MauledAgain

The tax world is interesting. Most of the people who are upset with the complexity of the federal income tax law, and who object to the loopholes and special interest provisions found in it, direct the bulk of their anger at the IRS. At the same time, there is a growing aggregation of individuals who object, not to the administrative agency, but to taxation itself. What harmonizes these seemingly discordant approaches is the tendency of people to lay blame in the wrong place. Congress, not the IRS, is responsible for the complexity and loophole corrosion of the federal income tax. In other instances, however, the governmental institution charged with administering a tax indeed deserves to be the object of taxpayer frustration, and yet too often the agencies deficiencies are conflated with analysis of the tax itself.

When it is time to hand out awards for Most Brazen Tax Administrative Agency, there will be more than a few people ready to nominate Philadelphia’s Board of Revision of Taxes. My commentaries on the flawed property tax assessment system go back almost ten years, beginning with An Unconstitutional Tax Assessment System, and followed by Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, and The Tax Price of a Flawed Tax System. As I easily predicted in the last of those, my commentaries “momentarily” ended. The story continues.

The tale of the BRT has become one of a chess game. After City Council decided to put to the voters a proposal to replace the BRT with two separate agencies, and the Mayor persuaded the BRT to relinquish its property valuation duties and restrict itself to hearing assessment appeals, five members of the BRT sued the City, as reported in this Philadelphia Inquirer story from several weeks ago. This news broke while City Council, the Mayor, and others debate how best to deal with the city’s budget gap. Thus, I wrote:

five board members of the Bureau of Revision of Taxes have sued the City of Philadelphia in an effort to derail the reforms that are underway to give the city the opportunity to fix the real estate tax. The board is trying to remove from the May 18 primary ballot the referendum question that asks city voters to decide if the BRT should be replaced with two new entities. If the board succeeds, the current property tax inequities and inaccuracies will continue. In an atmosphere of political bickering and litigious self-interest disguised as, at best, questionable concerns, what are the chances that the city can fix its tax system so that mayors and city councils need not dabble in soda taxes?

Ideally, the city would fix its property tax system, and then adjust rates as part of the process of balancing a budget. However, so much time was lost with political nonsense while attempts were being made to fix the property tax system that the city has run out of time. Its choices are terrible. Either it magnifies the shortcomings of the real property tax system, or it turns to an unwise, administratively inefficient, and possibly legally flawed tax on sugared beverages. It faces this brutal choice thanks to decades of political patronage run amok. Ultimately, failure to design and properly maintain one tax system has opened the door to another that might be impossible to design and maintain, properly or otherwise. Other jurisdictions, including the federal government, ought to heed this lesson, because the tax price of a flawed tax system is orders of magnitude higher than the cost of fixing the flawed system before it fails.

It’s no wonder that objections to raising the real property tax rate as an alternative to other proposals, such as the soda tax, the trash pick-up fee, and changes in the business privilege tax, on which I commented a few days ago in Don’t Like This Tax? How About That Tax?. Why expand something that isn’t working well? The city is between a rock and a hard place, and in no small measure due to the antics of the BRT.

Not satisfied with suing the city to prevent the reform plans from moving forward, the BRT chose to let its agreement with the Mayor to relinquish its property valuation duties expire. According to this story, in what was described as a “surprise,” the BRT decided to take back control of the property assessment process, while continuing to hear assessment appeals. The Mayor’s office claims that there had been a “verbal agreement to extend the memorandum of understanding” that had been signed six months ago. From the Mayor’s perspective, the BRT members acted to preserve the $70,000 salaries they receive for their part-time jobs. This is where the chess game analogy provides some guidance. It has been suggested that if the BRT continued to acquiesce in letting Richard Negrin, a mayoral appointee, run the assessment process, it would weaken its position in the lawsuit, because entering into and continuing to abide by the memorandum of understanding would make it easier for the city to argue that the BRT should be estopped from arguing that its existence is essential to administration of the property tax system, and from arguing that the city has no power to interfere with the BRT. But even if the BRT loses its lawsuit, until the reforms are approved by voters and put into place, the BRT could cause all sorts of problems. For example, it could reverse the freeze on property assessments that Negrin had declared shortly after taking over supervision of the assessment process. The BRT, however, seems unfazed by the fact that the judge who is involved in appointing people to the board, and the City Council member who is leading the effort to increase property taxes in lieu of trash pick-up fees, both roundly criticized its decision. It also appears that, because Negrin chose not to continue supervising day-to-day operations considering the BRT’s action, the BRT has no one exercising managerial control over its employees. Negrin noted that the BRT’s action undercut the progress he had made in getting BRT employees to “embrace” the change he was trying to bring to the “culture and performance of the agency.” According to Negrin, the BRT is “paralyzed now.”

Of course, these antics by the BRT brought a response from the mayor. According to a Philadelphia Inquirer story two days ago, the mayor announced that “he and City Council would immediately attempt to slash their salaries and seize control of their budgeting authority.” That the mayor is angry is apparent from his choice of words. He called the BRT “a rogue board,” and likened them to “pirates.” Claiming that the BRT “appears to be out of control,” and that it is exhibiting “behavior [that ] is bizarre, … irresponsible, … irrational,” and that “undermines our reform efforts,” the mayor is requesting that those $70,000 salaries be reduced to the state law minimum of $18,000. The mayor has other plans, which he did not disclose, to try to convince the BRT to renew the memorandum of understanding. The member of City Council who sponsored the legislation that put the BRT’s future in the hands of the voters has promised to “assist the mayor in reminding [the BRT] that it is City Council and the mayor that make the rules, and the BRT that follows them.”

When a tax agency behaves as does the BRT, not only butchering its responsibilities to assess properties fairly and sensibly, but also plays all sorts of games trying to hang onto power that arises from political patronage, it is difficult for those who defend the existence of taxes to justify calls for compliance when the administrative agency performs and behaves so badly. This is an instance where, however one views the property tax in terms of where it fits on the spectrum of efficient and fair taxation, the flaws arise from the BRT’s inability and refusal to do what the law commands it to do. The backlash among voters against the BRT can too easily become a backlash against taxation. Though the mayor and City Council finally are dealing with the problem, it comes very late in the game, decades and decades after the seeds of inefficiency, irregularities, and incompetence were sown. Legislatures not only need to produce tax laws that are efficient and fair, they also need to set up tax administration that is efficient and fair. One without the other is a recipe for disaster. Just as a bad tax can doom administration of the tax, bad tax administration can doom a tax. Philadelphia has become an object lesson for this proposition.

The saga of the troubles afflicting the Philadelphia real property tax continues ceaselessly. First addressed by me in An Unconstitutional Tax Assessment System, it then got attention in Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, Taxes and Priorities, R.I.P., BRT, A Tax Agency Rises from the Dead, and Tax Law as Subterfuge: Best Use Valuation v. Current Market Valuation, How to Kill a Bad Tax System That Will Not Die?, The Bad Tax System That Will Not Die Might Get Another Lease on Life , Robbing Peter to Pay Paul, Tax Style, Don’t Rob Peter to Pay Paul: Collect Unpaid Taxes, and The Philadelphia Real Property Tax: Eternal Circles .

This time, the focus is on the plight of property owners who face the long-scheduled expiration of real property tax breaks. Last week, a Philadelphia Inquirer article described a “frustrated taxpayer” who is facing homeownership after the tax abatement on her property comes to an end. Years ago, Philadelphia decided that to encourage home buying in the city, it would provide a ten-year period of substantially reduced real property taxes on properties purchased during the qualifying period. The tax abatement would persist even if the property was resold to a new owner during the ten-year period. The taxpayer in question purchased her home in 2009, “knowing that the house was in the final years of a 10-year tax abatement.” The property was assessed at $350,000, but her tax bill was only $453. She knew that in 2011, when the 10-year-period expired, her taxes would go up. Go up they did. To $10,563. In a city where the average real estate tax bill on a residence is roughly $1,350, the invoice came as quite a shock.

There are two reasons for the huge jump in the taxpayer’s real estate property tax bill. First, although, as discussed in many of the previous MauledAgain posts on the topic, most properties are underassessed, properties blessed with tax abatement are assessed at or close to actual value. Considering that some properties are assessed at 3 to 3.5 times below market value, a property assessed at or near actual value will be subject to a real estate tax bill 3 to 3.5 times what it would have been had it, too, been underassessed. Second, when the assessors placed a value on the taxpayer’s property, they overvalued it.

A private sector valuation expert noted that “anyone shocked by a post-abatement bill was being ‘willfully ignorant.’” Yet, he explained that if enough people are “willfully ignorant but upset, then the city has a problem.” The extent to which property owners do not appreciate the impact of tax abatement in the long term is reflected by a comment made by the taxpayer in question, “I guess I didn’t really understand the tax implications.”

Long-term residents have little sympathy for taxpayers who enjoyed ten years of tax breaks. The taxpayer featured in the story owned the property for only several years, but the previous owner had the benefit of the abatement. In a buyer’s market, ought that not have been taken into account in determining the purchase price? Should the taxpayer have said to the seller, “Look, you’ve pocketed a cumulative real estate tax savings of tens of thousands of dollars over the past seven or eight years. I’m looking at a huge tax increase in two or three years. That reduces the amount I’m willing to pay for the property.” During the real estate boom, that might not have worked, but in today’s market, the buyer has the leverage to take this approach. I wonder how many realtors and home purchasers in Philadelphia take into account looming abatement expirations.

