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Friday, September 10, 2004

When is 23% Really 30%? 

Calls to reform federal taxation are almost everyday events, and the introduction of bills in the Congress to do so gets their advocates some attention, even if it is transitory. Sometimes a bill, though unlikely to become law, can spark serious debate. Such is the case with H.R. 25, the Fair Tax Act of 2003. Essentially, it replaces the federal income tax, estate tax, etc. with a federal sales tax.

The bill is advertised as enacting a 23% federal sales tax (in lieu of an income tax whose rates range from below 23% to above 23%). But, as I often tell my students, let's do a bit of statutory analysis (though in this case it's bill language analysis because it's not yet a statute).

Proposed section 101(b)(1) states: "In the calendar year 2005, the rate of tax is 23 percent of the gross payments for the taxable property or service."

Looks like a 23% rate, right?

Wait.

Proposed section 101(a)(5) provides; "The term `gross payments' means payments for taxable property or services, including Federal taxes imposed by this title."

So, if I buy something for $100, the proposed sales tax is NOT $23. It is 23% of $100 increased by the sales tax. We need some algebra. The tax is $30. How? 23% of $130 is $30. The tax is 23% of $130 ($100 plus the $30 tax).

Whoa. Why not simply a 30% tax on the $100. Same thing, right?

Yes, it's the "same thing" in terms of the $30 tax result. But it's a totally different thing when it comes to selling the tax to the public. Replacing the income tax with a 23% tax is going to attract more support and votes than replacing the income tax with a 30% tax.

This is a proposed 30% tax. It's being sold as a proposed 23% tax. That's misleading.

Discussion among some tax law professors drew some mixed reactions. There are some existing taxes that are "inclusive" of tax, for which there are stated rates. One argument is that there is no difference between saying that the cost of an item is $100, plus $30 must be paid in tax, and saying that the cost of an item is $130, of which $30 is remitted as tax. That's true, but that misses the point.

The point is that most Americans, other than perhaps a few who can think in terms of "exclusive of tax" and "inclusive of tax" rate setting, think that a stated 23% tax means, pay $100 for something plus pay $23 in tax. They don't think it means, pay $100 for something plus pay $30 in tax, even if the tax of $30 is 23% of the $130 that comes out of the purchaser's pocket including the tax.

Another argument is that the VAT (value added taxes) used in Europe are "inclusive of tax"). So what? This isn't Europe and the general public doesn't think that way about sales taxes. Sometimes I wonder at the chasm between academic theory and the general public's day-to-day life.

Americans are accustomed to thinking in what academics call "tax exclusive" terms, and it is totally misleading to shift gears without notice. Yet it was argued that there is nothing wrong in framing the issue in a way most palatable to the goals of the advocates of the legislation, because, after all, lawyers and advertisers do that all the time. Maybe that's why lawyers and advertisers top the list of "most admired persons" and "most admired professions." Sorry about the sarcasm. Just because something is done, even if it is done often, doesn't make it right.

The discussion inspired me to contribute a description of a cartoon:

*****s comment about math disingenuity reminds me of the Calvin and Hobbes comic in which failure to understand math boomeranged. Hobbes says to Calvin: So how'd you do on the math test?

Calvin replies: I bet Suzy Perkins a quarter that I'd get a higher score.

Hobbes: Did you?

Calvin: No, but I got back at her. I paid her only three dimes.

I don't know how to describe the look on Hobbes' face.

Great cartoon, it's missed, and it sometimes presented a quip of use in teaching tax and for teaching generally.

This brought a negative reaction, which puzzled me. I share now my response. When I re-read it, I decided it really does represent my opinion of folks who just can't put it square on the table, for the desire to win so overwhelms the willingness to play fair:

The Calvin and Hobbes reference, for which I am responsible, was intended to make the following points: those who do not study carefully the words and numbers used in others' expressions are doomed to being fooled, and when it comes to the question "fooled by whom?" the answer is "by themselves."

And it is on that ability of an oft-unschooled citizenry to fool itself (into thinking it knows and understands) that the merchants of "cleverness" (be they politicians, lawyers, or product sellers) construct careers. Taking advantage of another's disability doesn't earn high marks with me. If I know that someone will be misled I have an obligation, and I make every bona fide effort, to see to it that what I am saying is understood. I expect no less of those who advocate in the public arena. Of course, I understand that my expectations are close to futile.

Hence, although one can argue that in some worlds three dimes equal a quarter (which they do for certain old quarters whose value is beginning to creep up a wee bit on the hopeful road to being worthwhile collectibles), I don't understand the annoyance with the reference. Of course, in a world where three dimes rarely are considered to be equal to a quarter, thinking that they are (or that they are less) is just as much a twist as is the use of a tax inclusive rate ballyhooed in a world where tax rates are almost universally considered to be tax exclusive.

All of this can be avoided if precise and accurate statements, long as they may need to be, trumped the soundbite mentality of the so-called post-modern culture. I wonder who would be most unhappy with a requirement that a proposed rate for a proposed national sales tax be expressed in a manner that precluded any twist. Surely those who, in lieu of "23% rate" would need to say (their choice), "30% of pre-tax cost" or "23% of tax-inclusive amount". The latter, of course, would need to be explained to most of the citizenry whom legislators are obliged to serve, which would surely turn on the lights with a brightness that would reach into the deepest, darkest corner.


My spirits were lifted by the private emails in which people expressed agreement. Why is it so difficult for things to be cleared of the smoke and mirrors? When I think of who benefits from the "cleverness" I begin to understand why the world is such a mess.

Trucks, Accidents, and Money 

I've been trying to find statistics on tractor-trailer accidents, and have come up empty. I'm trying to learn (1) what percentage of traffic accidents involving tractor trailers are caused by tractor trailers, (2) what percentage of vehicles on the road are tractor trailers, and (3) what are the economic costs arising from delays due to accidents involving tractor trailers.

My interest was triggered by yet another Traffic Report on Philadelphia's KYW radio of a road closure due to a single-vehicle tractor trailer accident. It's the umpteenth one this week. When these accidents happens, they can paralyze the region's already inadequate highway system.

If I can find the information, I will be in a position to share some ideas about tax issues involving tractor trailer and other highway accidents. So, if you know where I can find the information, please let me know. Yes, I've googled, and I've visited the National Highway Transportation Board web site. Thanks.

Taking a Shot at Both Parties 

Readers of MauledAgain know that I don't hesitate to criticize politicians, no matter their party, and that I consider the traits of the politician to be far more important in evaluating a vote than the politician's party affiliation. For me, "We must elect more [Democrats/Republicans/whatever]" is a distraction from the questions that need to be asked.

