MauledAgain

Monday’s Philadelphia Inquirer brought a small item that described the results of research exploring the connection between childhood music lessons and long-term brain health. The headline caught my eye because I could relate to it. When I saw “Those clarinet lessons helped you tune up for your later years,” I had no practical choice but to keep reading. Why? When I was a child, my father taught me to play the clarinet. Or perhaps I should say that he tried to teach me. I made progress, but certainly not to the level that would open the doors to any concert hall. Part of my failure to progress competently was my resistance to what I perceived as an irrelevant instrument in the days when playing guitar – especially electric guitar – seemed to be the gateway to success in a variety of venues. My father would have nothing of rock music. He, and I later discovered, more than a few others of his generation, considered rock music to be some sort of communist plot to weaken the youth of America. Apparently he abandoned that outlook in his later years, something I discovered when I arrived home for a visit and he was playing compositions penned by the Beatles and a few other artists of that era. He never did quite get to Pink Floyd. Perhaps had he lived a few years longer, he would have made friends with The Wall. My father, who played several instruments professionally, and even a few more for fun, had previously decided to teach my brother how to play the saxophone. Now that was an instrument with rock band potential, as my brother demonstrated and as Clarence Clemons – and others – proved. And now, one of my brother’s granddaughters is making a name for herself playing, yes, the saxophone. I, however, long ago abandoned the clarinet, though I still own several. I did not abandon my love of music, and dabble with keyboards, though quite inadequately.

So this Philadelphia Inquirer story suggested that I might owe my father an apology. According to the report, researchers examined 70 adults with similar levels of education and fitness, and who had no symptoms of Alzheimer’s disease. The adults were give a battery of cognitive tests. Who scored the best? Those with ten or more years of musical training. Who scored the lowest? Those with no musical training. Those running the study want to do more research, to determine if the cognitive performance enhancement is caused by the music lessons or by some other factor.

The lead research tossed out an idea that I found quite plausible. “Since studying an instrument requires years of practice and learning, it may create alternate connections in the brain that could compensate for cognitive declines as we get older.” If that indeed is the case, then would not the same cognitive achievement be attained by other endeavors requiring years of practice and learning? Certainly more research is in order.

So where does tax fit in? Two questions pop into my brain. Do years of practice and learning involving tax have the same effect as years of practice and learning involving music? Do years of practice and learning involving music make a person more proficient in learning tax? When I was a student in the basic federal income tax course, the professor often referred to “music majors” as a stereotype of students he expected to struggle in the course. Yet, my years of teaching have taught me that music majors do well in tax law. Though I’ve not conducted any empirical or laboratory research, I have convinced myself that the reason rests on the number of shared characteristics between music and tax law. Both require attention to detail. Both require careful reading. Both emphasize the need to recognize and apply patterns and sequences. Both are highly structured. Both are, to some extent, mathematical. Both involve interpretation. Both require precision. Both require the learning of a new language. The only difference between music and tax law that I could find has nothing to do with the learning process. Music makes almost everyone happy. That cannot be said about tax law.

This isn’t my first foray into the connections between tax and cerebral characteristics. Not long ago, in The Tax Brain, I asked:

Is there such a thing as a tax brain? Is there something to be said for the fact that most tax practitioners are proficient in semantic language processing and arithmetic calculation? Are there areas of a tax person’s brain that are larger or smaller than the typical brain, or that show higher or lower levels of activity? Are the brains of tax professionals awash with dopamine or with noradrenaline?

Now, to that list of questions, I add, “Do musicians and tax professionals find themselves in the same part of the intellectual family tree?” Perhaps a more important question is this: “Do tax professionals face a lower risk of cognitive decline as they get older?” There are plenty of anecdotes that I could share. What I prefer to see is an appropriately conducted study.

Seventeen years ago, I co-authored an article that focused on inadvertent consequences of changes to the section 751 regulations. The title, “IRS Hot Asset Reg Re-tuning Falls Flat, Causing Sharp Pain for Partner Estates,” 94 Tax Notes 751 (2002), probably doesn’t say it all, and only a few of the borrowed musical terms show up in the table of contents:

Overture ................................................ 751
1st Movement: Sonata of the Basis Discrepancies ......... 752
2d Movement: Rondo of the Resolutions ................... 753
3d Movement: Scherzo of the Fractured Minuet ............ 755
4th Movement: Variations on Fractured Syncopation ....... 757
Finale: A Crescendo of Improvisations ................... 757
Coda: The Denouement of Repetition ...................... 760
The Final Gong .......................................... 760

The full scope of this musically influenced tax article can be understood only by reading it. And I’ll leave to another post, and another area of science, the significance of the page number on which the article appeared.

About a year and a half ago, in Poll on Tax and Spending Illustrates Voter Inconsistency, I reacted to the results of a Quinnipiac University poll that indicated New Jersey residents, although favoring spending cuts over tax increases, failed to achieve a majority when it came to cutting the outlays for any particular program. I explained that, “The 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.”

In my post back near the end of 2009, I hypothesized that the problem rested in the “I want, I got, I will continue to get” experience that leads so many people to an entitlement mentality that objects to cutting any program other than one that, at the moment, does not directly benefit the person suggesting which programs get cut. I noted that the problem “may be a simple matter of what the residents of New Jersey want being something that collectively is more than what the residents of New Jersey have.”

According to a new Quinnipiac poll released last week, as reported in this story, attitudes haven’t changed. Sixty percent of those polled support increased state spending on public schools, and 57 percent supported increases limited to the state’s poorest areas. Nonetheless, 67 percent take the position that spending is not the best way to improve public schools. Of those polled, 59 percent oppose tax increases, even though 52 percent support restoring the higher tax rate on incomes exceeding roughly a million dollars, and 55 percent oppose tax cuts for corporations.

Though roughly 40 percent of those polled appear to be taking a consistent position, roughly 60 percent, or more, do not want to pay more taxes, do not think spending is the best way to improve public schools, but support increased spending on public schools. That sort of reasoning makes no sense. Is it any wonder that governmental budgetary processes are a mess throughout the country?

With the inconsistency seemingly flavored by irrationality, I’m beginning to think that there is more to the disconnect than simply the entitlement mentality. The inability of so many people to frame the analysis in a logical manner is disturbing. Another instance of that bewildering approach manifested itself last week in the various comments that blamed the President for the increase in gasoline prices and claimed that by preventing his re-election, gas prices would be reduced. Hello! How is the President, or any president, responsible for the finite nature of hydrocarbon resources and their decline? How is the President responsible for the huge increase in the number of the people living on the planet? How is the President responsible for the huge growth in the number of people no longer content to walk, ride donkeys, or ride bicycles because they have experienced and now want self-propelled vehicles? How is the President responsible for the effect of speculators’ gambling on oil and gasoline prices? How is the President responsible for the cost of switching gasoline refining to the summer-blend process? Careful reasoning tells us that gasoline prices are doing what was predicted, namely, increasing, at the time that was predicted, namely, as the global economy began to rebound from the recession. Of course prices are increasing, and it’s something that would have happened no matter who was in the White House.

In Poll on Tax and Spending Illustrates Voter Inconsistency, I repeated the questions I asked in New Jersey to Follow in California's Tax Footsteps?: "Is no one taught the skills required to balance budgets? Are fiscal discipline and common sense lost abilities? Are there any political leaders still standing who have the courage to explain the true cost, tax-wise and otherwise, of the things that the people demand? Is the nation paying the price for too many years of too many people refusing to say 'no' to the demands of those who are unable to comprehend that money does not grow on trees?"

It’s not possible, in the long run, to run a government by cutting or maintaining taxes, increasing spending, and reducing deficits and debt. Yet that is what the nation, and the residents of specific states and localities, want. It’s not possible, in the long run, to make gasoline available to everyone at $1 or $2 per gallon. Those who tell people that these things are possible know that when people discover that they are not, the disappointed people will lash out. Those who tell these myths to people then conveniently direct the anger and frustration arising from the disappointment so that it lands on the political enemies of those who sell the false promise of a no-tax government and $2 gasoline in every vehicle. Politicians seem to think that people do not want to hear the truth, yet it seems from various polls and commentaries that most people do want to hear the truth. Unfortunately, people tend to react by voting out the elected official who brings bad news. For that reason, present-day politicians hesitate to elevate truth over re-election opportunities. The truth needs to be told, and the politicians who do best at telling the truthful bad news are those who also bring a simultaneous delivery of realistic, feasible plans to deal with the bad news and the ability to deliver both messages in a manner that helps people understand what needs to be done, rather than riling them up. The bad news is that very few, if any, now remain in politics who have that trio of abilities. Hopefully, that won’t be an enduring truth.