The pending Actual Value Initiative, offered as a solution to the various issues afflicting the city’s real property tax, would also resolve the abatement expiration difficulty. But that effort is stymied by politics and, most likely, a deep misunderstanding of the economics. Politicians, like most taxpayers, aren’t as adept with numbers as they ought to be and need to be.

The taxpayer appealed to the Bureau of Revision of Taxes, which lowered her assessment. But it got hung up on the math, specifically, the conclusion by the State Tax Equalization Board that the city was not assessing at the appropriate fair market value percentage. At the moment, both the taxpayer and the city have filed appeals though the court has not yet scheduled a hearing.

With the real property tax system falling apart, it would make sense to conclude that the officials charged with a fiduciary responsibility to protect the city, and its revenue process, would be working assiduously to solve the problem. Instead, the crisis becomes a political football, as is the case with pretty much every other public issue confronting this country, whether nationally, regionally, or locally. The well-being of the public good has become the neglected child of a political system co-opted by those giving highest priority to continuity of office, personal power, and aggrandizement. There is a problem, a workable solution exists, and it’s time for the city’s politicians and the state’s legislators to do the job they were elected to do.

With each passing year, the number of taxpayers subject to the alternative minimum tax (AMT) grows, as does the attention given the issue in mainstream media. It is a popular tax topic for journalists, as evidenced by reports such as this one, particularly because its growing reach does not sit well with those who are brought within it on account of the way the AMT is structured.

Though Congress has tinkered with the AMT to offset some of its growth, the fixes are temporary. When those fixes expire, assuming that they are not extended, as many as 30 million taxpayers may find themselves subject to a tax that was designed to prevent wealthy taxpayers from using tax breaks to reduce their income tax liability.

Some reformers call for repeal of the AMT. Others think that further polishing will solve the problem. For example, one proposal is to make capital gains and dividends that otherwise are taxed at special low rates subject to the AMT. Take a look at Linda Beale's "Congress Fiddles While Middle America Burns: Amending the AMT (and Regular Tax)". Others suggest permanent increases in the threshold amounts below which the AMT does not apply. A few have advocated repealing the regular income tax and letting the AMT be the structure used to compute income tax liability.

I take a very different approach, though I doubt I am the only one to consider it or even to adopt it. To me, the AMT is nothing more than a patch on a very flawed regular income tax. In other words, if the regular income tax were properly designed, there would be no need for a "fix" to deal with the consequences of taxpayers whose regular income tax liabilities are reduced because they take advantage of the deductions available in the tax law. If the regular income tax causes some taxpayers' tax liabilities to be less than what people think they ought to be, and yet those tax liabilities are computed properly, then the problem is in the design of the regular income tax. In other words, the existence of the AMT is proof positive of the flaws of the "regular" tax. Fix the regular tax and there's no need to fix the fix.

The most frequently heard or read disagreement with my approach is a political one. Succinctly, it is easier for a politician to tinker with the AMT than it is to fix the regular income tax mess. It takes far more courage, far more vision, and far more technical savvy to heal the wound than it does to change the color of the band-aid.

Sadly, it probably is true that the Congress, whether controlled by Democrats or Republicans, will not do what needs to be done. Whether it will adjust the AMT remains to be seen, but surely the eternal quest for votes will trigger some sort of relief lest the next electoral results exceed a simple turning out of the incumbents.

The intrusion of politics is unfortunate. Service to country and fellow citizens has taken a back seat to loyalty to party and party bosses. Crafty publicists hawk tax breaks in a superficial manner, leading taxpayers to think they are getting a tax break even though the AMT blocks that tax break from having any real effect. How is this possible? The tax law is so complicated that most taxpayers don't understand that they are being conned. Perhaps it is not a mere oversight that tax law is not taught in the nation's high schools.

What's worse, some people prefer a flawed regular income tax system. They have more to gain by it than from a transparent, honest, efficient, sensible and fair income tax system. The advantage of a flawed tax system is that it permits the folks who think they're entitled to go straight from the left turn lane and to cut in front of everyone who have been waiting patiently to sneak in a special break without anyone noticing, while also tossing in symbolic tax reductions that end up vaporizing under when the AMT is applied.

Nonetheless, I offer this challenge to the newly elected Congress whose members have assumed a mandate of "leading this country in a new direction" to back up their promises with action. Rather than wasting time and intellectual capital arguing over the trivial stuff, take the opportunity to clean up the income tax mess. Jettison the dozens of exclusions, deductions, and credits directed toward special interests, put an end to special low tax rates, remove the working poor from the tax rolls, and restore progressivity so that someone with $30,000,000 of taxable income is taxed at meaningfully higher rates than someone with $1,000,000 or $400,000 of taxable income. Done properly, a genuine reform would permit reduction of tax rates so that there would not be as much incentive for special interest groups to seek special tax breaks and would permit repeal of the AMT. The Pennsylvania individual income tax, with few exclusions, almost no deductions, a handful of credits, a prohibition against using a loss in one category of income to offset income in another category, and a rate of just over 3 percent, simply doesn't attract the sorts of power brokering, back room dealing, hideaway dinner meetings, and disguised lobbyist favors that have infected the federal income tax.

The incoming Congress has a golden opportunity to make a genuine difference. Let's see what it can, and cannot do.

Readers of the MauledAgain blog surely have noticed the increase in posts related to indictments of, convictions of, and guilty pleas by tax return preparers. Those posts include Tax Fraud Is Not Sacred, Another Tax Return Preparation Enterprise Gone Bad, More Tax Return Preparation Gone Bad, Are They Turning Up the Heat on Tax Return Preparers?, Surely There Is More to This Tax Fraud Indictment, Need a Tax Return Preparer? Don’t Use a Current IRS Employee, Is This How Tax Return Preparation Fraud Can Proliferate?, When Tax Return Preparers Go Bad, Their Customers Can Pay the Price, Tax Return Preparer Fails to Evade the IRS, Fraudulent Tax Return Preparation for Clients and the Preparer, Prison for Tax Return Preparer Who Does Almost Everything Wrong, Tax Return Preparation Indictment: From 44 To Three, When Fraudulent Tax Return Filing Is Part of A Bigger Fraudulent Scheme, Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, and Sins of the Tax Return Preparer Father Passed on to the Tax Return Preparer Son.

In Preparers Preparing Fraudulent Returns Need Prepare Not Only for Fines and Prison But Also Injunctions, I wrote:

Something is amiss. To get into these situations, a preparer must conclude that the rules don’t matter, that the rules matter but only for others, that the fraudulent return preparation activity won’t be detected, and that there will be no consequences. These aren’t cases of carelessness, negligence, ignorance, or other problems caused by preparers who want to do what’s right but stumble. Those preparers can be helped to get better because they are trying and can benefit from additional tax preparation education. The preparers who engage in generating fraudulent returns know that what they are doing is wrong, but don’t care. Unfortunately, that attitude, not caring about doing what is wrong, isn’t limited to tax return preparers cranking out fraudulent returns. In that sense, the fraudulent tax return preparation problem is simply one facet of a much bigger issue, one that reaches far beyond taxation.

Reader Morris took note of my comments and suggested to me, “Maybe the problem is not enough people are being sentenced and those that are sentenced are not going to jail. Maybe the problem is the IRS is not adequately funded and are investigating fewer tax preparers.” He referred me to an Accounting Today article, “IRS investigating fewer tax preparers,” which discussed information contained in the 2020 Annual Report of the IRS Criminal Investigation Division. According to that report, investigations of abusive tax return preparers dropped from 224 in 2018 and 163 in 2019 to 140 in 2020. Similarly, recommended prosecutions dropped from 177 and 203 to 145, informations and indictments dropped from 170 and 138 to 128, and the number of preparers sentenced fell from 148 and 154 to 112. So the observation I made in Another Tax Return Preparation Enterprise Gone Bad was off the mark. I had noted, “Perhaps they are turning up the heat on tax return preparers gone bad. They being investigators and attorneys at the Department of Justice, though they usually work in cooperation with agents and auditors from the Internal Revenue Service.” Apparently that’s not the case. According to the Accounting Today article, IRS Criminal Investigation chief Jim Lee attributed the declines to a combination of new agent training and the pandemic, including impacts not only at the IRS but at the Department of Justice.

This information is relevant if, in fact, the decline in investigations and prosecutions in 2020 somehow invited more tax return preparer misbehavior. If that were the case, then as investigations and prosecutions increase, along with convictions, guilty pleas, and sentences, tax return preparation fraud should decrease. This proposition is, of course, one that finds parallels in all facets of criminal law. Does increased enforcement reduce crime? The debate over the answer to that question has raged for decades, with proponents on both sides finding and offering evidence.

But my concern isn’t simply with what I described in Fraudulent Tax Return Preparation for Clients and the Preparer, where I wrote:

It’s no secret that there are tax return preparers who do not comply with the tax laws. It’s no secret that they get caught. It’s no secret that they are indicted and either plead guilty or are convicted. Yet there are tax return preparers who continue to prepare and file false returns. Given the eventual outcome, why do they do this? Yes, there are people who think they can “get away” with a crime, but when the activity leaves a paper trail, it makes it too easy for the IRS and Department of Justice to discover the reality.