The federal ban on assault weapons has expired, because the Congress found itself unable and unwilling to extend it. The failure of the proposed legislation cannot be laid at the feet of either party. It gets attributed to members of BOTH parties. At least those members who voted down the bill that would extend the ban.

As with most of what Congress does, this is a wee bit more complicated than a simple up or down vote on extending the ban. Summarizing the detailed explanation, the Congress had in front of it a bill that would absolve gun manufacturers from any liability for any damages caused by a gun. Some members of Congress succeeded in tacking on two amendments. One would require background checks on people buying guns at gun shows. The other would extend the assault weapons ban.

Shortly before the bill came up for consideration, back in March, head counters predicted a close vote. The bill was defeated in the Senate, 90 to 8. I can't think of any sport in which 90-8 is "close." What happened? What happened is that the National Rifle Association made it clear that IT did not like the legislation. It spoke. Ninety Senators listened. Even the proponent of the bill voted against it.

That's clout. It's also a recipe for a lot of dead and injured people.

Yes, I know the arguments and I've read the Constitution. There's enough ambiguity for the matter to deserve the input of the public. The polls show that the public supported the extension. Those elected to represent the public represented the small group with clout.

The tax connection? Here's how I'd solve the problem. Calculate the damages caused by guns. Subtract the benefits generated by the cost of guns (e.g., the culling of deer herds). Allocate the difference among guns according to the capacity of the gun to cause damage and to generate benefits (e.g., one does not hunt deer with an assault weapon, simply because one wants to take home something other than ground venison). Impose a tax on guns equal to the allocated amount. Provide an exemption for inoperable antique collectors' items. I predict that the sales of guns would quickly readjust. I'd allocate this weapons user fee to pay the damages and to fund a program to crack down on those violating gun control laws.

And, yes, I'd be open to a similar "damages caused tax" on swords, baseball bats, bows and arrows, and kitchen knives. I'm guessing it would be a much much lower tax.

Yet More on Outsourcing Legal Research 

Yes, blogs can be "heard" around the world. Recently an attorney in India responded to my post on outsourcing. He didn't mention the first followup post. He has agreed to sharing our email exchanges and to being identified. I learned, for example, that outsourcing enterprises in India are now being challenged by outsourcing enterprises in Romania.

The man's name is N. Ramaswami. He wants to "accept the challenge that Indian lawyers cannot do what American attornesy can do." He has a good point. He and I, and anyone else, can debate and run theory at each other all day, but the ultimate test, of course, is in the practice world. In the dialogue you'll see why I'm not in a position to provide the practice opportunity that Ramaswami seeks, but perhaps someone in American law practice disagrees with me, and welcomes the opportunity to prove me wrong. Or perhaps someone simply is curious, and sees an opportunity to try an alternative approach to legal research. You can reach Ramaswami at ramaswami2000@yahoo.com. Tell him you met him here. I'm sure he'll be letting me know what happens.

So for those interested in a dialogue between a U.S. law professor and an attorney in India, who come from different cultures and yet share some things in common, read on to see how the power of the Internet is reshaping how the world operates, not only in terms of outsourcing, but simply in terms of dialogues taking place between people who otherwise surely would not have communicated with each other over such vast distances. It is, yes, the 21st century.

The email came from Ramaswami Natarajan on 9/2/04:

Dear Prof. Maule:

I'm pleased to write this mail to you. Please do not consider this as spam as this mail is a challange to you due to your postings at http://www.mauledagain.blogspot.com/

I'm an Indian Advocate and a Patent Agent. I have learned American Legal Research while working for www.citethelaw.com I had been trained by Mr. James P. Kimmel, Jr., Esq. President of Citethelaw.com. Mrs. Chris Kimmel who now works in Pepper Hamilton studied in your Law School and possibly she is one of your students.

You can find my resume at www.tmpsearchers.com/resume.html and two of my legal writing samples at www.tmpsearchers.com/sample1.htmland www.tmpsearchers.com/sample2.html. Please go through the samples and my resume.

I have been mainly trained in Westlaw and I do not have a copy of the Blue book. Therefore you might find that my legal writing is not as per
rules. I'm trying to improve that.

I find that your criticism of outsourcing legal research to India a bit far fetched. Actually if you put a Lawyer to learn the basics and then focus on one area of law, all that you need is about 6 to 9 months. Of course the lawyer must have had his training in India very well.

Let me give a challange to you. Let me do one project free of cost for you. I do need a Westlaw password to do it and you can expect me to do the legal research and analyse it accurately but fall short in legal writing. After all I have to write for both India and America and this coupled with the absence of blue book has made my legal writing not as good as it should be.

I have given this challange to few other Attorneys and they have refused to take it even when it is offered free of charge and obligations. I hope and trust that you would do take it. If I succeed please do let me introduce to others known to you.

The few Indian firms that offer to do legal research outsourcing have refused to take me either for they consider me to be a potential competitor and my efforts and time spent are being wasted.

* * *

Best Regards,

N. Ramaswami
Advocate & Patent Agent

I replied:

Sir,

Your offer, with its implicit and explicit limitations, proves the case I am making. What you offer is what I might expect of a first or second year law student, but not what I would expect of an attorney. If and when I need the sort of assistance you wish to sell, I can obtain it by having the Law School hire one of our students to do the research. There is no economic efficiency in exporting the work to India, and there are many disadvantages to having the work done by someone who is not physically present and unable to be present at the school.

I totally disagree that one can learn an area of the law in 6 to 9 months. As someone who advocates the lengthening of law study from 3 to
4 years, I surely do not find any support for the idea that someone can attain professional forensic ability in less than a year. I thnk what you are describing does not even rise to the level of what we expect from research librarians who are not lawyers.

This is not to condemn you or to insult your training or those who taught you. You have learned some American legal research, but that alone is insufficient to do what lawyers do. At best, you are finding information, a task which digital technology makes easier for lawyers to do without assistance. For example, though in years past, in the 80s and early 90s I had one, two, sometimes five research assistants, I now have none, and only occasionally have a need for one. Yet my scholarly production has not diminished, and arguably, depending on how one measures it, has increased. Why? Because I can do research sitting at my desk that once required me to walk to the library and dig around for hours.

Understandably the companies that provide outsourced legal research consider you a competitor. So, too, do the students who would lose an opportunity to work with one of their professors because the work has been shipped elsewhere. The opportunity to work for a professor is not simply a matter of earning an income but an opportunity to enrich a piece of their legal education by digging into a specific area under the guidance of omeone expert in that area.

What I do not fully understand is why there is a need for Indian advocates to do American legal research. Is there not a need for Indian legal esearch? In a nation with a population 3 times that of the U.S., I would expect that the need for attorneys and legal researchers to be so great that there would be no surplus available to enter into an outsourcing. Surely the Indian legal system and the citizens of your nation would benefit much from access to your skills and talents.

