Philadelphia and other cities, employers and associations representing employers, urban and regional planners, the Delaware Valley Regional Planning Commission, the Southeast Pennsylvania Transportation Authority, The Pennsylvania Motor Truck Association, the Bicycle Coalition of Greater Philadelphia, and the CEO Council for Growth. Though one might expect the Motor Truck Association to resist tax increases, it appears that this organization and its members have managed to put long-term forward-projected thinking ahead of short-term profit maximization. Good for them.

So what’s the snag? A little more than half a year ago, in Poll on Tax and Spending Illustrates Voter Inconsistency, I commented on the results of a poll in New Jersey that revealed the following tidbit: “When asked if the gasoline tax should be increased to pay for highway and mass transit improvements, 62% said no.” I noted that “[t]he poll reinforces my contention that the underlying problem is the continued demand for government spending on programs that benefit state residents coupled with a continued resistance to the idea of paying taxes in order to fund those programs.” At the hearing, State Representative Kathy Manderino picked up on that problem when she explained, “Every citizen wants everything fixed, but nobody wants to pay for it." Bingo. She added, "We are not going to have a vote [in the legislature] this year unless you get people off the 'I'm afraid to make a tax vote' dime they're on." Indeed. And why are legislators so afraid to vote for revenue to provide the benefits, such as safe road and non-failing bridges, that people want? Because the anti-tax crowd has seized center stage and preaches a gospel of “no taxes no matter the long-term cost.” Perhaps they would rather die than pay taxes, but the rest of us prefer not to be crossing a bridge in our vehicles when it goes down. They have bullied politicians by broadcasting misinformation and appealing to emotional reactions to taxes. But there is good news, at least in Pennsylvania. According to the executive director of Pennsylvanians for Transportation Solutions, a recent poll indicated that 64% of those questioned “would be willing to pay $50 more a year to improve transportation.”

The executive director of the Delaware Valley Regional Planning Commission shared some data. A 5-cent increase in the state gasoline tax – currently at 32.3 cents a gallon – would raise $300 million even though it would increase the average driver’s gasoline costs by two dollars a month. He summed up the problem nicely: "While it may never seem a popular idea to raise taxes or impose additional fees, particularly in the current economic climate, transportation services must be viewed as a utility that everyone uses, everyone benefits from, and everyone must pay for." Imagine what life would be like if the roads and bridges collapsed or reached the point where traffic ground to a halt. What happens to incoming shipments of food, fuel, medicine, and other supplies? What happens to businesses trying to ship goods to other places? Manderino suggested that the state close bridges in danger of collapse so that motorists would experience what life will be like when the money runs out. The cost of maintaining roads and bridges has increased during the period since the last increase in the tax, and yet somehow the state is expected to get by on revenue that is shrinking in real terms. The “no tax increase” campaign is ludicrous.

Yet the anti-tax movement resists all taxes, no matter the purpose or the circumstances. What I wrote a year ago with respect to discussion of an increase in the federal fuels tax, in Is a Gasoline Tax Increase in the Pipeline?, is no less relevant today as applied to a state gasoline tax increase:

I do not understand the anti-tax sentiment when a tax is paid for direct benefits. Among my questions for the anti-tax crowd are these: "What do you propose be done? Should the nation's highways and bridges be permitted to deteriorate so that there are more incidents like the bridge collapse in Minnesota? Would you prefer a tax on everyone but yourself or yourself and your friends? Is this really about your insistence that you can go straight from the left-turn lane because you are special? Does your position reflect some sort of philosophy that you should get what you want for nothing? Are you unable to recognize that highways and bridges aren't free and that someone must pay for their construction, maintenance, and repair?"

Some of the group that opposes increases in the gasoline and other fuels taxes claim that an increase would, to quote the editorial, "damage the economy badly." I disagree. If the gasoline tax is not raised, roads will fall apart. The goods that are shipped by truck will be delayed in reaching their destinations and might not be delivered at all. Would that be good for the economy? On the other hand, faced with higher overall gasoline costs, Americans may think seriously about getting rid of the fuel-gobbling vehicles and replacing them with alternative transportation. Yes, it would be economically painful in the short-run, but it would generate long-term benefits. Post-modern American culture, characterized by "I want it all and I want it now" and afflicted with the urge to kill the goose that lays the golden eggs, has been poisoned by an inability on the part of most people to think in long-term increments. Highway deterioration is but one of the many catastrophes that loom for this nation if people don't restructure the way their short-term outlook masks long-term realities.

Technically, an increase in the gasoline tax is NOT an increase in what a person pays for gasoline. It's an increase in what drivers are charged for upkeep of the roads that they use. It would be much easier to make this point if the gasoline tax were separately invoiced, because those little stickers at the gasoline pump disclosing the portion of the per-gallon price that is remitted by the station operator as taxes doesn't seem to get through to people. This is yet another reason I prefer the mileage-based road fee in lieu of the gasoline tax, As I explained in Change, Tax, Mileage-Based Road Fees, and Secrecy, I am a fan of the mileage-based road fee, and although the NSTPRSC recommended one, it was disappointing that some unidentified someone in the Administration nixed the idea before the public could be educated about it.

In the long run, the answer must be mileage-based road fees. I have written extensively about this user fee, most recently in Change, Tax, Mileage-Based Road Fees, and Secrecy and in Mileage-Based Road Fees, Yet Again. Though it will take time to implement this system, it’s time to begin. Legislation increasing the state gasoline tax needs to include provisions authorizing the Department of Transportation to determine and publicize what needs to be done to shift to a system that correlates charges for using roads and bridges to the imposition on the motorists obtaining the benefit.

Pappas laments, in his latest post:

I shutter when I consider that Professor Maule is likely teaching his students that there are no valid alternative arguments to increasing taxes on the rich and expanding the role of the federal government.

It’s too bad Pappas is so far away, because if he were nearby, I’d invite him to sit in the basic federal income tax course for a semester – spared of any exam or grading – just to observe what transpires. I’m too busy trying to help students how to read the piles of verbiage that have been loaded into the Internal Revenue Code to advance some special interest to wander into tax policy. There’s a tax policy course but I don’t teach it because there are other courses that I’m needed to teach. Tax policy enters into the conversation in the basic tax course when students ask why, for example, section 86 is such a minefield of complexity. The answer has nothing to do with tax cuts or tax rates.