My concern is why some people prefer to do what is wrong, might be or might not be deterred by enforcement, and cannot, on their own, choose to do the right thing and refrain from doing the wrong thing even in the absence of the threat of being caught and sentenced. In some instances, preparers who commit fraud do not think it is wrong and somehow justify, at least to themselves and perhaps to their clients, that there are good reasons to ignore societal norms and laws. Often, these positions are taken because of a combination of the person not receiving adequate ethical training during childhood and an intentional delivery of law-breaking encouragement from other sources. It’s a difficult issue, because whether there are instances in which breaking a law is justified is yet another question that has fueled a debate that has been ongoing for centuries. Yet there is no need to dive into that discussion when addressing the question of tax return preparation fraud. Even if someone could conjure up a justification for preparing and filing fraudulent tax returns, doing so makes such a mess of the clients’ lives that some other avenue for communicating the justification needs to be identified. For example, a tax return preparer who tries to justify the fraud because “taxes are too high” or “the client needs quick cash” can and should find other ways to protest tax rates or help clients get loans. Yet the fact that most tax return preparers take a substantial “cut” of the refunds they generate for clients through fraud suggests that their motive isn’t some altruistic concern about tax rates or client liquidity but simply another seemingly “quick and easy” means of getting money. And that is why I wrote, as quoted above, “In that sense, the fraudulent tax return preparation problem is simply one facet of a much bigger issue, one that reaches far beyond taxation.” The miserable condition of the nation’s economy, growing wealth and income inequality, increases in unemployment, and the economic and other insecurities afflicting a substantial portion of the nation’s people, the impact on the poor of the money addiction of the ultra-wealthy, and the perception that those with money can get away with, or be pardoned for, crimes, especially economic crimes, all encourage some people to turn not only to tax return preparation fraud but also to a variety of similar misdeeds, such as impersonating the IRS in scam phone calls or the fake delivery “brushing” scam.

Reducing tax return preparation fraud will be easier to accomplish if it is part of a larger attack on all types of fraud, not just the tax kind. Better yet, that larger attack is more likely to succeed if it is part of an much bigger attack on crime. Success requires more than increased enforcement, but fair, equitable, and just enforcement. So long as those with money and connections are less frequently investigated, indicted, or arrested, get lower sentences, get preferential treatment while in custody, are far more likely to receive a pardon, and can “get away with murder,” even on Fifth Avenue, at least some of those not so privileged will turn to tax return preparation fraud, to say nothing of other crimes, in an attempt to compensate for the inequalities. It is said, “If it ain’t broke, don’t fix it.” It’s too easy to forget the corollary. “If it doesn’t work, fix it.” It’s not enough to prosecute and sentence fraudulent tax return preparers. It’s absolutely necessary to prosecute and sentence, at the same rate and with the same intensity, the folks who are playing tax fraud games with orders of magnitude more dollars on much bigger stages.

All sorts of tax news breaking today. I'm going to postpone discussion of the corporate tax bill passed by the Senate until it reaches Conference. I'm going to postpone discussion of the tax reform hearings before Philadelphia's City Council until it does (or doesn't do) something.

I haven't said much about the relationship between taxes and the internet, and because discussion is starting to heat up again, I want to share some thoughts.

The notion of "taxing the Internet" makes about as much sense as "taxing a highway." Highways are not people or entities and they don't pay taxes. The Internet is not a person (sorry, Bill Gates) and it is not a legal entity. So it doesn't pay taxes and it doesn't file tax returns.

When people mention "taxation of the internet" they mean two things. One is taxation of transactions and activities conducted on or through the internet. The other is taxation of access to the internet. Continuing with the "information superhighway" metaphor, the first is similar to taxing gasoline used by vehicles to drive on a toll road, and the second is similar to the toll charged for access to the toll road.

So much has been written and spoken about taxation and the internet (notice the very careful use of the words in that phrase) that I'm not going to try to provide links. Nor am I going to dissect the specifics of the many proposals, arguments, rebuttals, and commentaries that have been served up to us. I'd rather try to straighten out the context in which the discussion occurs.

The overriding principle that should apply is this: when it comes to taxing transactions and activities conducted on or through the internet, or taxing access to the internet, those transactions, activities and access should be taxed no differently from the way in which transactions and activities conducted through means other than the internet are taxed. This principle, though, is ignored by those who take either extreme position with respect to taxation and the internet.

On the one side is the argument expressed in the title of Dick Armey's Philadelphia Inquirer commentary: "Cyberspace is the last frontie; don't let them tax the internet" [you need to subscribe (which is free) to access the article]. Armey advocates keeping the internet tax-free, though that is a misleading goal. The internet has not been tax-free, is not tax-free, and will not be tax-free. Armey argues chiefly against taxing Internet access, but he doesn't distinguish between that sort of imposition, and taxation of transactions conducted through the Internet. The principal argument that he and other "don't tax the internet" advocates raise is the wisdom of letting Internet technology grow and mature without the hindrance of taxation. If we were to abolish taxes on all who need to grow and mature, there wouldn't be much left to tax.

On the other side are the folks who advocate taxing all internet transactions. Chiefly advanced by some state legislators, who are seeking to increase state tax revenues, the argument is that any connection whatsoever between the transaction and the state entitles the state to subject the transaction to its tax system. The best example is that of on-line sales and the extent to which a state sales or use tax should apply. Suppose consumer A, living in New Jersey, uses the Internet to access the web site of a retailer located in Illinois, looks at products, orders a product, pays using a credit card, and receives the shipment in New Jersey. Does a sales tax apply? The answer is found in the tax treatment of a similar transaction, in which the person's neighbor looks at a print catalog, phones the retailer, and makes the purchase. New Jersey cannot require the retailer to pay a sales tax because the sale does not take place in New Jersey, and New Jersey cannot require the retailer to pay a use tax unless the retailer has a sufficient "nexus" (or set of contacts) with New Jersey to justify imposing the tax. Without getting into all the technical analysis, sending a catalog into New Jersey is not sufficient nexus. Why should the Internet transaction be treated any differently? What New Jersey can impose is a use tax, on the purchaser, but effective administration and enforcement of use taxes seems to escape state legislatures. The hole in tax revenue caused by inefficient use tax enforcement existed long before the Internet came into being, but the Internet brought attention, and the attention brought the state legislatures the temptation to make the retailers do their use tax administration and collection for them.

States are strange in this respect. Because Delaware has no sales tax, and Pennsylvania does, many Pennsylvanians drive to Delaware to purchase items on which they do not pay the Pennsylvania use tax. Delaware merchants use "no sales tax" plugs in their advertising. Unlike the Liquor Control Board, which sends undercover agents to the District of Columbia (where alcohol is much less expensive principally because of lower taxes) to look for vehicles with Pennsylvania license tags outside retail liquor establishments, and who then call ahead to officers "waiting at the border," the use tax division doesn't seem to care. Some states now include a "use tax" line on their income tax returns. How effective that will be remains to be seen.

Between these two extremes, but also advocating positions that are theoretically or practically untenable, are those who suggest taxes on email, taxes on all Internet transactions but not on access, and taxes on all Internet access but not on transactions. Each of these deserves a moment in the spotlight. It's easier to knock something down when it can be seen.

Taxes on email are advanced primarily as a means to end spam. The argument is that spammers send so much email that the taxes would cripple their operations but not affect other users. First problem: similar arguments were made when the income tax was first enacted, with promises that only those with very high incomes would be subject to that tax. One need not be a tax expert to know that where we are today with income taxes isn't what was promised. Once the foot is in the door.... Second problem: most spammers operate outside the jurisdiction of the U.S., so just as they laugh at laws making spam illegal so too they will laugh at the imposition of a tax.

Taxes on all Internet transactions but not on access are advocated by those who think that the door to the internet should be open to as many people as possible, something that is more likely if access taxes are prohibited, but that transactions on the Internet should be taxed. There is a flaw with both parts of this position. If access to the internet should go untaxed in order to maximize availability to everyone, then so too access to cable, telephone, and every other form of communication should be tax-free. If all transactions on the Internet should be taxed, then all transactions not on the Internet should be taxed, a result that is unconstitutional and that does not occur under existing law.

Taxes on Internet access but not on Internet transactions are advocated by those who think that Internet access is no different from access to any other form of communication, but who argue that tax-free Internet transactions will encourage people to access the Internet. The first part of this position makes sense, provided it is applied consistently with existing access taxation. The second part of this position says too much. If repealing (or refusing to enact) sales taxes encourages people to do business in a state (such as can be argued is the effect in Delaware), what happens when all states repeal their sales taxes? The edge held by one state over another in the economic arena disappears. Perhaps that is good. Perhaps it is better to repeal all taxes. "Then what?," he asks rhetorically and sarcastically.