It’s likely that even people who are not tax professionals can answer the following question: “If taxpayer T writes a $100 check to Charity A, and delivers it to the Charity, and Charity A cashes the check, is T permitted to claim two $100 charitable contribution deductions on T’s income tax return?” I expect similar results if they tried to answer this question: “If taxpayer B purchases kitchen equipment for B’s restaurant, paying $1.5 million, is B permitted to deduct depreciation on the equipment totaling $1.5 million, and then start over, deducting another $1.5 million of depreciation?” And I expect roughly the same results if they tried to answer this question: “If taxpayer Z drives for business purposes from Z’s office to client G, whose office is 10 miles from Z’s office, and then drives, for business purposes, 8 miles from G’s office to Client H’s office, and then drives 14 miles from H’s office back to Z’s office, is Z permitted to deduct transportation expenses based on 48 miles (2 x 10 plus 2 x 14)?

Anyone with even a rudimentary understanding of tax, or some sort of basic common sense, would quickly determine that the answer to each question is “No.” It’s obvious, isn’t it, that paying $100 ought not generate a $200 deduction, spending $1.5 million on depreciable equipment ought not generate $3 million of depreciation, and driving 32 miles ought not generate 48 miles’ worth of deductions?

In a recent case, however, a taxpayer tried, unsuccessfully, to achieve a double-dip with respect to home office expenses. In Bosque v. Comr., T.C. Memo. 2011-79, the Tax Court addressed the proper treatment of home office expenses when a taxpayer conducts multiple businesses from that office.

The taxpayer was a self-employed attorney, and also preformed services for a corporation that he formed in 2005. The corporation was in the business of recruiting individuals to become real estate agents. The taxpayer and his wife had added a room to their house which the taxpayer used as an office for his law practice and for the corporation he had formed. On the Schedule C for the law practice, the taxpayer deducted $7,551, representing the allocation of the residence expenses to the room. On the Schedule C for the services rendered to the corporation, the taxpayer deducted $7,729, representing the allocation of the residence expenses to the room. As the Tax Court put it, “Instead of apportioning the business use of their home between [the corporation] and the law practice, petitioners claimed as a deduction the full amount of the business of their home twice.” The Tax Court’s opinion does not explain how the apportionment of the residence expenses to the room generated $7,729 and $7,551, respectively, but made it clear that these were duplicate amounts. The court stated, “Petitioners claimed on both their 2006 ACI Schedule C and their 2006 law practice Schedule C deductions for the business use of their home. Although Mr. Bosque used the same room for both businesses, petitioners claimed the full amount of the deduction on each business’ Schedule C.” Technically, there was no duplication with respect to the $178 claimed on the Schedule C for the services rendered to the corporation but not on the Schedule C for the law practice.

The IRS, not surprisingly, argued that “because Mr. Bosque used the same room in the house for both businesses, petitioners are entitled to only one deduction for the business use of their home,” and also argued that “since petitioners were allowed to deduct the expense for the business use of their home on their 2006 law practice Schedule C, they are not entitled to the deduction claimed on their 2006 ACI Schedule C.”

The taxpayer “admitted that he used the same home office for both his law practice and [the services rendered to the corporation]. The Court agreed with the IRS, noting that “to allow petitioners two deductions would be to double the amount of the allowed deduction under section 280A(c).”

The opinion does not indicate whether the return was prepared manually or through the use of software. The software with which I am familiar is designed so that home office expenses are shared among multiple businesses. Though I don’t know for sure, it’s a safe guess that other tax preparation software also prevents double dipping with respect to the same expenses.

One wonders how the taxpayer would have reacted if the IRS attempted to require the taxpayer to report the law practice and corporate services income on both Schedule C and on some other schedule. One can also wonder how taxpayers would react if the IRS required gross income from rendering services to be reported on a Form W-2 and then again on a Form 1099.

Last August, in Tax Politics and Economic Uncertainty, I agreed with the comment of Martin Regalia, chief economist of the U.S. Chamber of Commerce, who noted that “Uncertainty is the probably the biggest factor retarding economic growth.” It is my position that the constant tinkering with the tax law, such as the on-again, off-again bonus depreciation deduction, makes it even more challenging, if not impossible, for businesses, particularly small businesses, to do the long-term planning necessary for a viable business plan. I am convinced that, as I argued, “The bottom line, no pun intended, is that it is easier for businesses to make decisions if they know what lies ahead, regardless of what lies ahead, than if they don’t know what lies ahead. Businesses can react to higher tax rates and to lower tax rates, if they know what the tax rates will be, but their decision modeling suffers when virtually everything in the tax law remains open to change, perhaps retroactively, sometimes at a moment’s notice.” I explained that although the Congress is able to provide a sufficiently certain tax law, it does not do so because its members can play the uncertainty into bargaining chips in their unchanging pursuit of campaign contributions, a point on which I had elaborated in A Zero Tax, A Zero Congress with respect to the consequences of Congress’ refusal to come to grips with a permanent solution to the estate tax mess. Just last week, in What Sort of War is the “Real Budget War”?, I argued that “the uncertainty raised by the dilly-dallying and political posturing infecting the process is one of the most significant reasons American businesses are hesitant to expand, hire, borrow, lend, produce, or commit to much of anything other than what is imminently necessary.”

In more than a few posts, I have repeatedly argued that the tax cuts and tax breaks touted as “job creators” have failed to generated the promised jobs. For example, in If At First It Doesn’t Work, Try, Try, Try Again, I asked this of the bonus depreciation and section 179 expensing deduction expansions:

The previous incarnation of section 168(k) “bonus depreciation” as well as continual expansion of section 179 expensing have been consistently hailed as solutions to the nation’s economic woes of the moment. Yet no evidence exists that these tax giveaways have had the claimed effect. Why is it, for example, that during 2008 and 2009, while businesses basked in the benefit of 50-percent bonus depreciation, the economy got worse, not better? Where are all the jobs whose creation was promised when the proposal for the 2008 and 2009 tax break was being trumpeted as the answer? Where is the economic recovery that supposedly was an inescapable consequence of enacting those tax breaks? Similar questions can be asked about the long parade of tax breaks for business investments during the past 50 years.

I elaborated on this point in Job Creation and Tax Reductions:

Fourth, reducing tax rates or extending low taxes for the wealthy, which is what Boehner advocates, does not create jobs. Extending tax cuts for individuals with incomes exceeding $250,000 (for purposes of simplicity, without getting into the slightly different numbers for individuals in different filing status categories) in addition to extending tax cuts for individuals with incomes under that amount would have no effect on small business owners who do not generate that much income from their business. And that's most truly small business. What about individuals with incomes exceeding $250,000? Will they create jobs if their taxes are reduced or if their tax cuts are extended? Not necessarily. A person does not “create a job,” that is, hire a person for a position that previously did not exist, simply because the person’s tax cuts are extended. People do not hire other people for the sake of doing so. They hire other people if they have work that needs to be done. Extending tax cuts does not cause an increase in the amount of work that needs to be done. Even if it did, would the extension of a tax cut that means roughly $35,000 to someone with income of $1,000,000 generate a new job of any significance? Considering that it costs roughly $1.40 to pay $1 in salary, even if the person with $1,000,000 of income needed work to be done, at best they could “create” a job that pays roughly $25,000. One job. One job paying very little. On the other hand, if the person really needed to hire someone, the tax law provides a zero tax rate on the income used to pay a new employee. Thus, no matter the tax rate, if the person with $1,000,000 of income needed to hire someone to do work for $25,000, by doing so at a rough cost of $35,000, the person’s taxes would be reduced under current law by roughly $12,000, and under a tax-cut-expiration situation, by roughly $14,000. In other words, the “we aren’t creating jobs because our taxes might go up” is utter nonsense. If the person has work that needs to be done, $2,000 isn’t going to make or break the decision. Better yet, the wealthy person can hire enough people so that their taxable income sinks below $250,000 and they won't need to bother themselves with what the tax rates for the wealthy are, and in the process they can learn what it's like to live like most people do. What will create jobs is an increase in demand, 90 percent of which comes from the 99 percent who are not in the economic top one percent, and the best way to stimulate demand among the 99 percent is to extend their tax cuts. Ironically, where work needs to be done, such as highway and bridge repair and maintenance, refurbishment of public infrastructure such as storm sewer systems, firehouses, schools, sanitary sewage systems and plants, dams, national cybersecurity, and similar public improvements, the advocates of tax cuts for the wealthy hold a position that guarantees the lack of funding for most, if not all, of what needs to be done to keep the nation vibrant in a changing world economy.

Now comes news that reinforces my position that tax certainty has far more value than ever-changing, sometimes expired, sometimes re-enacted, sometimes retroactively modified tax breaks and tax rate cuts.

Last week, in his column Philly Deals nicely headlined Isn't It Rich? Capitalists Who Accept Higher Taxes, Joseph N. DiStefano asked an important question, “So how are the rich - and the larger group of Americans who think they're rich, want to be rich, support the rich, or at least trust rich Republicans more than rich Democrats - going to react to Obama's warning that he won't back down next time [when it comes to opposing extending the Bush tax cuts for the wealthy]?” The answer was one that works for many questions. “It depends.” Specifically, according to DiStefano, it depends “on which rich you mean.” DiStefano reminded his readers that last fall he had commented on the arguments made by well-known billionaires and millionaires in favor of “higher taxes on wealthy Americans as a matter of national fairness and fiscal sobriety.” He then reported that his discussions with financial professionals disclosed that “their working-rich clients aren't necessarily discouraged to expand their businesses because of higher tax rates.” Instead, “A bigger burden is the unpredictability of tax rates and tax breaks; subsidies and penalties; and liability, labor, and trade, and pollution laws and regulations as Democrats and Republicans keep rewriting the rules or threatening to.” In a conclusion reminiscent of my own proposition, he wrote, “This politically manufactured instability makes it tough for capitalists to plan.”

