MauledAgain

Most people do not understand income tax rates. Some law students enrolled in the basic income tax course struggle to understand tax rates. What confuses people is the difference between marginal tax rate and average tax rate. It is not unusual for someone to look at a federal tax rate schedule, find the bracket that fits their income, and conclude that they pay that percentage of their income in federal income tax. This generates all sorts of inaccurate claims to the effect that people with a certain income pay tax at a particular rate. For example, this writer claims that “Americans who take home over $400,000 are mandated by law to pay 39.6 percent in income tax.” Aside from the fact that tax brackets are based on taxable income and not take-home pay, in 2013, the year the article was published, a single person with, for example, $410,000 of taxable income does not pay an income tax of 39.6 percent. That person’s tax liability of $120,064 is 29.3 percent of taxable income.

Aside from the erroneous use of gross income rather than taxable income in selecting a tax bracket, the principal problem with the misuse of the tax rate schedules is the treatment of what is a marginal tax rate as though it were an average rate. For example, if taxable income of up to $50,000 is taxed at 20 percent, and taxable income above $50,000 is taxed at 30 percent, a person with taxable income of $60,000 would be subject to a tax liability of $13,000 ($50,000 x .20, plus $10,000 x .30). It is easy for someone in that situation to claim that they are taxed at 30 percent, but in fact, their tax liability of $13,000 is 21.7 percent of $60,000. Failure to understand the difference generates exaggeration, which in turn triggers more resentment than is warranted.

What makes this myth even more insidious is that when phase-outs are taken into account, and tax liability is divided by taxable income, the average rates are highest not for those with the highest taxable incomes, but for those in the middle brackets, and in some instances, for some taxpayers in lower brackets. I explained this tax quirk in A Foolish Tax Idea Resurfaces.

Americans’ confusion with average and marginal tax rates provides fertile ground for the growth of misleading claims and absurd hyperbole. The myth that people are taxed at the highest nominal marginal rate on all of their income is a myth that needs to die.

Retailers operating in states that do not have sales taxes entice out-of-state purchasers to cross the border to make purchases by emphasizing the notion of “tax-free” purchases. An article about a particular incident of this approach triggered A Peek at the Production of Tax Ignorance, in which I repeated an earlier explanation about the use tax, the tax imposed by the purchaser’s state of residence on out-of-state purchases of items brought back into the state of residence.

What sustains this myth is a combination of ignorance, experience, and revenue department inefficiency. Most taxpayers do not understand that a use tax exists, the conditions under which it applies, and their legal obligation to pay it. Most taxpayers who cross the border to make purchases in states without sales taxes and return home with their purchases do so without any adverse effect, aside from the classic situations involving vehicles, boats, and a few other “big ticket” items. Revenue departments have insufficient resources and mechanisms to collect use taxes aside from “big ticket” items, and because the cost of collecting use taxes is a much higher percentage of the tax when compared to the cost of collecting in-state sales taxes, use tax collection is inefficient and spotty, as I explained in Collecting the Use Tax: An Ever-Present Issue.

Many states are making efforts to educate the public with respect to use taxes. Some are trying to incorporate some sort of flag in state income tax forms. The effectiveness of those efforts is low. Until people become accustomed to paying use taxes, the myth will persist because the non-compliance persists. At some point, states might decide to bring tax education into their K-12 systems, and some have, to some limited extent, but until it is pervasive, this myth will endure.

Though there are rare instances in which a tip can be characterized as a gift excluded from gross income, as a general proposition tips are included in gross income. It takes a very unique set of facts to pull a tip out of gross income by demonstrating that it is a gift, as I described some years ago in Should a Tip Be Excluded from Taxation as a Gift?. Thus, claims that, as a general proposition, tips are gifts and not taxed, are wrong. As the court in Cracchiola v. Comr., 643 F.2d 1383 (9th Cir. 1981), stated, “Petitioners’ first argument, that tops are not income is wholly without merit.”

It is understandable why this myth circulates and has traction. Most people who collect tips are paid very little, rely on the tips to make a living, and are unhappy to learn that tips are included in gross income. Worse, certain employers are required to report tip income on Forms W-2 issued to employees based on formulas, so that occasionally an employee might end up paying taxes on an amount of tips slightly higher than what the employee actually received. These situations also are very rare.

Another reason for this myth’s endurance is confusion generated by discussion of sales taxes. In most states, sales tax is computed with respect to the cost of goods and services exclusive of tips unless the tip is built into the stated price. Explanations of this principle often includes the words “tips are not taxable,” which people take out of context. The context provides the modifier “for sales tax purposes,” which should preclude treating the statement as applicable “for income tax purposes.”

Sometimes, people say to me, quite excitedly, “The IRS Gave Me a Refund,” or “The IRS Is Giving Me a Refund.” Closely related to the “I’m Getting a Refund and Not Paying Tax” myth, this myth reflects two misperceptions.

In some instances a refund, or a portion of a refund, arises from a refundable credit. In these situations, the money paid to the taxpayer is coming from the United States Treasury courtesy of the United States Congress, or from a state treasury courtesy of a state legislature.

In many instances, the refund is nothing more than the IRS returning to the taxpayer some, or in some rare cases all, of what the taxpayer has paid in through withholding and estimated tax payments. I suppose that those who are concerned that the federal government or a state government might run out of money before the refund is paid are overjoyed when the refund arrives, but as a realistic, practical matter, simply getting one’s money back isn’t a joyous occasion. Actually, it’s a bit sad, because the money that is being refunded hasn’t earned interest.

Though I haven’t kept a count, I know that there have been dozens of times when someone would tell me that because they were getting a tax refund they weren’t paying tax. More than a few students entered my basic federal income tax course thinking the same thing, as evidenced by conversations in and out of the classroom, and as indicated on responses to semester exercises.

Whether a person has a tax liability cannot be determined simply from the existence of a refund. Though a person who is not getting a refund because additional tax is due surely is paying taxes, a person who receives a refund can fall into one of two categories. Some taxpayers receive a refund because they have a zero tax liability, and had taxes withheld, paid estimated taxes, or qualify for a refundable credit. But many taxpayers receive a refund and yet have a tax liability. The refund arises because they had taxes withheld and paid estimated taxes in amounts exceeding the tax liability.

When people want to know whether or not they are paying income tax, they need to look at the line on the return that shows “tax liability.” The lines for refund and for additional payment simply reflect the extent to which the amounts that have been paid match with the tax liability. A taxpayer who has $10,000 of federal income taxes withheld from wages and who has a tax liability of $7,500 rejoices at the prospect of a $2,500 refund, but ought not declare, “I’m not paying taxes.” That taxpayer has paid $7,500 in federal income taxes. Worse, they have made an interest-free loan of $2,500 to the applicable federal or state government.