The toughest positions to analyze are those that sit between the extremes but that lack internal consistency. The arguments advanced in a letter to the editor responding to Armey's commentary, also found on the Philadelphia Inquirer web site and requiring the free sign-up demonstrate this problem. First, the writer argues that internet access of any type should be taxed as is telephone and television access. That statement is followed by the suggestion that email and other information access and distribution should not be taxed because there is no tax on postal mail or library use. Aside from taxes that are imposed to provide the library resources, the chief problem with this argument is that it conflicts with the first. A person who uses the Internet only for email and information access nonetheless would be subject, under this writer's vision, to the access tax imposed on the person's DSL, cable or other connection means. If, however, the writer is arguing against a SEPARATE, ADDITIONAL tax on email or information access, then the writer makes perfect sense. Maybe the editor edited the letter.

The writer then argues that "products and services bought and sold via the Internet should be subject to all taxes levied today just as if you went to your local hardware store, bookseller or antique shop." The first problem I have with this argument is that information access and email are services, so I suppose the writer intends that "(other than email and information access and distribution)" be inserted after "products and services bought and sold via the Internet"? The second problem I have is that the writer equates purchasing a product via the Internet with going to the local store, when in fact it is unlike going to the store and instead, most like shopping via a print catalog. The writer would give states the right to require Internet vendors to collect use taxes, even though there are constitutional roadblocks to doing so. The writer's unfamiliarity with these limitations is evident from the next sentence: "A sales tax is a sales tax regardless of where or how you buy the product." That just isn't so. Pennsylvania cannot impose a sales tax on a purchase made in Delaware. The WHERE of the transaction matters. Legislatures deal with this situation by imposing a USE TAX on the Pennsylvanian who makes the purchase in Delaware (but it cannot require the Delaware store to collect that use tax unless that Delaware merchant has some connection with Pennsylvania).

Finally, the writer concludes with a proposition that baffles me: "The people and organization connectivity, information access, educational value, and search engine capabilities of the Internet are the essence of what needs to be available to everyone tax-free. Everything else should be subject to fair taxation." Well, this proposition is inconsistent with arguing that internet access should be taxed as is cable and telephone access. It also extends tax exemption to some of the products and services that the writer argued should be taxed just as if a person went to the local store. The education value tax exemption doesn't leave much that isn't educational, unless, of course, the writer means "educational as I define educational," a definitional snag that would sidetrack the proposition. The meaning of "fair taxation" has been debated for centuries, so I won't criticize the writer on this point because it's peripheral to the main question.

The purpose of taxation should be to raise revenue to cover the cost of legitimate government activities that benefit all citizens. Of course, most governments use taxation to redistribute income and wealth, to encourage or discourage specified behaviors or activities, to reward cronies, and to enhance the power of politicians. Serious debate about the purpose of taxation involves the "meeting costs" perspective the "income and wealth redistribution" perspective, and the "social engineering" perspective. The principle that "activities and access involving the Internet should be taxed no differently from the way in which transactions and activities conducted through means other than the internet are taxed" leaves the resolution of tax policy to a debate that transcends the Internet. Access to the Internet and transaction conducted on or through it are treated no more harshly, or gently, than any other.

If, however, someone wants to argue that the Internet is different, three things must be demonstrated. First, the advocate must be willing to eliminate Internet access and transactions from all taxes so that the slate can be clean for the next step. Second, the next step is to make a persuasive argument that a tax on Internet access and/or transactions can achieve one or more of the three serious tax goals: cost matching, income and wealth redistribution, or social engineering. Third, if such a tax CAN have advance the goal, then it must be shown that advancing or meeting that goal is something that SHOULD be done.

Although taxation with respect to Internet transactions as a means of advancing social engineering goals (e.g., the taxation of spammers) has been suggested, no one has yet demonstrated that it can be done. Suggestions with respect to the taxation of Internet gambling, for example, run into the same problem as does the email tax proposal: the Internet transcends the jurisdiction of any one government (notwithstanding the attempts of some nations to control the language or content of what's on the web or the attempts of some tiny village to restrict the Internet to the boundaries of its culture).

Using taxation with respect to Internet activity to redistribute wealth or income doesn't make sense. If use of the Internet, access to the Internet, or providing access to the Internet generates income for a person, existing income taxes apply. If such use or access generates wealth, existing property, estate, and inheritance taxes apply.

Taxation with respect to Internet access and activity to recover societal costs DOES make sense, IF and only if it can be demonstrated that the Internet imposes on society or government costs that did not exist before it came into being. If a state Attorney General must hire five more attorneys to combat Internet fraud, or if a state gaming commission must hire ten more staffers to deal with internet casino problems, or if a federal agency must hire fifteen more people to protect citizens from phishing schemes, then some sort of tax could be justified. The question would be, what sort of tax? Ideally, the tax should be imposed on the people making it necessary for the government to incur the costs. It cannot and does not happen that way. For example, governments incur costs to provide police protection from, and criminal prosecution of, criminals. Yet there is no special tax on criminals. True, criminals can be required to reimburse the government for costs, but that rarely happens. In terms of benefit, everyone benefits from police and prosecutorial activity, so the tax is imposed on all taxpayers subject to the applicable tax (usually a property tax and often an income tax).

How's the best way to tax those who benefit from government activity to protect users of the Internet? Taxing those who use the Internet. Should the tax be a flat access tax? No, because that WOULD deter people from getting on board the technology train. Should it be a tax based on volume of use? Yes. At what point should it be imposed? By whom should it be imposed? If it is imposed by a state on state residents, how can that be administered? It can't, not without expensive alterations to the Internet structure and imposition of huge administration costs on providers.

The Internet is global. The taxation needs to be global. But how could that be administered when the world's nations have demonstrated that they can't administer anything that well? They've come close with a few treaties. The Internet is seen by some nations and groups as a threat, by others as an opportunity to do good, by others as an opportunity to expand economically, by still others as an opportunity to assist in damaging others, and the list of interest groups with competing interests includes many others.

So, as a practical matter, the best that might be possible is simply this: (1) tax access as is taxed telephone and cable access, (2) tax retail transactions as catalog sales are taxed, imposing use tax collection responsibilities on those with sufficient nexus to the taxing state, (3) eliminate and prohibit "Internet only" taxes, and (4) find another way to deal with spammers, casinos, and other social behavior that is considered unacceptable or inappropriate.

Peter Pappas is at it again. In More Lies about Tax Lies, he attempts to rebut the points I made in Tax Myths, Tax Lies, and Tax Twisting. In his effort, he engages in the same sort of twisting and misrepresentations that are at the root of what I set out to debunk.

Though the myths I discussed were those presented on another web site, Pappas persistently refers to them as “Maule’s . . . Myth” in a blatantly obvious attempt to cause his readers to think that I developed the myths. No, I simply was commenting on a list developed by someone else.

Pappas claims that “No serious person on the right has ever suggested that the poor should pay more taxes because the wealthy are over-taxed.” I suppose Orrin Hatch is not a serious person. He’s not the only one complaining that the poor, and the middle class, should pay more. So when Pappas claims that “Conservatives want everyone to pay less taxes,” his assertion flies in the face of what has been said. But in missing this reality, Pappas is trying to deflect attention away from the original point, which is that the failure to use the phrase “federal income” before the word taxes, in other words, the failure to be precise, creates an impression that is erroneous but intended.

Pappas then again tries to deflect attention from the error by claiming that the omission of the phrase is designed to rebut an alleged lie, that is, that the rich don’t pay their fair share of income taxes. Aside from the fact that an opinion about fairness cannot be a lie because there is no truth or falsity to an opinion, an attempt to rebut a statement, whether opinion or asserted fact, ought not be made by offering an imprecise statement that implies a falsehood. Pappas demonstrates the futility and desperation of his position when he claims that the fact that the “top 50% pays 100% of the federal income taxes” means that “the assertion that the top 50% does not pay its fair share is false.” Why? Because the assertion is that “the rich don’t pay their fair share of income taxes” which is a different question from whether the “top 50%” is paying a fair share. Lumping the top 1% with the next 49% is a sad gesture of trying to hide the wealthy among the middle class.

Finally, Pappas gets to the root of the problem. He claims “Maule knows that we are and always have been talking about federal income taxes.” Of course. That’s not the issue. The issue is my concern that typical Americans who are not tax professionals don’t know that. When they ask me about what they are hearing and reading, they demonstrate the pernicious effect of deliberate lack of precision. The liars know that they might not have much of a chance of fooling some of us, but they certainly are taking their best shot at fooling most of us. Pappas then claims that because I object to these misstatements, it proves I am a liar. Yet Pappas admits that the critical words “federal income” are left out. So how am I a liar when my claim is that those words have been left out, and that by leaving them out, the statement implies something other than the truth? The answer is Pappas’ claim that I labeled the statement “47% of Americans don’t pay federal income tax” as a lie. I challenge Pappas to show us where, in any of my posts, I have asserted that the statement “47% of Americans don’t pay federal income tax” is a lie. I asserted that the statement “47% of Americans don’t pay tax” is a lie, and Pappas' only defense is that the two statements are the same. They’re not, and the inability to tell the difference between the two says a lot about Pappas and his argument.

When Pappas then claims that I plan to “confiscate wealth” from the haves, he climbs even deeper into the pit of rhetorical nonsense. All I have argued, for years, is that the Bush tax cuts were unwise, especially during a war. Letting the Bush tax cuts expire is not confiscation of wealth. And when he repeats the claim that no one has ever said that “47% of Americans don’t pay any tax at all” he conveniently ignores supporters of his outlook on taxation such as the Rev. Rick Warren, who told his followers, “HALF of America pays NO taxes. Zero.” So who’s the liar and who’s the propaganda minister?