Di Stefano then shared something that many people intuitively suspect. The same financial professionals told him that, “It's different among those whose money was mostly inherited. As a group, say the pros, those people are more likely to hate taxes, period, and to support politicians who promise to cut them, no matter what. Having lost the capacity to earn more, they fight harder for what's left. Even if that means a fat national deficit.” Interesting, isn’t it? I’m particularly puzzled by the notion that people who inherit money have “lost the capacity to earn more.” Maybe someone can start a new business, teaching those born into money how to earn money, just as people born into specific athletic skills end up needing to learn how to develop their other natural talents when time runs out on their physical superiority.

Who can disagree with DiStefano’s proposed solution? He suggests, “Maybe the solution is to simplify the tax code, set income-tax rates at some world-competitive level, keep them there for the next 20 or 30 years, and boost inheritance taxes.” The productive wealthy, those who seemingly are attempting to develop business plans to which they can commit, have indicated their ability to deal with such an environment. Having tried the approach of continual re-enactment of short-term tax changes, and having seen it fail, it is time for Congress to try something else. The folks who brought us the last several decades had their chance. It’s someone else’s turn now. Didn’t they learn that rule in kindergarten? You know, the one about taking turns and not hogging things?

It’s tax day, because a holiday in the District of Columbia required the “postponement,” at least for federal income tax returns, of that very disliked tax return due date. There are few who delight in filing tax returns, even fewer who revel in paying taxes, but there are some who understand the necessity, and even some who find tax return preparation so enticing that they’ve made a career out of it. Then there are those who can’t help but teach and write about tax. A recent report about brain structure sizes has me wondering about the tax brain.

A report appeared last week, and seemingly went viral, if close to 7 million hits on google when I searched for the report defines viral, and it suggested that the brain structures of “liberals” and “conservatives” differ. I put those terms in quotes because each may have more definitions than there are words in the lexicon. According to this story, for example, the study published in Current Biology claims that liberals have more gray matter in a part of the brain associated with understanding complexity and conservatives have more gray matter in the part of the brain that processes fear. Thanks to reading more than a few books about conscience, will, thought, speech, theology, and brains during the past 30 years, I did not need to drag my high school biology classes out of their deep coma in some unlit corner of my brain to understand the words “anterior cingulated cortex” and “right amygdala,” the two areas of the brain, respectively, noted by the study. The report explains that previous research shows a difference in brain activity in those areas of the brain that differ according to the “liberal – conservative” dichotomy as self-reported by participants in the study.

Comments and posts on this report are flooding cyberspace and mainstream media. What one learns, or at least what is asserted, is most interesting. For example, Ian Monroe links to reports that show differences in IQ between “liberals” and “conservatives” but hastens to point out that IQ means a variety of things because there are a variety of different intelligences, including mechanistic intelligence, mentalistic intelligence, technological intelligence, and traditional social intelligence. Monroe also links to studies claiming that liberals have less disgust sensitivity, prefer large urban areas, and are more reactive to gaze cues. Yet another study claims that conservatives have more highly active left brains, which has higher levels of dopamine, whereas the right brain has more noradrenaline, and uses these findings to conclude that conservative mental attributes lead to advantages in semantic language processing and arithmetic calculation. Monroe points out that as we age, the dopamine system becomes more active, which might explain why at least some people become more “conservative” as they grow older.

The comments to the report of the story at Good Culture drew attention to some interesting tidbits about brains. One person noted that there are people who are conservative on fiscal issues but liberal on social issues. I suspect, though, that answering the question implied in that observation requires a careful re-examination of the labels because it’s not necessarily inconsistent to be liberal on social issues and conservative on fiscal issues, though very few people fall into that category. Another person let us know that alligators are so ornery because they have an enlarged medulla oblongata. Yet another person asserted that small amygdalas were linked to sociopaths and serial killers.

And that brings me to my question about the brains of tax folks. Is there such a thing as a tax brain? Is there something to be said for the fact that most tax practitioners are proficient in semantic language processing and arithmetic calculation? Are there areas of a tax person’s brain that are larger or smaller than the typical brain, or that show higher or lower levels of activity? Are the brains of tax professionals awash with dopamine or with noradrenaline? One of the reports cited by Ian Monroe noted a “weak correlation” between disgust sensitivity and support for tax cuts, but not any of the other tested issues. For me, my disgust sensors light up every time I read tax legislation, especially the items classified as a simplification measure. I suspect that disgust sensitivities are in high gear today, and perhaps in the weeks leading up to it, as people cranked up their tax return preparation software, or met with their tax advisors, or looked over their tax returns. One wonders what their brains would do if they were admitted into the back rooms where tax legislation gets drafted and lobbyists meet with legislators.

This tax brain idea is perhaps too cerebral. With all the tax law changes that need to get pushed into the brains of tax folks, it’s no wonder that our skulls aren’t exploding.

Three months ago, in Cutting Taxes + Failing to Identify and Enact Spending Cuts = Default?, I shared my prediction that “the collision between the refusal to raise taxes and the inability to cut spending is going to happen sooner than I had anticipated, and with consequences that will prove, with effect far beyond words on the pages of a blog, how foolish it is to increase spending without raising taxes.” Several days ago, in Now for the Real Budget War, Jeanne Sahadi of CNN correctly notes that the agreement reached between Congress and the Administration on the 2011 budget is nothing more than a warning that if they use similar tactics when dealing with the looming debt ceiling issue, the nation faces a grave crisis. To her analysis I add the proposition that the uncertainty raised by the dilly-dallying and political posturing infecting the process is one of the most significant reasons American businesses are hesitant to expand, hire, borrow, lend, produce, or commit to much of anything other than what is imminently necessary.

The CNN article points out that some legislators, specifically naming Michele Bachmann, think that an increase in the debt ceiling is the same as a spending authorization. It isn’t. One need only sit through a good civics course to learn this. The fact of the matter is that, as Sahadi explains, “Even if Congress never approves another spending increase or tax cut, the country will not have enough revenue coming in to cover all its bills.” So what happens if the debt ceiling isn’t increased? Secretary of the Treasury Tim Geithner offers this scenario: "A broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds." But as I pointed out in Paying Interest Alone Does Not Foreclose Treasury Default:

If the Congress refuses to increase the debt ceiling, investors will react by dumping their holdings in U.S. debt, long before the government misses an interest payment. This dumping won’t be a matter of investors selling off the debt. It will take place as investors decline to re-invest in Treasury obligations when they receive the proceeds of the obligations coming due within the next few years. Fear of being the “last investor in the game” will deter the reinvestment. Consider that during the next year almost $2.5 trillion of Treasury obligations will come due, as summarized in this chart, for reasons explained in this prescient warning with respect to the shortening of maturities on Treasury obligations. In other words, not only must the government pay interest on the outstanding debt, it must also come up with cash to pay off the maturing obligations. Usually, it does so by issuing new obligations, but will it be able to raise $2.5 trillion if the Congress has frozen the debt ceiling? Even if some investors decide to “roll over” their investments, the reverberations through world stock, commodity, and other markets if even one-quarter or one-third of the required cash cannot be raised will be tremendous. And it’s likely that what does get raised will demand higher interest rates, thus wedging even more spending into future federal budgets.

As Sahadi notes, conservative lawmakers refuse to vote for a debt ceiling increase unless there are spending cuts, and they object to tax increases. Other lawmakers object to reductions in Medicare, Medicaid, and social security benefits. That is a recipe for a stalemate.

It seems to me that the nation has been led into this quagmire by some very clever folks who followed a blueprint not unlike those used by con artists. Step one, increase military spending without increasing taxes. Step two, almost immediately cut taxes on the wealthy, with the promise of new jobs. Step three, complain that spending exceeds revenue. Step four, cut Social Security, Medicare, and Medicaid. Step five, claim that step four is necessary to generate the new jobs that didn’t appear after step two was implemented. When the smoke clears and the mirrors are removed, the net effect of this plan is as follows. The rich have more, disproportionately so. The poor aren’t any better off. The middle class is disappearing, and its financial future is hijacked. Proof of this nefarious scheme can be demonstrated by examining what would have happened had the morally correct path been followed. Giving the war advocates the benefit of the doubt, increase taxes when increasing military spending, or at least, refrain from cutting taxes on the wealthy. That leaves the speculators with less money to use in the artificial real estate price run-up that inevitably collapsed and brought the economy down. Of course, it means far fewer assets in Swiss bank accounts, offshore trusts, island tax havens, and conspicuous consumption. America needs to ask why the nation followed the quagmire blueprint rather than the morally correct path.