Good luck with that.

Jim Maule

Of course, a response came my way later that evening:

>>> Ramaswami Natarajan 9/2/2004 9:05:46 PM
>>>
Dear Prof. Maule:

I thank you very much for the very prompt email.

Please just call me Ramaswami in future correspondence please.

1. Every Indian Lawyer now goes through three or five years of intense legal study to qualifiy. What I meant as 6 to 9 months for such a Lawyer
is to specialize in one Area of American Law. This is actually done by Indian students who do their LL.M after graduating from India and the course duration is one year only. Getting a B.L in India now takes five years whereas getting a J.D takes only four years in the United States.

2. Labor Arbitrage is the main reason why all kinds of services are outsourced to India and other countries. Just as you describe that you no longer need assistants and can take information far more quickly yourself, so too can persons sitting at the other corner of the world where the average income level is about 100 times lower than that in the United States. So companies that are losing money can save themselves from a crisis by getting things done offshore. If the economy goes down, businesses go down and to survive they need to cut costs. And they do it by paying some overseas worker 10% of that they pay a worker in the United States. I believe that corporate law departments are going to have to do this now. And I would expect the compensation to go down in future to fresh associates.

3. I do not wish to work for you since you have a large number of law students to train. The only limitation that I have at the moment is on legal writing. None on legal research and analysis which you have mentioned in the blog. I had no hesitation to disclose the limitation for I write for two legal systems and this problem creeps up. And of course I had never been to the United States and have learnt every thing through the internet.

4. However unpalatable this is to all of us, this digital revolution is going to affect us all. I have lost myself some times. Once one firm known to me refused to do a work saying that the price offered was too little. The client posted the project on elanceonline.com and got a lesser quote from a more competent person from Romania. So ultimately even in India we will have a problem five to seven years from now or may be early.

5. Unlike the United States, education in India is not costly. We turn out thousands and thousands of specialists every year around the country. In our state Tamil Nadu alone, the number of seats for admission to the Engineering course which were not taken remained at around 30,000/-. This is just in one year. You can imagine the number of seats filled up across India for all disciplines. Also unlike the United States most of the population here is young and so the competiton and talent levels are high.

6. When you have a strong dollar, you have certain advantages and certain disadvantages. I think this is some thing that has to be accepted or else the United States must radically bring down the value of dollar to remain competitive in services? Can any one agree to this?

I thank you again for the prompt response.

Best regards,

N. Ramaswami

And so, not surprisingly, I continued the conversation:

Dear Ramaswami,

My ability to sit at a screen to do my research provides an advantage over using research assistants in two ways.

First, if I do the research myself, I do not need to invest time teaching the research assistant about the particular project in which I am engaged. That time investment was worth it when the alternative was to go to the library. Now that I can visit the library through on-line research, there is no such advantage to the use of research assistants.

Second, if I do the research myself, I do not need to go back to the research assistant for clarification. I can look at the source materials with the same brain that is holding the entire project.

When I did use a research assistant, I would overcome the second problem by meeting with the person. The person was nearby. There were no
time zone impediments to spoken conversation. Written dialogue was possible, but it is more time consuming, and the ability to measure if the person was "getting" the point I was making did not exist. So I could invest time in writing many paragraphs only to lose the person in the first one.

Thus, I don't think that hiring someone thousands of miles away is the same as hiring someone who is close at hand. Outsourcing can and does work for repetitive tasks that do not change intellectual demand each time through. It can and does work for physical activities, such as manufacturing. It is used, but I think badly, for customer service, because that is an area where, again, each call (or at least many of them) brings a new dimension or challenge.

Thus, I don't think the product is the same. It may be cheaper, in the short-run, but in the long-run I think it will be more expensive than having kept these sorts of pursuits in the hands of those immersed in the culture and legal system in which they arise. To put it another way, I think that if you came to the States and practiced here, after a few years you'd be a totally different lawyer and would bring to the table, research and otherwise, perspectives and appreciations that you simply cannot obtain on-line.

You are right, I think, that as time goes by, the same outsourcing problems afflicting US business will affect India. The question is, what happens where there are no more countries where the currency value difference makes outsourcing tempting in the first place? The answer is the long-term cost to which I refer, namely, the need to re-train people who had left the industries or professions when the outsourcing started.

Although the dollar is strong as to India, it is in fact much weaker as to Europe. So weakening the dollar to "balance" the exchange with India would devastate European trade. Perhaps the problem is that European currency is too strong. Or perhaps the investment decisions of countries investing in the US should change (how, I don't know) so that they are investing in capital, not just labor, in India. An influx of capital into India would provide jobs for the ensuing construction and development, and for the services that would then need to be provided. I don' t think that bringing capital into India by paying what are low wages in the outsourcing country (even though they are higher wages by the standards of India) is going to infuse ndia and other nations with the necessary capital. All that is happening is that large corporations are finding new pools of labor to exploit.

And perhaps policies in India that steer too many people into some professions and insufficient numbers into others needs to change. Surely there are needs that must be met, and labor isn't being funneled to those needs. The same is true, to some extent, here and in some other countries. The long-term risk is that instead of developing their own practice to carry into older age, young professionals in India are holding themselves out for outsourced work, which, as you suggest, won't be there in five or ten years. Then what? The years that could have been spent developing one's own practice, or a practice in a firm, are lost. And a new cohort of people willing to work for less will displace those who are now working for less.

* * *

Respectfully,

Jim Maule

Shortly thereafter, I received this email:

Dear Prof. Maule:

I apologize that I have forgotten to respond to one of the most important points that you raised.

Please see what you wrote in your mail below:

"When I did use a research assistant, I would overcome the second problem by meeting with the person. The person was nearby. There were no time zone impediments to spoken conversation. Written dialogue was possible, but it is more time consuming, and the ability to measure if the person was "getting" the point I was making did not exist. So I could invest time in writing many paragraphs only to lose the person in the first one.

Thus, I don't think that hiring someone thousands of miles away is the same as hiring someone who is close at hand."

I beg to disagree with you with due respect.

I believe that you use the Internet very frequently and I'm some what surprised. I use the Yahoo email account principally for I also use the Yahoo Messenger. Now Yahoo and MSN messengers enable you to have live, I repeat live, video conferencing with any one of your buddies if you make some simple investment in a web cam that costs about $50, and a decent internet connection ( I myself have a 256 kbps connection and so would expect you to have far higher speeds). You can interact with other persons have a voice and video chat live free of charge. Some times the service of these messengers are poor and if you pay about $25 per month you can have a private account with some web servers where you can have a live video conferncing.