Most taxpayers understand that income reported on a Form W-2 or Form 1099 must be reported on their tax return. Whether they understand why those amounts are gross income, they usually understand that “the IRS knows about it, so I had best report it.” Many taxpayers take a leap, and conclude that if the IRS doesn’t know about it, there’s no need to report it. Coupled with that misperception is the proposition that if it’s not on a Form W-2 or Form 1099, the IRS doesn’t know about it. Thus, we find this advice: “If she has no w2 or 1099, no income then she does NOT have to file.”

This myth gets people in trouble. For example, one commentator suggested, “First of all, work in the underground economy: No w2’s or 1099’s.”

The reality is simple. Items that are gross income must be reported on tax returns whether or not a Form W-2 or Form 1099 is issued to the recipient of the income. Some types of income cannot be reported on such a form because there is no one to issue the form. For example, a taxpayer who finds a $100 bill on the street and keeps it has gross income, but will never receive a Form W-2 or Form 1099. In some instances, payors are not required to issue Forms 1099 if the amount in question is less than a specified amount, usually $600. That rule, designed to reduce reporting burdens on payors, does not mean that amounts of less than $600 are not gross income.

From time to time, someone asserts that because they have been paid with property and not cash, the payment is not subject to the income tax. Not only have I heard this from people generally, I’ve also heard it occasionally from students in the tax course. Fortunately, it’s usually early enough in the course for a correction to be made in how they understand the definition of gross income.

The “it’s not cash, so it’s not taxed” myth flourished in the early days of the barter boom. Some barter exchanges at the time listed “tax free” as one of the advantages of bartering. Eventually, the IRS engaged in an education effort that eliminated almost all of the barter under-reporting, at least among the commercial barter exchanges. There surely are barter transactions taking place in settings that are informal and occasional, with participants thinking that the absence of cash makes the transaction nontaxable.

What fuels the “it’s not cash, so it’s not taxed” myth are several perceptions. One arises from a notion that things usually taxed, such as wages and interest, are almost always paid in cash, a concept that some people translate into a conclusion that to be taxed, it needs to be in cash. Another arises from the rationalization that the lack of liquidity arising from the receipt of property rather than cash permits dispensation from taxation because of the lack of cash with which to pay tax.

This particular myth doesn’t circulate as often and as widely as the “IRS enacts Code provisions” myth. Whether it disappears entirely remains to be seen.

It is not uncommon to discover someone’s assertion that the IRS has enacted a particular Internal Revenue Code section or even the entire Code. For example, in this presentation, readers are told that in 1996, “IRS enacts IRC Section 4598” but that simply isn’t true. Congress enacted section 4598. In this commentary, we are told, quite incorrectly, that “Every year, the IRS enacts certain changes to the tax code.” A merchant servicing company claims that “In January 2011, the IRS enacted section 6050W.” It is unquestionable that this myth has multiple variants.

As I explained in The Precision of Tax Language:

The IRS DOES NOT ENACT INTERNAL REVENUE CODE SECTIONS. It is the CONGRESS that enacts Internal Revenue Code sections. That’s very basic stuff. Extremely basic stuff. Understandably, many of the propaganda ministries have a not-so-hidden agenda of trying to persuade people that it’s the IRS that generates the tax laws, as part of the effort to discredit the IRS and taxes generally. But tax professionals know, or at least should know, better.

An interesting twist to this myth is that it’s not so much a tax myth as it is a civics myth. As I also wrote in The Precision of Tax Language, “For some reason, although all Americans over the age of, say, fourteen, should understand that statutes are enacted by legislatures, the teaching of what was once the ubiquitous Civics course has been shelved in most school districts.”

Because I no longer teach the basic federal income tax course, I no longer have the opportunity to evaluate how deeply imbedded this myth is in the minds of law students. Early in the semester I reminded them, or perhaps explained to some of them for the first time, that Congress enacts provisions of the Internal Revenue Code. Shortly thereafter, when administering the first out-of-class graded exercise, I presented to them a situation in which they needed to react to some variant of the “IRS enacts Code sections” myth. The internet was a treasure trove of possibilities to work into the facts of the exercise.

I wonder how many tax law professors use this simple technique, dealing with a rather uncomplicated legal principle, to disconnect their students from myths, to identify which students have been paying attention, and to give students the opportunity to engage in remedial education.

But it’s not just law students who need remedial education. There are tax professionals, members of Congress, entrepreneurs, journalists, and all sorts of other people who need to pause and unburden themselves of their mistaken notion of who gives us tax laws.

Misperceptions about taxes abound. I’m not referring to the parade of rationalizations from the tax protest movement, though the terrible consequences of being led astray by its misinformation, as I described in For Would-Be Travelers on the Noncompliant Federal Income Tax Protester Path can afflict those who fall prey to tax myths that find traction for reasons other than tax protest.

There are numerous tax myths. Though not infinite, there are more than enough to warrant a short blog series calling attention to the more common myths, and those that are most likely to create problems for significant numbers of taxpayers. They are discussed in no particular order, because alphabetizing them isn’t particularly useful and there is no good way to determine which ones are the most prevalent.

How do tax myths get started? Sometimes a person does not understand what someone else is explaining, orally or in writing. Sometimes someone tries to help someone else but makes a mess of the explanation. Sometimes the myth arises from a well-intentioned attempt to put a complicated concept into simple sentences.

No matter how they start, tax myths, like other misinformation, are difficult to squelch. Once they take root, they spread like poison ivy or bamboo. Cut down in one place, they show up somewhere else. Hopefully, those who read the upcoming posts will dismiss any tax myths to which they subscribe, and find something useful to help them free others of their unfortunate attachment to one or more of these myths.

It’s a common complaint, tinged with a bit of humor, often heard when summer driving season rolls around. Highway construction slows traffic, and motorists are confronted with the ubiquitous “Temporary Inconvenience, Permanent Improvement” signs. The joke is “Temporary Improvement, Permanent Inconvenience.” Sometimes it seems that way. But reality is no joke.

