MauledAgain

One might think that a tax law amendment that reduces the tax rate on dividends would be simple. Perhaps "dividends are taxed at a rate of 15 percent."

Simple isn't allowed. Simple lets too many people understand what's going on. Simple puts tax experts out of work.

So, instead, Congress chose complicated.

"For purposes of this subsection, the term "net capital gain" means net capital gain (determined without regard to this paragraph) increased by qualified dividend income."

OK, that means, "dividends are taxed at the rates applicable to capital gains."

But what's "qualified dividend income"?

It means dividends received during the taxable year from domestic corporations and qualified foreign corporations.

Ah, the old "define something by using terms that themselves must be defined" approach. It takes 20 lines of text to define "qualified foreign corporation."

Wait.

"Such term" (that is, qualified dividend income) "shall not include...." Here follows a list which need not be repeated to make the point. Seven lines of text, followed by eight lines of text co-ordinating the reduced rate with the deduction for dividends received that can be claimed by corporations that receive dividends. Then there is an 11-line subparagraph dealing with "special rules."

All of this, however, fades when it is time to deal with the effective date. The effective date for the reduced rate of tax on dividends is "taxable years beginning after December 31, 2002." For almost all individual taxpayers, that means the lower rates first apply to 2003. Tax returns for 2003 are those being prepared at this time. The effective date is NOT in the Internal Revenue Code. It is in the amending act.

However, a special rule states: "In the case of a regulated investment company or a real estate investment trust, the amendments made by this section shall apply to taxable years ending after December 31, 2002, except that dividends received by such a company or trust on or before such date shall not be treated as qualified dividend income (as defined in section 1(h)(11)(B) of the Internal Revenue Code of 1986, as added by this Act.)"

Huh?

To understand this provision, it is necessary to understand how a regulated investment company (RIC) and a real estate investment trust (REIT) is taxed. Generally, if it receives income and passes it out to its shareholders, then it gets a deduction. In other words, the shareholder and not the company is taxed. The shareholders are the folks who invest in these companies.

So, dividends received before 2003 but paid out in 2003 don't qualify for the lower tax rate. There is a requirement that RICs and REITs provide to their shareholders Forms 1099 that tell the shareholders how much of what they earned is a qualified dividend. That makes sense, as only the RIC and REIT managers would know.

Except that they don't.

In a much-needed article on this matter, a Philadelphia Inquirer reporter takes readers behind the scenes to see tax Forms 1099 in the making. To read the full article, go to the Philadelphia Inquirer and go to the business section for today (April 7), click on the article, and then log in or register (it's free).

Todd Mason points out that these companies sent out Forms 1099, and then discovered they hadn't done the computations properly. So they send corrected Forms 1099. Sometimes they correct the corrected Forms 1099.

If the taxpayer has already filed his or her return, there may be a need to file an amended return. What fun.

But first, why are the companies having such problems figuring out what portion of the dividends qualify for the lower rate?

First, because although some dividends clearly qualify, and some clearly do not, others are in an in-between area that requires so much additional analysis that companies sent the Forms 1099 before that analysis was complete. Why? Because the tax law requires that those Forms be sent by January 31. No matter that Congress has made things more complicated.

Second, the IRS changed its mind on some technical points, and issued revised rules. But by the time it did this, it had already posted on its web site, and mailed, instructions to Form 1040. Which, of course, became out of date, and wrong. So, taxpayers must go to the IRS web site to get the correct instructions.

Another wrinkle in the mix is the requirement that the shareholder (the taxpayer) own the stock for at least 61 days in a 121-day period during which the dividend is paid. The IRS puts the burden of determining if this requirement is met on the taxpayer, not the company.

In many instances, the change on the corrected Forms 1099 will be such a low dollar amount that filing an amended return won't be prudent. There's no point in spending money and investing time because the tax liability is a few dollars lower on account of a few dollars of dividend income previously characterized as not qualified being re-characterized as qualified.

The IRS reminds taxpayers that if an amended return is warranted (an increase in tax liability or a significant decrease in tax liability) it should not be filed until the original return is processed, usually a matter of a month or two.

It's not that there should be a better way to enact and administer tax laws. There is. The question is why the Congress insists on making the simple complicated. The answer is that someone benefits. And it surely isn't the typical taxpayer who is compelled to deal with this nonsense.

Do you think any of the presidential candidates even understands this?

Ask them.

Allan Sloane, a Newsweek journalist, has shared Six Fixes for the Tax Mess". Though he claims it is arrogant for an "unelected media-elite guy like [him]" to make these proposals, I disagree. As he says, "as April 15 nears, we all become tax experts." It's not arrogant, it's useful. Would that everyone give some thought to the matter. Would that a certain 535 people who work in D.C. give some thought to the matter.

He's talking policy, not technical drafting. So here's my quick reaction to his proposals.

1. Reform the Estate Tax.

He suggests keeping the tax, with a much higher indexed exemption ($3.5 million a person), with the top rate cut from 48% to the maximum individual income tax rate (35% at the moment).

My take: If the estate tax stays, these modifications make sense. As long as there has been an estate tax, there have been people finding ways to avoid it. Each ploy is met with a legislative response, making the law even more complicated, and dragging in the not-so-wealthy (even aside from the exemption amount problem). Instead, I'd rather see unrealized gains subject to income tax at death. The income tax is graduated, the starving orphans don't have parents with unrealized gains in their assets (because they don't have assets), and without a huge exemption the use of death as an income tax avoidance planning tool would be significantly curtailed.

2. Keep the 10% Bracket and 'Marriage Penalty'

I think Mr. Sloane means keep the 10% bracket and marriage penalty relief, because that's what he describes.

My take: I agree, and I'd go further: marital status should be irrelevant in computing taxes, just as it is irrelevant in computing bridge tolls. See James Edward Maule, "Tax and Marriage: Unhitching the Horse and Carriage, 67 Tax Notes 539 (1995)."

3. Create a Trust Fund We Can Trust

Mr. Sloane suggests letting the Social Security trust funds buy mortgage-backed securities and such, but not Treasury securities or stocks. He would require the Treasury to pay cash interest on the fund's T-bonds, rather than paying with Treasury IOUs.

My take: Mr. Sloane's conclusion that this would put the Social Security funding mess in our faces is correct, and it is a good idea. Call it full disclosure or truth-in-advertising. Anything that clears out the smoke and breaks the mirrors is a good idea.

4. End the Tax Cut For Dividends And Capital Gains

He starts by sounding like me in my income tax classes. "Come on, already. Income is income." Bingo.

My take: I'm all for this proposal. But I would add indexing of basis because the current tax code is premised on a reluctance to tax artificial amounts generated by inflation. Not too long ago I shared an overview of the arguments on both sides of the capital gains rate debate and the reasons for my support of full taxation with indexed basis.

5. A War Surcharge

Mr. Sloane suggests a 10% temporary war tax to pay for the war on terror, rather than financing it with borrowings from foreign central banks. Families with relatives stationed in Iraq and Afghanistan would be exempt. He points out that "Civilians are supposed to sacrifice during a war. ... Instead of sacrificing, civilians are partying with tax cuts."

An interesting idea. Close to a user fee, which I've always supported. Two quibbles: some people who have received tax cuts aren't partying, but he's right: many people are living their lives as though there is no war. There is. The other quibble is that I'd extend the exemption to all military (definitions already in the Code) because Iraq and Afghanistan are not the only places where the military is fighting the war on terror.

6. Fix the Alternative Minimum Tax

Mr. Sloane is quite right in pointing out that the two major presidential candidates are steering clear of the "mess" that is the AMT. He wants to eliminate it and raise rates to offset it.

My take: I agree. Mr. Sloane admits he doesn't know exactly how it would play out, and as he wanders closer to the tax labyrinth he hesitates. No wonder. Get too close and there are few brain cells left with which to write Newsweek columns!! Seriously, this is a huge problem, one that I have previously discussed.

So, all in all, high marks to Mr. Sloane. I'm going to try to send him an email and invite him to comment on my comments. I'll let you know if he replies.

Taxes are everywhere. Some, like the income tax and even the sales tax, jump in our faces. Others aren't so obvious. Take a close look at the itemization on a phone bill. We can do that when we have the time.

But do we ever look closely at the breakdown of what we pay to park our cars? Probably not. At least, I haven't. The rare occasions when I drive into center city Philadelphia and park, I pay the garage fee and never thought about the tax.

Until today, when KYW, the local news station, reported that the mayor was proposing an increase in the parking tax to help reduce the budget deficit. Reaction was mixed, and instructive.

An opponent claimed that even a $1 increase in the tax would deter people from coming to Philadelphia and would contribute to the growing erosion of Philadelphia as a city that's in the loop of fashionable places. Advocates of the tax increase expressed hope that it would encourage more people to use public transportation, which one particular advocate described in very favorable terms.

I disagree with both of them. A $1 increase to a $20 parking fee, which is a 5% increase, isn't going to get much attention from tourists and occasional visitors. The percentage is low and so is the absolute dollar increase. Commuters who drive and park every day will notice what would amount to a $250 increase in parking expenses. But do the commuters have much of a choice? (Of course, some do. They can try to find jobs in the suburbs. Or, if they own businesses, they can move to outside the city limits.)

If the public transportation system was reliable, safe, and timely, perhaps it would draw more riders. An increase in the parking fee might cause ridership to grow. My experience with public transportation in Philadelphia is that it rarely gets me from where I am to where I need to be, rarely runs on time and thus is useful only if I don't care when I get to where I need to be, and is never available when I arrive back in town on an Amtrak train bringing me to 30th Street Station. The system is still locked into the "live in the suburbs work in the city" mentality of the mid twentieth century. As a private system, the city system began to struggle financially as employers and businesses fled the city, the state caused a government agency (SEPTA) to be formed to take it over, SEPTA grabbed the profitable suburban lines (Frontier, Red Arrow and others) and everything would have collapsed but for taxpayer money used to shore it up. Drivers and mechanics go out on strike on a regular, staggered basis (city division running, suburbs on strike is followed by city division contract settled but suburbs are out on strike), and the word unreliability glows even more brightly.