In fact, when I teach tax computation, I show the students enough so that they understand the meaning of progressive taxation, rate brackets, and marginal rates. I don’t require them to do the computations, because there are software programs, IRS tax tables, and commercial charts available to spare students the arithmetic agony. There’s no time to study the tax rates that existed in years past. In other words, the topic – as is the case with almost every topic I have addressed in this blog – doesn’t come up in this class. It’s a three-credit course. There simply isn’t time.

When it comes to grading students, I don’t ask them policy questions. Whatever opinions they have, they don’t affect their ability to do statutory analysis, to read a case, to answer a question that focuses on what current law requires a taxpayer to do. They need to understand that section 1, in its current form, is progressive and not a flat tax. Whether they think it ought to be one or the other doesn’t tell me whether they understand what it presently, in fact, is. Fear not, Peter, I’m not addressing, nor grading students with respect to, the issues we’ve debated.

If I were to teach a Tax Policy course, and chose to address the tax rate question, I’d give the students reading assignments from across the spectrum of ideas. I’d let them make their own decisions. I doubt that the minds of those who entered the class with pre-formed opinions would be changed; at best, one or two might re-consider their position. For those few who entered the class devoid of any position on the issue, and perhaps such people exist, it would be an interesting study to determine what impact the experience would have. Some probably would leave the course as agnostic as when they entered. The difficulty in measuring the impact of the course would be in separating what a student learned in the course from what the student acquired elsewhere. Few students, for example, are exposed to the fun of section 86 outside of the basic federal income tax course, but most students in a tax policy course have been exposed to all sorts of “tax-cut, tax-hike, no-tax, more-tax” discussion throughout mainstream media, twitter, facebook, and even blogs, to name just a few of the many places they get information.

On the other hand, not a single student who was paying attention would leave a tax policy course thinking that a “flat tax” would simplify the tax law. They would leave the course, as they leave the basic tax course, understanding that the tax law would be much less complicated if the special rates for capital gains were repealed. They’d be graded on their ability to construct arguments, their ability to provide citations demonstrating that they’ve read and analyzed materials they’ve discovered by doing research into an issue, their ability to organize their writing, but not on their conclusions unless those flew in the face of accepted fact.

The Maule-Pappas debate arose from my assertion that there is a need for more tax education in this country. For example, suppose that every American learned how to compute their taxes under existing law, how to compute their taxes under what the tax law will be in 2011 barring legislative intervention, and how to compute their taxes under what the tax law would be if top rates were slashed even more and capital gains rates brought down to zero. Then they could see for themselves, for example, that under the more-tax-cuts plans, very few of them would benefit from lower capital gains rates. Then most of them could see for themselves that under the more-tax-cuts plan their tax bill might go down a few dollars – or perhaps even go up because of the AMT (which I’m sure many of them don’t quite understand because it’s not taught in our school systems) – the tax bills of the wealthy and ultrawealthy would go down by huge amounts. Then most of them would see that under the 2011 tax law that awaits us barring legislative intervention, their tax bills might go up by a few dollars, if at all, while the tax liabilities of the wealthy and ultrawealthy would go up by much larger amounts. And then they would be able to see what the tax bills of various taxpayers would have been during the 2000s had the “fight a war on credit extended by other nations” approach had not been taken. Then they would see who benefitted from the tax policies of the 2000s. Who still has a job? Who has money stashed overseas? Who is better off than they were ten years ago? Who’s not?

In the history of the species, there have been ideas that have been advanced, tried, and discredited. Some of these ideas have been so thoroughly discredited that they’ve lost all of their advocates. I wonder if in the dying days of these ideas, the last handful of advocates translated attacks on the idea into an attack on themselves in order to divert attention from the worthlessness of the idea, to garner sympathy, or to make the attacker look bad so that the idea could be rehabilitated. After several decades of supply-side, trickle-down, spend-but-don’t-tax, and other voodoo tax and economic policies, it’s time to put those bad ideas into the dustbin of history. And if anyone defending those ideas wants to use the term “character assassination” – as Pappas put it in If You Oppose Tax Increases You’re Stupid, Exploited or Dishonest – to describe my attacks on those ideas and my call for wider tax education so people can analyze them without relying on the oversimplified soundbites tossed about in the media, then so be it. If it makes Peter Pappas feel better that people think I’ve trashed his reputation, let him so complain. Those carefully reading my posts will understand the reality. My reality is that Pappas and I will accomplish nothing more by continuing this debate other than experience in coming up with fun post titles. Whether we accomplished anything with what we did do is something everyone else can decide for themselves.

So why does Pappas so desperately want to show the world that I have tagged him, and other tax-cut defenders, with terrible labels, when in fact all I’ve done is assail the wisdom of their tax-cut advocacy and question their inability to see what most Americans – though unfortunately not the outspoken ones getting media attention for their histrionics – have come to understand?

Pappas tries to answer this question by arguing as follows:

Only a fractious fool would suggest it is a good thing that a few people are rich while the majority are poor, yet that view is precisely the view Maule wants you to believe that I and those on my side of the debate hold. Why? Because it makes us look, at best, ridiculous and at worst, malicious. I have never said or implied that it is good for America that the rich are getting richer while the poor are getting poorer. What I have said, however, is that confiscation through taxation is not the way to deal with the problem.

I’ll let America decide what a decade of the tax cuts Pappas defends has accomplished and what those who advocated and continue to defend those cuts are thinking. On the other hand, what most Americans are thinking probably is very depressing for the few remaining tax-cut defenders. Incidentally, I haven’t advocated confiscatory actions, nor have I advocated a return to the days of 90-percent marginal rates. For some reason, Pappas thinks that my support for returning the top rate from 36% to 39.6% – and my criticism of it not having been so fixed when the decision was made to spend trillions on war – is support for confiscatory taxation. My reading of supply-side literature suggests that the anti-tax crowd thinks any tax rate exceeding 1% on unearned income is confiscatory.

Pappas also claims:

I don’t want the rich to get richer at the expense of the poor. On the contrary, I’d like to see everyone get rich. The more the merrier. Having said that, I simply don’t believe that the solution is to confiscate the wealth of the members of one class of Americans and redistribute it among the members of another class of Americans.

So let the poor catch up, Peter, and that means that the wealthy need to stop getting richer, especially when everyone else is getting poorer. During the tax-cut years, the wealthy have opened their lead on the poor. History tells us that when the top rates are higher, the poor can close the gap. Linda Beale has delved into this issue in Maule and Pappas on Progressive Taxation and the Decreasing Burden on the Rich.