The zeal with which the advocates of even more tax cuts for the wealthy, counterbalanced with taking the ax to Social Security, Medicare, and Medicaid, is matched by the zeal with which advocates of a compassionate society defend the rights of the middle class and the economically disadvantaged. Even if the weekly incremental debt ceiling increases predicted in the CNN article occur, the outcome will be very different from the threat of a government shut-down precipitated by last-minute agreements on budget deals. Government shut-downs pretty much have an impact when, and if, they occur. The impact of federal debt totals colliding with the debt ceiling ripple through society long before any “deadline.” As I concluded in Cutting Taxes + Failing to Identify and Enact Spending Cuts = Default?, “The consequences of a default by the federal government on its debt would begin to appear before it actually ‘ran out of money.’ Even if the default was short-lived, the catastrophic economic consequences would, according to the Secretary of the Treasury, ‘last for decades.’ A protracted stalemate would make the Great Depression look like a walk in the park.”

Ironically, if spending is such a terrible thing, especially when it contributes to a deficit, why were Republicans, including those controlling the Administration at the time, so eager to toss money into bailing out the wealthy whose speculation and other unwise financial shenanigans had done so much damage to the nation? In Where Is the Money To Be Found?, I objected to the bailout of foolish investment bankers and others who had played idiotic games with the excesses of post-tax dollars in which they found themselves wallowing. Similarly, I objected to tax rebates that were nothing more than crumbs thrown to the economically disadvantaged to distract them from what was going on with the bulk of the tax cuts. As I explained in Can a Tax Rebate Band-Aid Stop the Economic Bleeding?:

To finance the tax rebates, the Treasury will need to borrow money, because it doesn't have spare cash sitting around. From whom will it borrow? Someone with dollars to unload. Who might that be? Could it be the People's Republic of China? Saudi Arabia? The United Arab Emirates? Some international bank? Whoever it turns out to be, they will be looking for two things. They will want interest, because they're not going to lend the money for nothing. And ultimately they will want the debt repaid. Who pays the interest? Who repays the debt? It will be the taxpayers of the third, fourth, and subsequent decades of this century. These taxpayers, already burdened with individual debt, will discover that they lack sufficient funds to buy the things they need and the luxuries they desire without going into more debt. From whom will they borrow? At what point do the creditors say, literally, ‘We own you.’

Yet, government borrowing to help the wealthy didn’t raise the fervent outcries of protest that emerge when Medicare and Medicaid spending are portrayed as the cause of government borrowing that actually took place to finance tax cuts for the wealthy.

In Cutting Taxes + Failing to Identify and Enact Spending Cuts = Default?, I warned that:

The nation is approaching, more and more quickly, the point of no economic return. I wonder when someone will make it clear to the entire nation, and not just to the few readers of this and a few other blogs who understand the maxim, a nation is doomed when it spends trillions on war while simultaneously continuing and increasing tax cuts that especially benefit the wealthy. I wonder when someone will succeed in persuading the nation that the only hope is a reversal of the mistake, even though it cannot be fully reversed. Even a partial reversal poses the possibility of redemption. [Republican Senator Pat] Toomey wants "concrete steps toward fiscal sanity." Would not undoing the fiscal insanity of the past decade be the place to start?

I then asked, “If it’s so wrong for the government to spend more than it takes in, are the Republicans going to go back and correct their previous errors?” Or is the great wealth shift – the one that occurs when Social Security, Medicare, Medicaid, and other programs benefitting so many Americans are cut so that taxes can be reduced for the wealthy in exchange for empty promises of jobs – going to be the event that future historians identify as the defining moment in the transition of this nation from democratic republic to corporate feudal fiefdom?

Kudos to Paul Caron, whose post headline the other day, Trump's Tax Plan: One-Time 14.25% Net Worth Tax on Those With Over $10m, caught me off-guard. What sort of proposal was this, coming from someone doing surprisingly well in those way-too-early presidential nomination polls for the Republican Party. A closer look revealed that Paul had dug up a headline from almost 12 years ago, when Donald Trump was a “prospective candidate” for the Reform Party. According to a CNN article with no less an eye-stopping headline, Trump Proposes Massive Onetime Tax on the Rich, Trump suggested a 14.25 percent tax on the net worth of individuals and trusts owning $10,000,000 or more. Trump claimed that his proposed tax would raise $5.7 trillion, permit payment of the then $5.66 trillion national debt, provide a tax cut to the middle class, and maintain the fiscal health of the Social Security system. The tax cut for the middle class would be financed with half of the reduction in interest payments achieved through elimination of the federal debt, with the other half being plowed into the Social Security trust fund. Trump argued that his plan would “trigger a 35 to 40 percent boost in economic activity.”

Trump’s plan, which may or may not still find favor with him, poses all sorts of interesting questions. Here are some. I’m confident there are others.

If enacted today, would the rate need to be more than 14.25 percent because the federal debt is so much larger? Or would it be lower because the wealthy are so much wealthier? Or would it perhaps be the same?

If the proposal gained any traction, would the wealthy accelerate the pace at which they shove their assets into Swiss banks, offshore trusts, and island tax havens? Of what value is a tax on wealth owned by United States citizens and trusts that is maintained in other jurisdictions?

Considering that the proposal is the opposite of a tax cut for the wealthy, and considering that there are those who fervently believe that jobs are created when taxes on the wealthy are reduced, would the proposal cause a loss of jobs? Or would the proposal, by infusing tax cuts into the hands of the middle class, spark a demand for goods and services that would compel the wealthy to hire people to meet that demand? In this regard, jobs created by small businesses would be unaffected because few of their owners are multimillionaires. Jobs created by large corporations would be unaffected because corporations are not within the scope of the proposal.

If the wealthy transfer 14 percent of wealth to the federal government, does that means that the wealthy would lose 14 percent of their incomes? Or some similar percentage? Would that not reduce their income tax liabilities, thus re-generating a federal budget deficit? Or would taxes collected from the surge in jobs and investment predicted by Trump offset that revenue loss?

What happens to the credit markets if the United States suddenly owes no money? Does it change the value of the dollar? Does it drive down interest rates because the nation’s former creditors now have funds to lend? In this regard, it’s tough to see how interest rates could go any lower.

Does the proposal have any effect on the deficits created by the excess of spending over revenues for years after the proposal is enacted and implemented? What is to prevent reappearance of federal debt?

Considering that most of the wealth in question is not in liquid form, what would be the effect on the stock, commodities, real estate, and other markets when the wealthy seek to sell assets to raise cash with which to pay the debt, assuming that the Trump tax could not be paid in kind? If the tax were paid in kind, or the assets sold on the market, would the effect not be simply the transfer of assets from the hands of the wealthy into the hands of the nation’s current debtors? Would this be any different from shifting deck chairs on the Titanic?

How is this “life tax” any different from the so-called “death tax” so despised by most Republicans, other than taking place while the owner of the wealth is alive to see it implemented?

What happens to Trump’s present-day Republican Party presidential nomination aspirations when “news” of Trump’s 1999 proposal circulates throughout the blogosphere and mainstream media?

One of the flaws in trying to use the tax law to influence behavior is that legislators too often target symptoms rather than problems. That’s not the case with all taxes. For example, a tax designed to defray the cost of trash removal that is based on the cost of removing each pound of refuse focuses on the problem, namely, the burden to a government of removing the trash. The fact that the tax also serves as an incentive to reduce trash by recycling and cutting back on purchases of throw-away items is a welcome side effect. On the other hand, proposals to tax soda and “sugary beverages” not only attack a symptom rather than a problem, but also discriminate in favor of other items that produce the same symptoms as those generated by the drinking of soda and sugary beverages.

My opposition to a tax focused solely on soda has been explained in a series of posts, starting with What Sort of Tax?, and continuing in The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, and Philadelphia Soda Tax Proposal Shelved, But Will It Return?. On March 24, 2010, my editorial, Why Phila. Soda Tax Already Has Gone Flat, was published in the Philadelphia Inquirer.

Last week, in his Opinionator column, Mark Bittman, writing about efforts to make wholesome foods more available to residents of inner city neighborhoods, lambasted opposition to soda taxes. He rued the failure of proposals in New York, San Francisco, and Philadelphia, which he attributed to “heavy campaigning by the beverage industry.” He claimed that any mention of a soda tax brings “hysteria from people (only some of whom are industrial-food shills) who claim that a soda tax is tantamount to a government takeover not only of food manufacturing but of our lives.” He noted that “Even more incredible, there are people who believe a soda tax – admittedly regressive – is somehow an attack on the poor.” He argued that a soda tax would reduce soda consumption, and also would reduce obesity. In his words, enactment of a soda tax would encourage politicians “to tax other disease-causing ‘foods.’”