I predict that the proposed parking tax increase, if enacted, will have minimal effect on jobs leaving the city. It will have no noticeable effect, and maybe no effect at all, on the number of cars entering center city. It's one of those taxes to which so few people pay attention that it can be raised by a $1 here and a $1 there and the complaints and criticisms offered by those who do notice are drowned in the noise of car engines and squealing tires.

Personally, because I advocate user fees, I favor parking taxes. Bringing a vehicle into center city and parking it there imposes burdens on society that are borned by governments on behalf of society. It wouldn't surprise me that the per-day cost of burdens imposed on center city by the arrival of a car exceeds what the parking tax would be after the proposed increase. Exhaust soot blackens buildings and fouls the air, long-term health care costs rise on account of the damage to lungs and skin and other body parts from the fumes, police are needed to handle traffic congestion, traffic lights need to be maintained, accidents impose costs in a variety of ways, and the list goes on and on and on.

I wonder what would happen if the parking tax were set at the true economic cost. I suspect it would cause a significant decrease in the number of cars being driven into center city. And it would also cause more jobs to leave.

Hint: "The hidden costs of driving in the U.S. amount to at least $184 billion per year, including $40 billion for road costs not covered by fees and tolls and $56 billion for health damage due to air pollution." (from The Center for a New American Dream, citing "The Roads Aren't Free," a July 1998 paper by Clifford Cobb of Redefining Progress.

One last tidbit, from the web site of the Perimeter Transportation Coalition, a site well worth the visit if you are interested in a full discussion of the true costs of driving a car:

"This one is a little mind-numbing, but its worth slogging through.

"Are you living far away from work so that you can afford "more house?" Most couples will "consume" approximately eight (8) cars during their 30 year mortgage. We assume that you would buy an average-priced new car (about $20,000 in 1996) every seven years, and that the value of that car at the end of seven years would be practically nil. Calculating fuel, depreciation and maintenance at $.22/mile, and about 15,000 miles each year, you would tally up about $185,000 in operating expenses during the life of your house mortgage. Figuring an average annual inflation in the price of a new car (and its out of pocket expenses) to be 5%, and that average finance rates would be about 10%, your investment in cars over a 30 year mortgage would be about $400,000. How much "more house" closer to work would that buy?"

After all of this, maybe I should walk home. It's only a mile and a quarter. So what that it's raining and there are no sidewalks? I only have 35 pounds of computer equipment to lug.

Tax just doesn't go away. Today it grabs three different headlines. The gasoline tax is getting attention as part of the debate over gasoline prices, the IRS wants more money to pursue tax delinquents, and the City of Philadelphia moves ahead with tax breaks for one company.

The Gasoline Tax

The gasoline tax is just one piece of a much bigger discussion concerning gasoline prices. There are some who advocate reducing the federal tax on gasoline to alleviate the economic impact of higher gasoline prices on consumers. That idea won't work and it makes no sense.

Why won't it work?

First of all, the federal gasoline tax is not the cause of the higher prices. The gasoline tax is a fixed per-gallon amount (rather than a percentage) and it hasn't changed as gasoline prices have increased.

Second, even an elimination of the federal gasoline tax wouldn't bring prices down much. Perhaps elimination of state gasoline taxes (usually higher than the federal tax) would have an impact, but that won't happen. Almost every state in the nation faces severe budgetary constraints, even crises, and no state is going to surrender revenue.

Third, if gasoline prices at the pump are reduced through reductions of the gasoline tax, producers will increase prices at the wellhead. OPEC has said as much. So a reduction in gasoline taxes simply shifts more American dollars to oil producing nations.

Why does it not make sense?

First, the gasoline tax pays for highway maintenance and improvements. Reduce the tax and the revenue must come from some other source. So a consumer who pays less for gasoline and more for some other tax (such as a state or local roads tax) isn't any better off.

Second, if the gasoline tax is reduced and highway maintenance and improvement projects are shelved, consumers will pay more to keep their vehicles operating. Bad roads mean tire damage, shock absorber failure, and a wide variety of ailments caused by the bouncing, shaking, and crashing.

Third, trying to keep gasoline prices artificially low treats the symptom rather than the ailment. Gasoline prices reflect supply and demand. Supply is limited and demand is skyrocketing. Nations with emerging economies, such as China, or recovering economies, such as Japan, generate more demand for energy. China's population may be as high as 1.5 billion, an increase of 500 million over the past several decades. Automobiles are replacing bicycles in some Chinese cities. Americans aren't conserving gasoline. Why tinker with the real cost of a product other than to buy votes.

So what to do?

First, let the market determine the price. Make certain that the crude oil manipulations of the 1970s aren't being repeated. Impose a windfall profits tax on oil producers if that is necessary to curtail profiteering on the market. As the price increases the next few suggestions will find more takers.

Second, gasoline consumers can re-evaluate their consumption. What sort of vehicles do they drive? Are they fuel efficient? How many miles do they drive? Are they necessary? How is it that it seems every high school student of driving age attending a suburban high school MUST drive to school (while the school buses run around half empty)? I laugh when people criticize me for driving a vehicle that gets fewer miles per gallon than does their vehicle, because I drive fewer miles in a year than many of these folks drive in a calendar quarter.

Third, consumers can (and will) re-evaluate spending priorities. Have a chat with parents and grand-parents and ask them how they "got by" on far less income. Simple. Their children wore hand-me-down clothing, there was very little in the way of "designer" clothing to purchase at inflated prices (and few succumbed to that silly mystique), children weren't pampered with the privileges of adults, and homes were smaller.

Fourth, public transportation needs to be revamped. Most people use cars because the public transportation system doesn't "take me there." Attempts to build new lines meet resistance because of the cost.

A lot of these solutions require people to take a long-term view. That doesn't happen. Long-term views require patience, planning, and thought. Long-term views don't mesh well with sound bites. And that is a nice transition to the second tax story for the day.

The IRS Wants Money for Enforcement

The IRS has asked Congress for more money so that it can audit more taxpayers, collect more delinquent taxes, and pursue tax criminals. The number of IRS employees assigned to these tasked DROPPED 21 percent between 1998 and 2003.

Congress has always been reluctant to fund the IRS. After all, Congress went so far as to put restraints on the IRS to keep it from being an unkind agency that tried to get people to pay their taxes. Taxes that THE CONGRESS, not the IRS, imposed. Even though studies show that every $1 invested in IRS tax enforcement generates $8 of tax revenue, and even though there are hundreds of billions of unpaid taxes collection of which surely would make a difference in the deficit problem, members of Congress are reluctant to campaign for re-election against someone who gathers votes by painting the incumbent as someone who voted to turn the IRS loose on the taxpayer.

There's a HUGE disconnect at work here. There's no long-term assessment of what is being done and funded. Long-term analyses just don't sell in the sound bite world.

Why has the IRS cut back on the number of employees doing tax enforcement?

Here's how it works. The Congress appropriates money to the IRS. Some years Congress has cut the total. Other years it has increased it a small amount. Then Congress mandates that all federal employees get raises. The Congress, however, doesn't increase the agency budget to cover the raise. So, for example, the IRS must find $100,000,000 to cover CONGRESSIONALLY MANDATED pay increases, and it must take that $100,000,000 from something else in its budget. Like tax collection and enforcement.

Talk about killing the goose that lays the golden eggs. On this one, Congress once again scores negative points. And that transitions to the next story, which is about another legislative body.

A Philadelphia Tax Break

Philadelphia City Council gave preliminary approval to a plan that reduces the local tax burden of Ace Ltd., an insurance company. Why?

Because Ace says that it will leave if it doesn't get the tax break. And it would take its 1,000 jobs elsewhere.

That sort of talk (threat) scares politicians, so they scramble to deliver concessions. Unless, of course, it's an ordinary citizen who says "I must leave if they don't reduce the tax burden." Then the citizen leaves. Along with so many others that the city's tax revenue drops. So the city increases taxes on businesses, which threaten to leave.

The official justification is that by cutting Ace's taxes the city will retain jobs. Pretty convincing argument, I guess, because only two council members (one a Democrat and one a Republican) voted no (both, interestingly, sons of former mayors). Only one person showed up to speak against the proposal.

So what happens if this gets approved? Are new jobs created? No. Do city tax revenues increase? No. Do city tax revenues decrease? Yes. How does the city make up for the decrease? It could reduce services, increase taxes on other taxpayers, or borrow money. The first choice drives more individual taxpayers (and small businesses) out of the city or out of business. The second choice does the same thing. The third choice requires further cuts to finance the interest payments, and poses a long-term threat to the city's financial stability. It wasn't that long ago that New York City almost defaulted on its debt.

The city is in a spiral. A revenue death spiral. How can it get out of it? What is needed is clear: it needs a tax base. It needs jobs. It needs businesses willing to set up shop in the city and it needs people willing to live in the city. It needs a reversal of the trends of the past 30 years.

Why do people not live in the city? Most say it is the high taxes and the low quantity and quality of services. I think it is more than that. I think it is a matter of people not wanting to live or work in a place that suffers from the inefficiencies and political games that afflict Philadelphia government. People don't "see" Philadelphia as a great place to live and work. Philadelphia needs to examine WHY people are reluctant to live and work within its boundaries. It needs to ask questions and it needs to be prepared for answers that it won't like and that will cause much angst. It needs to admit that the policies of the last 30 years, even if suspended for a mayoral term here or there, don't work and should be rejected. THAT will require a huge shift in the way things are done in Philadelphia.