With the position into which he and his tax-cut defenders have backed themselves, Pappas has no choice than to rebut my attribution of the current economic mess on the spend-but-don’t-tax policies of the past decade by claiming that he believes “that the recession as caused by a variety of complex factors none of which acting alone would have been sufficient.” Every respectable economist and analyst traces most of those factors back to the federal deficit. And the rest of the factors reflect what happens when greed flashes its short-term success; it spirals across the economy, bringing us bubbles arising from gambling with debt and making bad loans, deregulation contributing to environmental disasters and electricity price manipulation, and fraud that rips apart the foundations of a healthy economy. Those interested in more education can study this detailed report. But the advocates of small government and lower taxes don’t seem to notice that the smaller the government, the bigger the reach of the greedy and the larger the misdeeds of the money-addicted. Pappas complains that government has grown, but has he noticed that the nation’s population has grown? Has he noticed that the nation’s problems have grown? Has he noticed that the number of greedy people breaking the law has grown? Has he noticed that the need of the average person for protection against the cartels has grown? And he wants government to shrink under these circumstances? All that would happen is that the oversized public sector monoliths would become a de facto government or governments, making even the tax cut defenders long for the “good old days when at least we had the chance to vote the rascals out.” Pappas calls for tax cuts, but unless he advocates an even larger federal deficit, he surely must advocate spending cuts. I’d like to see his list, a list sufficient to eliminate the deficit while permitting more tax cuts.

Pappas concludes this aspect of his tax cut defense by taking umbrage at my position with these words:

Think about it, Maule is so sure that those of us who favor lower taxes and smaller government are blinking idiots that he compares our beliefs to the belief of some that the world is flat.

Well, guess who introduced the flat-earth concept into the debate? Here’s what Pappas said in Anti-Taxers are Either Rich, Plan to be Rich or Think the World is Flat:

Come on, Professor. You might as well have said, “Pappas favors tax cuts on the wealthy because he either is wealthy, plans to be wealthy or thinks the world is flat. The third option is no option at all.

Pappas sticks the flat-earth concept onto his position, and then tries to hold me accountable for introducing the concept into the debate. Think about it, Pappas is so sure he can pull the wool over people’s eyes that he’s gone so far as to attribute to me something he said. And yet he worries about how I teach my students. I’ll address that in my next post.

The tenacity with which Peter Pappas holds his views on tax policy and the amount of offense he takes at having those views scrutinized, criticized, and invalidated is admirable. Unfortunately, it’s doing nothing to change my mind and doing everything to keep me from changing his mind. At this point, the next best opportunity to determine the soundness of the contrary positions that he and I take with respect to tax policy issues will be at least several years from now, when we will be able to look back on the 2010s. I think it is safe to predict that we’ll be in just as much disagreement then as we are now. As for his taking offense and translating criticism of his tax policy fact gathering, analytical, and forensic processes into perceived insults to his intelligence, only time will tell if his perception will evolve, and if it does, it won’t be on account of anything I write.

This debate began when, in Is Public Truly Getting IRS-Congress Distinction?, I wrote:

Less than a week ago, in Tax Education is Not Just for Tax Professionals, I wondered, “isn’t it time to counteract the deliberate misinformation campaigns and the foolish repetition of nonsense by the ignorant by stepping up public education, not only in schools but in workplaces, civic associations, and community centers?” It’s no coincidence that tea party movement members are being duped into fighting taxes used to pay for public education. An educated public is the worst enemy that the wealthy elite can imagine.

This call for education as an antidote to anti-tax misinformation touched a nerve with Pappas, who posts at Tax Lawyer Blog. He expressed his outrage in If You Oppose Tax Increases You’re Stupid, Exploited or Dishonest. My response, in If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?, not only failed to convince him of the need to toss aside the failed policies of the trickle-down theorists, but also fueled a response from him, in Taxes, Saints & Sinners, that consisted of an attempt to recharacterized my multi-faceted analyses into three points that he tried to undercut. My responsive three-part series, Canonizing the Rich with Tax Cuts: Part One, Canonizing the Rich with Tax Cuts: Part Two, and Canonizing the Rich with Tax Cuts: Part Three, did nothing more than to encourage more of the same from Pappas, whose post, Anti-Taxers are Either Rich, Plan to be Rich or Think the World is Flat continued the same dual-pronged complaint that I not only unjustifiably dismiss as foolish the tax policy dreams of “small government” advocates but also cruelly denigrate the intelligence of Pappas and others of his ideological temperament. In turn, when I explained as clearly as I could, in More Proof the U.S.A. Needs More and Better Tax Education, why Pappas was wrong on the first count and misinterpreting my criticism of his position as an assault against his character, I accomplished nothing but to encourage Pappas to replay his hand, in The Professor Still Thinks Anti-Taxers are Ignorant or Malicious. I will try one last time to set the record straight, though I doubt it will have any effect.

Pappas claims that his argument is that I and my “pro-tax cohorts assume that those who believe they are wrong are either ignorant or selfish.” If Pappas would read carefully what I write, and refrain from injecting his own words into my compositions – as he has done repeatedly, for example, with the word “evil” – he will observe that I have ascribed multiple possibilities for explaining how people can cling to a tax policy rowboat that sank several years ago. Though selfishness and ignorance are two causes of this admirable but misplaced worshipping at the feet of the since-discredited supply-siders, they are not the only causes. Perhaps it’s a matter of flawed reasoning. Perhaps it’s deliberate misinterpretation of existing facts. Perhaps it’s a form of denial designed to preserve psychological well-being in the face of the crashing down of one’s entire tax policy, small government dreams. Perhaps it’s simply stubbornness. Frankly, I don’t care that Pappas or anyone else wants to think that lower taxes on the wealthy would make for a better life for everyone else. What I care about is the misinformation campaign that has distracted the downtrodden from focusing on the causes of their misery, because that sort of approach is no less objectionable than is the practice of claiming that someone has written something that he hasn’t written.

Pappas thinks that by writing “Pappas does nothing to flatter himself by parading out the discredited claim that letting the rich get richer while the rest of the country stagnates is good for everyone” somehow proves that I am calling him “dumb or selfish.” Once again, Pappas makes a leap from an attack on his tax policy views, and the observation that he doesn’t earn points by holding that view, to an assertion that his entire intellectual capacity has been questioned. For all we know, Pappas excels at organic chemistry. What I notice in these complaints is just one more version of the oft-heard “You criticized something I did or said, therefore you have rejected me in my entirety.”