Now let me know which is cheaper. A one time investment of $50 plus about $25 per month for video conferencing with no telephone bills to spend or an expensive person nearby. I think that today we can have virtual assistants sitting any where in the world close by. Yes, initially the accent problems in the voice are there but they are over come quickly. I'm not sure if you are aware of these things. Of course you may have different views but it is no longer necessary for some one to sit near you to converse with you live. It can be done easily and cheaply through video conferencing.

Technology has improved enormously.

Best Regards,

N. Ramaswami

I could not resist continuing the dialogue:

Dear Ramaswami,

Only the best videoconferencing provides the same sense of presence. For me, not only eye contact but body language is important. To see the entire person the resolution needs to be high, and that requires bandwidth. The bandwidth I have here at the school (but not at home) is high, but it's shared with a lot of people.

So we end up with videoconferencing that is either the face, or a way too fuzzy look at the entire body to pick up body language. Eventually we'll get there, you're right, but it's not quite the prime time player that I'd like it to be, for me. I may be a bit more demanding than most people in this regard and I know it works well for some people.

I'll look at the things you sent sometime over the long weekend.

Jim Maule

My last reference was to Ramaswami's request that I look at his work product.

Dear Prof. Maule:

I thank you for agreeing to look in to the papers I submitted and I would be very obliged if you could give me your insight and valuable guidance as to how I can improve my legal writing.

I look forward to hearing your insightful comments on my legal writing and analysis.

Best Regards,

N. Ramaswami

When I looked at Ramaswami's work product I did so primarily to evaluate my contention that legal research is not something that ought to be outsourced. That was, of course, the point in my blog post to which Ramaswami had made his objection. With his permission, I share my response:

Dear Ramasawami,

I've looked at the two writing samples that you shared. My reaction is affected by not knowing what you were asked to do. I am guessing that you were asked the question as you stated it, because the memos don't contain any statement of facts. Thus, one very important legal analysis skill, applying law to facts, isn't present.

One concern is that you are hampered by having English as a second language. Your English is very good, but our legal writing instructors would take their red pens to it. I have the same problem with my French, and that's why I have not tried to spend a semester in Quebec or France teaching tax in French. I suppose that the more you interact in English the more you'll get the technical aspects of using the language in the legal field polished. My French improves when I am in France and then rusts up when I am not using it.

Another concern that I have is that what you are presenting is chiefly a series of quotations from primary sources (statute, cases, etc) Thus, there is little opportunity to evaluate your analytical skills. As for research skills, I don't know the areas well enough to know if you found all the relevant authorities.

Our Legal Writing instructors incorporate legal analysis into their course. They believe, and I agree, that one cannot learn to write well as a lawyer without polishing legal analysis. That's because what shows up on the paper is a manifestation of what is in one's brain. So not only do they focus on the technical stuff (e.g., grammar), which gets polished with use, but they also pay close attention to the structure of arguments, sequence, paragraph clusters, sentence sequence, and application of law to facts. The students write memos, opinion letters, appellate briefs, and a few other short documents. In their memos, they are presented with fact situations for which there is no clear authoritative answer. Those are much more challenging than simply dealing with research into a question for which there is a clear answer.

Most American lawyers who seek assistance need help with the cases for which there is no clear answer. In litigation, they look for predictions of the arguments from the other side, and proposed responses. In planning, they look for the advantages and disadvantages and the factors that favor one alternative over another. When the answer is clear, most lawyers don't need the assistance because they know the law.

I'd characterize your research as what I would see from a law student or a person recently graduated from law school. What the person doesn't yet have is the experience of being in American legal practice. If you practiced in an American firm for a few years, you'd develop as they do, but you've already explained how that option doesn't work for you.

The delay in putting our conversation onto my blog is simply a matter of reacting to other issues. Of course, our conversation about your writing stays between us.

Jim Maule

Despite my offering to keep my evaluation "between us," as is apparent from this posting, Ramaswami requested that I share it, as explained in his next email, in which he also explains the context in which his outsourced legal research assignments arose. Read carefully and you'll note that Ramaswami has yet another skill, as an examiner. He remains convinced that outsourcing legal research to India can benefit both persons in his position and U.S. attorneys. Perhaps our exchange can help readers decide for themselves. Anyhow, here's his response:

Dear Prof. Maule:

I thank you for your very kind assessment and very prompt response as promised during the Labor Day weekend.

A legal research firm gave the fact patterns to me and then the issue was presented to research. I had an understanding with them that I shall not disclose the facts. Since the the fact patterns revealed the identity of the parties (and when I was not hired by them) I had to delete the names of the parties and delete the fact patterns and edit the memos done by me significantly. Unfortunately since I have had prior contacts in the United States, the legal research firm felt that I could pose a threat to them in the long term by putting up an commerce website myself once my skills are polished and so refused to hire me. I apologize for not stating the lack of fact patterns in the earlier emails, as I believed perhaps inaccurately that when the sample law memos are given this is the accepted practice in the United States.

I'm amazed by your humility and openness that you are not exposed to the areas of the Law dealt with in the law memos. The Legal Research is accurate and on point but I suspect that the Legal writing is not in the law memos.

Yes, my legal writing suffers from want of exposure to the Blue Book and the citations style. I have done more complex legal research assignments with www.citethelaw.com that involved legal analysis but we had a clause that I should destroy them when the contract was terminated and I did so promptly. So I have no back up copies.

In so far as analysis is concerned, in the sample memos, the issues asked were simple and direct and so I did not have much of an opportunity to analyze. So I had to leave it at that. The only memo that required an analysis is the Trademark memo but again the aspects for analysis are very limited.

In 1998 I had the kind of evaluation packet that you describe where for a situation you have no clear answer and I was asked to write both for the Plaintiff as well as the defendant. I wrote it and out of several who attempted I was the one among the two selected for having done it correctly. Of course legal writing was perceived as weakness at that time but when we started working, Legal Research and paralegal support became more important than polishing my legal writing. Therefore to this day I have not had a focused training on legal writing alone. The only equivalent of the Blue Book is available online for free at www.cornell.law.edu. At the moment the link is not working and I will send you the link when it works. Yes, if I master the Blue Book and the rule on citations and write correctly I think I can meet their expectations. I just do not know how to get this training on legal writing. I agree that this also needs a sound knowledge of law and when you put words in to writing you put essentially your thoughts in to your writing and so the analysis part is correct.

I agree with your very candid assessment that you would rate me as a recent law graduate without much of an exposure to the practice in a Law firm. This is indeed the truth. I had learned American Legal Research overseas focusing on my practice here and tried learning a foreign practice at the same time and I have not had much of an exposure in the last two years. I believe if I manage to work for a law firm continuously for one year and keep writing these Law Memos and other duties expected of a Junior Associate, well I will learn to do things as done in the United States. But I guess that this continued exposure to the environment that a Junior Associate is entitled to is exactly (the same problem and the situation) which I have not had so far.