My guess is that it will not happen. The unions are too strong (helping Philadelphia earn more points with the MTV Real World negative headline fiasco), the politicians too entrenched (the Fumo private tax collection deals come to mind as an example), the entitlement advocates too short-sighted, and civic pride too wounded for the city to come back absent an upset in the way things are done. It won't happen because people are walking away rather than staying to fight for change. Giving up tax revenue to keep 1,000 jobs in the city is a band-aid on a hemorrhage.

So, gee, how's YOUR day going?

I wonder how many people say or think "time to face the music" when they sit down to being preparing their tax returns. I'm sure a lot of people have some sense of dread when tax time arrives.

This morning I heard a radio announcer plug his station by relating a report that someone had advised listening to soothing music while doing tax returns. Of course, he pointed out that his station would be playing soothing music and thus everyone doing tax returns should listen. Interesting approach to building up an audience!

I dug around, and the best I could find is some advice in this newsletter. It has a long list of techniques for dealing with the stress of tax time, and listening to soothing music is one.

My reaction is, "Can't hurt." Studies show music affects mood, body and brain chemistry, blood pressure, and health. Soothing music won't simplify the tax law, it won't make the forms easier to understand, it won't reduce the time needed to do the return, and it won't lower the tax bill. It just might make coping with all of those stress generators a bit easier.

Maybe we can start a list of recommended music. "Music for Doing Tax Returns." Wonder if that would have kept Napster alive, ha ha ha. Send in your recommendations. I'll post up a list.

And, no, absolutely no way the IRS (or any court) would buy the argument that the cost of the music is deductible as a tax return preparation expense or as a medical expense deduction.

Oh, the stress of it all. I'm off to listen to some music. "Music to Write Blogs By." ???

Law school has become even more popular. Applications are up. Acceptance ratios are down (it's tougher to get in). It seems that everyone wants to be a lawyer (though that really isn't the case). What everyone wants to be is a sports agent (or at least it so seemed when Charles Barkley, visiting some years ago for a Sports Law Forum, asked that question).

Law school deans and faculty like to think that they are doing something very special. They like to proclaim that they are "teaching people to think like lawyers." Because one of my specialties is tax law, I wondered, "Am I trying to teach people to think like tax lawyers?"

More than two decades of teaching has educated me. I'm not teaching people to think like tax lawyers and law faculty aren't teaching people to think like lawyers. Sounds strange. But it isn't.

What are we doing? We are teaching people to think. Period.

In some ways, that's not so special. Engineering faculty teach people to think. Philosophy faculty teach people to think. Chemistry faculty teach people to think. Even public speaking faculty teach people to think.

Well, at least that's what we're supposed to be doing.

Surely there are nuances of difference. Engineers use numbers more than do lawyers and lawyers use words more than do engineers, but ultimately words and numbers aren't all that different.

So, what's the big deal?

The big deal is that most people don't learn how to think in the way that the excellent lawyers, the excellent engineers, the excellent chemists, the excellent of anything think. That is, rigorously, carefully, completely, rationally, and intensely. Whether it is the engineer designing a bridge, a construction worker installing its beams, a lawyer preparing the paperwork, or a chemist researching the formula for the paint, we want the thought process going into the project to be rigorous, careful, complete, rational, and intense. Too often, in much of what people do, the thinking doesn't measure up. And all of us pay the price. True, all of us, at one time or another, some more than others, fail to think through before acting or speaking (after all, much of what the public speaking faculty do is to stress the need to think before speaking).

Let's look at each of these characteristics, and let's consider how shortcomings can afflict our lives.

1. Rigor. This refers to the discipline of staying on schedule, of getting thoughts ordered and sequenced, and of persevering in the face of confusion or failure. Most college graduates, even the best of the best who show up in law school, acquire a habit of letting things go until the end of the semester. It's a bad habit, and they dislike our attempts to break them of it. When things are left until the last minute, there's no cushion for error and no allowance for the unexpected. Things get rushed. Matters get glossed over. Superficiality begins to reign. Things get sloppy. Sloppy, of course, being the opposite of rigor. Think of the defective merchandise that gets purchased, the contractor who fails to show or shows late only to put in a rushed effort, the missed diagnosis, the forgotten surgical sponge. Haste makes waste, but dawdling leads to rushed catch-up. I never understood attorneys who leave filings until the deadline, and then miss it. What's the harm in getting something done ahead of time? It's nice to see highway departments paying contractors bonuses if they finish early. It's nice to have a contractor show up early, and finish sooner than expected (it HAS happened).

2. Careful. To be careful is to pay attention to what one is doing, or analyzing, or moving, or saying, or, yes, thinking. To be careful is to test one's attempt, to question one's hypotheses and premises, to re-check computations, to look again for spelling, punctuation, and grammar errors. Without care, there is more sloppiness. Care reflects a value, that is, that the matter being considered makes a difference. There's some emotion in that element, and it is a good emotion. It is the emotion of inspiration.

3. Complete. To be complete is to finish the process. Many law students struggle with the notion that if they begin the analysis with "if the dog that bit the plaintiff wasn't on a leash, then...." they need to explain what happens if the dog WAS on a leash. Computer programmers learn early that to program "IF A > 6, THEN" requires dealing with A = 6 and A < 6 either by precluding it or allowing for it. Well, some computer programmers so learn. Others don't. Almost all of the time that a program crashes, it's because the designer did not THINK THROUGH TO THE END.

4. Rational. To be rational is to keep irrelevant information out of the thought process. There are times when emotion matters, and emotion is a characteristic that can be studied and discussed (and thought about) in rational terms. Unfortunately, higher education has become infected with one of the nastiest children of political correctness that exists: the exaltation of feelings over all else. A modified variant of "if it feels good, do it" (that is, don't THINK about the consequences, to one's self or others), it provides a safety net for the unprepared, the incapable, the lazy, and the dishonest. After all, we feel what we feel, and there is no right or wrong about it, right? So by encouraging students to proclaim how they feel, without pushing them to THINK about a matter as a way of learning how to deal with the feelings, we create a society in which impulse reigns over civilized order. THINK about that. It's no wonder we are afflicted with the sorts of ills that plague early 21st century life. Drive-by school shootings, corporate and tax fraud, terrorism, irresponsible activity, drug overdoses, and the entire litany of social disorders can be attributed, at least in part, to the exaltation of feeling over reason. When students stand up in mock appellate court and say to me in response to a question, "Your Honor, petitioner feels that..." I interrupt them (much to their chagrin) and announce, "Counsellor, I am interested in what petitioner thinks, not in what petitioner feels." Other faculty do likewise. Would that we had the opportunity to say that to more people. Granted, there are times when feelings matter, but feelings don't matter if the issue is whether the dog was or was not on the leash.

5. Intensity. Intensity requires focus. It requires concentration. It requires pushing to the side the distractions that interfere with the thinker's line of reasoning. Law students are distracted no less than, and perhaps more than, people generally. Often the difference between a student with a 3.7 GPA and a student with a 2.8 GPA is the difference in distractions afflicting them during exam time. When a person's house catches fire, or their mother dies, or their child is sick, or their spouse gets uncooperative, the person's thinking shifts elsewhere. These and a long list of other distractions have happened to my students over the years. Some distractions are life lessons; after all, no one practices law (or any other profession or trade) without distractions. Learning how to deal with them is a life skill. But self-made distractions ("we felt like going golfing because it was the first nice day of spring so we missed class") don't evoke the same sympathy and concerns as do the car accidents on the way to an exam. Overlaying the distraction issue are the multi-tasking and depth issues. Lawyers need to juggle multiple thought threads as they analyze an issue (so, too, do a lot of other people). Lawyers (and others) need the ability to work through multiple-step analyses that require 10, 15, 20 steps. About a decade ago, a student who was a few years older than most of his colleagues said to me after class, "You said you noticed we have problems with this issue. Do you know why?" "Tell me," I responded. "It requires us to stay focused on 8 steps, which take time and effort we aren't used to giving. We're the MTV generation. We can't stay on one thing for more than 5 seconds or 3 steps." He was very very right. All these attention-deficit disorder problems might reflect society's inability to teach (from birth) the qualities of paying attention. A child parked in front of cartoons doesn't develop the same thinking skills as does one put in front of books or toys that require the child to think their way through to something.

Yes, there is something about teaching children to think that would make law school a natural next step rather than the jarring awakening that it is for most students. I am no fan of most pre-K, K-12, and undergraduate education programs. There are some very good ones, and there are some very good teachers. Remembering that parents, entertainers, celebrities and politicians also are teachers, in one way or another, too many teachers aren't teaching what needs to be taught.

Not only are many of the youngsters being encouraged to let feelings stifle rational thought, they end up thinking that the acquisition and regurgitation of information is the essence of education. It isn't. In this regard, most law school faculty, especially in the dreaded first-year, don't help. Closed-book final examinations that constitute 100% of the course grade encourage cramming and memorization, and rewards those with good memories. The best thinkers often don't have the best memories.

When I tell my students that being a lawyer means being a problem solver and a problem preventer (in technical terms, being arbitrators, judges, litigators, planners, and drafters), they stare at me. No, it's NOT like it is on television. The best lawyers are those with the most developed ability to THINK. Good practice for thinking are exercises such as crossword puzzles, anacrostics, and similar puzzles. In fact, DESIGNING a crossword puzzle is even better exercise. Some smile, others groan. "If you don't like to think, why do you want to be a lawyer?" I ask. The honest ones sometimes say, "Money." Other honest ones say, "I feel I need to change the world." (Don't we all?)