Almost seven years ago, in Funding the Infrastructure: When Free Isn't Free, I reacted to the interstate bridge collapse in Minnesota by pointing out, “From that tragedy came at least one lesson. This nation had best repair its infrastructure, particularly highways and bridges. The catch? The repairs cost money. Where will the nation get the money it needs for this task?” I deplored the narrow-minded, single-focused opposition to raising funds to pay for preventative repairs. The attempt of the previous Administration’s Transportation Secretary to explain why it made no sense to raise those funds was baffling then and just as moronic today. I predicted that it would be only a matter of time before the infrastructure disrepair adversely affected people’s lives, health, and economic condition, noting “ When enough bridges collapse and highways fall apart, the trucks won't be moving products, such as fuel, food, clothing, and, yes, even military supplies. If you think that won't affect economic growth, you don't understand economics.” I predicted:

The problem with rejecting tax increases until the funding allocation system is fixed is that more people will die, more people will be injured, more property damage will occur, and more transportation bottlenecks will stifle the economy while Congress wiggles and squirms and the Administration and politicians wave slogans in the voters' faces. "No tax increases" sounds great until one realizes it's not unlike the "No more spending" family budget vow that looms in the way of paying for the baby's food. Perhaps "No more unnecessary tax increases" would resonate with those whose ability to analyze economic problems goes beyond three-word sentences.

For people living in the greater metropolitan Philadelphia area, the rising tide of infrastructure collapse is becoming brutally evident.

On June 2, transportation officials closed a bridge on I-495 in Wlimington, Delaware, effectively closing I-495 itself. The detrimental impact on Delaware, its people, and its economy, is difficult to ignore, as explained in reports such as this one. Granted, the problem that necessitated the closure was not so much one of unrepaired deterioration but a matter of unregulated or badly regulated decision making that led to the dumping of dirt that shifted support columns. Eighteen days later, drivers in Montgomery County, Pennsylvania, awoke to the news that yet another bridge over the Perkiomen Creek has been closed because of structural deficiencies. There are six bridges over the Creek, and now two of them are closed, for an indefinite period. These bridges won’t fix themselves for free. There is no guarantee that either of these bridges will re-open before a third or fourth bridge is closed.

There has been, not surprisingly, quite a bit of griping about these and other closures. The resulting traffic jams cost drivers time and money. Along with diversion of business to other areas, as described, for example, in this report, the traffic tie-ups are costing businesses revenue and thus profits. Just as it is foolish, in the long run, to avoid a few dollars of gasoline taxes in the short-term only to be confronted with much higher front-end alignment repair costs, to say nothing of death and injury, so, too, the short-term bonanza of avoiding revenue increases to fund infrastructure are dwarfed by the price America will pay for the past 15 years of catering to the “freedom means everything is free (at least for me)” crowd. And the price will be more than the lost revenue, closed businesses, increased fuel costs, and wasted time. Much more.

In Funding the Infrastructure: When Free Isn't Free, I concluded:

The fact that I, like most others, do not like taxes does not mean I will reject them when they are necessary. It would be better, and easier, to talk about "user fees" because that's what the federal gasoline tax and the proposed mileage-based road fees are. Properly structured, set at a price that reflects the true cost of building and adequately maintaining a highway, bridge, interchange, or other facility, these user fees would not only move the debate from the silly place it now occupies but also would make the prospect of additional bridge collapses and road failures the highly unlikely outcome most people thought was the case.

Any other approach does not bode well. Paying for repairs with borrowed money increases the nation's debt load, making it more likely that the foreclosure will destroy the country. Ignoring the problem and not spending money guarantees death and destruction on a far larger scale. Abandoning the infrastructure simply hastens the demise of the economy and ultimately the country. Unfortunately, the time has come to pay the price for so many bad transportation infrastructure decisions during the past 50 years. The even more unfortunate aspect of the matter is that most of those who made the bad decisions aren't around to see the consequences of their vote-pandering and ignorance or to deal with the consequences. The only good part of this is that voters will have a chance to ensure that those bad decision makers still around are deprived of additional opportunities to make a mess of things.

I wonder how many of the drivers inconvenienced by the closures and how many of the people economically disadvantaged by the closures are among those who voted for the “no tax” Pied Pipers. I wonder how many are beginning to understand that just as someone can look at a repaired bridge or repaved highway and think, “My tax dollars purchased this for me and others,” others can look at a collapsed or closed bridge or potholed highway and think, “This is what no-taxes gets us.” There’s a lesson to be learned. Let’s hope it’s learned in time.

New Jersey is in a quandary. A budget quandary. It’s not alone, but it presents an interesting example of the sort of choices that must be made when the “taxes and jobs” connection is invoked during policy debates.

The Republican governor, according to this report, has proposed filling the budget gap by taxing electronic cigarettes, increasing almost two dozen fees, and removing the provision that permits businesses in Urban Enterprise Zones to pay sales tax at half the normal rate. A member of his own party, the Senate minority leader, has objected to the proposals, arguing that the tax on electronic cigarettes would put a damper on an industry and cost jobs. Similarly, the sales tax exemption in question was designed to stimulate small businesses, presumably to create jobs.

On the other side, according to another report, New Jersey Democrats have proposed increasing the income tax rates on taxpayers with taxable incomes exceeding $1,000,000. The usual reply is that such a move would destroy jobs because the rich create jobs. Democrats are unhappy with Republican efforts to solve the budget problem by cutting pensions, a compensation-reduction move that also negatively affects jobs.

All that this proves is that the word “jobs” can be tossed around no matter what one wants to argue, and depending on the context, it can invite fear or it can be the bait that entices people to support a bad idea. The bottom line is that every tax affects jobs in two ways. Taxes both encourage the creation of jobs and encourage the elimination of jobs. Because wages are deductible, taxes encourage job creation. Because taxes reduce business cash flow, taxes discourage job creation. Because taxes provide revenue with which governments can hire people to provide necessary public services, taxes encourage job creation. This back-and-forth can continue for quite some time.

The lesson is that using job creation or job destruction as an argument when taxes are being debated is a waste of time. True, it works to fire up some voters and alarm some taxpayers, but as the past decade and a half has shown, most of the arguments presented with respect to the impact of taxes on jobs have turned out to be facetious at best. When arguing about taxes, what needs to be discussed are the purposes to which those taxes would be applied, and the connection between those purposes and the incidence of the tax in question.

Earlier this week, in a Philadelphia Inquirer op-ed, Nicholas E. Calio, president and CEO of Airlines for America, came out in support of the Transparent Airfares Act, which would allow airlines to specify how much of the cost for an airline ticket reflects taxes. The legislation also is supported by major labor unions and has bipartisan backing in Congress.