I have studied several cases and in most the situation turns out to be a repetitive one. Say on motions for and against summary judgment etc and most legal research firms are asked to do this kind of work only. I guess only 20% of the work done by Legal Research firms is complex. And I have worked here off again on again for four years now. So I think that most Law firms would also need non-complex legal research regularly. Perhaps I'm wrong. Perhaps being at the higher end of the legal profession teaching tax law, you look at it differently. I must however confess that I have not had exposure to Tax law questions and have not studied it just as I have not practiced tax law in India. Your Tax Law and Criminal Law appear to be somewhat different than ours being a far advanced economy and having a different culture. We have a very lenient criminal justice system here.

Please do not hesitate to put my writing to the blog and please do not hesitate to disclose your assessment. I'm honored that you agreed to assess me and made very candid remarks. This proves both of what we are saying. With practice, Lawyers in India can assist the Lawyers in the United States but this requires a constant devotion and continued attention. Not on again and off again kind of experience that I have had so far.

I'm actually trying to find if a small law firm would retain me to assist them online. So far I have had no success but I'm still trying. I was offered a salary of a two way air tickets and $1200 per month for working for 12 hours a day as a paralegal in 2001 beginning and Jim Kimmel ruled it out saying that it would not even enable me to survive on my own. I needed to send at least $1000 to my family to support them here and that was not possible and hence I decided to work online and did not choose to come to U.S.

Ironically I'm qualified to write the exam to qualify for a Solicitor in the United Kingdom but I have not studied their Law.

You can very well ask, why not focus on India? I believe that the essence today is getting to know more people in several places, getting to know several systems and then try to bring in the capital needed whether it is for outsourcing or other projects to benefit my country. I'm trying and I will try to do this by all fair means until I succeed with God's help.

I thank you again for your very kind assessment, very prompt and very candid response and frank statements of your own limitations. I feel humbled. Please do not hesitate to put any one of our conversations on the blog. I do not believe in hiding my weaknesses and only if I learn what they are, I can correct them.

Please let me know when this is posted to the blog and if possible please let me have automatic emails when some one posts a response. No problem if this is not possible.

If possible, and if it is within your powers, please let me compete with your students in one legal research assignment you give them (Unfortunately I have no idea of American Tax Law) and I have no passwords to Westlaw or Lexis for my personal use. If the assignment would test the analytical skill, then I believe you would know first hand whether legal analysis is also possible to be done offshore. I do not know if you would appreciate the idea or would do it given the cry against offshoring. Well, coming back to the benefits for corporate on offshoring, would a fresh Law Graduate, just out of college work for $25 to 30000 per year?. That would be a significant addition to my income here and I would very happily accept it. This is why offshoring works. I doubt if you could hire a paralegal for that salary in your State. This is what actually drives the economics. I hope you would agree with me.

I thank you again for your very magnanimous and kind emails.

Best Regards,

N. Ramaswami

I then brought this particular exchange to a close with an email that explained why there could be no such competition, and that Ramaswami's concept of law salaries in the U.S. was perhaps not unlike the perceptions held by many Americans outside the profession:

Dear Ramaswami,

I do not give my students in my courses research assignments. So there's no opportunity to put you in competition with them. Research assignments are given to research assistants when I have them, but as I mentioned, I haven't had research assistants for several years because I don't need the help. I don't anticipate having one in the near future.

There are law graduates who take jobs paying in the $20,000 and $30,000 ranges. Much attention is given to the top students who go to New York, where salaries are inflated because the cost of living there is so much higher, and start at salaries of $120,000. In the next group of cities (e.g., Philadelphia), starting salaries for the top students are just now reaching $100,000. Salaries in San Francisco and L.A. may be closer to those in NY as those are expensive cities but I don't know for certain.

Students who work in smaller towns start at $30,000, $40,000, $50,000. Starting salaries for law clerks for judges and attorneys in federal agencies are in the $30,000s and a few in the $40,000s.

Students who work in public interest, such as advocates for the poor, or in legal aid (for impoverished criminal defendants) often have starting salaries in the low and mid $20,000s.

So when you hold yourself available for a salary in the $25,000 to $30,000 you're not presenting, to most law employers, a significant financial advantage. For those to whom you would, the counter-balance is their reluctance to hire any law student other than the top students from the top schools.

The economics of lawyer compensation in the U.S. are complex, sometimes counter-intuitive, and misleading at times. A plaintiff's lawyer will win a big case, get paid on contingent fee basis, and bring in millions from that one case. Suddenly everyone thinks all lawyers earn that amount!! (It happens too with professional athletes, where for every player making big dollars there are two players making far less (though they do earn a nice amount)).

I will let you know when I post up to the blog. It will be soon but not immediately. Late this week, early next week?

Jim Maule

Wednesday, September 08, 2004

Isn't Anything Ever Simple? 

Suddenly there's been a flood of speeches, articles and blog bits focusing on a connection between the number of jobs in the economy (including the outsourcing issue) and the tax policies of George Bush. For example, John Kerry claims that "George Bush has chosen to support a tax code that rewards outsourcing." In a Slate article, Daniel Gross asserts that the enactment of tax breaks for investment in capital has turned business outlays away from hiring employees to capital purchases. On The Leiter Reports blog, Benjamin Hellie and Jessica Wilson argue that a Bush second term would bring attempts to reduce depreciation periods to a one-year expensing deduction, with dire consequences for the jobs market.

Is it this simple?

No. Economics is never simple. Its formulas and concepts are almost as complex as those characterizing quantum physics.

The tax code's treatment of U.S. companies doing business abroad was pretty much established before George Bush took office. Much of it has been around for a long time. It's complicated, a true bipartisan mess, and I suppose that what Kerry means is that George Bush has failed to change what he found in a way that would keep jobs in the United States.

Kerry's proposal, which is to "repeal the tax breaks that encourage companies to ship jobs overseas and use the savings to reward companies that create jobs in America" doesn't say anything about how this would be done. He claims that under his plan "99 percent of companies will pay lower taxes." So who pays the tax increase to prevent this plan from increasing the deficit that Kerry dislikes?

Kerry says nothing about the pending legislation, which changes the taxation of U.S. companies doing business abroad, in an attempt to comply with the WTO ruling that portions of the U.S. tax code constitute an export subsidy that violates WTO agrements. The WTO authorized the European Union to impose retaliatory tariffs on U.S. companies until Congress removes the offending provisions. Though Congress has bickered about how to solve the problem, nothing has been done, the EU retaliatory rate has increased to 7%, will reach 17% if nothing is done, and is draining billions from these companies and the U.S. economy. Kerry's statement, "“Today, the tax code actually does something that’s right. It actually gives tax breaks to companies that export American products." suggests that he doesn't quite "get it" when it comes to understanding the WTO ruling. Perhaps Kerry wants the U.S. to go it alone and ignore the WTO. Perhaps in seeking a role-model to follow in going it alone he can ask advice of the fellow he often accuses of ignoring international relations, a guy named George Bush.