Soda consumption, or more accurately, excess soda consumption is a symptom of a problem that reaches beyond soda. Too many Americans have poor eating habits. When combined with another problem, insufficient exercise, consequences such as obesity, heart attacks, strokes, and a variety of other health issues that, no pun intended, tax the health care system and require increases in government and private sector spending on curative, rather than preventive, health care, are pretty much unavoidable. Taxing soda does not solve the problem, nor does it do much to alleviate the symptom. It is unlikely that a soda tax would reduce soda consumption by a sufficiently significant amount to make any sort of meaningful dent in a culture of poor eating that extends way beyond inner city neighborhoods. Even if a soda tax causes people to purchase less soda, perhaps to the point of purchasing so little soda that the tax raises little or no revenue, people will spend their “beverage dollars” on things like diet soda, fruit juices, coffee, tea, and other liquids. Recent studies show that diet soda, especially when consumed in large quantities, poses health risks. Fruit juices contain fructose, even if unadulterated by the addition of corn syrup or cane sugar. Coffee and tea contain caffeine, which is harmful to some individuals and also poses health risks. Oddly, the sugar tax proposals that have been floated do not reach the cup of coffee or tea to which sugar has been added, in some instances to the point of making soda seem bitter.

However much of a risk soda poses to a person’s health, it is far from the most unhealthy substance people ingest. Consider, for example, donuts. Donuts not only contain sugar, they also contain fats that pose no less a risk to a person’s health. Why are there no proposals for donut taxes? Consider, as another example, cakes, pies, and other pastries. These are yet more items that combine sugar with fats, providing a double dose of health risk. Perhaps a pie tax or pastry tax has been proposed somewhere, but I’ve seen no push for a cake tax or pie tax along the lines of the effort to enact a soda tax. Why?

The comments to Bittman’s column are informative and interesting. There seems to be a disagreement on whether the tax on “sugar-sweetened beverages” would include a tax on beverages containing high fructose corn syrup. Even if a proposed tax reaches drinks containing either substance, why give tax-free treatment to other food items that contain high fructose corn syrup? One comment noted that “almost any ‘food’ can cause disease or other problems if consumed to excess.” This is quite true. Even excessive consumption of water can kill a person. This comment also questioned why a government should be “meddling by way of legislation in people’s dietary affairs.” As one who has argued against using tax law to accomplish social goals, I must agree that there are serious disadvantages to trying tax law solutions to a problem, made worse by targeting symptoms of that problem. The problem isn’t the food item. There are people who drink soda and eat donuts and pies, and yet are in fine health. There are people who have serious health problems caused by bad eating habits and lack of exercise who don’t drink soda. As another comment noted, “More kids are fat today because they don't get any exercise. If you want to ‘do’ something about it, you should be supporting sports programs or a mandatory one hour a day of PE at the schools.” Yet some politicians are making careers out of chopping school budgets and axing sports programs.

In a rebuttal to Bittman’s claim that soda taxes are an attack on the poor, another comment argued that the soda tax “is an attack on the poor” and that “We have too many regressive policies and we keep adding to them as we refuse to tax income, capital gains, etc.” The person making this comment then asked, “Why do we use ‘sticks’ on poorer/middle class people to get them to act correctly, but have to provide ‘carrots’ to the well-to-do?” Good question.

Yet another comment noted that, “If you're part of the Tea Party and you don't believe government has any role trying to improve the health of the American people, that position is certainly easy to understand but it is wrong. The U.S. (New York, actually) pioneered public health over 100 years ago, and trying to prevent obesity and diabetes should be no different than preventing cholera and dysentary [sic] were at the dawn of the public health movement. I'm sure in the 1880s there were those who maintained the government had no role trying to interfere with the free market in contaminated drinking water. Fortunately those people did not prevail.”

The question isn’t whether governments should be concerned with citizen health. Clearly they need to be. For example, when it is time to raise an army in defense, governments need healthy individuals. The existence of too many unhealthy individuals will break the backs of health-care systems, whether funded by government, the private sector, or some combination. The question is how does a government ensure that its citizens are healthy.

A tax designed to ensure a healthy citizenry needs to be focused on the burden imposed on society by a person’s failure to maintain a healthy lifestyle. How that can be measured is problematic. Perhaps it is easier to tax unhealthy foods than to figure out the computation base of a user fee designed to relieve society of the cost of a person’s bad habits, much as it is easier to tax cigarettes than it is to impose a user fee on individuals who develop illnesses on account of smoking. If the approach that is adopted is to tax unhealthy foods, then the tax should be on all unhealthy foods, not just soda. Yet, the problem isn’t the food, other than foods containing poisonous substances; the problem is excess consumption. Yet a tax on large restaurant servings would be flawed because some people make two or three meals of their purchase by using the badly-named “doggie bag.” Similarly, a tax on large hamburgers could easily be circumvented by purchasing two small hamburgers. Ultimately, the practical and administrable solution is to limit taxation to those substances, such as nicotine, that pose a high risk of harming health, and on items that contain such substances.

Another comment suggested the opposite of taxation, namely, incentives to “those who achieve desired BMI numbers.” This is a thought-provoking idea. Would it work? Perhaps. Is it administrable? Maybe. Ought it be government regulated? Probably not. Some health insurance companies already provide similar incentives, namely, premium discounts to customers who work out at a gym more than a certain number of times a month. Though there is a good argument that private sector health insurance companies have their own incentives for doing this, as it is cheaper to reduce premiums than it is to pay out larger medical expense reimbursements in the future, the current condition of American health and the proliferation of obesity cause me to wonder why the private sector hasn’t made any significant progress in this regard.

Yet another comment made an excellent point. The federal government “is actually subsidizing corn, and hence [high fructose corn syrup], and beef, and other food animals that are fed corn.” Thus, as the comment points out, “government interference [in what we eat] is already here, unfortunately in such as [sic] way as to decrease the price of unhealthy foods and maximize consumers’ ability to buy them.” Are the advocates of government subsidies for specific agricultural businesses among those who are lobbying for a soda tax? I doubt it. Are the advocates of government subsidies for specific agricultural businesses among those who decry government interference in private life? I would not be surprised if the answer is yes.

It is not surprising that government taxation and spending polices, as a whole, including user fees, tax credits, and rebates, work at cross purposes. Designing tax policies that are coherent requires much more care and attention than slapping a tax on one symptom of a much larger and more pervasive problem. The prediction that a tax on soda will lead to taxes on other items is no guarantee that a tax on soda will be followed by a tax on donuts, pies, or hamburgers. In this instance, if there is to be a tax, a package deal makes more sense.

About five months ago, in The Grand Delusion: Balancing the Federal Budget Without Tax Increases, I explained why it is not possible to balance the federal budget while simultaneously ruling out tax increases and severe cuts in programs beloved by many Americans. I noted that a poll by the Kaiser Family Foundation suggested why so many Americans think it is possible to balance the budget while cutting spending that doesn’t impact their beloved programs. According to that poll, 40 percent of Americans “think that foreign aid is one of the two biggest areas of spending in the federal budget.” In fact, foreign aid accounts for less than one percent of federal spending.

Now comes another poll, this one by CNN, that was summed up nicely in the headline: “Americans Flunk Budget IQ Test.” Apparently during the seven months between the Kaiser Family Foundation poll and the CNN poll, Americans didn’t learn very much, if anything, about the budget. According to the CNN poll, “Americans estimate that foreign aid takes up 10 percent of the federal budget, and one in five think it represents about 30 percent of the money the government spends.” This poll also provided another example of Americans misunderstanding the facts. When asked about funding for the Corporation for Public Broadcasting, Americans think that 5 percent of the federal budget ends up with the CPB. The truth? Federal funding for the CPB is less than one-tenth of one percent. Yet another example involves pensions and benefits for federal workers, which consumes about 3.5 percent of the budget whereas on average, Americans think these items consume 10 percent of the budget. Even military spending is overestimated, with respondents estimating it consumes 30 percent of the budget whereas in fact it accounts for 19 percent.

CNN Polling Director Keating Holland offered analysis very similar to what I provided in The Grand Delusion: Balancing the Federal Budget Without Tax Increases. He noted that “cutting unpopular programs would probably not cut the deficit very much, and cutting the deficit would probably require cuts in programs that Americans like.” Social Security, Medicare, and Medicaid account for 40 percent of the budget, and yet according to the CNN poll, 87 percent of respondents do not want cuts. In fact, forty percent want Social Security payments to be increased.

Representative Paul Ryan’s recently released blueprint for reducing and eliminating the federal budget deficit stays true to Republican opposition to tax increases and devotion to even more tax decreases, and instead proposes long-term cuts in a long list of programs, including Social Security, Medicare, and Medicaid. Whatever one might think of his plan, holistically or in detail, one must admire his willingness to confront Americans with the starkness of the choices that the nation faces. As the debate develops and intensifies, Americans eventually will realize – notwithstanding all the misinformation that spews forth hourly and contributes to the public misunderstanding of budget realities – that the budget deficit cannot be eliminated or significantly reduced without tax increases, cuts in popular programs, or some combination thereof. How would America vote if presented with the following question: “Which of the following options do you prefer as a solution to the looming federal budget deficit and accumulated public debt crisis? A. Provide even more tax cuts to corporations and wealthy individuals while cutting Social Security, Medicare, Medicaid, and numerous other federal programs B. Repeal the tax cuts for wealthy individuals C. Leave taxes alone while cutting Social Security, Medicare, Medicaid and other programs D. Repeal some or all of the tax cuts for wealthy individuals, and cut Social Security benefits by extending the retirement age.” The CNN poll suggests that choices A and C are disfavored by 87 percent of Americans.