Under current law, airlines are required to include taxes and fees in the ticket’s base price. Consequently, unless a consumer has the time and skill to do extensive research, the ticket purchaser has no idea how much of what’s being paid is for taxes. That’s wrong. It’s one thing to disagree on whether there should be a tax or how much it should be, but it’s a totally different thing to hide taxes. When the tax is out in the open, people can see what it is, and then construct their arguments about the tax. If the tax is hidden, discussion of its appropriateness is curtailed or impossible, because it’s rather difficult to argue about something that the would-be debaters don’t know exists.

This is not the only example of hidden taxes. In 1990, as I explained in Objections Raised to Elimination of Legislative Tax Deceit, Congress enacted two phaseouts in order to raise effective tax rates without raising section 1 stated tax rates. I explained:

In this particular instance, Congress wanted to raise taxes without raising tax rates, because it concluded that it could tell Americans that it did not raise taxes by pointing to unchanged tax rates. However, "clever" minds figured out that if deductions, in this case itemized deductions and the deduction for personal and dependency exemptions, were reduced, the effect would be an increase in tax revenues. In other words, Congress "discovered" that it could raise taxes without raising tax rates and thus trumpet a self-serving proclamation that it had not raised taxes. The simple word for this is lying.

I campaigned against these phaseouts from the start. For example, take a look at my letter to the editor, "Author, Don't Phase Out the Phaseouts, Kill Them," 70 Tax Notes 911 (1996). From July of 1996 through July of 1999, I chaired the Phaseout Tax Elimination Project of the American Bar Association's Section of Taxation Committee on Tax Structure and Simplification. The major accomplishment of that Project was the Report of the ABA Tax Section Committee on Tax Structure and Simplification: Phaseout Tax Elimination Project, issued in July 1997. Almost a year later, the elimination proposal found light of day in H.R. 4053, introduced by Mr. Neal, for himself and Mr. Rangel (June 11, 1998), and eventually found its way into enacted legislation through a path too long and tortured to recount in detail. Unfortunately, the current Administration decided to restore these hidden tax rates, an idea I deplored in A Foolish Tax Idea Resurfaces and in Tax Rates and Deduction Caps. This time around, the advocates of tax deception carried the day, and the phaseouts were brought back.

So it ought not surprise anyone who follows this blog that I agree with Nicholas E. Calio. He points out that 17 different taxes and fees are buried in ticket prices. I will admit that I cannot identify or name more than a few of those taxes. As Calio explains, when people purchase other items, the receipts show the base price, and separately state the applicable sales, transfer, or other taxes. There is no reason to treat airline tickets any differently, other than legislative desire to hide from people what they are requiring people to pay in taxes.

I have only one quibble. The proposed legislation would “allow” airlines to disclose the taxes separately from the ticket base price. The legislation ought to “require” airlines to do so. Even though airlines, if allowed to state taxes separately, most likely will do so in order to show that what they are charging is less than what it otherwise would appear to be, it makes sense, just to be cautious, to require the separate statement of taxes. Americans deserve nothing less.

Almost two weeks ago, in Is It Fraud, Negligence, or Simple Tax Hatred?, I wrote about a Republican member of Congress who claimed a property tax homestead exemption to which he was not entitled, was informed of its inappropriateness, made up the difference with a check that bounced, and then the following year again claimed the exemption to which he was not entitled. Perhaps there is something I do not understand, because for me a public official ought to make certain that he or she is in substantial compliance with the tax law. Minor errors will happen, but the egregious matters ought to be avoided. They provide too much issue-deflecting ammunition for one’s electoral opponents.

Now comes a report that Andrew Cuomo, governor of New York, has run into property tax trouble. Cuomo’s celebrity chef girlfriend, Sandra Lee, did some renovations to the house she shares with Cuomo, talked about the work in magazine interviews, but then refused to let the town assessor come into the house to see the work and determine the impact on the house’s assessed value. Making things more complicated is Lee’s failure to obtain the required building permits. Generally, building permits alert assessors that changes are being made to a property, changes that potentially affect the property’s value.

Cuomo, according to another report, claimed that he did not know that Lee had prevented the assessor from entering the house, and that exterior inspections were the only thing required under the law. According to yet another report Cuomo explained, “In terms of local rules, I’m not all that familiar.”

Cuomo’s opponent in the upcoming gubernatorial election charged Cuomo with evading property taxes and attempting to cover up the improvements. A spokesperson for the opponent said, "We are directly suggesting that Andrew Cuomo hid renovations to his home in order to evade the higher property taxes he would have to pay if those renovations had been properly permitted, as is required of other citizens. We are further suggesting that the governor is intentionally barring home access to his town assessor to conceal the amount of work that was done. We are also accusing Governor Cuomo and his government staff of not telling the truth in press reports about the extent of work done in the home.”

The assessor raised the assessment by guessing at what had been done inside the house, presumably relying on the magazine stories about the work. Lee explained that she will review the new assessment. If she does not file a grievance the assessment becomes final.

Unlike the member of Congress who deliberately claimed an exemption, once after being told it was inappropriate, and who paid with a bounced check, Cuomo is not a Republican. He is a Democrat, but one who has made property tax reduction one of his objectives. This is not the way to do that, but it’s unclear to what extent Cuomo is involved in the renovations. The house was purchased by Lee, Lee arranged for and supervised the renovations, Lee discussed the renovations in magazine interviews, Lee barred the assessor from entering the house, and Lee is the one considering whether to file a grievance. Perhaps she is doing this at Cuomo’s behest, or with his guidance and blessing. But perhaps not. Perhaps Cuomo is somewhat like the stereotypical male who doesn’t pay much attention to interior decorating and the remodeling of kitchens. Lee is sufficiently well-off to pay for the renovations without even asking or telling Cuomo, especially as it appears to be her home for all practical purposes.

If Cuomo is in some way wrapped up in an effort to avoid property taxes, then he has caught the same tax hatred virus that has infected so many Republicans. If the situation is entirely of Lee’s doing, then Cuomo is suffering from, and will suffer the consequences of, failure to exercise an abundance of caution, to the extent of advising partners, friends, and associates to conduct their tax transactions with the utmost of care, lest their behavior boomerang back onto the public servant.

A recent case, Baur v. Comr., T.C. Memo 2014-117, demonstrates why, sometimes, the tax law doesn’t provide a reset button. If we don’t get it right the first time, we lose, and we cannot pretend that we have won. Though it is unfortunate that minimizing adverse tax consequences requires careful examination of much of what we say, do, write, and sign, that’s the way it is, and until it changes, we can either scrutinize our transactions at the outset or suffer the consequences of not being permitted to change the facts after the fact.