What Kerry and many others don't seem to understand is that the US has two choices. The first is to ignore the WTO, suffer the retaliatory penalties, watch companies either pay the penalties or stop exporting to the EU, and watch those companies cut jobs because the money for jobs is being paid in EU penalities or because the cessation of exports has reduced the need for workers. The second is to comply with the WTO ruling, end the penalties, and let the companies manufacture products people overseas are willing to buy. The first option is the one Kerry advocates though he doesn't say so explicitly. The second option poses the risk that to make products attractive to overseas buyers the companies will try to keep costs down by outsourcing jobs to people willing to work for less money. So back we come to outsourcing, with Kerry describing the attempt to comply with the WTO ruling as advocacy of outsourcing, though, in all fairness, Bush and some members of his administration have characterized outsourcing as good for the economy. Could they be right?

Outsourcing is good only if it frees up a group of workers from one set of tasks to be hired for another set. The bottom line is, as will be discussed in an outsourcing dialogue that I've had with a person in India and that I will post soon, that when worker A offers to do the job for less than worker B wants, worker A will be hired unless worker B presents something that justifies the price differential. If worker B, losing the competition in job set 1, turns to job set 2, and offers a service for which there is no competition, then the outsourcing (whether to another country or another domestic community) can be a net positive. For all the talk about the loss of jobs and the slow creation of jobs, the classified ads remain numerous, certain industries continue to beg for applicants (e.g., skilled nursing care), and try to find a contractor to build an addition to a home. The problem is a mismatch between what workers can offer (and what they want for it) and what companies need (and what they're willing to pay).

The solution, therefore, isn't to prohibit outsourcing per se (though I continue to assert that certain types of services, such as legal research, ought not be outsourced, and that will get more attention in the upcoming posting). The solution is to re-train individuals so that they can offer the skills that companies need in place domestically. This nation somehow managed to handle the shift from buggywhip manufacturing positions to auto worker positions. It managed the shift from blacksmith's apprentices to machinists, and now must handle the shift from machinist to skilled nurse. Our education system, at all levels, fails miserably in preparing students for multiple career paths, something that is essential in a world where having a backup plan is essential.

Using the tax law to prevent outsourcing isn't possible. Here's an example. Suppose that a company pays $100 to a domestic worker, B. It deducts the payment and, using an easy but artificial 25% tax rate, reduces taxes by $25. The net cost is $75. The company then finds that worker A, in India, will do the job for $40. The deduction reduces taxes by $10, so the net cost is $30. The company saves $45. If Kerry's proposal is to deny the deduction for the payment to worker A in India, it simply makes the net cost $40. The company saves $35. The company will continue to outsource.

In the meantime, keep in mind that worker A, now "wealthy" by economic standards in India, has disposable income, and purchases products manufactured by, or services provided by, American workers or by multinational companies employing American workers. So perhaps worker B gets back into the game, but at another position. See, it's far more complicated than the simplistic soundbites spewed by candidates, and I've left out much of the complexity.

The same sort of complexity afflicts the question of whether tax breaks for capital investment causes domestic job loss. Surely at one level, when the tax law encourages spending for capital items to increase, the purchaser has less available to hire employees. In the Slate article, Daniel Gross explains nicely the answer to the next question, namely, doesn't the company need to hire people to operate the capital items being purchased? The answer is that some of the capital items being purchased are complex software packages that permit the company to do more (or at least as much) with fewer workers. Another example, I suppose, is the purchase of robots to build automobiles and other items. And that takes us to the next question. Don't the sellers and manufacturers of the capital items being purchased in larger numbers because of the tax breaks need to hire people to keep up with the demand? Aside from the use of robots (which ultimately, I suppose, will be built by other robots as cyborgs take over and science fiction comes to life, but I digress), some of the jobs created in order to manufacture the capital items are located overseas. These are not necessarily "outsourced" jobs, because the product is being made in the same country as are the workers; it's just that the purchasers getting tax breaks for purchasing the capital items are choosing products manufactured elsewhere rather than products manufactured in the U.S. Why? Usually because the foreign product is cheaper and of no less quality. Toyota can explain how a product of better quality can outsell a domestic product even if the price is *higher.* Why is the foreign product cheaper? Because the workers in that country don't demand as high a wage? Why not? Because the cost of living is cheaper in that country. Why? Because the standard of living is not as high. In The Leiter Reports blog, Hellie and Wilson explain that some of this economic disequilibrium is attributable to American life-style. It's expensive, they point out, to have sprawl and to be automobile-dependent.

Perhaps it's been a matter of having lost an undeclared and unnoticed (until now) economic war. Without bombs, without military action, without declarations, workers in other countries stood up and made themselves available at lower wages. Some came to the U.S. and are engaged in jobs that "Americans don't want." Others stayed home and manufactured products that were at least equal to, or in some instances, better, than the American counterpart, and generally offered those products at lower prices. Still others stayed home and used 21st century technology to provide services at cheaper prices to Americans.

For the moment, in a few areas, Americans hold an edge. Development of new medicines is one. Workers in that industry will be quite unhappy if as a result of pressure for lower drug costs, these companies move offshore. It's dangerous to cook the golden goose.

I've not mentioned interest rates. I've not mentioned money supply. I've not mentioned a lot of things. But let me add one more wrinkle. Suppose that Kerry, or Bush, or, more accurately, the Congress (it's on its members, after all) manage to create millions of jobs in America paying the amounts American workers demand. What happens? Prices go up, except to the extent that tax breaks are used to subsidize the job creation. Either way, the American taxpayer/consumer pays the increase. Inflation heats up. Americans begin complaining about price increases.

What started this? I think it began with the spread of industry from cottage to village to town to region to nation. Technology means that a professional athlete or entertainer can be seen by millions. The audience is 100 times what it was, so the person gets paid 100 times what they had earned. There's no news in comparing what present-day baseball players earn not with someone like Ty Cobb or Babe Ruth, but with Hank Aaron and Willie Mays. Corporate CEOs and brokers jumped onto the more-numbers-more-money bandwagon. The economies of scale, rather than being used to benefit all, benefitted a few. The same few who then demanded tax breaks on their capital gains and interest. As if a ballplayer or entertainer brings to the economic table some fabulous investment making skill that deserves a tax subsidy. Sorry, but those who thought this post was an ode to George W. Bush were wrong. That's because, as I've noted, neither of them have impressed me as a complete leadership package.