In FICA, Medicare, and Payroll Taxes, I noted that “Advocates of tax cutting need to identify the cuts they would make to balance the budget, and if they don’t touch defense, Medicare, Social Security – and they’re stuck with the interest payment on the debt – there’s not enough to cut.” Paul Ryan has implicitly concurred with my position, and has boldly suggested cutting Social Security, Medicare, and Medicaid. Surely he knows there will be, as I predicted in The Grand Delusion: Balancing the Federal Budget Without Tax Increases, “howls of opposition from across the spectrum, with people of all ages and political stripes objecting.” I wonder if he realizes that as Americans ask why there need to be cuts in those programs considering that they’ve been forking over regressive payroll taxes for all of their working lives, more and more people will point to the reason for the budget deficits of the past decade, causing the chorus of calls for repeal of those unwise tax cuts to become louder, stronger, and more persistent. Imagine the sound bite: “First they cut taxes for the rich, and now they’re coming after your Social Security, Medicare, and Medicaid.” Of course, there is an argument on the other side. “It costs too much,” someone told me when I was explaining my position. “And what happens, then, when the Medicare and Medicaid funding is insufficient to defray the health care costs of the retired and disabled?,” I asked. The response was simple. “Let them die.” He added, “It’s time to cull the herd, and that’s an efficient way of doing so.” If that’s the philosophy underlying the campaign for reduced taxes on the rich and reduced Social Security, Medicare, and Medicaid funding, it says quite a bit. And if Americans do select choice A in the preceding multiple choice question, the nation will send a most interesting message to the rest of the world. My concern is that although Americans disfavor choice A by a wide margin, the political system works in a way that makes it quite possible for choice A to become America’s future.

In The Grand Delusion: Balancing the Federal Budget Without Tax Increases, I described that future:

Who would rejoice at cutting almost 90 percent of national intelligence activities, border security, federal highways, and the Coast Guard? How about NASA? Having already had its budget cut, it has cancelled the program to replace the shuttle, which means China, or perhaps Japan or Russia, will put people on the moon, plant their flag, and leave the United States gasping in the wake of these other nations’ successes. Cutting interest on the national debt would destroy the country’s credit, and accelerate the deep spiral into which it already is heading. Note that to reduce interest on the federal debt, the debt must be cut, which means chopping even more expenditures in order to generate a budget surplus that can be used to pay down the debt.

* * * * *

There are those who would cut all the social programs other than Social Security, Medicare, Medicaid, and veterans’ benefits, but that won’t generate a 33 percent reduction in spending [the amount required to eliminate the deficit]. With state and local governments unable to take up the burden, that sort of cutting would create a desperate conglomeration of destitute individuals driven to do more than demonstrate. Do the people who advocate this sort of cutting ever stop to picture or imagine what society would become under those circumstances?

I followed that inquiry with this thought: “With 40 percent of the nation’s citizens thinking foreign aid is one of the top two federal expenditures, we have a very long way to go before Americans are cleansed of the lies and misleading sound bites of the extremists and ready to tackle the problem. By then, it will be too late. Unless taxes are raised – and that’s not saying there should be no cutting of expenditures – but, I repeat, unless taxes are raised, America will be a second-order, or perhaps even third-order, nation by the end of this century.” The recent CNN poll shows that we still have a very long way to go.

The headline caught my eye. The words, Former TV Anchor Glad She Challenged IRS, caused me to think that perhaps a ground-breaking tax case in which the taxpayer prevailed had just been decided. That’s not what happened. The story was a follow-up to a month-old Tax Court decision, Hamper v. Commissioner, T.C. Summ. Op. 2011-17 (Feb. 25, 2011). In that decision, the Tax Court held that a television anchor woman was not allowed a deduction for the cost of clothing, contact lenses, make-up, and grooming items such as manicures, haircuts, and teeth whitening. The case was so run-of-the-mill that I didn’t bother to comment about it.

The story attached to the headline indeed demands some comments. It provides a frightening insight into why some very avoidable tax return preparation errors occur. The former news anchor “decided to share her story as a tale of caution during tax season.” She stated, “I would hate for anyone else to go through this.” There’s much to be learned.

First, the taxpayer explained that she took the deductions in question because, “Other TV anchors told her they did it [take the deductions].” The lesson is that something is not right just because other people are doing it.

Second, the taxpayer explained that the “professionals who prepared her taxes over the years told her it was fine.” That is scary. They should have known better. The lesson is that when relying on a profession, check out the person’s credentials. Try to find out how their clients have fared in terms of IRS audits and subsequent litigation. That may be difficult to do, but it’s worth the try.

Third, when she was audited, the taxpayer learned that “[h]er tax preparer offered little help, so she called” a tax accountant. The lesson is that using a tax preparer who is not willing to stand by his or her work is unwise.

Fourth, the tax accountant, when interviewed for the story, explained, “Anietra [the taxpayer] felt, as well as I felt, that the clothing she purchased would be an ordinary, necessary job expense.” The lesson is that feelings have nothing to do with tax law and tax law interpretation. When students practicing appellate advocacy begin their responses with, “Your Honor, I feel that . . . ,” I interrupt and ask them what they are thinking. Feelings might matter when it comes to deciding if a witness is credible or if punitive damages are warranted, but no matter what sort of feelings are triggered by reading tax law – and they’re usually not good feelings – the answer rests on cerebral analysis, not emotion.

Fifth, the tax accountant in question further explained, “The tax code says you can deduct all expenses ordinary and necessary to maintain your income.” The lesson is that reading one provision in the Internal Revenue Code is insufficient because there often are other provisions that limit what the first provision says. In this instance, section 162(a), which provides a deduction for ordinary and necessary expenses of carrying on a trade or business, and section 212(1), which provides a deduction for expenses paid or incurred for the production or collection of income, are overridden by section 262, which disallows deductions for personal, living, or family expenses. Numerous cases had explained that the cost of clothing suitable for everyday wear – in contrast to apparel such as welders’ gloves, and firefighter gear – are personal expenses nondeductible under the tax law. One need look only at IRS Publication 529 to learn this simple rule. This error is the flip side of one that I described in Unmasking the Deductibility of Halloween Costumes, where a taxpayer decided that because the costume in question was unsuitable for everyday use, its cost was deductible, without taking into account the fact that there was no trade or business purpose for acquiring the costume.

Sixth, the tax accountant in question explained that, in his opinion, “the IRS trampled on Hamper’s rights and fined her unnecessarily.” The lesson is that taking a position for which there is not only no authority but for which there is established authority to the contrary is foolish. The penalty – which, incidentally, is not a fine – was imposed because the taxpayer, and by implication her tax return preparer who disappeared as soon as the IRS showed up, was negligent.

Seventh, the tax accountant argued, “I’ve never in all my years of practice seen a situation where the IRS imposed a penalty. They’ve been waived in every other case.” The lesson is that tax law reflects more than just what one person has seen or experienced. The accuracy-related penalty that was imposed on the taxpayer has been imposed on many other taxpayers.

The taxpayer “hopes that others can learn from her experience.” I wonder if that will happen. Five years ago, in a post that no longer shows up because of the page size limitation on monthly archives on blogger.com, I tried to alert people to the very bad advice being offered with respect to these sorts of expenses. Here is a republication of the relevant portions of Personal Grooming Expense Deduction? Dream On:

If March roars in like a lion, which it did here, surely tax season debuts each year with the usual scavenger hunt for deductions. This year is no different. What is particularly annoying is that with the tax law so complicated, no one benefits when erroneous information further complicates taxpayer attempts to comply and tax return preparer attempts to be of service to their client. I confess to being easily annoyed when bad tax advice makes the rounds. The latest entry, or should I say re-entry, into the find-a-deduction sweepstakes is the "personal grooming expense deduction."

The February 2006 issue of "Costco Connection" has a tax-savings article in which the author, Howard Scott, in a paragraph headed "Seek out other expenses" writes: "Do you incur personal grooming expenses because image is important?" [To get to the page, after clicking on the URL, click on "Smart Tax Tips" at the bottom left, and then click on "15 Tax Talk" on the right-hand side.] My thanks to Greg Stewart of Spokane, Washington, for bringing this to the attention of the ABA-TAX listserve's subscribers.

There is no such deduction. There is a long list of cases denying deductions for personal grooming, no matter the connection it might have to the conduct of a trade or business. For example, in Thomas v. Comr., T.C. Memo 1981-348, the Tax Court wrote: "Whether or not petitioner was required as a condition to her employment to be neatly coiffed, the expenses she incurred for this purpose are inherently personal in nature and cannot be considered as business expenses."