In Baur, the taxpayer and his wife were divorced after 27 years of marriage. The divorce decree incorporated a marital settlement agreement into which the taxpayer and his wife had entered. Under the agreement, the taxpayer agreed to pay his ex-wife, as unallocated maintenance and child support, $3,750 per month. He also agreed to pay 45% of any and all net bonuses and commissions that he received. The payments were to terminate upon the earlier of the ex-wife’s death, the taxpayer’s death, the ex-wife’s remarriage, or the ex-wife’s cohabitation with an unrelated person on a continuing conjugal basis. The agreement provided that if one of the children is emancipated or one of the other children lives independently or outside the ex-wife’s residence without financial support from the ex-wife, then the unallocated support payment would be modified to $1,800 per month, subject to review upon petition by either party. The agreement also provided that the amounts paid by the taxpayer “are acknowledged to be paid incident to the Judgment for Dissolution of Marriage and in discharge of [taxpayer’s] legal obligation to support [the ex-wife, and that the] sums shall be includable in the gross income of [the ex-wife] and deductible from the gross income of [the taxpayer] within the meaning and intent of Sections 71 and 215 of the United States Internal Revenue Code of 1986, The Tax Reform Acts of 1984 and 1986, as amended, or of any identical or comparable provision of a federal revenue code hereinafter enacted or modified.” The agreement provided that the “parties expressly state that they have freely and voluntarily entered into this Agreement of their own volition, free from any duress or coercion and with full knowledge of each and every provision contained in this Agreement and the consequences thereof.”

During 2010, the taxpayer paid $45,000.02 to his ex-wife as unallocated maintenance and child support, but did not pay any portion of a bonus that he had received. On his 2010 federal income tax return, the taxpayer deducted $41,695 as alimony paid, later explaining that he intended to deduct $45,000 but erroneously deducted the $41,695 amount. In June 2012, the IRS issued a notice of deficiency to the taxpayer, disallowing $26,143 of the deduction and allowing $15,552 of it, though on brief the IRS increased the amount it allowed to $17,981.89. In September 2012, the court that has issued the divorce decree issued an order that stated, “[T]he provision in the Judgment for Dissolution of Marriage concerning unallocated support is intended to be maintenance, for the support of [the ex-wife],” that the payments that had been made “have been and continue to be maintenance to [the ex-wife], that it was the court’s intent that the payments are to be includible in the ex-wife’s gross income and deductible by the taxpayer, that the inclusion of the paragraph concerning emancipation and financial independence of the children was a scrivener order, was not intended to be part of the decree, and should be vitiated nunc pro tunc.

The Tax Court, after setting out the basic rules of section 71(a), explained that section 71(c)(1) excludes from the definition of alimony and separate maintenance payments any part of a payment which the terms of the divorce or separation instrument fix as a sum payable for support of the payor spouse’s children., and that section 71(c)(2) provides that if any amount specified in a divorce or separation instrument is to be reduced upon the occurrence of a contingency specified in the instrument relating to a child, such as attaining a specified age, marrying, dying, leaving school, or a similar contingency. or at a time that can clearly be associated with that kind of contingency, an amount equal to the amount of the reduction is treated as an amount fixed for child support.

Because the paragraph dealing with the emancipation or financial independence of the children falls within section 71(c)(2), the court was required to determine whether that paragraph was operative for tax purposes. The taxpayer argued that the state court’s September order made the paragraph retroactively inapplicable. The Tax Court relied on previous decisions holding that the definition of alimony and separate maintenance payments rests on the text of section 71 and not the intent of the parties to the divorce or the state court, and that state court orders retroactively redesignating payments as alimony and not child support, or vice versa, are disregarded unless the retroactive order corrects a divorce decree that at the time issue mistakenly failed to reflect the intention of the court at the time of the original order.

The Tax Court pointed out that the divorce decree incorporated the marital settlement agreement, and that the agreement was “freely and voluntarily entered into” by the spouses “with full knowledge of each and every provision contained in this Agreement and the consequences thereof.” The agreement unambiguously provided in the paragraph in question for a reduction in payments based upon particular contingencies related to the children. The Tax Court rejected the state court’s statement that the paragraph in question was not intended to be part of the divorce decree and was a scrivener’s error. The Tax Court took note of the fact that the state court issued its September order only after the taxpayer received the notice of deficiency from the IRS, and concluded that inclusion of the paragraph in the marital settlement agreement incorporated into the divorce decree was not an error.

The taxpayer’s deduction was limited to what the IRS allowed. The Tax Court also held that the imposition by the IRS of the section 6662(a) accuracy-related penalty would be sustained if, after the recomputation of the taxpayer’s tax liability to reflect the reduction of the alimony deduction, there is an understatement of the taxpayer’s 2010 tax liability that exceeds the greater of 10 percent of the tax required to be shown or $5,000.

The lesson to be learned is that tax consequences need to analyzed before the fact, and not after the transaction has been completed. Often, I tell my students, “Some clients will give you a chance to help you out by talking with you before they do something, but many others will not. It’s from the latter group that comes the pressure to backdate documents, hide facts, invent facts, and otherwise try to make things appear other than as they are.” It’s easy to forget that the tax law casts a shadow over pretty much everything, and it must be given its attention sooner rather than later.

It truly is amazing that some of the people who complain about their tax bills appear thrilled with a deal that the state of New Jersey has reached with a Philadelphia professional sports team. For a state whose governor makes a big deal about cutting taxes and cutting spending, the deal in question violates that philosophy and even apart from theoretical concerns, doesn’t make any sense. As reported in this story, the state of New Jersey will grant $82 million in tax credits over a ten-year period to the Philadelphia 76ers, who in turn will build a practice facility in Camden, provided that the team employ at least 250 people in Camden and remain in that city for at least 15 years. Those who don’t consider the tax credits to be a transfer of money to the team owners should change their mind once they understand that the credits can be sold for cash. In other words, New Jersey is writing 10 $8.2 million checks payable to multimillionaires.

Why would the state dish out $82 million to a team owned by multimillionaires rather than cutting taxes on lower and middle income taxpayers or using the funds for something along the lines of feeding the hungry, educating children, or protecting the environment? In theory, the state gets back more by funneling tax dollars to wealthy owners of professional sports teams than it would get back by educating children or feeding the hungry. The theory, of course, falls apart when it meets reality.

According to the report, the state will get back $76.6 million over 35 years through taxes paid on employee wages and that oft-trumpeted “secondary effects” component, predicated on employees spending money in Camden. But what sort of deal is this? Who in their right mind would agree to pay $8.2 million per year for 10 years to get back $2.2 million per year for 35 years? Do the math. Don’t forget present value. It doesn’t add up.