And who's to blame? Who attends the games and watches the movies? Who buys the products of the companies that bankroll this wealth shift? Who flocks to some Idol tryout seeking to get on the bandwagon even if dozens of others are injured when they are shoved off the back end?

Well, this was no sound bite. Yet another reason I am not, cannot be, and surely will never be, a politician. I don't like giving simplistic answers, I don't like one-sentence generalizations, and I don't get satisfaction from twisting things. I like details. I enjoy a ten-minute or ten-hour immersion into a deep read-and-think exploration of a topic, new or old. So for those who share that with me, here's hoping you found something worth reading in this post, and more importantly, some reasons to keep thinking.

Monday, September 06, 2004

Thoughtless Demagoguery: Keeping Logic from Trumping Emotion 

Buried in last week’s news was the announcement that Medicare premiums are slated for a 17% increase next year. That means the monthly fee of $66.60 will jump to $78.20, the largest dollar increase in the program’s history. People are very unhappy about this news. The increase comes on top of a 13.5% and an 8.7% increase for this year and last year. People, and some politicians, have become very emotional when discussing the issue or criticizing the increases.

It makes sense that at an emotional level purchasers dislike price increases. I’m not certain that sellers experience some sort of emotional glee when prices increase.

Logic, though, suggests that only when price increases are not matched by fair return should there be principled opposition from purchasers. Likewise, if a seller is merely passing along increases in the seller’s cost, then the seller doesn’t have any reason to consider the price increase a particularly happy or unhappy occasion, except to the extent the seller empathizes with the purchaser.

So what’s the deal with Medicare premium increases? Assuming that logic can trump emotion, which itself is a highly problematic premise, are these increases a necessary and logical unhappiness or are they anger-justifying pocket-picking?

Congress has provided by law that the federal government pays 75% of Medicare Part B benefits, and the recipients of the medical care pay the other 25%. Part B is the medical insurance portion of the health care coverage provided by Medicare, whereas Part A is the hospitalization portion.

The medicare program is not a for-profit corporate endeavor. Thus, when the fees charged to Medicare beneficiaries are increased, the increase is passed through to the providers of the medical care. There are no profits to be affected by the increase. There are no corporate executives whose compensation is increased. The compensation of the government employees managing the program is unaffected by the size or existence of an increase in premiums.

What causes the increase are the same things that cause increases in medical insurance premiums paid by employers for their employees, paid by employees who contribute to their employer plan, paid by persons who pay for their own plan, and paid by parents for dependent children who are not enrolled in other plans. If the cost of medical care increases, premiums for medical insurance, including Medicare, will increase.

A portion of the increase is attributable to the prescription drug coverage that was added to Medicare. It makes sense that if the benefits under the plan are expanded, the plan will incur more costs, which will be passed on to the beneficiaries. Also passed on to the beneficiaries are the benefits of having the plan pay for what the beneficiaries had previously been purchasing. Thus, the increase should be netted against the savings realized with respect to prescription drugs. Because the amount spent by each individual on prescription drugs varied, the net benefit or detriment will vary from person to person, making generalizations difficult. Nonetheless, they are made, and depending on how they are made, they can be polarizing. Hence, the emotion that is stoked by the issue.

For some Medicare recipients, the government subsidizes some or all of the premium payments, including the increase. Although Medicare is not means-based as a general rule, there is an element of means-testing in this subsidy.

Criticism of the increase has been widespread and intense. The concerns fall into two categories.

The first is the allegation that Medicare is a giveaway to medical providers, drug manufacturers and insurers. The amount paid by Medicare to physicians will increase by 1.5%. That increase is consistent with inflation, and surely far less than what physicians need to pay for the huge increases in malpractice insurance premiums. More on that in a moment. The charge that drug manufacturers are overcharging, chiefly based on the prices at which drugs sell in Canada, overlooks the fact that almost all of the development of new medicines takes place in the United States. What would happen to drug prices in Canada if new drug development shifted (along with its jobs) to Canada? Or perhaps we would be better off having kept drug prices so low during the past several decades that there wouldn’t be any new drugs the prices for which could be the subject of a present-day argument? And insurance companies? Are they rolling in excess profits? Allegations have been made that insurance companies have been “stashing cash,” arguably to cover future medical catastrophes. This issue, however, is one that transcends Medicare, and requires close examination of how, for example, the medical costs of a biological, nuclear, or chemical attack would be paid. Consider that in the casualty insurance arena only the setting aside of reserves will blunt the huge cost of multiple hurricanes crashing through Florida.

The second criticism is that the news was “leaked” at a time when other news stories were getting the attention. The Administration claims that the news was released when the numbers were ready. If this is such an important issue, then those to whom it matters can come forward with evidence that the numbers were ready several weeks ago, or a month ago, and were held back until hurricanes struck Florida. I suppose that someone *knew* hurricanes would strike Florida and create a news blur under which the Medicare premium increases could be announced. The silliness is particularly evident when one considers the fact that the increases come to the attention of those paying them. Many Medicare beneficiaries are as adept with the law, the regulations, and news affecting Medicare as are lawyers practicing in the area.

In my last post, I criticized Bush for his inconsistencies with respect to tax reform and tax incentives. Now I am going criticize Kerry for making silly statements concerning Medicare. If you get the idea that I have doubts about both of them, you’re right.

In his statement, Kerry painted the President’s promise in his convention speech to make Medicare stronger as inconsistent with the increase in premiums. I suppose Kerry thinks that things can be strengthened without cost. I’ll give him the benefit of the doubt and guess that what he was *trying* to say is that Medicare could be made more efficient, so that strength could be maintained without raising costs, and that strength could be increased with less of an increase than the one announced. To do this, of course, would require the Congress (of which Kerry is a member) to change the law that governs Medicare. As happens with tax, the Congress, responsible for the mess, blames the IRS, and now members of the Congress (Kerry not being the only one making the charge), responsible for tacking all sorts of things onto Medicare that go beyond medical care for needy retirees, blames the Administration.

What is particularly puzzling about Kerry’s statement are these questions: "Who are they going to send the bill to? Are they going to send the bill to Halliburton? Are they going to send the bill to Ken Lay and Enron?" "You bet they're not," Kerry said, answering his own question. "They're going to send the bill to our senior citizens. They're going to send the bill to all of you people." I cannot find Kerry’s explanation of why Halliburton, Enron, or Ken Lay should be billed for increases in Medicare premiums. That’s because he doesn’t have one. I do. It’s called demagoguery. To paraphrase a long-ago chair of the House Ways and Means committee, “Don’t tax you, don’t tax me, tax the guy behind the tree.” There is nothing to indicate that Halliburton, Enron, or Ken Lay, for all their shortcomings and misdeeds, caused the increase in health care costs that drive up the Medicare, and other health insurance, premiums. Yet the “someone else pays” mindset is evident in proposals such as Rep. Herseth’s proposed bill that would limit Medicare insurance premium increases to no more than 25% of the annual social security cost of living increase for the year. Fine. WHO PAYS THE REST OF THE BILL? Or perhaps medical services can be cut back, as has happened in England, where the same sort of misregulation made a shambles of medical care?