Pappas takes this further by claiming, yet again, that I accuse he and his fellow “small government conservatives” of being indecent and ignoble. Unable to point to any such language in my posts, he claims that it is an “obvious implication.” He rests this on his claim that I am charging the “tax-cut defenders” as people who “know our position is wrong.” Hello? Didn’t Pappas just claim I tagged them as ignorant, namely, not knowing? That’s the whole point. Most of the people showing up at rallies to defend tax-cuts that benefit others and worsen their own situation are operating out of ignorance, namely, not knowing, and thus cannot be accused of being ignoble or indecent. Pappas so desperately wants to show the world how horribly he has been “tagged” by me. Why? I’ll dig into that in my next post.

On Friday, as the Memorial Day weekend was about to begin, I heard a commercial on a local radio station that began with these words, “Memorial Day. Time to have fun and do projects.” It was an ad for a home improvement supplies store. Excuse me for being petulant, but Memorial Day isn’t a time to have fun and do projects. It’s a day intended for remembrance. It’s a day devoted to thinking of all that has been done and is being done for us by those who have served or are serving, in one way or another, for the defense of our nation and our liberties.

Memorial Day is not a time for fun. When I think about those who have given their lives, or one or more of their limbs, or their health, and who have sacrificed time, for recompense that is just infinitesimal fractions of what the power brokers haul in, I cannot but admire the gifts that Members of the Armed Forces have bestowed on this country during the past 234 years. We owe them, and we owe them a lot. I can’t imagine that they were simply having fun.

Memorial Day ought not be, and will not be, just one day. That will become readily apparent when this nation wakes up and understands the debt it owes to those who have served. Wars may end, but our obligation to care for our veterans does not end. It will not end. When we read or speak of the trillions of dollars that have been expended in the current war, we forget that the expenditures will persist for as long as there remain with us survivors of those dreadful experiences.

Memorial Day is not just a time to think about the past, but a time to think about the future, for the past impacts the future. When the time comes to pay the price for the irresponsible behavior of the “spend-but-don’t-tax” crowd, we will hear a variety of complaints about spending to which many might object but which is as imbedded in the budget as are interest payments on the overwhelming federal debt. We must understand that as the future rolls upon us, we are obligated to continue funding the care, rehabilitation, and well-being of those but for whom we would not have a future.

When Memorial Day’s wider meaning is understood, the lesson “you can pay now or you can pay a lot more later” comes home both in a defense sense as well as in a fiscal sense. Wherever one stands in the “tax-and-spend” versus “don’t-tax-don’t-spend” or “cut-tax-cut-spending” debate, it is nothing but short-sightedness to have thought or to continue thinking that “spend-but-don’t-tax” is a responsible way of being stewards of our nation. Let’s make certain that when today becomes the “later” in the painful process of “paying later” for the foolishness of “spend now, pay later,” that we don’t require our veterans to pay a second time. What they paid the first time is far more than what most Americans have ever imagined paying. Unlike taxes, what they’ve paid cannot be measured in dollars.

Remember these things, especially as the debate gets even more heated. Remember these things, when the temptation to forget becomes overpowering. Remember these things, when time tries to push memories into the distant past that once was today’s future.

Sorry about the bad grammar, but it happens. A grammatically correct expression of the thought would create too long of a post title.

The topic is getting attention because two amnesty programs are underway that affect the geographical region in which I live. Both Pennsylvania and Philadelphia are conducting tax amnesty programs. Under Act 48, signed into law on October 9 of last year, the Pennsylvania Department of Revenue has set up the Pennsylvania Tax Amnesty Program, which runs from April 26 until June 18. The Department is waiving all penalties and half of the interest for any taxpayer who owes back taxes and who comes forward to pay up. Philadelphia has initiated the Philadelphia Tax Amnesty Program, its first in 24 years, which runs from May 3 until June 25. Like the Pennsylvania arrangement, the city is waiving all penalties and half the interest for any taxpayer who owes back taxes and steps up to pay.

Actually, there are two questions about tax amnesty. One is asked by a government agency, namely, should an amnesty program be established? The other is asked by taxpayers, namely, should I take advantage of the amnesty program? The considerations that are taken into account in making a decision are different.

From the government’s perspective, the principal economic advantage of an amnesty program is that it generates a short-term surge in revenues, and it’s obvious why amnesty programs are getting much attention at the present time. Another advantage is that amnesty programs, by enticing taxpayers to pay back taxes on their own initiative, save the government the costs it would otherwise incur in tracking down delinquent taxpayers, engaging in audits and reviews, and pursuing a collection process. The disadvantage is that the existence of an amnesty program and the possibility it will be repeated in the future encourages taxpayers who are thinking of letting their current tax obligations go unpaid to do so. The interest and penalties that are designed to discourage waiting to pay taxes until the government tracks down the taxpayer lose some, or all, of their impact if taxpayers perceive them as empty threats waiting to be tossed aside when the next amnesty program rolls around. There are all sorts of studies and articles written about the success of tax amnesties, evident from the numerous results searching for “’tax amnesty’ and success” but those reports focus on the short-term revenue surge. Other studies, such as Katherine Baer’s and Eric La Borgne’s Tax Amnesties: Theory, Trends, and Some Alternatives, suggest that in the long run amnesties work only if coupled with increased enforcement after the amnesty expires, and claim that amnesties do not bring chronic non-filers back into the system. Others question the impact on the morale of compliant taxpayers, who may see themselves as having made the economically unwise choice when compared to the delinquent taxpayer who ended up with penalty-free, lower-interest use of money for the period the tax debt was outstanding. Whatever the analyses may demonstrate, tax amnesties are all the rage among state and local governments. Even the federal government instituted a limited tax amnesty program with respect to off-shore transactions and accounts. Whether one likes them or not, tax amnesty programs are all around us.

From the taxpayer’s perspective, the principal economic advantage of an amnesty program is that it guarantees an elimination of penalties and a reduction of interest that will not be available if the government pursues the taxpayer through the usual procedural channels. The economic disadvantage is that the taxpayer who enters into the program is giving up the chance that the government would not have identified, located, or pursued the taxpayer. Does not the amnesty program send a message that the government cannot keep up with all of the delinquent taxpayers and that it is offering to cut a deal because it would raise less revenue, and pay more money doing so, in the absence of the amnesty? Does this not mean that the chances of getting “caught” are lower than the taxpayer may have originally contemplated? Consider that a government with a 100 percent delinquent tax collection success rate doesn’t need an amnesty program.