I've been writing a series of articles over the past few years, distributed to our students, which emphasize these and other aspects of learning to become a lawyer. I must be onto something. Faculty and practitioners have sent me notes expressing deep agreement and similar sentiments. Faculty and deans at other law schools have asked for (and received) permission to duplicate and distribute one or another of the articles to their students. Two of the articles were reprinted in a national law teaching journal. The best part is that no one has expressed disagreement. Hmmmm.

If we, the law faculty, succeed in our task, we have reshaped minds that haven't been shaped to think and we have polished those that have been so shaped. We have prepared students not simply to be lawyers or to think like lawyers, but to think in ways that are beneficial for all sorts of disciplines. By the tenth anniversary of law school graduation, at least half of the graduates are NOT in traditional legal positions. They discover that people in other fields respect and admire the analytical, rational, disciplined thinking that the law school graduate can contribute. Maybe the most successful of the graduates are the ones who went to law school to learn how to think, period. (I confess. I went to law school because I wanted to be a tax lawyer, and while working as a tax accountant I noticed that the tax lawyers were having more fun doing what they were doing. Oh, yes, they were making more money, but so what? Look where I ended up. Teaching. That's another story.)

My perspective on all of this was reinforced the other night, when a student formerly enrolled in Partnership Taxation (considered the most demanding and difficult course in the post-graduate program in which I also teach) said to me, "It's amazing. I struggled in Partnerships at first, but eventually it came together and I did well, as you know. What you don't know is that since then my grades improved dramatically. You showed me how to think about things, how to organize and structure arguments and information, how to process through material, in ways that I can use in all my courses. I wish I hadn't put off taking Partnerships as long as I did." Indeed, that was a most gratifying statement.

So, that's what it's about. The irony is that students usually don't realize why law school is the way that it is until after they graduate and live the practice life. Or, perhaps, after they take a few more courses. Weirdly, we ask them to evaluate our teaching while they are in the course. I'd rather get their evaluations three years after graduation. Too many of my colleagues through the country are so reluctant to weather the criticism that comes from students who don't understand why we need to demand rigor, care, completeness, rationality, and intensity that they succumb to the "pamper them" and "be nice to them" and "entertain them" student demands. Fortunately I have enough of an ego to withstand the winds blowing in from all sides.

If you got this far, thanks for reading this. Perhaps it will help you contemplate the world a bit differently, or perhaps it will shed new light for you on the issues of education, education funding, and school discipline that are of great concern to so many of us.

Remember: the children we educate today, the lawyers and doctors and engineers we educate tomorrow, are the ones who will be taking care of us next week when we are in our 80s and 90s. WE HAVE NO CHOICE BUT TO DO AN EXCELLENT JOB FOR WE CANNOT DEMAND EXCELLENCE IN RETURN WITHOUT HAVING GIVEN OF IT.

This isn't what I planned to post today and I still expect to get to that in a few hours.

But I just had to react to John Kerry's proposal to stop the outsourcing of jobs by lowering corporate tax rates. OK, so the headline is misleading. He proposes to tax U.S. corporations on taxable income worldwide without most of the exceptions that currently exist in the law and that permit the corporations to defer payment of their taxes. That would raise revenue which in turn would be used to lower corporate tax rates (whereas other members of his party would use the revenue for other purposes).

I'd like to see the computations used to generate these conclusions. Think about it.

First, if the deferred income is taxed, the corporations will claim a foreign tax credit for the taxes paid to other countries on that foreign income. I assume, I hope that whoever did the computations took this into account. There's a lot of foreign tax credit out there waiting to be claimed simply because it cannot be claimed if the foreign income isn't taxed by the U.S.

Second, how does this keep jobs in the U.S.? If a company can pay someone in India $20 to do what it would need to pay an American $100 to do, how does a change in the tax rate from 35% to 33.25% change the outcome? It STILL is more profitable for the corporation to move the job to India.

So, I have a gut suspicion that Kerry wants to soundbite his "I propose to lower taxes" slogan to rebut accusations that he supports tax increases. I'm sure that when the critics point out that he is cutting CORPORATE taxes (as if Enron, Adelphia, Worldcom, and the rest need tax cuts) he'll claim "to create jobs."

The problem, of course, is that the tax law encourages investment in offshore jobs not simply through the corporate tax rate and deferred foreign income provisions but through the effect of the tangled web of complex provisions woven throughout the Internal Revenue Code. It's a thicket of provisions that amplify the effects of other provisions, in a structure that is far more complex than Kerry's simplistic proposal.

Of course, the current Administration and its allies in the Congress are responsible for a chunk of this mess. It is this group which passed tax cuts encouraging investment in equipment (including equipment manufactured overseas) rather than in people. It is this group which cuts taxes on dividends and capital gains.

The unfortunate part of all this sound-bite competition is that it is misleading, erroneous, simplistic, ineffective, inefficient, unwise, inappropriate, and blatantly political. What is more unfortunate is that many Americans will listen and conclude it "sounds good to me" because they don't know any better. What a way to select leadership.

The answer to the political soundbite problem is, of course, the same as the answer to the jobs problem.

In a word: EDUCATION.

Which is what I had intended to discuss, and will.

And no, I don't support education because I am an educator. I am an educator because I am a fan of education.

Hang around a university campus long enough and you notice an interesting phenomenon: during exams, it not only gets very quiet but the tension is thick. It's human nature to leave things go to the last minute, which is an approach that doesn't work very well except, perhaps, for baseball hitters deciding precisely where to swing (and that's a matter of waiting until the last fraction of a second).

It's much the same with income tax returns. A small group files early, gets it out of the way, and watches the rest of us with glee. The early birds often are eager to get their refunds. Another small group files for the automatic extension, making August 15 the due date. To do this, the taxes need to be paid (and if an additional amount is owed in August, there's interest to pay, and perhaps penalties). But most folks wait until the last minute, which is rapidly approaching. And then the panic sets in.

Years ago, most people could do their tax return in an hour or two. The tax law was fairly straight-forward, especially for people who weren't running their own business, weren't invested in partnerships, and didn't have international transactions. Now, a larger portion of the taxpaying population is involved in partnership investments, international investments (including those done through mutual funds), and their own businesses. The tax law has become so complex, that a long list of social engineering credits (child credit, HOPE credit, lifetime learning credit, etc etc) and the alternative minimum tax intrude on many, many returns. The tax computation itself, if there are capital gains (again, likely for those invested in mutual funds), is a post-traumatic flashback to the days of high school physics and calculus.

"Oh, but there is software to do that!" is a frequent response. Yes, there is, but it's only as good as the information provided to it. The taxpayer still needs to dig through records, make evaluations of expenses in order to categorize them, and to determine if prerequisites to deduction or income exclusion are met. Information once irrelevant to the tax return now matters. As I plowed through my return several weeks ago (no, I'm not finished, but I figured I'd get the easy part done first), I concluded that there was very little of my life that the tax law doesn't touch or require me to account for in some way. Here's a small list of the sort of information about my life that the tax law demands I put on the tax return:

* My name, address, age, marital status, and other family information
* My employer's name, and all the information one finds on a W-2
* Information about any business I operate
* Information about my house: the expenses of owning and maintaining it, including real estate taxes, mortgage interest, utilities, repairs, insurance, etc. etc., the total square footage, the square footage of the home office, the cost of each major improvement and the year it was done (that includes the purchase of a new heater after the one in the house when I bought it blew up, and it also includes the new roof, and the raising of part of the roof).
* Information about the equipment I acquire for my home office, such as computers, the scanner, the printer, etc.
* Information about the software I purchase for my business computers
* Information about my car, because I occasionally use it for business (and also use it for charitable purposes)
* Information about my telephone usage, dividing it between business and personal use
* Information about the charities to which I contribute, and a lot of information about my activities with my church (because it is a charity)
* Information about my bank account, retirement plan, and any income-producing asset
* Information about the state and local taxes I pay

The government has become an information glutton. Here we go again: can you imagine this sort of interrogation before paying a toll to cross a bridge?

And my situation is far from the worst. For example, there are families that have extraordinarily high medical expenses, so they must provide all sorts of medical information. If they sold property, or had a casualty loss (such as a car accident), there's even more information to provide.

I rhetorically suggest to the students in my basic tax course that by the end of the semester they should be making a list of the information about their lives that would NOT potentially be required on a tax return. Shoe size? Favorite ice cream flavor? The list is short, and trivial.

The frustration for many people is not just filling out complicated forms. It's needing to stop at line 342 and wandering into a treasure hunt through one's files to determine the date on which something was purchased years ago, or the number of miles driven for charity, or the portion of a hotel bill that reflects telephone charges incurred for business purposes. It's tough to see how the cost of all this record keeping and research (in terms of time expended, space allocated, and dollars spent) is better for the nation's economic and social health than is the cost of "giving up" most of the social engineering provisions in the tax law. The answer, of course, is that it is good for the politicians. Which, to politicians, means that it is good for the country.

So within a week or so life is going to get chaotic for a lot of people. There will be a spike in the phone calls and emails coming my way with the "I have a quick question" introduction. Of course the question is quick, it's the answer that might run on and on. "Is it deductible" is only three words. There are no substantive tax law provisions dealing with deductions that are shorter than multiple sentences of many words.

It could be worse. Every few years or so, a member of Congress, displaying either a sick sense of humor or a seriously misguided but well-intentioned desire to improve the quality of life, suggests that the problem would be solved if the due date for a tax return was moved from April 15 to the taxpayer's birthday. It wouldn't work. Even with provisions dealing with taxpayers born on February 29, even with provisions dealing with people whose birthdays happen to fall on a holiday in a given year, and even with provisions providing for the selection of a filing date by a married couple who don't have the same birthday (almost always the case though I do know a married couple who share the same birthday and I tease them about the good planning that cuts birthday restaurant dinner visit costs in half), the plan won't work. It simply would take the angst of April 1 - April 15 and spread it throughout the year. Toss in the insult of having to file a tax return on one's birthday (what a gift!). Then imagine that by July the IRS notices a pattern of errors on filed returns, and it issues a notice that requires everyone who has filed by that time to re-file. It is far better for the returns to be filed early so that the IRS can identify quickly the "common mistakes" being made.