It gets worse. The 250 jobs aren’t new jobs, because the team simply will move its employees from Philadelphia to Camden. That doesn’t mean, however, that they will spend their take-home pay in New Jersey. Philadelphia’s restaurants and night life beckons across a river that can be crossed in a matter of minutes. I discovered this many years ago, when I interviewed at Rutgers Camden School of Law, and was taken to lunch in Philadelphia. The computation generating the $76.6 million return, pitiful as it is, needs to be redone, and it will generate an even lower number. Critics are calling the $76.6 million amount “inflated,” and also point out that the facility won’t do much, if anything, for local residents in one of the poorest cities in the country. There are no plans for the facility to be open to the public. So why should New Jersey taxpayers chip in to build something that has no value to them?

This deal is not the only one through which taxpayer dollars have been channeled to business owners. Close to $4 billion in tax credits has been dished out during the past ten years. And the benefits to the state’s economy? Negligible.

In the meantime, the state faces a budget gap, has failed to fund its pension obligations fully, and is cutting spending on other programs. States with budget deficits ought not be sending money to multimillionaires. Alternative proposals for the site, such as businesses offering entry-level jobs in a city where 42 percent of the residents live below the poverty line, did not gain traction.

Where are the advocates of the “free” market and the so-called superiority of the private sector? Why can’t a team owned by multimillionaires build its own facility without asking taxpayers to foot part of the bill? If the proposal is not financially viable without government input, then the proposal should be shelved. And if it is financially viable without government input, which surely is the case, then the deal is nothing more than a grab by takers who see an opportunity to increase their wealth at the expense of taxpayers.

There is, I think, an addiction that gets little, if any, attention, though some studies, such as the one described in this report, are beginning to find their way into the spotlight. There are wars on drugs, anti-gambling initiatives, anti-smoking incentives, and even remnants of the Prohibition movement funded, nurtured, and empowered. One common thread in all of those efforts is the point that nothing is ever enough, that whatever drug works one day, more of it will be needed on the following day or during the following week. Too often, the spiraling cycle stops only with death.

In comparison to substance abuse, the addictive lure of money and wealth gets far less attention. Whatever rationalization is advanced for their behavior by the folks who simply can’t get enough money – and eliminating taxes is part of the attempt to maximize personal wealth – the bottom line is that even with more money that the typical person would know what to do with, those who are addicted to money never have enough, cannot stop trying to get more, and like those addicted to other things, don’t let concern over harming others get in the way of satisfying their unquenched thirst for money.

Now comes an ORC International poll that asked some interesting questions about the connection between money and happiness. The responses are even more interesting. The questions are relevant to the money addiction question, because most addicts will explain that they pursue what they are pursuing because they want to be happy.

One of the questions asked, “how much money would you and the other people in your household need to make this year in order to consider yourself rich?” Two percent selected as their response, “No amount of money would make me feel rich.” Unlike those who, coming from various economic perspectives, would feel rich with anything from the $1 to $29,999 category (4%) to the $1 million or more category (11%), those two percent would not feel rich even if they had an infinity of money.

The next question asked, “how much money would you and the other people in your household need to make this year in order to be happy?” This time around, six percent concluded that “money can’t buy happiness,” but 85% had some amount of money (ranging from the $1 to $29,999 category to the $1 million or more category) that they concluded would make them happy.

The published survey results do not reveal whether the 2 percent who would not feel rich no matter their annual income are among the 6 percent who think that money cannot buy happiness. My guess is that these are two different groups of people. My guess is that the six percent, having concluded that happiness cannot be purchased, don’t need much to feel rich. Are the two percent who would not feel rich with any amount of money the same two percent who responded that income of $1 million or more would be required to be happy? I think so, but the survey doesn’t answer that question.

The survey results do make clear, however, that the vast majority of Americans would feel rich and be happy with annual income of less than $1 million, and more than half would feel rich and be happy with annual income of less than $100,000, although very few went as low as $50,000. I wonder how many of these people ask the same question I ask, that is, “At some point, what does one do when there’s more money than there’s time to figure out how to use?” Economists call that the dwindling marginal utility of money, that is, at some point, a person doesn’t really need any more money. Unless, of course, they’re addicted. So for a very few, the need for money and wealth is insatiable, not only as a means of purchasing politicians and dominating nations, but also simply for the sake of “having it.” The “My [pile of money] is bigger” syndrome has much to do with it.

Sometimes people can escape. It requires stepping back and looking at money from another perspective, as did Sam Polk, who shared this confession. His suggestion at the end is commendable, but I doubt it will resonate where it needs to be understood. It isn’t just the addict who suffers when addiction runs rampant.

And that’s why reducing taxes to zero, though perhaps bringing thrills to those who want a world without government where they can run free until, of course, they run into someone else who is running free, will do nothing to satisfy those who want every dollar they can grab, and then some. As the Sam Polk explained, “I heard the fury in their voices at the mention of higher taxes.” It matters not to them that the reduction of taxes has, in the long run, not only hurt those not addicted to money but the addicts themselves, for it has fueled their obsession with the notion that there are no limits to wealth, and with their fixation on the fantasy of being “the” person who has it all. The only person who can have it all, and does have it all, is God. And no amount of money can buy God.

The facts are simple. The taxpayer is hired, the employer pays a salary, and the employer also sets aside some money in a deferred compensation plan for the taxpayer. The salary is included in gross income for federal income tax purposes. The salary, and the present value of the deferred compensation, is subjected to FICA taxation. In this taxpayer’s case, because the salary subject to FICA exceeded the limit on the portion of FICA attributable to social security, the FICA tax in question is only the hospitalization insurance, or Medicare, portion of the tax. The employer goes bankrupt, does not pay the deferred compensation, and will never pay the deferred compensation. The taxpayer sues for a refund of the FICA taxes paid on compensation never received by the taxpayer. The IRS denies the refund claim. The taxpayer sues. The taxpayer loses.

This is the tale of Balestra v. U.S., No. 1:09-cv-00283 (Fed. Cl. 2014). As the court explained, FICA generally applies to wages when they are paid, but there is a special rule in section 3121(v)(2) subjecting the present value of certain deferred compensation payments to FICA tax at the later of when the services are performed or when there is no substantial risk of forfeiture of the rights to the income. The regulations under section 3121(v)(2) provide that in computing the present value of the deferred compensation, no discount is applied “for the probability that payments will not be made (or will be reduced) because of the unfunded status of the plan, the risk associated with any deemed or actual investment of amounts deferred under the plan, the risk that the employer, the trustee, or another party will be unwilling or unable to pay, the possibility of future plan amendments, the possibility of a future change in the law, or similar risks or contingencies.” The regulations do not provide for refunds in the event the deferred compensation is not paid.