Pappas then turns to the second myth, that “The American people and corporations pay high taxes.” He ignores the fact that I pointed out that the word “high” is “more difficult to parse.” Instead, he asserts that tax rates in other countries are meaningless. That could be so, but there are plenty of tax-reduction and tax-elimination advocates who point to tax rates in other countries as warnings of what will happen if taxes are not reduced even more. The worst part of his attempt to deal with the second myth is the way Pappas attributes things to me for which he has not proof. For example, he claims, “Most Americans don’t want to be like France, even if Professor Maule does.” Again I challenge Pappas. Show us where I have taken that position. Pappas follows that sentence with a footnote, but was I ever disappointed to discover that the footnote lacked any citation or link to proof of his assertion. Actually, I wasn’t disappointed. I was elated, because the lack of the proof demonstrates that Pappas is making up facts. After all, if he had proof, surely he would have provided it.

When Pappas gets to the third myth, he asserts that “Maule knows very well that many, if not most, conservatives don’t want to raise government revenues at all.” Of course I know that. My point is that although they want to reduce government revenue, the tax-cut proponents argue the opposite, perhaps because they know that they would lose votes if they admitted they want to cut government revenues to the extent they intend. In other words, when tax-cut advocates claim that they want to cut taxes in order to raise revenue, they know they aren’t coming clean with America.

Pappas then tries to take apart the third myth by claiming that tax cuts do create jobs and that the President has admitted that tax cuts create jobs. What the President said, however, is consistent with my point, namely, that tax cuts for the 99% generate jobs. Why? Because those cuts are an application of demand-side job growth. The tax cuts that bring joy to the wealthy, however, rest on the disproven and failed supply-side approach.

Pappas then tries to attribute to me a goal of increasing the top rates to the 70% to 90% range, but at least this time he buys himself some leeway by using the phrase “I suspect even Maule, himself [takes that position]." By phrasing it this way, he has an out when he fails in my third challenge, which is to demonstrate that I have made such an argument. That he wants to take my goal of letting the top rate return to 39.6%, where it was when the economy did well, and recast it as a claim that I want it to reach double that rate is quite revealing. He adds to that an unconditional claim that I favor increased government spending. Here’s yet another challenge for Pappas. Show us where I’ve taken that position.

Pappas doesn’t like the statistics, widely accepted, showing economic growth and tax rates, and relies on the idea that correlation is not causation. He claims that “myriad other factors” contribute to economic performance. That, however, does not remove tax rates as a factor. Some of the factors cannot be controlled, such as weather damage or overseas political conflicts, but tax rates can be controlled. Tax rates were cut in 2001. How have you fared since then?

My post yesterday challenging the assertion that the Internal Revenue Code is "clear, simple, and well organized" has brought a quick and intense response from the People's Tax Lawyer (Kreig Mitchell) and a nicely reasoned and balanced "middle position" analysis from Stuart Levine.

Mitchell stresses that he is a practitioner. So, too, am I, though no longer on a full-time basis and no longer with taxpayers (aside from a few to whom I dare not say go away). My clients are tax practitioners, directly and indirectly. So when I help a tax practitioner help a client I'm not doing something all that different (if different at all) from what tax practitioners do.

Mitchell writes, "the non-practicing tax professor’s job is to ferret out arcane and obscure rules and fact patterns that may or may not be an issue or even arise in real life. Such a reading of the Code allows the tax professor to test which students deserve the higher mark and which deserve the lower mark." Where Mitchell gets this idea is a question I'd enjoy having answered, because that's not what I do as a tax law professor. There is no time in my courses to ferret out arcane and obscure rules. There's not enough time to deal with the basics. Although occasionally a student complains that I left an exception to an exception for some later day in practice, most appreciate the separation of fundamentals from arcane that characterize the courses that I teach. Granted, some don't quite grasp this until they are in practice and discover that client problems and assignments from partners make my tax courses seem like child's play. My job is to prepare students to learn how to interpret the Code and other tax sources and to learn how to teach themselves as they progress through a career during which there likely will be 20 or more major tax acts changing how they deal with their tax and non-tax clients. Mitchell's assertion reminds me of the students who contend that if they got a question wrong it was because the question addressed an obscure provision. I resist responding that a provision never read is indeed obscure.

Mitchell then attacks academic scholarship:

It also provides academic job security. The process goes something like this. One professor writes an article on some arcane and obscure rule or fact pattern. It is sufficiently long and/or complex so that no one actually reads it. Everyone just assumes that the piece is good and wise and the professor adds another publication notch to his or her belt. Then a second professor writes an article citing the first professor, which adds a publication notch to his or her belt. The process continues until there is a whole mess of writing on an issue that may or may not materialize in real life. Then one or more professors hold themselves out as consultants on the issue -- advising tax planners as to how the issue is important and how they can help their clients avoid it. The process has the trappings of a multi-level marketing scheme. I have not read the particular tax professor’s work, but I think that this is the market for tax translation that the professor mentioned.

Well, as everyone who listens to me or reads my comments on the matter, I'm no fan of typical academic scholarship published in student-edited, and usually untimely, law reviews. I'm somewhat of a misfit in the law school "academy" because my writing, whether articles, book chapters, or books (such as Tax Management Portfolios) focuses on problems that already exist in practice. That's why I keep in contact with practitioners. It lets me find out what's happening in the practice world. Amazingly, and it absolutely amazes me, Mitchell hasn't read any of my writings. Let me be an egomaniac for a moment. How can anyone practice tax and not use Tax Management portfolios, at least now and then? And if anyone is dealing with the income side of tax (in contrast to international or estate and gift), the place to start is with the 8 overview portfolios, all of which have been written by this "particular tax professor." Hmm. That idea of the unread and therefore obscure and arcane provision seems to resurface here. So the accusation that I, or for that matter, any other tax law professor, invents issues that otherwise would not exist and then inject them into the practice world is flat out silly. The few tax law professors who confine their writing to highly theoretical and conceptual explorations are not in a position to so influence practitioners.

Mitchell then contends that

even if these arcane and obscure rules and fact patterns do arise, they have a way of working themselves out. This occurs where the government is not able to recognize the issue; the government recognizes the issue but decides not to pursue it; the government recognizes the issue, pursues it, loses in court, and gives up; or the government recognizes the issue, pursues it, loses in court, and expresses that it will continue to pursue the matter. In the later case it is only a matter of time before the courts or Congress clarifies the issue or the issue becomes a non-issue via one of the previously stated means. In the end, the tax professors are the only ones talking about the issue (typically for many many years).

An issue that affects a taxpayer is not arcane and obscure to that taxpayer. Absent guidance, the taxpayer must choose between safe surrender and risky adventure. Sometimes what little guidance exists comes from things such as Tax Management portfolios. Considering the number of law review articles and Tax Management Portfolios cited by the courts, surely the output of practitioner-focused tax law professors has value. Let me self-promote again. A few years ago, I discovered, thanks to an observant law librarian, that the Department of Justice had cited some of my Tax Management Portfolios in appellate briefs, on more than a few occasions.

Then Mitchell states: "The truth is that a great many tax cases are won on procedural grounds without ever getting to the underlying substantive tax law. Yet very few tax professors write about or even teach tax procedure. The academic world portrays tax procedure as lowly or not worthy of academic study." I must bring this to the attention of the two faculty members who teach a basic and advanced tax procedure course at my school, and, oh, there's one that deals with criminal tax procedure. I devote 2 days at the beginning of the basic tax course taking students through an overview of procedural issues. Every survey result I've seen suggests that J.D. students are getting some exposure to procedure, and LL.M. students are pretty much compelled to take at least one such course. I'd like to see the empirical evidence that supports Mitchell's assertion.

What follows is shocking. He writes, "Rather than teaching the law and skills necessary to do this, tax professors employ their flawed means of reading of the Code to have their students explore the merits of one or two words in the Code." Flawed means? Does Mitchell intend to suggest I (alone or with my colleagues) have turned thousands of students into bumbling tax practitioner fools? Surely such an outcome flies in the face of what my practitioner graduates tell me.

I guess Mitchell doesn't like tax law professors. How else to explain this comment: "But to be fair, reading the Code for arcane and obscure issues and fact patterns is not entirely useless. It does give tax professors something to do, it does allow tax professors to feel like they are contributing something, it does help justify paying tax professors a salary, and in rare cases, it does add to the body of tax knowledge." I wonder what traumatic academic experience brought about such a "paint with a broad brush" attack.

But here is a clue:

This brings back memories of my partnership tax law class. In that class the professor did not simply cover the main rules and point out interesting or novel issues. Instead, the professor went into great detail about very specific fact patterns involving inside and outside basis, tax and cost basis, minimum gain charge back and qualified income offset provisions, and about other minutia. For sure, it was all good information to know. However, the fact patterns presented were very obscure. At the review for the exam one student asked the professor how partnerships could function in the real world given our partnership tax laws and why anyone would set up a partnership given the amount of compliance work that would be required to comply with the partnership tax laws. The tax professor responded by saying that almost no one complies with the law. After graduating and practicing I now know that the professor was partially correct.