The only solution, I think, is a law requiring members of Congress to file their own tax returns, without any professional assistance, and without using tax return software. Walk a mile in our shoes.

In the meantime, I am finished with my return but for one item. I am waiting for a charity to send me a Form something or other that is an appraisal certification for a gift of property that I made last year. I cannot file the return without sending this Form by postal mail to the IRS Service Center in New England. Imagine if my birthday had been January 4.

Amazing.

I post my small description of searching for citations to my articles. I discover that one of them is available on-line from the publisher without having to subscribe to Westlaw, Lexis, etc.

In an earlier posting about marriage and taxes, I had commented that I had previously written about the topic but that the article wasn't available, so why bother linking.

Guess what? Yes, this is the article that I found. So, you can read it here. It's part of Tax Analysts' Tax History Project, a grand undertaking supported by the excellent efforts of many, including Tom Field, the creator and driving force behind Tax Analysts. He also taught me State and Local Taxation in my LL.M. program more than a few years ago, and was my thesis advisor for my research into the impact of federal income tax integration on state income tax systems. That, in turn, led to the projects and writings on state income taxes and subchapter S corporations, which in turn led to... oh, that's all best left for another post.

It's that time of the year again when faculty report to the Dean what they've been doing. The Dean likes to know that the faculty has been teaching well, writing productively, and performing service for the community.

Faculty tend to discuss their writing in terms of "scholarship," and one element is the extent to which a person's writings have influenced the development or the application of law in some way. One measure of that impact, though imprecise, is the extent to which a person's writings have been cited, quoted, paraphrased, or otherwise referenced. As the Internet has grown, the ease with which one can discover that one has been cited or quoted has increased accordingly. Yet the same phenomenon brings pages of irrelevant "hits" from the search engines.

So, today, I'm spending time looking for articles and cases that cite, quote, or paraphrase me. I haven't done this for quite some time. It's not as easy as pumping my surname into the search engine, because there are a lot of people with my surname, rare as it is. There are at least a dozen variations of my full name (nickname, reverse order, use of middle initial, etc etc).

So I end up searching for a phrase from the title of each writing coupled with my surname. Interestingly, there are several other Maules (professors all) who do writing in the area of taxation. It figures! Even more interestingly, they are in other countries (Canada, England).

Hence, no long substantive tax analysis today. Just a suggestion that if you haven't "googled" yourself yet, try it. It's amazing what turns up. I'm finding myself cited, I'm finding myself quoted, I'm finding my name on library acquisition lists (those don't count for what I'm doing today), I'm finding previously unknown cousins, and I'm finding some strange stuff. Not quite as strange as the spam that rolls in with the topic "foal studebaker antonio" but strange because I'm not on the page. Or ought not be on the page.

And, yes, this blog is turning up. That doesn't mean all sorts of people are reading it, but it's creeping up on them. What a feeling. To go out on the Internet and to find one's self being mauledagain!

A friend asked me for some help the other day. He was doing a tax return for a small trust. He's not a "tax guy" but he's a smart, educated fellow who surely would do at least as well, and most likely better, than many or most of the students in the basic federal income tax course that I teach. He's been doing this trust's tax return since its inception, so I asked what's the problem? His reply was that he was bewildered by the tax computation portion of the Form 1041 Schedule D. The trust had a small amount of capital gains distributions and also received dividends qualifying for the lower tax rates.

So I agreed and he stopped by. He laughed and said he figured I could punch the numbers into "that tax program you have." Well, I do have Turbotax. So does he. But the Turbotax we have doesn't do trust tax returns. There is software available from Turbotax to do trust tax returns, but when there's only one return to do and the total income is less than $800 it isn't worth the expense.

The ultimate good news was that because the trust distributed its income and is allowed a $300 exemption deduction, it had no tax liability. The bad news was that at first I forgot to subtract the $300 so I ended up plowing through the tax computation portion of the Form 1041 Schedule D. The good news is that despite that portion of the form not being needed, it wasn't a waste of my time because I had the education experience of making direct contact with a the tax computational portion of a Schedule D other than through Turbotax. Yes, the Form 1041 Schedule D is a bit different than the Form 1040 Schedule D (the one used for individuals), but they're very similar. They share a level of complexity that to most folks looks like a differential calculus exercise.

Sometimes I think this is all part of a vast conspiracy among tax software manufacturers, lobbyists, members of Congress, and the Treasury Department. Then I do a reality check and remember that as long as there are taxes there will be a need for tax software, and that the folks at Turbotax are probably (strange as it may seem) among those in the forefront asking for tax simplification. Why? Because programming this tax complexity isn't easy, and the more chances for mistakes, the more mistakes get made. Issuing updates to fix mistakes is expensive. Early in its history, Turbotax required several updates each tax season to deal with errors, but now it's become almost perfect. The years when I would be on the phone with the Turbotax people educating them and explaining how the software wasn't tracking the tax law have faded into the past. They were always very polite but I should have held out for a lifetime subscription!

So why is the Schedule D of Forms 1040 and 1041 (and others) so complicated? Because the Congress insists that certain capital gains, and now, certain dividends, should be taxed at rates lower than those that apply to salaries, interest, pensions, the taxable portion of social security, book royalties, etc. In other words, stock market and other investing and corporate ownership is seen as more important (or at least, deserving of less taxation) than is earning a living through sweating, being retired, or conducting a business in partnership or LLC form. (To be technical, capital gains are taxed at a variety of lower rates, not just one lower rate. To keep this analysis from getting unduly complex, I'll ignore those complexities upon complexity.)

Someone, a few years ago, wrote a brief article in which they listed the arguments made by the advocates of low (or no) capital gains taxation and the arguments made by those who think capital gains should be taxed as is any other income. There were more than 6 dozen arguments on each side. This is hardly the place to list all of them or to analyze each of them. Let's instead consider the major premises.

The advocates of low (or no) capital gains taxation claim that they are being taxed on "phantom" income because some of the gain represents adjustments in price that reflect inflation. They point out that adjustments for inflation exist in the tax law for a wide variety of items (for example, the personal and dependency exemption amount, the standard deduction, the cut-offs for the phase-out of various deductions and exclusions, etc.) But they overlook the fact that the tax rate schedules themselves are adjusted for inflation. Not good enough, they reply.

The answer, therefore, is simple. Make an inflation adjustment to the basis in the asset being sold. Capital gain reflects the difference between the net selling price and the amount invested ("basis") in the asset. So if T buys stock for $100 and ten years later sells it for $400, T has capital gain of $300. If T is in the 30% marginal bracket, T pays tax of $90 on the gain. But T argues some of the gain reflects inflation. How that justifies taxing T at a rate of 5% or even (as the advocates admit is their goal, zero percent) is impossible to understand, let alone accept. Why should T's tax on the gain be $15 or $0? Let's assume that during the 10-year period in question inflation was 35% (that's roughly 3% a year compounded). What makes sense is to let T adjust the basis from $100 to $135. Then T's gain would be $265 ($400 minus $135). Taxed at 30%, T would have a tax liability on the capital gain of $79.50. That's lower than $90 but not near the unfathomable $15 or $0 that T thinks is "fair."

So the advocates of low or zero capital gains rates turn to other arguments. One is the "lock-in" effect. They claim that owners of assets who do not need to sell will not sell if the gain is taxed at regular rates, because they know that at death their heirs will take the assets with a basis equal to fair market value, thus letting the gain arising during lifetime escape taxation. There are several problems with this argument. First, it relies on ANOTHER BAD TAX POLICY to justify a SECOND BAD TAX POLICY. There is no logic in letting gains go untaxed if the property is held until death. The justification is "we don't know what the decedent's basis is." Hogwash. If the decedent made a lifetime gift of the asset, the donee's basis is the decedent's basis and there are ways of figuring it out. It's done all the time. Basis isn't information that the decedent takes to the grave. (And taxing unrealized appreciation (the technical name for these gains) at death would justify total repeal of the estate tax; of course, it would raise more revenue than estate tax repeal would lose, so it's easy to see how members of Congress would sort themselves out on this one.) The second problem with the "lock in" argument is that it presupposes that non-tax factors compelling or strongly encouraging lifetime sales do not exist. Anyone who makes investment or ownership decisions based SOLELY on the tax law is going to be poor, barring extraordinary luck. Investment advisors are known to suggest that "holding on too long" is a bad thing.

Another major argument dragged out by the low/no capital gain tax crowd is that taxation of capital gains impedes capital formation. Supposedly, if capital gains are taxed at regular rates, people will not invest in capital formation (such as corporations, LLCs, and partnerships). Well, I ask, will they bury their money? Spend it? If they spend it, what will be done with the money by those who receive it? Oh, they'll spend it. Inflation will run rampant. So savvy folks will invest to shield themselves from inflation. And that, in turn, will generate capital investment, and loosen the consumption pressure on the inflation rate. Perhaps people would invest their discretionary income (money left over after paying for the necessities of life) in interest-bearing accounts. Which, of course, means that the banks and other financial institutions would have cash that would be used for (a) making loans to people who would invest in true capital, such as equipment, machines, buildings, etc. or (b) investing in the stock market or other equity arrangements.