What this analysis omits is the moral component. Taxpayers ought to pay taxes that are legally owed. Yet penalties and interest don’t deter a growing number of taxpayers who, for a variety of reasons, some nefarious and some simply negligent, fail to pay or refuse to pay their tax obligations. The decision to enter or not enter an amnesty program isn’t unlike the decision to pay or not pay taxes that is faced when the taxes are due. Economic analysis might suggest that playing the audit lottery optimizes “profits.” But the cost of short-term profits often is long-term loss, a concept that seems to have been missed by many taxpayers, businesses, entrepreneurs, and commentators. That long-term loss includes not only direct economic loss, but the indirect economic loss that flows from inattention to moral obligation. If amoral economic analysis prompts every taxpayer to decide not to pay taxes, the long-run cost, not only in economic but in societal terms, is devastating.

So to the taxpayer my advice would be to “get in there and pay before it is too late.” That advice probably would cost me a lot of clients who simply don’t want to contribute anything to the cost of the society in which they live. My advice to governments, however, is more nuanced. I would tell them, “Sure, institute a tax amnesty program, keep it short in duration, but then come down hard on the delinquent taxpayers who did not pay up, perhaps dedicating 20 or 30 percent of what is collected from the amnesty to undertake a rigorous pursuit of the scofflaws.”

It started with my post, Is Public Truly Getting IRS-Congress Distinction?. My suggestion that if people understood the tax system and the fallacies advanced by the anti-tax folks and by those advocating even more tax cuts for the wealthy riled up Peter Pappas, who posts at Tax Lawyer Blog. He commented on my analysis, In If You Oppose Tax Increases You’re Stupid, Exploited or Dishonest. In If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?, I elaborated on my position and analyzed the arguments Pappas raised, but that failed to persuade him, for in Taxes, Saints & Sinners, he tried to controvert what he identified as the three main points that I had advanced. I followed up with a three-part series, Canonizing the Rich with Tax Cuts: Part One, Canonizing the Rich with Tax Cuts: Part Two, and Canonizing the Rich with Tax Cuts: Part Three. Not surprisingly, Pappas has reacted to my arguments with his latest post in this debate, Anti-Taxers are Either Rich, Plan to be Rich or Think the World is Flat.

Although the debate started with my contention that the nation suffers from the effects of inadequate education with respect to taxation and tax policy, it has evolved, as one can tell from the titles to some of the posts, into an examination of the motives of those who support tax cuts for the wealthy and even those who oppose taxes, period. I’ve been accused of labeling these people as “evil,” though I did not use that word, of being arrogant, because, I suppose, I’m so confident that misinformation about tax and tax policy has harmed the country, condescending, perhaps because I see lack of education as something needing redress, sophomoric, for reasons that escape me, and insulting, surely because I dare to challenge the goals of those who oppose remediation of a decade’s worth of bad tax policy. Accused of offering no facts to support my position, I have supplied cite after cite to study after study, none of which get any acknowledgment in the posts Pappas propounds.

Pappas agrees that I did suggest three possible reasons why he – or anyone else for that matter -- advances the cause of tax cuts for the wealthy. Here is what I had said:

I offered three possible reasons for the vigorousness with which Pappas opposes letting the tax cuts for the wealthy expire. First, perhaps he is among the wealthy. Second, perhaps he is certain to be or desires to be wealthy. Third, he thinks tax cuts for the wealthy have so benefitted the entire populace that more should be enacted.

Paraphrasing these three reasons, Pappas concludes:

Now, if I ascribed to either one of the first two reasons, that would make me selfish and self-interested. If, however, I ascribed to the third reason, I would be a blithering idiot because it’s obvious that we are doing worse today, in the midst of a recession, than we were ten years ago when we were not in a recession. That’s not much of a choice, now is it?

No, it is not much of a choice, and it proves my point. If the third reason is a non-starter, or as Pappas puts it, “no option at all,” because the nation’s economic experience has demonstrated the foolishness of cutting taxes on the wealthy at the turn of the century and the double foolishness of not undoing that mistake when government spending exploded with the onset of war, then what’s left to commend the cause of those who want to preserve the economic status quo as it relates to taxation of the wealthy?

Pappas provides this nugget of wisdom:

Maule is correct. Most of us are indeed worse off today than we were ten years ago. But that hardly means that we’re worse off because George W. Bush lowered the top tax rates. Correlation is not causation. There are thousands of subtle and not so subtle differences between the 1990’s and the 2000’s, any one or a combination of which might be responsible for our current predicament. Cherry-picking a single difference and assigning it all of the blame is both simplistic and silly. So simplistic and silly, in fact, that anyone can do it. Like thus:

The reason we are worse off now than we were in 2000 is that during the 90’s, when we had higher tax rates on the rich, corporations moved their operations overseas in record numbers. The flight of the job creators eventually caused the massive rates of unemployment we began seeing in 2007.

In his attempt to disprove the established connection between the government’s don’t-tax-but-spend policy of the 2000s and the nation’s current economic mess, Pappas conjures up an implausible example in the hopes that its disconnects can somehow create a broad brush that would sweep away any explanation that dares to lay blame on those don’t-tax-but-spend policy decisions and decision makers. The silliness of Pappas’ “straw man” argument is that tax rates were reduced during the Clinton administration – though not deeply enough to satisfy the wealthy and their advocates – making it fantastical to claim that tax increases in the early 1990s caused a mess in 2007 through 2010 despite intervening tax cuts pushed through by people on both sides of the partisan aisle, one side because it wants to destroy taxation and the other because it perceived political survival as requiring caving in to the other side on this point. While we’re playing this sort of game, try this analysis: the success at pushing through ill-advised tax cuts, and in preserving them in the face of overwhelming war-time expenditures, so emboldened this group that they parlayed their addiction to money, a/k/a greed, and the need for ever-increasing “money highs,” into riskier and riskier stunts like mortgage securitization schemes that also afflicted the same rapidly-vanishing middle class that was already reeling under the impact of the tax cuts for the wealthy. Pappas wants “certainty” but although quantum physics teaches us that in the long run there is no such thing in the material world, I suggest he take a look at this prescient analysis from October 2007, and note particularly the observation that most Americans were not doing what they needed to do to LEARN about the impending economic mess, which exploded in their faces not long after, in no small part due to lack of education.