First, note the typical desire for "main rules" and "interesting ... issues" in contrast to the nuts and bolts of practice. This is a desire of which most of my students need to be, and are, eventually, disabused. Second, inside and outside basis is a fundamental linchpin of subchapter K. Tossing it off as "minutia" indicates a total lack of appreciation for what partnership taxation is about. Questions from practitioners struggling with real-life, practice world subchapter K issues involving basis, minimum gain chargebacks, and similar issues dominate the ABA-TAX listserv. Why? Because the Code, and yes, the regulations, are not well drafted. So I get to "translate" not only for list participants but for the dozens of practitioners who email me directly. If these are silly arcane issues, why are the practitioners wasting their time with them? Yes, compliance is horrible in this area of tax law. Why? Because people don't take the courses? Because the law (Code, regs) is NOT as simple as Mitchell contends? Because as students practitioners "tuned out" anything past "main rules" and "interesting issues"? Surely, reading the Code through a filtering lens of "main rules" leaves the practitioner with a simple (but erroneous) short and easy text.

Mitchell then states, "In the end, many of the partnership tax issues that were so pertinent in my law school partnership tax class are really non-issues in practice. Even then, I recently read an article by that very same professor complaining about the complexity of our tax code. Go figure." Well, of course, go figure. Yes, I complain about the complexity of the Code. Mitchell claims the Code is clear and simple. (He also claimed not to have read any of my works, but I guess he did.) My partnership tax class focuses on issues that practitioners have presented to me in one way or another. There is a long list of issues I don't cover, because time is scarce and these issues haven't been in the spotlight. Time and again, I cite (anonymously) a practitioner question posed to me on the listserv or directly by email. As law professors in most subjects tell their students, "We don't need to make up this stuff." Time and again former students call or write to express amazement that they are encountering in practice what I predicted they'd encounter (not a grand accomplishment considering in most instances I was relaying information from other practitioners).

When Mitchell writes, "The perspective from the ivory tower is not the only perspective out there," he implies I live in the ivory tower. I don't live in an ivory tower or an ivy-ed tower. That's been one of my hallmark characteristics, and one that, at times, has presented challenges fitting in with the culture of a theoretically-focused non-tax academy. I am surely the last tax law professor on the planet to be accused of being too theoretical, isolated, oblivious to the practice world, or residentially ivy-ed.

Mitchell concludes: "I did not say that the Code was perfect. What I did say is that from my perspective, for all it is to accomplish, the Code is model of clarity and simplicity and it is not too complex." As Stuart Levine points out, compared to most state tax laws the federal Code is high quality. True. And amongst 8-year-olds I'm still a very good basketball player. Analyzing the Code through stadard readability tests, for example, is a far better way to determine its clarity and simplicity. It's been done, and the Code is far from "not too complex." That the Code is not as bad as the regulations, or as some degree of organization, is no high praise.

Mitchell never responded to my specific examples of serious flaws in the drafting and style of the Code. Stuart Levine's post presents a good defense, explaining how the drafting process almost guarantees what we get. Where are the examples of clear, easy to read and understand Code provisions? Where are the readability scores showing the Code as a model of clarity?

Attacking the critic is not a useful response to the criticism. This is especially true when the attack on the critic is groundless. I expect better. My students say I am demanding. I am. I am, because I know that practice will be just as, even more, demanding. It demands something more than a gloss on "main rules" and "interesting issues." It demands a thorough understanding of the details that matter in practice. Arcane or not, if the client has the problem, the issue is real. And if the Code were so simple, why are there so many taxpayers seeking or needing professional tax advice?

I stand by my criticism of Mitchell's assertion that the Code is simple and clear. It's not.

During the 2005 tax filing season, the California Franchise Tax Board (FTB) administered a pilot program for a project called ReadyReturn. A group of taxpayers was invited to join the pilot program. Under the pilot program, the FTB prepared the taxpayer's return, and then gave the taxpayer the opportunity to verify the information, make any necessary changes, and sign and submit the return. According to the FTB report, approximately 50,000 taxpayers were invited to join the pilot program, of whom nearly 9,400 filed the return prepared by the FTB (5,600 by e-file and 3,800 using traditional paper). The ReadyReturn site provides slightly higher numbers: 11,620 participants (5,610 by e-file and 6,010 by paper).

The FTB prepares the taxpayer's return by "using wage and withholding information that is already reported to the state by employers." Accordingly, the taxpayers invited to participate were those "who file the most simple returns."

FTB surveys of the participants revealed that almost all of them considered ReadyReturn easy to understand, almost all of them concluded they saved time using ReadyReturn, and more than 90% also concluded it was more convenient than how they filed the previous year. Roughly 80% reported that ReadyReturn made them "feel less anxious about filing their tax returns." The survey also discovered that 99% of the participants were “Very Satisfied” or “Satisfied” with ReadyReturn, roughly 97% would use it again, and about 90% thought ReadyReturn was a service that the government should provide. Only 5% indicated they believed their personal information was not secure with ReadyReturn. Many of the taxpayers invited to participate who chose not to do so turned down the opportunity because they had already filed their return, though others expressed doubt about the security of using the Internet, were not comfortable receiving a pre-filled-in return, or preferred a non-government e-filing company. The FTB reported that ReadyReturns were less likely to fall out of processing because of errors, that ReadyReturn users were less likely to receive error notices, and that ReadyReturn introduced "thousands" of paper filers to e-filing, with more than half of the ReadyReturn participants who used e-filing having used paper filing for the previous year.

Based on these results, the FTB requested that the program be fully implemented. However, it would be limited to taxpayers who are single, have no dependents, claim the standard deduction, and have income derived solely from wages.

The project, however, is not without its critics. For example, the National Taxpayers Union (NTU) produced an issue brief, California's ReadyReturn Program: Fool's Gold in the Golden State, in which it pointed out numerous concerns. First, the NTU wondered why the FTB should "get into the tax return preparation business," considering that there are more than adequate numbers of tax return preparers available. Second, the FTB provides a free e-file service, which should mitigate concerns about private industry charging taxpayers for that service. Third, there is no guarantee that the FTB would make fewer computational mistakes than other preparers. Fourth, the FTB is unlikely to "scour the tax code for ways to reduce the filer's prepared tax liability." Fifth, changes in the taxpayer's status could change eligibility, posing the risk that taxpayers would not understand the need to switch to a private preparer. Sixth, there is a cost in generating FTB-prepared returns that end up in the trash because the taxpayer became ineligible to participate or otherwise chose to pass up the chance. Seventh, ReadyReturn makes it less likely that taxpayers will understand how much of their income is being withheld or otherwise paid in taxes because they will not look at the return or have a preparer explain it. Eighth, some taxpayers may see ReadyReturn as a new approach to increasing tax collections. Ninth, the service would not be free because its costs are borne by taxpayers generally. Ninth, ReadyReturn could lead to FTB offering bookkeeping services or estimated tax computation advice, and, at the very least, would justify requests by the FTB for more employees and more funding. Concerns from other critics echo these arguments.

The California State Senate Republican caucus has prepared a briefing report on ReadyReturn that devotes far more space to objections than to the advantages touted by its supporters. The Howard Jarvis Taxpayers Association released a commentary in which it called ReadyReturn a "prime example of California's long line of information technology boondoggles," claimed that "[i]n addition to the conflict of interest in having the tax collector also serve as the tax preparer, the program presents a myriad of accountability problems, and suggested "ReadyReturn should be returned to sender with a cancellation notice."

The project also has its supporters. Joe Bankman, a member of the law faculty at Stanford, explains in "Simple Filing for Average Citizens: The California ReadyReturn" that ReadyReturn offers a solution to the trials and tribulations of fling tax returns. He rejects the arguments made by its critics, and rues the effectiveness of those lobbying on behalf of the tax return preparation industry. He concludes with a call for consideration of a similar program at the federal level. A lobbyists for the California Tax Reform Association explained that ReadyReturn was good for taxpayer privacy because taxpayers would "know what kind of information is there. It's simple and straightforward and demystifies the process of filing taxes."

Five months ago, I concluded that ReadyReturn wasn't ready for prime time. In my analysis I weighed the arguments in favor of its use against the arguments that it is not the answer to the problems it purports to ameliorate. Recently, as the FTB's request for full implementation came under attack in the California legislative process, the debate resurfaced. New arguments have been advanced, principally to paint ReadyReturn as a program to save low-income taxpayers from fee-paying and sometimes predatory tax return preparers. After considering these new arguments, my conclusion remains unchanged.

ReadyReturn has been hailed as a "move in the right direction" to deal with increasingly complex provisions that directly affect taxpayers least likely to have the ability to handle them, such as the additional wrinkles added to the earned income tax credit (EITC) by the legislation providing tax incentives for recovery from Hurricanes Katrina, Rita, and Wilma. The concern is that even more low-income taxpayers will be driven to use fee-charging preparers because volunteer preparers cannot compete with the likes of H&R Block. Aside from the fact that California's ReadyReturn cannot do anything for people in the Gulf Coast region filing 2005 federal income tax returns, justifying the implementation of government-prepared tax returns by pointing to government-generated complexity is a bootstrap argument. All that would be accomplished is to make more and more low-income taxpayers wards of the state when it comes to tax compliance. The notion that these taxpayers will review the return "proposed" by a government is impractical. Low-income taxpayers would either accept the government proposal, even if it was incorrect, or go to a fee-charging preparer for help in deciding whether to accept it.