I could continue on and on with the dozens of arguments put forth by the advocates of low or no capital gains tax. I could add the dozens of arguments made by the opponents (and I already have outlined some of them). I could dedicate paragraphs of analysis to the question of why, if it is so good to tax capital gains at 5% or 0%, is it not just as good to tax salaries and interest and pensions at 0% or 5%. I could (and I may, in a future post) explore how we will end up with an income tax on salaries and not much else (especially if the proposal to make most contributions to savings accounts deductible). Add in the imposition of social security taxes on salaries (but not capital gains, interest, or dividends) and one quickly begins to see how two economic classes will come to exist in society. That is something that is flat out not healthy for survival of the nation. Am I beginning to sound like Howard Dean? Maybe if I refrain from screaming I'll avoid being mistaken for him. (After all, he is a Maule descendant (as you can see here ) so he must be right about something, and so I'm guessing it's probably in the tax area...)

Now, of course, with tax rates on capital gains having been lowered and then lowered again, to the point where a zero rate is rapidly approaching, the low/no capital gain tax rate folks turned to dividends. So dividends are taxed at these lower rates. Why? Supposedly it will encourage corporations to pay dividends (as to whether it does, see Story Number Five in my earlier posting on that topic. That makes no sense if the concern is capital formation, because under that theory, the corporations should retain cash to invest in additional property acquistion, in more jobs, and in business growth. Why distribute earnings to shareholders?

Easy. So that they can invest in other corporations. And get more capital gains. And have their net worth grow at an after-tax rate that far exceeds (relatively speaking) the net worth growth rate of folks who earn salaries and put their money into bank accounts to insure against next month's job loss. See how the gap between society's owners and society's workers is widening? When I use the phrase "economic slavery" to describe this phenomenon I get a lot of static from all sorts of people, but give it some thought.

What's really going on is the "don't tax you, don't tax me, tax that fellow behind the tree" phenomenon that has afflicted tax law development since the beginning of tax time. (The quote is attributed to former Sen. Russell B. Long.) Who's you? Who's me? Simple. You and me are the folks making the laws, that is, bringing their proposals in for enactment as rewards for campaign contributions. Where do they get all that money to contribute to the soft-money organizations? Hmmm... And who's behind the tree?

One response is to point out that most Americans own stock through their pension plans and thus share in the benefits of lower capital gain taxation. First, for many Americans in pension plans investing in stock, their stock ownership is remote and the benefits subject to the risk that the plan will go under, as has happened. Second, for many Americans, adding a few dollars of capital gains to their income would not push them into the high brackets where the benefits of 5% and 15% capital gains rates generate the most significant savings. Third, because pension plan income is not taxed to the participant until retirement (when it is taxed at regular rates), the existence of a low or zero capital gains rate for those pension plan capital gains is specious. It's like giving a person ineligible for a driver's a preferred appointment time for a driving test.

I began this discourse with a description of the complexity generated by taxing some capital gains and some dividends at lower rates than those applying to salary, pension, interest, and other income. Though the cry "it's too complicated" ought not always win the day (because sometimes there is no choice but complexity, as is, for example, the case with the chemisty applied to design life-saving pharmaceuticals), adding complexity to a system of any kind (including tax law) needs to be justified. The burden needs to be on those advocating the complexity. I submit to you that in this instance, the advocates of lower taxes on certain capital gains and certain dividends have not met that burden.

Tom Ferrick, a columnist for the Philadelphia Inquirer, had an interesting column in today's paper about the financial woes of the Philadelphia Gas Works. He took a close look at the PGW's proposal to raise rates to cover the revenue losses from people who don't pay their gas bills.

PGW has a long history of mismanagement, a problem that was recently addressed in a series of operating and personnel changes. PGW is owned by the city of Philadelphia, and contributes $18,000,000 to the city's budget. PGW faces a series of problems.

First, the cost of natural gas has skyrocketed, which has compelled PGW to increase its rates. Second, at least one-third of its customers live at or below the poverty level, so they end up not paying their bills (or paying only a portion) when their winter gas bills arrive. As Ferrick points out, a person working 40 hours a week earning $7 an hour finds it tough to pay a $500 monthly heating bill. Ironically, federal and state heating assistance isn't available to the "working poor." I thought that problem had been dealt with, but apparently there still exist programs that tend to encourage unemployment.

Third, and this is the big one, there are folks who can pay the bills but who don't, knowing that PGW is forbidden by law to shut off gas service in the winter months. Ferrick quotes and paraphrases a PGW official who calls these people "gamers" because they are gaming the system. Half of the PGW's 500,000 customers do not pay their bills on time, one-third of the customers live at or below the poverty line, and PGW intends to cut off service in April to 35,000 "severe" delinquent. Do the math. There are 80,000 customers living above the poverty line who aren't paying their bills, and at least 55,000 aren't going to lose service in April.

So, facing an anticipated $5 million loss, PGW is asking the utility commission to let it increase rates on the customers who do pay to cover the revenue shortfall from those who don't pay. What is that?

WHY, IT'S A HIDDEN TAX. It makes PGW, as Ferrick puts it, in part a social welfare agency.

Wouldn't it be better to increase taxes and use that revenue to subsidize the genuinely poor (and to hire law enforcement officials to call time-out on the gamers?). At least the tax would be deductible for federal income tax purposes, whereas increased gas bills are deductible only for businesses.

Ferrick also reports that PGW has asked Philadelphia to release it from contributing $18,000,000 to the city budget. If that happens, then the city's budget takes a shot, and it either raises taxes or cuts expenditures (i.e., services).

What a mess. When what PGW pays to acquire gas triples, there's a problem. The age-old argument about energy sources rears its head again, pitting advocates of renewable energy (solar heating) against those who posit that there's enough natural gas in the ground to last for hundreds of years. Well, then why has the price skyrocketed? There's no OPEC embargo to blame this time. Gas producers blame the government for policies that discourage or make expensive exploring and drilling for gas, the government blames the gas producers for bad planning, and I suspect that somewhere somebody sitting in an office, not getting their hands dirty, is making a lot of money moving someone else's gas around.

Even though it wouldn't end the problem, it does seem outrageous that people can game the system. People who can afford to pay, but who think they are so special that they deserve to avoid paying gas bills (so that they can acquire something else), are essentially telling the rest of us that we need to shoulder their share of the burden. PGW's reaction isn't unlike most other businesses. What you and I pay for a product covers the cost of employee pilferage of inventory, shoplifting, and the retailers' and manufacturer's bad debt expense. So who can blame PGW for doing what other businesses do? True, PGW's proposal is in the spotlight because it is regulated by the utility commission whereas most other businesses just make price adjustments. Other businesses also take steps to eliminate bad debt (by refusing to deal with deadbeats) and to eliminate theft. PGW, however, is constrained by a series of government interventions designed to protect the very poor that are in turn exploited by the gamers.

The gamers are everywhere. The problem needs to be addressed in a way that transcends PGW. The gamers are inflicting hidden taxes on all of us. The gaming isn't just the gas-bill-payment-avoidance play. It shows up whenever someone fails to do what he or she should do, and shifts the burden to the rest of us. Sometimes it's money, as in the PGW situation or in the shoplifting situation. More and more, it's time. A company ships software that hasn't been fully tested, and the consumers invest hours trying to fix it. Imagine buying a car, arriving at the dealership to discover it has four flat tires, and being handed a jack while being told to fix it yourself.

These corporate gamers have figured out that they can foist shoddy products on us and let us invest our time dealing with it. Same thing with telemarketers. We need to invest OUR time listening to them or trying to get onto a do not call list. Someone figured out that it pays to treat us this way (just as someone figured out it's cheaper to pay for deaths caused by defective products than to pay for the correction of the problem (a lot has been written about this theory and I'll leave the discussion to the experts (look at this explanation and be sure to scroll down to "Quality Cost Analysis"))). Sarcastically, I add that it's usually not a question of economic survival for the company, it's often a question of a highly paid CEOs, executives, and upper management not wanting to cut their salaries a bit so that the company can hire a few people to get the job done right in the first place.

Don't mind me. I spent four hours yesterday installing an update of Quicken that was supposed to be seamless. Even though my data was supposed to transfer over, I ended up having to enter manually all the categories (because they didn't carry over and could not be copied and pasted). There were all other sorts of problems. Who designed this thing? Who checked it? Who used it before shipping it? When the program failed, it told me to call the bank, the bank connected me with a third party servicing company, then I was transferred to a Quicken person, who wanted to send me back to a phone call with the bank, but I ended up back with the third party person. The third party technician was helpful; the person at the bank was sympathetic, as apparently I was the umpteenth person to call. Ultimately, as is usually the case, I figured a lot of it out myself. I am tempted to send Quicken an invoice for my time. But I don't have the time to continue playing the game.

Could I have avoided the update? Noooooooo. The bank and Quicken will cease supporting, or letting me use, the older version, as of sometime in April. Clever. The new version isn't any better nor is it more functional for what I want (a checkbook tracker and an on-line banking service). Instead, Quicken wants to advise me on taxes (hahahahahaha), make loans, issue me a credit card, ... why not mow my lawn, too? So I paid for what I already had, cluttered with other unwanted features that had the effect of denigrating the performance and efficiency of what I had. Why? Because of a corporate mentality that the corporation must dominate its market and all related markets. Find your niche, Quicken, and stick to it. Resist the temptation to imitate Microsoft.

Lest you think I'm simply ranting, do this: sit down and add up all the hours you spend doing something because someone else failed to do so or did something in the wrong way. Don't count hours expended taking care of children or ill family members. That's different. Think of the people to whom you've paid money only to get a product that requires you to invest more money or valuable time to fix it (want to hear the story about the peel and stick floor tiles that don't have enough glue and that turn out to be made by some company in Taiwan that is unreachable? Nah, I'll save that one for some other time). Surely, as things I've read recently indicate, it's a widespread problem. It is having and will continue to have, an erosive impact on the security, economic success, and well-being of our nation and our society.