Pappas claims that “none of the possible motives Mr. Maule attributes to me are flattering.” Aside from the fact I attribute them not only to Pappas but to his mentors, disciples, and tax policy comrades, Pappas does nothing to flatter himself by parading out the discredited claim that letting the rich get richer while the rest of the country stagnates is good for everyone. His disingenuous “who, us?” defense of the tax-cut crowd, wrapped in the cry that someone or something else, but surely not tax cuts for the wealthy, is the cause of current economic misery, is likewise not flattering at all. Perhaps it’s time for Pappas and the rest of the tax-cut defenders to admit that there isn’t anything that can be said about their position that flatters them or their policies.

Pappas complains that I, and others who share my views, “are constitutionally incapable of seeing any nobility or decency whatsoever in a person who believes something different than what they believe.” Where have I tagged Pappas as lacking nobility or lacking decency? This debate started with my claim that Americans need more tax education, not that they need lessons in nobility or decency. If Pappas wants to interpret my call for more tax education as “arrogant” or as an “ad hominem” attack, so be it. Perhaps that interpretation proves my point even more. Folks who believe the earth is flat, in the face of evidence from Magellan’s circumnavigation through satellite photographs, can object all they want to calls for geography education, and ought not and will not be treated as ignoble or indecent, but they ought not be permitted to be in charge of any government policy that involves, depends on, or deals with the shape of the globe. In other words, tax-cut advocates, you had your chance, it didn’t work, so please step aside and give others an opportunity even though it will be a tougher task because of the mess you left for us.

Some tax issues don’t get widespread attention because they’re too technical or deal with obscure transactions, but the proposed Philadelphia soda tax has been the talk of the town. On Thursday, as reported in this Philadelphia Inquirer article, City Council passed a budget that omitted the mayor’s proposed tax on soda and other beverages containing sugar. According to the article, similar proposals failed to pass in Baltimore, Washington, and New York State, though I’ve been told by readers that similar taxes do exist here and there throughout the country. It’s a controversial tax, and one on which I shared my thoughts most recently in Yes for The Proposed User Fee, No for the Proposed Tax. My op-ed piece on the issue, Why Phila. Soda Tax Already Has Gone Flat, was published in the Philadelphia Inquirer on March 24 of this year. It amuses me when supporters of the tax claim that the opposition comes from the “big soda lobby” because I do not own a soda company, I do not own stock in a soda company, I do not sell soda, and I do not drink soda. My opposition to the tax rests on a variety of principles, but there’s one that stands out.

Aside from the legal issues, aside from the difficulties of implementing the tax, aside from the cost to retailers of collecting the tax, aside from the cost to the city of enforcing the tax, aside from the ease with which the tax can be avoided, one huge question looms over the debate. Why single out beverages? Every justification that is given for taxing sugary beverages applies equally, if not more thoroughly, to other items. Donuts, for example, not only contain sugar, but contain fats. Hard candy is nothing more than condensed sugar. Cookies contain sugar, carbohydrates, transfats, lard, and all other sorts of things that do as much damage to a person’s health if ingested in unreasonable quantities. The supporters of the soda tax, though correct in pointing out that soda contributes to obesity, act and speak as though nothing else contributes to a person’s being overweight. There are far more than enough obese people who do not drink sugary drinks. A user fee, reflecting the cost to society of overindulgence in unhealthy foods, would be much more appealing if it applied to everything that was harmful to a person’s well-being. Spread over all unhealthy foods, a user fee could raise the same amount of revenue as would the mayor’s proposed soda tax without through a very low per-item assessment, unlike the significant increase in the prices of certain beverages that the soda tax would generate. Even a user fee on oversized portions might make sense, although that would punish people who save half of the gargantuan meal for the next day.

City Council’s decision to leave the soda tax out of the budget has not deterred supporters of the soda tax. The mayor explains that he is not “done fighting” and observers suggest that it will be re-proposed by the end of next month. In the meantime, even though Council passed a balanced budget, according to this Philadelphia Inquirer story, the mayor claims he will need to cut several fire companies, chop a day from library opening hours, and eliminate two classes at the police academy. Why? To increase the reserve fund. Reserve funds are important, and there’s much to be said about building them up during times of plenty, to insure against times of need, but is this a good time to be collecting more in revenue than is being spent? Yet, in another explanation, the mayor claims that the cuts are needed because of cash flow problems, that is, the timing of the inflow and outflow of tax receipts and expenditures. As it is, the budget passed by Council will allow for reserves, so Council and the Mayor are at odds over the size of the reserve. Are the mayor’s threats simply bargaining chips, considering how his planned cuts affect three city services that affect everyone, namely, police, fire, and libraries? No one in city government seems to mention how much can be saved by ditching those patronage jobs at the BRT, or elsewhere. Why?

On Tuesday, the voters of Philadelphia decided to relegate the Bureau of Revision of Taxes to the trash heap. According to this Philadelphia Inquirer article, more than 70 percent of those who voted opted to send the BRT into the pages of history. The vote was not surprising. The Mayor, most members of City Council, political watchdog groups, commentators, and just about everyone except those who benefitted from the BRT’s inefficiencies and the patronage jobs it provided were in favor of saying good-bye to an antiquated tax administration structure.

During the past several years, a continuous parade of revelations about BRT operations showed up in Philadelphia papers, often on the front page. I commented on some of these issues in a long series of MauledAgain posts, starting in An Unconstitutional Tax Assessment System, and continuing in 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, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, and Taxes and Priorities.

One might expect that the focus would now turn to implementation of the terms of the resolution that the voters approved. Within months, the mayor, exercising authority provided by the city charter, is expected to set up the Office of Property Assessment and the Board of Property Assessment Appeals that will take over the functions that had been assigned to the BRT. By separating the task of assessing property from the task of listening to and deciding appeals with respect to those assessments, the changes provide a better system of checks and balances than existed within the BRT.

But things may not move along on the expected timetable. According to this KYW Radio report, at least one member of the BRT has suggested he will challenge the vote. He questions the authority of the City Council to put the referendum on the ballot. The State Supreme Court, as reported in this article, and as I noted in Taxes and Priorities, previously dismissed a procedural challenge to the vote, but left the door open for a challenge based on the merits of the argument that City Council lacked the requisite authority.