The taxpayer argued that the FICA tax should not have been imposed on anything that is not income, and that because the deferred compensation is not income for purposes of the income tax, it is not wages subject to FICA. The taxpayer also argued that accrual accounting provisions should apply to defer taxation when realization of the benefits is doubtful and to provide for an adjustment when amounts that are taxed are not received. Implicitly, the taxpayer argued that failing to take into account the possibility of employer bankruptcy when discounting the future compensation is arbitrary and capricious.

The court pointed out that there is no getting around the language of section 3121(v)(2). It disagreed with the taxpayer that the words “income of every individual” means “wages received,” and with the contention that wages are a subset of income. The court agreed with the IRS that something can be taxed as wages even if it is not gross income, and that to conclude otherwise would make section 3121(v)(2) meaningless. It also pointed to section 3121(a), which provides that “Nothing in the
regulations prescribed for purposes of chapter 24 (relating to income tax withholding) which provides an exclusion from ‘wages’ as used in such chapter shall be construed to require a similar exclusion from ‘wages’ in the regulations prescribed for purposes of this chapter.”

The court rejected the taxpayer’s accrual method of accounting argument, noting that Congress chose to rely on the principles of substantial risk of forfeiture in section 83 rather than accrual concepts developed under common law. The court also pointed out that Congress “knows how to incorporate [accrual method accounting] principles when it desires, and it has not done so here.” The court further explained that in some instances Congress has provided relief when early inclusion causes taxation of an item that is never paid, giving section 166 as an example, and that in other instances Congress has not provided such relief, giving section 83(b) as an example. The court described the many issues that would need to be addressed, and the challenges presented, by a system permitting a refund when the deferred compensation was not paid. It concluded that nothing would have prevented the IRS from setting up such a system, but that the IRS was not required to do so. The court suggested that considering the complexity of setting up a refund system, it could “hardly fault” the decision not to do so.

Finally, the court rejected the taxpayer’s challenge to the lack of an employer bankruptcy discount factor, because nothing in the statute required that the discount process include such a factor. The taxpayer failed, according to the court, to provide any example of the use of such a factor in any other discounting provisions promulgated in regulations or otherwise. Thus, the regulations defining the discounting computation were not unreasonable.

In its opinion, the court shared a wonderful observation. The court wrote, “But these are matters for law makers, not judges --- suboptimal tax laws are still valid tax laws. (Title 26 of the United States Code would be a good deal shorter if the unwise tax laws could be purged by the judiciary.)” It is unfortunate that suboptimal laws of any sort, tax or otherwise, cannot be struck down because of sloppiness, inconsistency, stupidity, or other flaws. It indeed is true that the tax law would be shorter, and indeed less complicated, more efficient, and much fairer, if the judiciary could clean up the mess made by Congress.

Sometimes when someone says to me, after describing a tax rule or hearing a tax rule described, “That makes no sense,” I can find a way to demonstrate that indeed it does make sense. But sometimes, I cannot. And this is one of those times. The reason for the absurd result, being taxed on something never received, is Congressional inadequacy. What a surprise.

Reaching into my pile of topics waiting for attention, I pulled out this story from three weeks ago. A homeowner in Indiana computed the property tax on the home by subtracting a homestead exemption from the value before multiplying by the applicable rate. The problem with this approach is that the homestead exemption applies only if the homeowner is living in the house, and in this instance the homeowner had moved out and was renting the property to third parties.

This wasn’t the first time that the homeowner did this. The homeowner moved out in 2011, and after subtracting the homestead exemption, ended up reporting a tax lower than the actual liability. The county treasurer, who collects the tax, told the homeowner, when the homeowner showed up to pay the overdue tax, that the homeowner did not qualify for the homestead exemption. So what did the homeowner do in 2012? The homeowner once again claimed the homestead exemption. And the check that the homeowner wrote for the 2011 taxes that were overdue? It bounced.

So, perhaps one’s reaction is that taxes are complicated and this can happen to anyone. That might be a fair evaluation of the 2011 situation, might be, but it surely isn’t an explanation for the 2012 repeat. The 2012 delinquent tax was paid after a news organization approached the county auditor, who notified the homeowner that inquiries were being made about the situation.

The county treasurer called the homeowner’s actions fraud. The county auditor disagreed, calling it a mistake, and noting that even if someone intentionally claims the homestead exemption when knowing that it is not permitted, the term fraud is not used by the auditor’s office.

So who is this homeowner, about whom a news organization was inquiring? None other than a member of Congress who sits on the House Ways and Means Committee, the congressional committee charged with drafting the nation’s tax laws.

Some tax laws are very complicated. Some parts of complicated tax laws are insanely complex. But there are tax laws deserving of being called simple. The homestead exemption doesn’t require intense analysis, difficult computations, or frustrating lack of authority. When a person subtracts the homestead exemption, is told that it’s not permitted, and does it again, it’s not a question of complexity. There must be some other explanation.

Was it a mistake? Perhaps in 2011. Probably not in 2012. Was it fraud? Maybe. But I think it might be something else.

The member of Congress in question, Republican Representative Todd Young, is affiliated with the Tea Party movement. Is it possible that the claiming of an unpermitted homestead exemption is attributable to hatred of taxes? What sort of role model is this sort of behavior? And though these episodes suggest that Young’s other tax returns, state and federal, ought to be examined, it is easy to predict that if the IRS checks out whether the same sort of approach affects his income tax return, surely we will hear allegations of IRS unfairness, IRS misdeeds, and IRS targeting politicians affiliated with the Tea Party.

About a year ago, in It’s Not a New Tax, I explained why legislation to shift collection of a tax is not the equivalent of a new tax. Today, I explain why amendments to an existing tax does not create a new tax.

What caught my attention was a headline indicating that Newt Gingrich was outraged over “DC’s swarm of new taxes.” So I checked out his commentary. Here is what he said, referring to people in the District of Columbia: “If you get your carpet cleaned, you’ll pay a new tax. If you go to the car wash, you’ll pay a new tax. There’s a new tax on bottled water if you have it delivered. Yoga studios and gym memberships now carry a new tax.”