ReadyReturn has been defended because the only "realistic alternative to ReadyReturn is commercial tax return preparation services, which have a vested interest in complexity." Yet ReadyReturn would cement the complexity, because by sheltering taxpayers from its impact, it removes an incentive for taxpayers to press for genuine simplification. What better way to guarantee complexity than to make taxpayers think it doesn't exist because taxpaying has allegedly been "demystified" by letting the government decide what the taxpayer should pay? Simplicity in the form of marching in lockstep to government-dictated tax returns is a dangerously misleading attribute of ReadyReturn, and the theoretical proposition that taxpayers can reject the government's proposed return flies in the face of reality. Low-income taxpayers already are at the mercy of the government, and ought not think they are being befriended by an entity that by law is not set up to be the low-income taxpayer advocate. Consider, for example, the difficulties faced by low-income individuals when dealing with government-controlled child support and custody matters. Incidentally, almost every tax return preparer with whom I communicate abhors the complexity that has turned the tax law into an impenetrable mess. The suggestion, as has been made, that tax return preparers might have been involved in creating the absurd complexities of the hurricane relief EITC, ignores the fact that most complexity arises either from special interests seeking to hide a narrowly focused tax benefit or from theoretical solutions proposed by folks with little or no practical experience in dealing with taxes. Tax return preparers are busy enough and coping with more tax nonsense than they wish than to have encouraged the addition of more mazes into the tax law.

Ready return has been described as a good idea being plowed under by the tax return preparation lobby. That lobby is perceived as inimical to a free market, and as joining forces to conspire against the public. Yet, all things considered, tax return preparers and tax return preparation software don't carry prices that smack of monopolistic or conspiratorial
behavior. Consumer choice when it comes to finding a tax return preparer is orders of magnitude broader than when it comes, for example, to choosing a computer operating system. There is genuine competition among preparers and tax return software developers. The problem with applying market analysis is that it presupposes the government should be a player in the market. How, then, can a government protect the market when it's playing in it? Unless there is a reason for the government to monopolize a market (e.g., national defense), it ought to stay out of it.

ReadyReturn has been characterized as a move toward simplicity on the premise that a government employee has a vested interest in simplicity because it means less work. I disagree. I translate a desire for less work into a temptation to cut corners. And we know whose corner will be cut when that happens. Most government employees have a sense of "protect the revenue" built into their mind set by their training. The folks programming the computer aren't working in algorithms to determine if the taxpayer is claiming the correct number of dependents. Although the FTB request for full implementation would not include taxpayers with dependents, legislators who support the project want to expand it so that it does. All that the FTB could do is to list the dependents claimed on the previous year's return, because it does not have access to information about support, living in the abode, etc. But I wonder if its need for that information would open the door to government collection of even more information about every aspect of the taxpayer's life that affects taxes. Trust me, most things in life affect tax liability.

ReadyReturn has also been characterized as a program that would eliminate the business incentive of tax return preparers to understate tax liability in order to generate refunds, especially if being compensated with a percentage of the refund. Tax return preparer misconduct is not a situation running out of control; in contrast, at least one study has found that a "clear majority" comply with the highest tax return preparation ethical standards. That is not surprising, because there are in place sufficient incentives for tax return preparers to be honest. Penalties, prison, professional disbarment, and similar adverse consequences face the unscrupulous preparer. The problem is that the government has a miserable track record enforcing existing penalties against unethical preparers. Perhaps the FTB could stop trying to play tax return preparer and funnel some resources into helping law enforcement police the tax return preparation industry. Making the government the tax return preparer for low-income, and eventually middle-income taxpayers, on account of the misdeeds of the small number of preparers who act illegally is overkill. One question not asked by the FTB was, "Who do you trust more, the revenue department or your tax return preparer?" Somewhere in here I have visions of people being treated by government doctors, having their tax returns prepared by government employees, having their music censored by government bureaucrats, having their hair length set by government barbers, and so on. The words, "I'm from the government and I'm here to help you, uh, take over your life, because, after all, there are some not very nice people out there doing bad things preparing tax returns,." ought to send chills down the spine of every citizen. ReadyReturn increases dependency on government. That simply is dangerous.

Ready Return has been defended as protection against tax return preparers who advance refunds to low-income taxpayers at a very high rate of interest. Isn't usury illegal? Ought it not be? Ought not our government schools teach people not to borrow money at a high rate of interest and to report such transactions to the appropriate law-enforcement agencies? And if we are to worry about protecting taxpayers as consumers, why should revenue departments be presumed any better at protecting their customers (taxpayers) than are businesses in the private sector subject to all sorts of constraints and requirements designed to ensure consumer protection? It is rather ironic that ReadyReturn would be defended as protection against high-interest loans when governments think nothing of paying zero interest on overwithheld taxes that are refunded months after they've been collected. Casting government tax return preparation as the taxpayer's friend in setting appropriate interest rates makes little sense.

ReadyReturn has been hailed as a remedy for the difficulties faced by taxpayers when the preparer is "long-gone when the IRS asks for more information" or disallows a credit or deduction fraudulently obtained by an unscrupulous tax return preparer, because ReadyReturn provides the low-income taxpayer with more information with which to evaluate the analysis of their returns. Yet aren't these taxpayers perceived as needing the assistance of a ReadyReturn program because they cannot read, cannot deal with numbers, and cannot understand taxes? How are they going to do anything with the information supposedly provided by the FTB? How could the FTB possibly have more information than the taxpayer has? Users of ReadyReturn are put in the position of having a tax return prepared by the government that is presumed to be correct, and the burden of fixing an error is shifted to the taxpayer.

ReadyReturn has been described as a cost-savings rejection of "outsourcing" tax return preparation to the private sector, because it takes overhead and profit out of the cost of return preparation. The notion that there are no overhead costs to government programs makes no sense to me. Surely, ReadyReturn and the staff running it use electricity, water, and health plan benefits.

ReadyReturn removes third-party protection from taxpayer-revenue department relationships. Will one branch of the FTB audit the work of another branch? Isn't there a conflict of interest when the auditor is preparing the return to be audited? Absolutely. Has not a lesson been learned from Enron about the importance of independence? Apparently not.

ReadyReturn masks the problem. As I concluded in my October commentary on ReadyReturn, the solution to complexity is genuine simplification. To achieve that goal, complexity must be revealed for the economic and social drag that it is. The legislative addiction to special interests, of which complexity is a major symptom, requires withdrawal. Withdrawal needs to be discomforting. Enablers of complexity need to be identified, and should not be permitted to cushion the consequences of addiction that lull its victims into a false sense of security. Low-income taxpayers have no incentive to learn why the tax law has become such an agony to taxpayers unless they experience some of that agony. Sheltering low-income taxpayers, and eventually the middle class taxpayers the FTB and ReadyReturn proponents want to bring into the project, dampens criticism of the tax system, weakens the tax reform movement, and trims the number of citizens considering the tax law to be a problem.

Yet the advocates of ReadyReturn have a noble purpose. I think they genuinely want to help low-income taxpayers. I think some of them, at least, genuinely think that ReadyReturn is the answer. They mean well, and they have done society a service by bringing much needed attention to the dangers posed to society by tax complexity and to the aggravations afflicting taxpayers when they try to comply with those laws. Yet when reading reports that the taxpayers using ReadyReturn are happy, I wonder how much of that happiness is blissful ignorance? An informed and educated citizenry is essential to a democracy, and so long as the tax law is as it is, keeping citizens insulated from the reality merely guarantees perpetuation of the mess.
The urge to protect low-income taxpayers is not unlike the urge to protect one's child from falling off the bicycle while learning to ride. In the long run, the child must be allowed to fall.

I, too, deplore the increase in the need for paid preparers. The answer, though, is to make independent tax return preparation services available to all taxpayers who cannot afford those services, at least until the true need for tax preparation assistance is removed.

After arguing on a listserve that "The goal of helping low-income taxpayers can be achieved in less risky, more informative, and more effective ways," I was challenged to elaborate, and that if I've "got something better to offer," I should show my hand. Fair enough.

If there is going to be the expenditure of government funds to assist low-income taxpayers comply with the tax law, I'd rather see government pay the bill, thus keeping the third-party intermediary in the picture and thus keeping government honest and unconflicted. My experience with most (not all) state revenue department officials (and some IRS employees) is that they do not have the training or mind-set to prepare tax returns for low-income and middle class taxpayers as an advocate of the taxpayer. Paying the bill for independent preparers to do the job would keep the spotlight on the national disgrace (and threat to economic survival) that the tax law has become over the past three decades.