Even if the BRT is successful, all it accomplishes is a postponement of its date of death. If the referendum is overturned, the issue will be raised in the state legislature, which is unlikely to ignore the overwhelming voter support for terminating the BRT and which will be under pressure from the mayor, City Council, and other civic and political leaders in Philadelphia to put an end to the BRT. The BRT can prolong the process, but it cannot turn back the tide of change. Its delaying tactics, however, would cause Philadelphia taxpayers to endure one or two or three more years of inefficient property tax administration, while the city waits for the new system to be implemented.

This is one of those situations in which prudence should trump legal niceties. It’s a point not easily learned by some folks, including some lawyers. When I taught the course in wills and trusts, I used an example dealing with advancements to ask students what they would advise a client in a position to end up with more of her mother’s estate by staying out of the probate process. Some students, but far from all, understood that the client would end up with more money by declining to participate in probate, but would end up with an unhappy group of other heirs. What’s to be gained, in the long run, by suing to prevent the death of the BRT when it’s going to terminate one way or the other? It’s not too difficult to guess why the members of the BRT don’t want the BRT to die. It’s very easy to understand why the voters of Philadelphia have provided a resounding death sentence to the BRT.

In the long run, I’ll miss the BRT only because its death will mean that the stream of BRT stories on which I comment will come to an end. Somehow, I have a feeling that this post is not the last BRT post. We’ll see. But, fear not, I’m also confident that there will be more posts concerning the Philadelphia property tax and the new system that inevitably will be put in place.

Today, in conclusion, I will deal with what Peter Pappas describes as my third point, namely, the assertion that Pappas opposes higher taxes because he is either already rich or plans to be rich some time soon. Actually, what I wrote was the following: “Either Pappas is already among the wealthy, or he is so sure or desirous of joining their ranks that he subscribes to their outlook. Surely he cannot think that the nation is economically better off now than it was before the wealthy engineered their tax cuts a decade ago. Or perhaps he does so think?” In other words, I offered three possible reasons for the vigorousness with which Pappas opposes letting the tax cuts for the wealthy expire. First, perhaps he is among the wealthy. Second, perhaps he is certain to be or desires to be wealthy. Third, he thinks tax cuts for the wealthy have so benefitted the entire populace that more should be enacted. My rhetorical style somehow encouraged Pappas to add “some time soon” to what I purportedly claimed, even though those words don’t appear. Quick to criticize my debating style, Pappas more than once has added or changed what I have said so that he can set up something that is easier for him to attack than are the positions I actually have put forth.

Thus, Pappas claims that even though he “listed six perfectly reasonable, non-selfish justifications for opposing high taxes and the continued expansion of government,” I insisted “on assigning to [him] a selfish motive.” Pappas claims that I am “making the assumption that [he is] either rich or plan[s] to be rich some time in the near future.” The style in which I wrote my conjecture, specifically “Or perhaps he does so think?” suggested that Pappas was in fact relying on six justifications offered up as “perfectly reasonable” but dismantled for the reasons I and many others have repeatedly shared. There is no way of telling if Pappas is rich or not, if he wants to be rich or not, or if he expects to be rich or not, but it is clear that he subscribes to the notion that taxes for the wealthy ought not be raised, and that taxes, even though lower than they have been in the past, are high. Why he does so in the face an overwhelmingly dismal tax-cut track record astounds me. I can admire his tenacity but mourn his misplaced tax policy perspective.

Perhaps the deep attachment Pappas has for the cause of the wealthy will loosen after he takes a look at several recent revelations. In Tax Cuts and ‘Starving the Beast’, Bruce Bartlett explains how the “reduce taxes so that government can be reduced” tactic backfired and contributed to the economic mess in which the nation finds itself. It turns out that when the opportunity to increase taxes on the wealthy arose, federal expenditures as a percentage of GDP fell. But that effort was short-circuited when the “cut taxes for the wealthy and spend trillions in Iraq” fiscal insanity was foisted on the nation under the dubious promise of economic prosperity for all. In the meantime, a Quinnipiac University study revealed that a proposal to increase taxes on households with more than $250,000 of income is supported by 60 percent of Americans. The clincher, though, is Shifting Responsibility: How 50 Years of Tax Cuts Benefited the Wealthiest Americans, a position paper signed by small business owners and even several wealthy individuals, who understand the serious damage done by those tax cuts for the wealthy, in which they seek a plan of “Undoing the Damage” caused by “The Great Tax Shift” that came from “Asking Less from Those with More.” I suppose that by supporting continued tax cuts for the wealthy, Pappas supports continuing these trends set forth in Shifting Responsibility: How 50 Years of Tax Cuts Benefited the Wealthiest Americans: (1) The share of total federal taxes paid by the top 0.1 percent fell from 60 percent to 33.6 percent over a 44-year period, costing the Treasury $281.2 billion in 2007 alone; (2) The share of total federal taxes paid by the top 400 income-earners fell from 51.2 percent to 16.6 percent over a 52-year period, costing the Treasury $47.7 billion in 2007 alone; (3) The 2001 tax cuts cost the Treasury $700 billion between 2001 and 2008, and if retained as Pappas desires, will add another $826 billion to the federal deficit; and (4) In the meantime, the middle 20 percent of taxpayers pay 16.1 percent of their income in total federal taxes, whereas 50 years ago, it was 15.9 percent. Pappas wants studies, surveys, and facts. There are more then enough in this document alone.

If, despite seeing these facts, Pappas wants to continue advocating tax cuts for the wealthy, making the nation more and more a debtor nation, he ought not be surprised when things take a turn in the direction they have in Greece. Unlike Greece, there are no nations to which the United States can turn for a bailout. Given these facts, how can anyone continue to ask for more of the same? It makes no sense to stay the course when a tornado is heading straight at us. Tenacity is not a virtue when a tornado is headed directly at someone. Good judgment impels the sensible thing, and that is to reverse course, quickly.

Today I will deal with what Peter Pappas describes as my second point, namely the assertion that statistics showing that the rich pay a greatly disproportionate share of taxes are flawed. In If You Oppose Tax Increases You’re Stupid, Exploited, or Dishonest, Pappas relied on statistics showing the percentage of taxes classified according to adjusted gross income. Those statistics, for example, show that 22 percent of income is earned by those in the top one percent of adjusted gross income, but that those individuals pay 40 percent of income taxes. In If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?, I pointed out that adjusted gross income is a misleading measure, because it omits various sorts of income far more likely to be found among the wealthy than the rest of the nation’s taxpayers. If, instead of using adjusted gross income, the statistics reflected all increases in wealth – net of the cost of generating the income – the statistics would change. What sorts of transactions are missing? The adjusted gross income measure omits tax-exempt income, depreciation on properties not going down in value, earnings on money stashed overseas, gifts and inheritances, deferred compensation, and a long list of exclusions and deductions either far more likely to be found among the transactions of the wealth or, when also showing up in the activities of the not-wealthy, far more likely to be of a much higher dollar amount among the wealthy.