Curious, I did a bit of research and discovered, in this report, that the tax in question has been around for a long time. It’s the District of Columbia sales tax, and the proposal, and that is all it is, would extend the sales tax to include some transactions that for unexplained reasons have been exempt, though in some instances the reason could be simply that the item or service didn’t exist when the sales tax was enacted.

Of course, opposition to taxes, new or otherwise, is a prominent badge on Republican rally jackets. Yet, somewhat to my surprise, as I did a quick check on whether other states tax gym memberships, I discovered that among those that do, and a significant number do, one finds red states. Extending the sales tax to gym memberships, for example, has been proposed in Alabama Gym memberships are taxed in Florida, prompting proposals to suspend the tax for a short time. Gym memberships also are taxed in Missouri.

To be fair, Gingrich didn’t use political party labels in his commentary. Instead, he referred to “incompetent politicians with incompetent bureaucracies,” claiming that they “always need more money.” No one is a fan of incompetence and corruption, but even if those attributes were expunged from legislatures, executives, and agencies, the need for more money would continue to exist for the simple reason that the cost of the goods and services used or provided by government keep increasing. The incompetence claim is just another component of the anti-tax, anti-government campaign being waged by those in the employ of private sector buccaneers who want to run the world with a vote-proof oligarchy. The “new tax” ploy is a worn-out tactic of that campaign.

Bartlett D. Cleland, at the Institute for Policy Innovation, has published commentary in which he asks, “What's Wrong with the Middle Class?,” a question to which he answers, “Uncertainty, Taxes and Low Growth.” That, in fact, is the title of his piece, and in the piece he adds debt as a fourth cause. His proposed solution consists of investment in buildings and heavy equipment, internationally competitive sound tax policies, and telegraphed regulatory forbearance.

Cleland is quite correct that uncertainty gets in the way of economic success. It’s a problem that extends far beyond the business world. How can anyone make plans when everything is changing, often without notice? To some extent, uncertainty cannot be eradicated. Next week’s weather might force delays in shipping materials. A surprise announcement from a corporation can throw the stock market into disarray. But surely uncertainty can be reduced despite the fact that, ultimately, nothing is guaranteed. One of the significant contributors to uncertainty is the gridlock in Congress that leaves people wondering what the tax and other rules will be for a taxable or planning year already underway. As I noted in Tax Politics and Economic Uncertainty, Punting on Taxes and Tax Punting, Tax Uncertainty, and Tax Complexity, playing politics with tax and economic policy is a dangerous game. The solution isn’t mentioned by Cleland. The solution is cleaning up politics, outlawing gerrymandering, and reforming Congress. Until that happens, nothing will happen.

Cleland’s claim that high taxes keep companies from investing ignores the fact that companies have been generating record profits and have been building up immense amounts of cash. Even holding cash is, technically, an investment. The issue isn’t whether these companies are investing, because they are, but what investments are they, and ought they, be making. Taxes are lower than they were in the 1950s, and yet the economy rolled along nicely in the 1950s. Something else is the problem, and uncertainty is one piece of it. Taxes are not, aside from the substantial business tax breaks that are available to corporations, particularly the large ones.

Low growth is not a cause of economic distress. It simply is another name for economic distress or, perhaps to some, a symptom of economic distress. If the economy is fixed, low growth disappears. I’m not disagreeing with Cleland’s conclusion that there is low growth, just simply pointing out that low growth is not a reason for a sluggish economy.

I agree with Cleland that debt is a problem. It’s a big problem. A significant chunk of the debt, however, arises from the decision to cut taxes and increase military spending at the same time. I’ve written about this problem numerous times, explaining, for example, in Peacetime Tax Policy While Waging War = Economic Mess, that the economic mess was generated by factors underling the decline in the value of the dollar, in turn caused by the increase in debt, which “happened because at the same time federal revenues were trimmed through tax cuts, chiefly benefitting the wealthy, federal expenditures soared on account of the war in Iraq.” The tax cuts, we were told, would bring jobs. They did not. It’s time for the nation to file for a refund and to get its money back from the people who took it under false pretenses.

Cleland suggests that part of the solution is investment in buildings and heavy equipment. To some extent, but with some qualifications, he is correct. If by investment in buildings he intends to include rehabilitation of the millions of empty buildings littering the landscape, great. If he contemplates more new buildings while letting the vacant ones crumble and become safety hazards and drug dens, no thank you. Why heavy equipment? Is there something not so good about light equipment? What about infrastructure? Technically, highways, train tracks, bridges, and tunnels are not buildings nor heavy equipment. Does Cleland propose encouraging the purchase of equipment manufactured overseas? If so, how does that help the American economy grow? If Cleland intends to encourage or reward only purchases of American-manufactured equipment, then he’s on the right track. But to move down that track properly, the investment needs to be in jobs, with or without equipment. If corporations would view workers as assets rather than disposable supplies, the economy would flourish. Workers form the heart of the consumer class, and without a consumer class that has wages to spend, the economy sputters.

When it comes to international tax issues, Cleland is correct. Taxation of Americans and American companies abroad, and taxation of foreign corporations and aliens with respect to United States transactions needs to be fixed. It needs to be simplified, it needs to match burden with cost, and it needs to be fair.

Finally, Cleland asks for “telegraphed regulatory forbearance.” That’s not the same as certainty. Instead, it’s a fancy way of saying, “get rid of rules, and turn aside when businesses break the rules that still exist.” If the business world operated as it ought to operate, very few rules will be needed. Businesses must cope with piles of labor law regulations because, absent those regulations, businesses mistreated employees. Businesses must comply with mountains of environmental rules because businesses otherwise would destroy the environment. Had the folks at Enron, Adelphia, and the other poster children of corporate misbehavior, not done what they did, had the Wall Street speculators not pawned off bad mortgages, had the banks not mismanaged credit and use deregulation as a gateway to bad investment decisions, much of the regulatory increase of the past 20 years would have been unnecessary. If business wants fewer rules, business needs to behave more appropriately.

My guess is that Cleland speaks primarily on behalf of the small business, the sole proprietor, the up-and-coming entrepreneur. The problem is that these enterprises are at a disadvantage because the Wall Street operators and the gigantic corporations do not distinguish among small business, consumers, and the middle class when they engage in their oligarchic behavior, another significant contributor to the nation’s economic malaise. During the past year, there are signs that Main Street is beginning to understand that its interests are not being protected by Wall Street. Perhaps as alliances shift, the gridlock in Washington will dissolve, and some progress can be made to fix the problems. Subscribing to the Wall Street mantra, however, is not going to help Main Street or the middle class.