Technically, Scott has done nothing more than to ask a question. But considering that it follows a list of other questions, all focusing on deductions that would be available if the answer is yes, the inference is that a "yes" to the question would trigger a deduction. The inference surely is intended, considering the litany of items covered by the list of questions. After all, if the intent simply is to get taxpayers thinking about anything, why not ask questions such as "Do you have a pet dog?" or "Did you go to the movies?" Answering "yes" to these questions would not generate a valid tax deduction.

Is it fair to suggest that the question claims a personal grooming expense deduction exists? In light of other advice in the article. yes. Scott explains that even if a taxpayer has an accountant, the taxpayer knows his or her business better than the accountant does. In most cases, that's true. Scott then writes that the accountant might be "conservative." Perhaps. I'm sure he means conservative in the cautious and not political sense. Being conservative, Scott concludes, "often translates into a reluctance to implement new stratagies." So does this mean claiming a deduction for personal grooming expenses is simply a new strategy? I don't think so. Claiming impermissible deductions is a strategy almost as old as the income tax law. Refraining from doing so is not my definition of conservative. It's my definition of sensible, law-abiding, and prudent.

It may appear that I'm "picking on" Howard Scott. That's not what I'm trying to do. I didn't seek him out. He put his article into the public spotlight, and many taxpayers have read or will read it. All I want to do is to alert people to two simple things. First, there is no deduction for personal grooming expenses. Second, beware of what you read about taxes and rely only on advice from people whose tax-advice-giving reputations you can and do trust. Before relying on advice from Scott, I'd want to know more about him.

* * * * *

Following up on someone else's research, I looked around, and here is what has been found. The Costco article describes Scott as a "longtime writer and tax preparer specializing in small businesses" and explains he "has published more than 1,700 magazine articles and three books." Among those 1,700 articles must be the one appearing in Pizza Today and the two-paragraph "Avoiding an Audit" advice in Remodeling Online. According to this report, Scott not only is a free-lance writer and tax consultant, he also is a beekeeper.

Why have I invested my time in this story? Because umpteen million Costco customers will read the article. Tax practitioners are bracing themselves for clients arriving with a copy of the Costco article, along with grooming expense receipts, ready to argue that Costco's expert says that a deduction is available. No sooner had someone wondered aloud if people would take Scott's advice to heart than someone else answered affirmatively. A client arrived with a copy of the Costco article and announced she should be allowed to deduct the cost of her pedicures. Why? She often wears sandals and her toes need to look nice. The client's job? She sells carpets. Turned out the client was sufficiently informed about taxes and after a few minutes, let on that she was rattling her tax practitioner's cage. Most clients are not so savvy. Several years ago, another subscriber reported, clients asked about the "$5,000 vacation deduction." I wonder where that idea originated. Wherever it did, like the new ones that are popping up, they need to be discredited before innocent taxpayers get into trouble relying on them.

But for every client with some understanding of basic tax law, there are a dozen who grab onto the idea of a tax-savings deduction with the grip of a drowning person reaching for the life preserver. Add in the vanishing breed of people who do their own returns, some of whom surely will take the grooming expense question's intended inference to its logical conclusion, and there's real reason to worry about the impact of bad tax advice in an age when bad advice can circle the globe in minutes.

* * * * *

And here's hoping no one gets stung by claiming a deduction for personal grooming expenses.

Well, there was a hope dashed. At least for Ms Hamper, who was hung out to dry by her tax return preparer.

A week ago, in Some Tax Back-Peddling?, I asked whether the Pennsylvania governor’s expressed willingness to permit municipalities to impose impact fees on drillers was “the crack in the dam that eventually will open up the state to a more sensible tax policy.” I answered my own question with a hedge, “Perhaps. Perhaps not.” I noted that the cracks in the anti-tax strategy will widen as people begin to realize that a “no tax” philosophy hurts citizens in the long run, and that even the “anti-tax” governor has had to acknowledge that “there are problems, that the problems need to be given attention and resolved, and that at least a user or impact fee is in order.”

Now comes news that the governor of an adjoining state, also “famous” for his “anti-tax” stance, has had to own up, through an aide, that “new revenue sources” will be needed in New Jersey to pay for highway, bridge, tunnel, and public transportation repairs and expansion. Whether those new revenues come in the form of new taxes, higher rates on existing taxes such as the state gasoline tax, or user fees such as tolls, reality has again showed its face.

New Jersey’s Transportation Commissioner explained that although planned borrowing will buy the state some time, in about five years, the collision between public need and inadequate funding will be inevitable in the absence of tax and fee increases. Some legislators, though, object to borrowing, because it shifts the burden created by today’s use of public infrastructure to tomorrow’s taxpayers. At the very least, says one legislator, voters should have an opportunity to approve or reject increases in state debt. The governor, in either a surprising retreat from or a revealing indictment of his populist image, claims that voters have no say in whether the state borrows billions of dollars. Ironically, New Jersey’s governor is doing the same thing that his predecessors did, an approach that the governor was keen to criticize while on the campaign trail. If the legislature manages to enact a voter approval requirement, and the voters reject borrowing, the judgment day of tax and fee increases will arrive sooner rather than later.

Slowly, governor by governor, legislator by legislator, the folks who signed on to the “theory” of a low-tax, no-tax, cut-tax theory of public finance are discovering that reality is the true test of theory. In some ways, listening to candidates rail about how the nation would be better off if the income tax were ripped out by its roots or taxes cut to the bare bones or less, only to discover that application of these ideas cause economies to stagnate and people to suffer and die, reminds me of hearing teen-agers and some young adults proclaim that they know so much more than do their parents, until reality hits when they have children of their own. It’s not until a person gets out of the think tank and into the trenches that he or she understands the full depth and extent of a problem. It’s not until the candidates enter office and become enlightened by having access to the reality of public responsibility that they discover the short shelf life of campaign “sound bites.” That’s why a person not caught up in the compromises of electioneering can say, “There is a choice; pay the taxes and fees necessary for safe and efficient roads that are good for the economy and the people, or let the roads and bridges fall apart, causing the economy to sag, vehicles to break, and people to die.” A candidate cannot say that without risk of losing to an opponent who announces, “I hate taxes, you hate taxes, so vote for me, because we really don’t need more taxes, what we need are fewer and lower taxes, and with reduced taxes the public infrastructure will be so much better.” The latter claim is so much more enticing, but it’s a siren song nonetheless.

Almost five years ago, in A New Book on Taxation of Residence Sales: Don't Leave Home Without It, I reviewed Julian Block’s “HOME SELLER’S GUIDE TO TAX SAVINGS.” I concluded that it was “useful,” “solid, well-organized,” and a book that “every real estate agent and broker in the country who handles residential home transactions ought to acquire.” I must not have been alone in that conclusion, because the book has now appeared in a new printing. That suggests to me that people are buying it. As an author, I know that’s good news. Nor was I alone in my reaction, as similar and even more effusive praise for Julian’s book has appeared in Money, the New York Times, Forbes, and a variety of other magazines, newspapers, and professional association newsletters.

The new version is no less useful, no less well-organized, and no less informative. Julian continues to provide numerous examples, and to delve into “almost every possible variation on the home sale theme” as he did the first time around. He continues to focus on the issues specifically affecting surviving spouses, divorced and unmarried individuals, unmarried couples, owners of condominiums and cooperatives, and those who have used part of their residence as an office in home, to mention some of those to whose problems he gives attention. The checklists in the book have been retained and updated to reflect developments in the tax law. The discussion of record retention remains no less important than it was five years ago.

At a time when taxpayers are realizing losses on the disposition of residences because of the housing market collapse, Julian chapter on when losses can and cannot be deducted is especially timely. No less important is the chapter that deals with insolvency, foreclosures, and debt cancellation. There are chapters on casualty losses, home improvements in the form of medical expenses, and the mortgage interest deduction, though again Julian leaves the details of other home-related tax issues, such as real estate tax deductions and the computation of depreciation for home offices, to other books. That makes sense considering the basic theme of the book is residence sales.

There continues to be all sorts of misinformation circulating on the Internet and among home sellers, and there accordingly continues to be a need for Julian’s book. My suggestion five years ago that real estate agents and brokers get themselves a copy is no less valid today than it was then. The numbers of people selling homes without using realtors continues to increase, and they, too, would benefit from having a copy of Julian’s book.

“HOME SELLER’S GUIDE TO TAX SAVINGS” is available from PassKey Publications, as well as at outlets such as Amazon and Barnes and Noble. For more information about Julian Block, see his web site.

The mileage-based road fee, also known as the vehicle-miles traveled user fee, continues to get attention. The latest entry in the discussion is the Congressional Budget Office’s report, Alternative Approaches to Funding Highways. This report adds to the growing analyses contributing to, and the knowledge necessary for, the continuing study of how to deal with rapidly declining revenues available for maintenance of the nation’s highways, bridges, and tunnels.

My first foray into this issue was six and a half years ago, in Tax Meets Technology on the Road. That post was followed three years later by Mileage-Based Road Fees, Again, which triggered a series of posts over the next several years, including Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, and Looking More Closely at Mileage-Based Road Fees. Readers know that, as I pointed out in Pennsylvania State Gasoline Tax Increase: The Last Hurrah?: “What I support is the mileage-based road fee, a 21st century concept that seems to elude legislatures and politicians still living in the 19th and 20th centuries.”