Why would the use of a less flawed statistical base matter? Consider an example. Assume that the nation has 1,000 taxpayers. Ten of those taxpayers (the top 1 percent) each have adjusted gross income of $10,000,000 and pay income taxes of $3,000,000. Each of the other 980 have adjusted gross income of $50,000 and pay income taxes of $3,000. The total adjusted gross income of the 1,000 taxpayers is $149,000,000. Of that amount, the top 1 percent account for 67.1 percent. The total taxes paid by the 1,000 taxpayers is $32,940,000. Of that amount, the top 1 percent account for 91.1 percent. What happens if the same analysis is done using a measure of income that more closely approximates increase in wealth. Among the wealthy, there are far more dollars excluded and deducted that consist of tax breaks than there are among the not-wealthy. Assume (and I’ll come back to that) the ten taxpayers each have a more accurately measured income of $15,000,000, and still pay income taxes of $3,000,000. Assume the other 980 each have a more accurately measured income of $65,000 and still pay income taxes of $3,000. The total more accurately measured income of the 1,000 taxpayers is $213,700,000. Of that amount, the top 1 percent account for 70.2 percent. The total taxes paid by the 1,000 taxpayers remains $32,940,000. Of that amount, the top 1 percent account for 91.1 percent. The point is that the closer the income measurement is to an accurate measure, the less of a “discrepancy” between the wealthy’s share of income and the wealthy’s share of taxes.

The key, of course, is the assumption. No one really knows how much income is earned by the wealthy on monies stashed in secret overseas bank accounts or in offshore trusts. What’s certain is that there is quite a bit, and people earning lower amounts of income aren’t the ones with the “excess cash” available for deposit in Switzerland or the Cook Islands. Better guesses can be made with respect to some of the other items, but for one reason or another, the IRS does not generate all of the information that is required to generate precise numbers. The limited attempt to determine “expanded income” by the IRS does not provide the hidden information. The point is that the adjusted gross income numbers on which Pappas relies are, to this extent, arbitrary and tainted with the residue of the many tax breaks available, legally and illegally, to the wealthy. It has been demonstrated, for example, that two-thirds of the nation’s total income gains from 2002 to 2007 flowed to the top 1 percent of U.S. households, and that top 1 percent held a larger share of income in 2007 than at any time since 1928, as explained in this report and analysis.

Yet Pappas accused me of “[i]gnoring or dismissing facts [I] don’t like” and that doing so “is not evidence.” It is widely agreed among tax professionals that adjusted gross income is a flawed measure of actual income. According to this explanation of adjusted gross income, “In terms of the income tax system, AGI is the broadest measure of income but, compared with taxable income (the income measure to which tax rates are actually applied), it does not reflect personal differences that affect individuals’ ability to pay taxes.” An example of this flaw shows up in the fact that in 2006 there were 8,252 individuals with adjusted gross income of $200,000 or more who paid no federal income tax, and another in the news that nearly 1,000 individuals with income exceeding $1,000,000 paid no income tax in 2007. Pappas claims that I fail to offer “a shred of evidence” and fail to point “to a single contrary study” showing that his statistics “are wrong.” They’re not “wrong.” As I pointed out in If You Like What Tax Cuts for the Wealthy Brought Us, Are You Uneducated? Exploited? What?, they’re misleading and flawed. The evidence for this conclusion is overwhelming, I’ve pointed to enough of it to make the point, and anyone who has been through a good basic federal income tax or economics course understands this point. Even the IRS tries, though with limited success, to mitigate the flawed nature of adjusted gross income as a measuring stick by working with what it calls expanded income. It’s no wonder that Pappas and the wealthy have far more affection for statistics based on adjusted gross income than they do for statistics based on actual income.

Next, in an effort to prevail with quantity rather than quality, Pappas cites six things he generously calls “studies.” One is the IRS information based on adjusted gross income, another simply copies that information, a third is the U.S. Treasury version, a fourth is a very brief note that cites the Treasury item, the fifth is a CNN news report that refers to the fourth item, and the sixth is a CBO report that is the only one that relies on something other than adjusted gross income, but it makes no attempt to deal with the hidden income from overseas hidden bank accounts and offshore trusts or the deductions and exclusions which are not backed out in its attempt to generate “comprehensive household income.”

Pappas concludes by asserting that there is no room to “question whether or not the rich actually” “pay a disproportionate share of taxes.” Recall that this particular point of contention arose from the attempt by Pappas, in If You Oppose Tax Increases You’re Stupid, Exploited, or Dishonest, to demonstrate that the claim, “The rich don’t pay their fair share of taxes” is a “doozy,” one of “many distortions that regularly ooze from the mouths of big government activists demanding higher taxes on the rich.” When I rebutted that attempt, I did not try to prove that the wealthy do not pay disproportionately higher taxes. Instead, I stressed that “Pappas does nothing to define ‘fair share,’ even though there is much support for the proposition that regressive taxes are not fair.” Pappas still hasn’t offered his definition of “fair share.” Perhaps Pappas thinks it is “fair” that, as reported in Shifting Responsibility: How 50 Years of Tax Cuts Benefited the Wealthiest Americans, the top 400 income-earners paid 51.2 percent of their income in taxes in 1955 but only 16.6 percent in 2007, whereas the median income-earner saw the percentage of income paid in taxes grow from 7.4 percent in 1955 to 13.6 percent in 2007. I suspect his emphasis on the word “disproportionate” provides a clue that he’s in favor of the wealthy and the low-income folks all paying at the same rate, or perhaps for the aforementioned trend to continue until the top 400 are paying 0.1 percent of their income in taxes while the median income-earner pays 70 percent of income in taxes. The wisdom of cutting taxes for the wealthy is about as devoid of fairness as is the thinking behind the notion that the Sun revolves around the Earth.

In the next post, I turn to the question of why Pappas so zealously opposes the expiration of those unwise tax cuts for the wealthy.