Therefore, the money and resources being expended by the State of California to program, design, implement, and operate ReadyReturn should be used to finance a "tax return preparation credit" to be claimed by low-income taxpayers (however defined) who pay tax return preparers to prepare their return (and perhaps by those who prepare their own returns though that raises a gross income issue). In this manner, the tax return is prepared by someone or some entity outside of government, which makes it less risky because it puts a second set (or maybe even the only set) of knowledgeable eyes on the return (assuming the low-income taxpayer isn't knowledgeable and assuming, as I do, that the government employees
programming, designing, implementing, and operating the program are insufficiently knowledgeable about the specific tax situation of each taxpayer to know what is best for the taxpayer and in at least some instances are not up to speed on the law). This approach is more informative because it lets low-income taxpayers remain aware of the complexity imposed on them by state legislatures and revenue departments (and if implemented at the federal level, by the Congress and the IRS). This approach is more effective because it would generate fewer situations in which the taxpayer return shows a tax liability higher than (or refundable credit lower than) what an independent tax return preparer would generate. The credit could be disallowed to taxpayers who use a state-funded volunteer tax return preparation service, such as VITA programs that do state returns.

Francine Lipman of Chapman University School of Law considered the tax return preparation credit in her article, "The Working Poor are Paying for Government Benefits: Fixing the Hole in the Anti-Poverty Purse." She rejected the idea because she concluded it "would encourage rather than discourage the use of paid tax preparers with more even benefits being shifted away from working poor families and their communities to paid tax preparers." So stated, that seems true, but from a different perspective the question is whether the FTB should use tax revenue to pay its employees to prepare returns or transfer those dollars to low-income taxpayers so that they can hire independent tax return preparers to prepare their returns. So viewed, the credit removes the conflict of interest, preserves taxpayer choice in selecting a preparer, and decreases the risk that the FTB prepared return would be accepted blindly by taxpayers.

I have as much faith in things working out well for individual taxpayers under any sort of "we'll take over, thank you, sit back and relax" government-run program as I do in things working out for the folks trying to make sense of the Medicare mess. In both instances people theoretically can get third-party assistance, but if they cannot afford it, they don't get it. That's why I prefer the credit. If it means more tax return preparers get more business, that's simply another symptom of the tax complexity mess. The solution is to fix the problem, and not put a leaky band-aid on a symptom.

Short is not a word one finds being used in connection with taxation, other than in phrases such as "short tempered" tossed about in mid-April each year or "comes up short" used to describe the comparison of actual tax legislation to what needs to be done. A running joke about a "short tax form" is the two-line parody, "1. What did you earn? 2. Send it in." As for tax legislation, the phrase "short tax legislation" seems oxymoronic. Until now.

After receiving an e-mail imploring me to lobby in favor of a specific estate tax reform bill, I decided to look first at the legislation that has reinvigorated the debate about the federal estate tax. Introduced early in the 109th Congress, and thus one of only 9 bills to have a one-digit number, H.R. 8 was passed by the House on April 13 of last year. It was then sent to the Senate and place on its calendar. Subsequently, a variety of other bills have been introduced, each a variation on retention of the estate tax with higher thresholds than applied before the 2001 legislation was enacted to trigger the gradual phase-out of the tax scheduled to be complete in 2010.

The text of H.R. 8 is as short as a tax bill can get:

109th CONGRESS

1st Session

H. R. 8

AN ACT
To make the repeal of the estate tax permanent.

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

SECTION 1. SHORT TITLE.

This Act may be cited as the `Death Tax Repeal Permanency Act of 2005'.

SEC. 2. ESTATE TAX REPEAL MADE PERMANENT.

Section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall not apply to title V of such Act.

Of course, it makes no sense unless one examines section 901 of the referenced 2001 tax legislation and identifies title V of that act. It's easy. Section 901 is the "sunset" provision that terminates most of the 2001 changes and restores the tax law to what it was before the 2001 legislation took effect. Title V of the act is the provision that phases out the estate tax. H.R. 8, therefore, removes the estate tax repeal from the sunset provision that would restore the estate tax. In other words, it does what the Act title says. It makes the estate tax repeal permanent.

There are two major issues afflicting the estate tax conundrum. One is the question of whether it should be retained as it was in 2001, repealed, reduced in application, or otherwise modified. The other is the identification of some way to resolve the first issue without leaving taxpayers in suspense while they try to plan disposition of their property at death.

These issues have been discussed intensely by tax commentators during the past several decades. They have been reported, although usually in summary fashion, by the mainstream media. They are tackled by bloggers throughout the nation. Arguments in favor of one approach or another have been advanced, criticized, dissected, and rebutted. The debate is afflicted with misleading facts, appeals to emotion, predictions of dire consequences, and generous use of the words "fair," "selfish," "corrupt," "family," and other attention-getting buzz words.

Because the legislation, amendments to it, and substitutes have resurfaced in Congress and are scheduled for votes this week, it is time to revisit what I think is a very sensible way to resolve the divide between the advocates of total repeal and those who advocate retention of some sort of estate tax, however limited. In other words, it's time to consider, yet again, the repeal of the estate tax in exchange for the income taxation of unrealized appreciation in the decedent's property. Summarizing a my previous explanation of the proposal, the plan has these key elements:

1. Repeal the estate tax, for some of the reasons advocated by the advocates of repeal. The tax is complicated, it nurtures an industry dedicated to assisting wealthy taxpayers dance around the tax, it consequently is nowhere as efficient or effective as theory indicates, it encourages a variety of otherwise nonsensical transactions designed to reduce the impact of the tax, it imposes an additional layer of tax to the extent it is levied on property representing accumulation of after-tax income, and it requires the maintenance by the IRS of a cadre of professionals whose skills and efforts are consumed in countering the dance steps of those helping taxpayers do bizarre things with their property in efforts to avoid or reduce the tax.

2. In turn, include the unrealized appreciation in the decedent's property in gross income for the decedent's final taxable year. Death should not be a tool used to avoid income tax. The escape from income taxation offered by death contributes to the "lock-in" effect advanced by those who successfully advocated the special low tax rates applicable to capital gains and certain dividends, but not to wages, other gains, interest, and other income.

3. Permit taxpayers to index basis for the same reason other amounts in the tax law are indexed for inflation. The argument that inflationary gains ought not be subject to income tax because they do not represent genuine economic growth carries sufficient weight to support this component of the proposal. A person whose property increases in value by 1 percent when inflation is 1 percent is not a wealthier person and ought not be taxed on that increase.

4. Repeal the gift tax. It is, after all, nothing more than the flip side of the estate tax.

5. Include the unrealized gain in property gifted during lifetime by the decedent in the decedent's unrealized appreciation at death, unless the decedent elects to include that gain in gross income at the time of the gift. See, there still will be work for the estate planners. Actually, there still would be work without this election, and the election is not being proposed as a fop to the estate planning industry. Another option is giving the donee the option to include the value of the gift in gross income and removing the gains from the donor's tax base.

6. Provide a "capital gains deduction" for the decedent's final income tax return. The exact amount, whether two million dollars or five million dollars or some other amount, requires the crunching of numbers using the revenue estimating software that no one in government seems willing to share. It ought not be difficult, though, to calculate an amount that raises the revenue that the estate and gift tax system had been generating.

When I floated this plan last fall, it did not go without criticism. I addressed the questions and concerns in that earlier post, which I will not repeat. It is important, though, to restate several key points.

Determining deemed amount realized as of death is no more of an issue than is determining fair market value as of death. The proposal does not add any additional burden or administrative problem.

Determining indexed adjusted basis as of death is no more difficult that determining it a week before death if the decedent, not anticipating death, had chosen to sell the asset at that time. Even if it is easier for the decedent to determine basis than it is for the decedent's executor or heirs to do so, as I explained in this post, it's really a matter of who digs through the paper or digital files that the tax law requires the taxpayer to maintain. The basis determination objection to the taxation of unrealized appreciation is a feeble distraction.

To the extent liquidity is an issue, the estate tax payment deferral arrangements in current law can be adapted to income taxes arising from the decedent's final return. Here, too, a piece of existing law is maintained.

The debate over the estate tax, and the various proposals, including mine, plays out against a backdrop that is very disconcerting, and if it isn't, it ought to be. Most advocates of estate tax repeal refuse to accept the idea of taxing unrealized appreciation at death. They want a system that taxes investment income at low or zero income tax rates and to the extent accumulated, escapes estate taxation. Likewise, they want growth in investment assets to escape taxation. Whatever wonderful arguments can be paraded out in favor of exempting investment income from taxation, the upshot is that the burden of paying for government shifts to wage earners. That shift has already started. Considering the decline in real wages, the payment of low wages to undocumented workers, and the difficulty for wage earners to accumulate sufficient post-taxation discretionary income to move into the investor class, the ability of the nation to sustain itself by seeking all necessary revenue from wage earners is at risk. Many who reply that the solution is to cut government spending are among the first to object when a specific government expenditure is nominated for termination.

There's an undercurrent to the taxation debate that transcends taxation. It goes to the heart of whether this country will continue to have a middle-class, one of the significant indicia of genuine freedom and democracy, or whether it will atrophy into another of the "many ruled by a few" arrangements that have dominated human history. This question is even more provocative when one considers the ways in which the few have made their way into the elite. Though it is important that discussion of these issues be done in a manner that permits the entire citizenry to understand what is at stake, I have serious doubts that it will. The rhetoric accompanying the small estate tax repeal slice of the much larger question about what sort of nation we are, want to be, and will be, reinforces my doubts.