The upshot is that we are paying people for the privilege of doing their work. We're paying extra to cover the misdeeds of others. We're paying extra to cover the costs imposed on society by the gamers. That's just flat out wrong. Most of us do not (and should not) object to paying to help the truly needy and unfortunate, especially those who suffer because society failed them in some way. It is difficult to believe that clamping down on the gamers without hurting the genuinely afflicted is a task that cannot be done. There are times I think that it's not a question of whether it can be done, but whether there is a desire to have it done. So long as the gamers win, they will keep gaming. Software virus writers, PGW gas bill avoiders, sloppy product manufacturers, intentionally incomplete software releases, no-show contractors, and the rest of gaming crowd need to be put in the penalty box.

Otherwise, we will continue to pay these hidden taxes. Thinking of them in this manner, it may change our approach to dealing with those who are benefitting at our expense and who don't deserve to do so. And if steps aren't taken to put an end to the hidden tax phenomenon, it will grow until it chokes the economy and corrupts our standard of living.

Oh, do go read Ferrick's column. He's a good writer, he tackles interesting topics, and today he resonated very well.

This post ALMOST got the title of "Spinning Elephants" but the image it created in my mind was dreadful. It wasn't those circus elephants walking in tight circles. It was more the elephant doing break dancing.

Anyhow, remember the story about the three blind guys who are led to an elephant and asked to describe what they are touching? Or maybe in today's age of political correctness it's three visually challenged persons? Anyhow, each comes up with a different description. Everyone else knows it is an elephant.

What does this have to do with taxes?

A lot.

For those whose goal is lowering their taxes (which is almost every taxpayer, I suppose), the principal approach is to find tax benefits that apply to the taxpayer's situation. Most tax benefits require an outlay by the taxpayer or some activity by the taxpayer. Here's an example. A charitable contribution deduction is available to taxpayers who contribute cash to qualified charities. Wouldn't it be fun if a taxpayer could deduct a charitable contribution without contributing to charity? Hey, "That's fraud!" is a response that probably comes quickly to one's mind. Indeed.

It's easy to see the silliness (and illegality) of such a tactic because the law is relatively straight-forward (at least as I have described it) and because the facts are very obvious. Make the law complex or muddy up the facts and the door opens to some fancy tax footwork. Footwork quite unlike that of the spinning elephant.

Let me share two examples.

The first involves partnerships set up as investment devices designed to generate tax benefits in the form of depreciation and other deductions passed out to the partners. Over-simplifying things, many of these arrangements take advantage of the fact that the tax law allows deductions for depreciation on real estate even if the real estate is increasing in value. People who lack the resources to go it alone with this sort of investment find the investment partnership attractive because it lets them team up with others who also lack the resources to go it alone.

The arrangements require financing. If the financing is non-recourse (that is, the lender limits itself to recovering the loan by taking the real estate but not the partners' assets) then the investors get additional "basis" on account of the debt, which permits them to have the deductions passed through to them. Otherwise, basis (from the initial investment) will be insufficient to generate the desired tax benefits. The problem is that the lender wants more security than what is offered by a non-recourse debt, despite the higher interest rate on the debt. The lender either wants the debt to be recourse (can proceed against the general partner's other assets) or wants one or more of the partners to guarantee the loan (which makes it recourse). But if the debt is recourse, then the "basis" arising from the loan goes to the general partner or to the partners guaranteeing the loan. That's of no use to the investors who aren't guaranteeing the debt.

What to do?

What some want to do (and have tried) is to make the debt recourse so as to satisfy the lender and then to take the position that the debt is nonrecourse for tax purposes. The tax law prohibits this, but it doesn't stop people from setting up complex arrangments that are, in effect, smoke and mirrors to hide the reality. The hope is that the smoke will make the IRS blind, so that it thinks the elephant is an alligator or a tree trunk. Either it is or it isn't nonrecourse. (Sure, it can be partly recourse and partly non-recourse, but in that case the loan is treated as two separate loans). But a given dollar of loan is one thing or another, not both. The mindset of "I'll tell the bank one thing and I'll tell the IRS another" isn't unlike the mindset of "I'll tell the public investors one thing and I'll tell the insiders another" that gets people into trouble.

The second example involves small corporations that need a vehicle for the business. The corporation could make the purchase, but that process usually involves more paperwork, goes more slowly, and triggers higher insurance and vehicle registration costs than if acquired by an individual. So what some folks do is to have a shareholder acquire the vehicle in his or her name. However, they want the corporation to have the depreciation and other deductions associated with the vehicle. That requires that the corporation own the vehicle. But it doesn't.

A technique for dealing with this is to have the corporation and shareholder agree that the corporation is paying for the vehicle and is the owner, but that title will be in the shareholder's name. Does that work? It might, for tax purposes, because there are cases that attribute ownership not to who holds legal title but to who has the equitable (that is, the real) ownership. Fine. Except for one thing. If there is an accident, or the vehicle is stolen, and a claim is made to the insurance company, won't the insurance company figure out that the vehicle REALLY is owned by the corporation? Will the insurance company consider the placing of legal title in the shareholder's name to be a subterfuge designed to avoid higher insurance premiums? Will the insurance company deny coverage? Will it assert fraud? And what of the state or local government, which discovers that it has collected lower fees or taxes because the vehicle was treated as owned by the corporation for federal income tax purposes but as owned by the shareholder for state and local purposes?

A bit of having one's cake and eating it, too, though I never understood that phrase. If it's my cake, I get to eat it. (Supposedly after I eat the cake I no longer "have" it, but as cliches go, this one is weak.) In any event, in researching the cake phrase, it seems there are all sorts of situations where people try to get the advantages of mutually exclusive alternative situations while avoiding the disadvantages of both.

So the tax problem is simply a part of a bigger cultural phenomenon. Or is it even a deeper matter, such as basic human nature? Why not look at the choices, identify the advantages and disadvantages, weigh them, and pick? Recourse or non-recourse. Corporate ownership or individual ownership.

I suppose it's motivated by a sense of self-preservation, of maximizing benefits at any cost, of looking out for number one. I'm sure psychologists, social scientists, political analysts, and theologians have generated countless books, sermons, pamphlets, and speeches on the question.

Yet somehow, the cake disease continues to infect all sorts of things, including the tax law. Is it any wonder that tax simplication has no political support base? After all, who would vote to remove the mirrors, clear out the smoke, and put all the cards on the table? Not those who would lose (or perceive themselves losing) under those circumstances.

In the meantime, this average-height, slow, old guy is going to go play a few games in the NCAA March Madness Tournament. We'll just say I'm tall, quick, and young. It's madness, really.

They call it the "stealth tax." It's the alternative minimum tax, or AMT for short. The federal Internal Revenue Code has one, and some states do, too, though many of the states that have one do so simply because they track the federal tax statutes generally.

The AMT was enacted in response to studies that showed many taxpayers in the highest income levels were paying income tax at rates lower than those inflicted on taxpayers in lower income levels. Some very high income taxpayers were paying no tax. It wasn't that they weren't paying what they owed. No, the tax law itself permitted them to reduce their tax liability.

Why?

Well, the tax law is full of exclusions and deductions that reduce taxable income from what it would be if there were no exclusions or deductions. There are all sorts of exclusions and deductions, some fitting in with an attempt to measure a person's net increase in wealth (business expense deductions, for example), others fitting in with the notion that the income tax should reflect ability to pay (medical expense deductions and casualty loss deductions, for example), and still others fitting in with the continued attempts by Congress to control or encourage specific behavior (charitable contribution deductions, scholarship exclusions, retirement savings deductions, and a long list of other examples).

High income taxpayers are in a better position to arrange their financial affairs so as to maximize the use of tax exclusions and deductions. After all, lower income taxpayers pretty much are limited to paying for housing, food, medical care, and other needs of themselves and their children and other dependents. There's not much left for investing in one or another of "arrangements" designed to take advantage of tax breaks (some of which were intended and some of which were not intended to be used as they are used by the high income taxpayers).

So Congress reacted in a typically obfuscatory way. Instead of dealing with the exclusions, deductions and tax rates, it created a second layer of income taxation. The approach was to require taxpayers to take taxable income and to add back certain "items of tax preference" and some other deductions and exclusions to generate "alternative minimum taxable income." It's called AMTI for short, and it could be called "taxable income as it would exist if Congress eliminated most of the deductions and exclusions that ought not exist in the first place."

Then, AMTI is reduced by an exemption amount. This creates what is called "taxable excess." (Isn't this fun?) The exemption amount is $33,750 for unmarried taxpayers, $45,000 for married taxpayers filing joint returns, and $22,500 for married individuals filing separate returns. These amounts are increased to $40,250, $58,000, and $29,000, respectively, for 2003 and 2004.... and then they are scheduled to go back down.

The taxable excess is then taxed at 26% on the first $175,000 and 28% on anything over $175,000. The resulting tax is a "tentative tax" and the AMT equals the excess of the tentative tax over the regular tax. The taxpayer pays both, so that the total tax liability is essentially the same as the tentative tax. (I say "essentially" because there are some wrinkles involving tax credits that change this, but let's keep this on the simpler side.)

So why is this a "stealth" tax?

Because those not in the know think that it applies to the very rich. After all, they were the target of the AMT when it was enacted. But because of the nature of the items of tax preference and other adjustments added back, and because the exemption amounts DO NOT CHANGE WITH INFLATION, taxpayers who are not very rich, or rich at all, are finding themselves subject to this tax. And as we move into the later part of this decade, the spreadsheet operators tell us that tens of millions, I'll repeat, TENS OF MILLIONS, of taxpayers will be subject to this tax.

What's the big deal? The big deal is that these taxpayers end up NOT GETTING THE BENEFIT of the tax cuts that the Congress has enacted. Worse, the AMT really hasn't done much to prevent the abuses it was designed to eliminate. After all, if it worked well, why would the tax shelter industry continue to prosper?