The CBO report should help in dragging legislatures and politicians into 21st century public revenue approaches. It provides a comprehensive analysis of the advantages and disadvantages of the vehicle-miles traveled user fee. It’s well worth reading, and all I want to do is to highlight some aspects of the report that I happened to have found particularly enlightening.

The report confirms what most people would guess. “Most of the costs of using a highway, including pavement damage, congestion, accidents, and noise, are tied more closely to the number of miles traveled than to the amount of fuel consumed. (Because of the way passenger vehicles are regulated, their emissions of local air pollutants, such as particulate matter and sulfur dioxide, also are more closely related to miles traveled. The cost of local air pollution from trucks, which is regulated differently, is fuel related.)” The report explains that, “Fuel consumption depends not only on the number of miles traveled but also on fuel efficiency, which can differ from one vehicle to another and can change with driving conditions; therefore, charging highway users for the full costs of their use, or in proportion to the full costs, could not be accomplished solely through fuel taxes.”

The report also confirms the wisdom of funding highway, bridge, and tunnel maintenance with user fees rather than with monies from general revenues. It explains the efficiencies of user fees as contrasted with general tax revenues when applied to specific public sector services. Though, as the report points out, it is possible to raise the necessary revenue with slight increases in general tax rates, user fees are required to generate incentives for users to reduce their highway use costs, to produce less inequity in terms of who uses and who pays, and to avoid the distortions that arise from using existing inefficient general tax revenue systems.

The report adds another response to those who are concerned about the impact of vehicle-miles traveled fees on low-income individuals and those who live in rural areas and necessarily must travel more miles. According to the report, “VMT taxes are qualitatively similar to fuel taxes in their implications for equity. Like fuel taxes, they satisfy the user-pays principle, but they impose larger burdens relative to income on people in low-income or rural households. However, to the extent that members of such households tend to drive vehicles that are less fuel efficient, such as pickup trucks or older automobiles, those highway users would pay a smaller share of VMT taxes than of fuel taxes.”

The report points out that if vehicle-miles traveled user fees are intended to “maximize the efficiency of highway use,” they would need to reflect vehicle type, time of day, and nature of the highway. Working these factors into the system in turn raises privacy concerns, because it would then be possible for governments to know where and when a particular vehicle was traveling. Though various solutions have been proposed – including an option to pay fuel taxes in lieu of mileage-based road fees, restricting the amount of information provided to governments, and passing information through intermediaries – the report notes that similarly calculated fees already are in place, such as with the EZPass system.

One of the major issues in adopting a mileage-based road fee is implementation. It is not an issue that is easily resolved. As the report explains, “Estimates of what it would cost to establish and operate a nationwide program are rough. One source of uncertainty is the cost to install metering equipment in all of the nation’s cars and trucks. Having the devices installed as original equipment under a mandate to vehicle manufacturers would be relatively inexpensive but could lead to a long transition; requiring vehicles to be retrofitted with the devices could be faster but much more costly, and the equipment could be more susceptible to tampering than factory-installed equipment might be. Despite the various uncertainties and impediments, some transportation experts have identified VMT taxes as a preferred option.” Another issue is whether a vehicle-miles traveled user fee should be implemented and administered nationally by the federal government, or handed off to the states with federal encouragement and coordination. The report also addresses the perceived advantages and disadvantages of introducing private sector participation or even control over highway user fee collection, and issue I have discussed numerous times. Among the various posts that examine and de-bunk the myth of private sector superiority when it comes to dealing with public assets are Selling Off Government Revenue Streams: Good Idea or Bad?, Are Citizens About to be Railroaded on Toll Highway Sales?, Turnpike Cash Grab Heats Up, Selling Government Revenue Streams: A Bad Idea That Won't Go Away, Turnpike Lease: Bad Policy and Now a Bad Deal , How Do Toll Road Lessees Make a Profit?, The Pennsylvania Legislature Gets It Right, Killing the Revenue Idea That Won't Die, Are Private Tolls More Efficient Than Public Tolls?, More on Private Toll Roads, and Tax Profiteers Resume Takeover Attempts.

Something needs to be done, and soon, about the deteriorating condition of the nation’s infrastructure, including its transportation network. The report tells us that “According to the FHWA, in 2006, 47 percent of the miles traveled by all vehicles on roads eligible for federal funding occurred on pavement that, on the basis of a measure of surface roughness, was considered to be in good condition; 39 percent of travel occurred on pavement classified as acceptable but not good; and 14 percent occurred on pavement that was rated less than acceptable. Measures of congestion in urban areas developed for the FHWA show that congestion resulted in 4.8 billion hours of traveler delays and consumption of an additional 3.9 billion gallons of fuel in 2009 (34 hours in delays and 28 gallons of additional fuel per traveler).” Without a restructuring of the funding mechanism and accountability to make up for the nearly $40 billion annual shortfall in highway maintenance costs, this nation’s citizens will find themselves traveling almost all the time on less than acceptable payment and investing most of that time sitting in stalled traffic wasting and paying for energy. Once again, short-sightedness will prove to be a long-term mistake. This nation has had enough of that. The mileage-base road fee is as good a place as any to reverse the trend that is eating away at the foundation of the country.

My support for a user fee or tax on the companies drilling for, and extracting, Marcellus shale natural gas in Pennsylvania has been the subject of more than a few posts. For example, I discussed the reasons such a fee or tax makes sense in commentaries such as Tax? User Fee? Does the Name Make a Difference?, Polls, Education, Taxes, and User Fees, and Life for My Proposed Marcellus Shale User Fee?. Similarly, I have shared a my reactions to the failure of the state legislature to enact, and the refusal of the current governor to consider, such a tax or user fee. My analysis appears in posts such as A Classic Tax Increase Battle, Giving Up on Taxes = Surrendering Taxpayer Rights?, The Logic and Illogic of Tax, Texas Taxation as a Role Model for Pennsylvania?, and Voter Polls on Taxes and Electoral Polls on Taxes.

Now comes news that Pennsylvania’s governor admits he “would consider allowing municipalities to impose [impact] fees on drillers as long as the money generated stayed in those communities.” Is this the crack in the dam that eventually will open up the state to a more sensible tax policy? Perhaps. Perhaps not.

Some view the governor’s statement as no big deal, claiming that the governor previously made similar statement, including comments during the gubernatorial campaign. Others see it as an interesting backing-off by a politician strongly opposed to “any levy” on the drilling and extraction industry. Considering that the governor had been arguing, since taking office, that any sort of tax or fee imposed on these companies would obstruct the job creation that they foster, this is a significant retreat. Only a few weeks ago the chair of the governor’s Marcellus Shale Advisory Commission reacted to the notion of a tax or impact fee on the companies with the statement, “I think the governor made it very clear . . . no means no.”

The governor admits what I and others have been saying for months. There is an impact to the local communities, and that impact needs to be addressed “in some way, shape, or form.” That’s a good start.

The governor continues to insist that any revenue from impact fees, or, I suppose, user fees, on the natural gas companies must not find its way to Harrisburg. In some respects, this makes sense. To the extent that the heavy vehicles of drilling and extraction companies damage roads and bridges – damage that sometimes is visible and damage that will show up in the future – it makes sense to let the localities in which those roads and bridges are located to funnel the revenue from impact and user fees into repair of that infrastructure. It’s more efficient than having the money flow to Harrisburg so that the legislature can fight over how it gets allocated to the localities. There are drawbacks, however, to the local approach. Will localities try to attract drillers to their area by enacting fees that are less than those imposed by other areas? Possibly, though, as I stated in earlier posts, the gas companies will go where the gas can be found. Differences in rates or fee amounts among localities might affect the timing, in terms of where the companies go next, but eventually, if there is natural gas, the companies will come. This problem also can be alleviated somewhat by having the fees imposed at a county level or through use of an cross-jurisdictional authority not unlike a sewer authority. Yet the biggest disadvantage to a local impact fee is that the impact often falls beyond the boundaries of the locality or county where the drilling occurs. A solution to this challenge might be enabling legislation that permits, for example, down-stream localities to impose impact fees on drillers and extraction companies that pollute the headwaters of the stream or river. That, however, is not an easy approach to administer.

Some legislators consider impact fees to be less effective and less efficient than extraction or severance taxes. As one legislator put it, “If you ask a suburban Republican legislator to tell their constituents, ‘Yes, we're going to let your kid's tuition at Penn State go sky-high, we're going to let your property taxes go sky-high, and yet we're not going to tax the drillers,’ I don't think those constituents are going to like that." No, they won’t. They’ll find out that they voted for something other than what they thought they were voting for. It’s pressure from people who begin to realize where the uncompromising “no tax” philosophy – which still has adherents in the legislature – sells the state’s residents short, that will widen the cracks in the anti-tax strategy that have appeared with the governor’s acknowledgement that there are problems, that the problems need to be given attention and resolved, and that at least a user or impact fee is in order.