Here's an example. Stay with me. There's numbers here, but if we don't let ourselves understand the numbers, we're at the mercy of others. Others who perhaps don't have our best interests at heart.

Suppose Wanda and Harry are married and have four minor children. Harry earns $90,000 in salary, and Wanda stays at home. They pay $15,000 in state and local income taxes and real estate taxes, and $23,400 in housing interest, of which $8,000 is on the first mortgage and $15,400 is on a second mortgage. Because they have four dependent children, their 6 personal and dependency exemptions amount to $18,600.

Wanda and Harry file a joint return. They have gross income of $90,000. They deduct $57,000 of interest, taxes, and exemption amount. So they have taxable income of $33,000. The regular income tax is $3,235.

Harry and Wanda have an AMTI of $82,000. Why? Because AMTI equals their taxable income of $39,000, increased by the taxes, the interest on the second mortgage, and exemption amount not allowed for AMT purposes. $33,000 plus $49,000 equals $82,000. For 2003 and 2004 the exemption amount of $58,000 gives them a "taxable excess" of $24,000. The tentative tax, at 26%, is $6,240. That makes the AMT $3,005 ($6,240 minus $3,235). So instead of paying a regular income tax of $3,235, they must pay a total of $6,240. Their tax almost DOUBLES.

No one would call Wanda and Harry super-rich. Even folks earning $30,000, and surely folks earning $30,000 can picture life when earning $90,000 as higher scale living, would not call a married couple trying to raise four children on $90,000 a year "super rich." Comfortable? Maybe (I've omitted medical expenses and charitable contributions simply to keep the example easier to understand.)

It gets worse. In 2005, unless Congress does something, the exemption amount returns to $45,000. Ignoring changes in the amount of the personal and dependency exemption, or the regular rates, and assuming Harry continues to earn $90,000 and the amount of interest and taxes does not change, their taxable excess would be $37,000 ($82,000 minus $45,000). The tentative tax would be $9,620. The AMT would be $6,385. So instead of paying a regular income tax of $3,235, they would be required to pay a total of $9,620. Their tax almost TRIPLES.

I'll spare you the numbers if Wanda decides to get a job making, say, $20,000 a year in order to make ends meet. The tax on that $20,000 would be $5,200 (26%), not $3,000 (which is what she and Harry would expect with all the talk from Congress that "we reduced your tax rate to 15%)).

Interestingly, if Harry and Wanda earned their way with dividends from a trust fund, or capital gains, they'd be much better off, tax-wise. That, of course, is a topic I've promised to discuss in a future posting, and I will.

But for now, the question is the impact of the AMT. As mentioned, if Congress does nothing, it will affect more and more taxpayers, to the point of tens of millions. Already the attention being given to the AMT in the popular press is beginning to generate a reaction. If the Congress "fixes" the AMT so that it doesn't affect taxpayers earning less than, say, $150,000 (though I don't think that's the cut-off for "super rich"), it will cost a lot. How much? Over a ten-year period, somewhere between $328 BILLION and $647 BILLION. If you're really into the numbers, and some good discussion and charts on the AMT issue, take a look at The AMT: Out of Control, a paper presented the IRS June 2003 Research Conference by several persons affiliated with the Urban Institute.

In an era of growing deficits and increasing domestic and defense spending, how can this happen? Well, sure, some would advocate letting the deficit increase, and others will advocate that tax cuts will lower the deficit by sparking economic activity that, by being taxed, will generate revenue increases. Many others disagree. The point is, it's an expensive proposition to fix this (without some offsetting revenue increases) and it's a politically charged issue. Yet it hasn't gotten much attention from any of the presidential hopefuls. Maybe they don't know how to "soundbite" it.

So, this year, look at your tax return. Are YOU paying AMT? (Technically, a taxpayer pays AMT if the AMT tax is more than the regular tax).

So when you are wondering why all those tax cuts aren't cutting your taxes, could it be that the AMT is offsetting the cuts supposedly benefitting you? Could it be that because you make your living through a job that pays salary, rather than living on dividends and capital gains, that you don't benefit from the juicy part of the tax cut packages?

I still think tax should be taught in the 11th grade. I think high school juniors, who are of the age when some (too few) of our children begin to enter the job market, would be far more interested in numbers that affect what's in their wallets than in that abstract mathematical stuff. Oh, that would still be taught, but it's more fun using tax as an example than apples, oranges, or some other commodity.

But I doubt Congress (and the state legislatures) would be all that happy. Especially if I wrote the curriculum.

Some more thoughts about jobs, or the lack of them, are in order. It looks as though the jobs issue is going to be a significant factor in the November elections.

In the political arena, the jobs issue unfortunately becomes one of partisan bickering. For a person who has lost a job, or who cannot find a job, to pin the blame on the President or the Congress presupposes too much. Likewise, to encourage that sort of thinking oversimplifies matters to the level of a mindless soundbite.

After all, some folks don't have jobs because they cannot be trusted. Who wants to hire an embezzler, inventory thief, or substance abuser? Some folks don't have jobs because they do incompetent work. Who wants to expose their business to liability because a worker was grossly negligent? And some folks don't have jobs because they don't have the requisite training.

Surely there is a place for the government to encourage, and even fund, education of adult workers whose skill sets haven't evolved to keep pace with changes in workplace technology and techniques. Whether done by grant (which is preferable) or through the tax code (not so preferable because there are those who would turn the tax provision into a tax shelter benefitting those not in need of jobs), it's at least an investment that should generate a positive return (in the form of tax revenues on increased wages).

Consider, though, that some people with inadequate skill sets are in that position because they never acquired a skill set. It's one thing to be well trained for an industry that goes extinct (buggy whip manufacturers, rotary phone repairers, and typewriter factory workers), but it's another to be lacking in skill sets because of failure to attend school, to listen to teachers, to do homework, and to work diligently. Decades of attempts to deal with the schooling problems have produced nothing but further decline among those who leave school lacking skill sets. All the money in the world isn't going to change anything unless values are changed, and if changing values means attacking the lifestyles that inculcate anti-education values, then that needs to be done. That sort of talk, though, doesn't sell in election ads.

And that brings me to a suggestion made yesterday in a discussion about the role of government, and taxes, in creating jobs. There are two ways for a government to create jobs. One is for a government to hire people. That shifts activity to the public sector, which generally is inefficient, and in the long run, bad for the economy. The inefficiencies of government bureaucracies is not a secret. The other is for the government to fund jobs in the private sector, through direct funding or tax incentives. Direct funding usually amounts to substitute government hiring, because it often brings government supervision, imposition of government work rules that are a contributor to the inefficiencies of government bureaucracy, and government controls inconsistent with a free market place. Funding through tax incentives or disincentives can work, but its design requires knowledge and understanding of how tax incentives affect the economy. Well-designed tax incentives are a rarity, even when the advocates are attempting to design an efficient tax incentive (and despite the political chest thumping, many tax incentives aren't subjected to good design attempts).

Here is an example. The most recent major tax legislation contained provisions that, in theory, encourage businesses to invest in depreciable property other than real estate. The incentives come in two major forms. One is an increase in the absolute dollar amount that the business can deduct in the year the equipment or vehicles or other property is purchased and put to use. The other is an increase in the portion of the depreciation that can be deducted in that year. Combined, the impact is substantial.

Has it worked? Presumably, yes. Businesses are investing in equipment, vehicles, and other property. Businesses are taking advantage of these provisions to purchase expensive SUVs and other vehicles, a phenomenon that has already made the popular press in terms of public outrage. But businesses also are purchasing file cabinets, desks, computers, and all other sorts of business property.

How does this increased business spending for property affect the number of jobs? The debate is underway, and it will be a few years before the facts are gathered and analyzed. One effect of increased business spending for property is that the factories making the equipment need to hire more people to staff the additional assembly lines or other manufacturing processes. If those factories are overseas, the jobs being created don't favorably shift the U.S. unemployment rate. Another effect is that much of the equipment is robotic in nature, permitting and encouraging businesses to let workers go, or to refrain from replacing a retired or deceased worker. Those annoying "press 843,403 numbers to get to a human voice" automated telephone systems put some telephone receptionists, operators, and secretaries out of work. Robots are used in the factories that make vehicles. Better technology makes equipment more reliable, and those Maytag service staff folks are not only bored but pounding the pavement. Advertisements for the robot lawn mower and the robot swimming pool cleaner are additional examples of the replacement of people with machines.

But, and this is the big but, somehow the transformation to robots and the shifting of jobs overseas has NOT improved the American economic life style. Millions of hours are wasted trying to find a human who can fix what the automatic telephone answering system cannot. There is a shortage of nurses. California continues to recruit teachers from other states to fill an expanding gap. Surely more child psychologists are needed in the school systems to head off the increases in school violence and in sociopathic behavior of adults who weren't vetted out during their school years. Is the tax law encouraging this sort of job growth?

NO.

When it comes to jobs (in contrast to investment in equipment), the tax law encourages the hiring of the downtrodden. There are tax credits for hiring ex-felons, people from economically distressed neighborhoods, and others who might otherwise not be hired. But for what sorts of jobs are these people qualified? Without a tax incentive for training, these folks are hired to do the jobs that most other Americans don't want: mowing lawns, cleaning motel rooms, and similar low-paying, low-skill positions. The theory is, I suppose, that the positions that need filling (nurses, teachers, school psychologists, humans on the other end of the phone) will be filled through the incentives of the free market, that is, through higher salaries. But that isn't happening. Why?

Why?

Think about it. Share your thoughts. And wonder, is this question being addressed where it should be? As it should be?

As I sometimes do in my classes, I'll leave this to you to consider.