Who drives up the costs? We do. Yes, us. No politician will stand up and say that. That’s why I’m not a politician. How do we drive up the costs.

First, we insist on a medical profession that cures all problems. There are tens of thousands of diseases, ailments, injuries, and medical ills. Some are common, some aren’t. The cost of curing all of them is expensive. The cost of *finding* the cures is even more expensive. Someone has to pay. So the argument, of course, is that someone *else* will pay. That’s a silly argument, of course, because the “someone else” is us when someone else is making the argument. Understandably, there is an argument that the costs should be borne in some relationship to means rather than as a user fee, especially as those most in need of medical assistance often are disadvantaged because of the condition, but even if all persons earning more than $200,000 a year turned their entire incomes over to the government for this purpose there would be insufficient funds. Few seem willing to say it, but we’re not going to cure all diseases, save all lives, or create a medical utopia. Ever. A bit of study about parasites, viruses, and bacteria shows why.

Second, we make the cost of medical care much higher than they would be were we to adhere to lifestyles that reduced the chances of illness and disease afflicting people. People smoke, they ride motorcycles without helmets, they drive cars without wearing seatbelts, they get into arguments and shoot each other, they fatten the coffers of vendors of disease-enhancing foods, they use drugs for recreational purposes, and they engage in all sorts of activities that jeopardize health. I’ve heard the argument, especially from smokers, that “even if we lived a healthy lifestyle, we’d all get cancer when we were 100 and it would cost money anyhow, so by dying young we are saving the nation money.” The flaw in that argument is that when a young person’s health deteriorates, that person loses some or all of his or her economic viability, and thus loses the opportunity to generate more wealth to be set aside for late-life care.

Third, in response to the first two problems, we sue. We are a nation of blame shifters. We do stupid things and sue someone for having failed to stop us, even though had that other person tried to stop us we would have sued because of their interference in our life. It is a cultural characteristic. We cherish independence, which gets defined as doing whatever we want to do, suing anyone who gets in our way, and then suing someone when the lack of good judgment demonstrates that independence without responsibility is the opposite of freedom. And who benefits? The personal injury lawyers who pursue ill-advised litigation and nuisance lawsuits, and who rake in fees based on outcome rather than on hours of services rendered. Kerry, of course, said nothing about the impact of malpractice insurance premium increases on Medicare insurance premiums because his running mate happens to be a personal injury lawyer turned politician. Oh, I understand the argument that without contingent fees the impoverished plaintiff would not find access to the courts, but that argument merely supports a fee structure that charges successful plaintiffs a bit more than an hours-of-service fee, not a fee structure that causes personal injury lawyers to rake in tens or hundreds of millions of dollars because their plaintiff was awarded a huge sum. After all, the fee for writing an estate plan for a person worth $50,000,000 ought not be, and is not TEN TIMES the fee for writing an estate plan for a person worth $5,000,000, even if the fee is a wee bit inflated to cover the cost of providing low or no-cost will drafting for a person worth $5,000.

Political campaigns would serve the citizenry well if they triggered serious logical discussion of these sorts of issues. Instead, we are treated to emotional outbursts, screaming matches, insult trading, ad hominem attacks, Monday morning quarterbacking, scheming, plotting, and dedication to party rather than dedication to nation and citizenry. On the one side we get simple complexity and complex simplicty, and on the other we get thoughtless demagoguery that keeps logic from trumping emotion.

Friday, September 03, 2004

Complex Simplicity and Simple Complexity 

I took a look today at the text of the President's speech to the Republican National Convention. A student had stopped by my office earlier to tell me that the President had mentioned taxes a few times. The student noted that now he's in the tax class he's finding himself paying attention to things that would not have caught his ear or eye in times past. I wonder if it would be worthwhile to require all voters to sit through a basic tax course.

Anyhow, the President seems to have made two points about taxes:

1. The tax system, along with other government programs, was "created for the world of yesterday, not tomorrow." It is a "drag on our economy" and is a "complicated mess filled with special interest loopholes." It saddles "people with more than six billion hours of paperwork and headache every year." So he has concluded that a "simpler, fairer, pro-growth" tax system is in order and he intends to "lead a bipartisan effort to reform and simplify the federal tax code."

2. If the President has his way, the tax code will be used to provide tax relief to attract businesses to American opportunity zones. He would "offer a tax credit to encourage small businesses and their employees to set up health savings accounts."

So, which is it? The tax code is complicated and needs to be simplified? Or the tax code should be made more complex by adding at least two more special provisions?

Note that he didn't propose expanding enterprise zones. Wait, maybe it's empowerment zones. Wait, maybe it's the New York Liberty Zone. We're getting zone out here, folks. There are so many zones that Tax Management, Inc. decided it would make sense to have a separate Portfolio dedicated to the wide array of special provisions applicable to all these different zones. So I wrote it, and it's now in the publication process and should appear before too long.

Adding a new zone to the zone list complicates things. So too does the creation of yet another health care related provision.

It would make more sense to revamp all of the provisions relating to medical transactions, which in current form are so garbled that students continue to experience bewilderment as they sift through sections 104 through 106, turn to section 213, take a peek at MSAs, actually, wait, I don't have them do that anymore because it was short-circuiting their neural connections.

Nothing was said about abolishing the IRS. I guess not. Advocating new credits is inconsistent with jettisoning the system to which those credits attach. Almost as inconsistent as advocating tax simplification at the same time as advocating more layers of complexity.

Lest anyone think I've singled out the President and the Republicans for criticism, go back and look at my expressions of disbelief with respect to John Kerry's proposals. Unwise tax policy making, pandering to special interests, careless drafting, and half-baked tax ideas are a totally bipartisan effort. Whether they take turns adding to the mess or collaborate in doing so, members of Congress don't need Presidents and presidential candidates giving them even more ill-considered ideas to toss into the tax glop.

The student who stopped by asked me, "Do the people in Congress understand what they're doing with tax? Do they have to attend a class?" OH HOW I WISH THEY DID. I am sure I could persuade the Dean that as a public service I would provide a one-week tax course to all members of the Congress. What fun. What an absolutely enticing idea. Don't hold your breath. It won't happen. I'll spend my time instead writing new Portfolios on the next 12 zones, 30 credits, 15 phaseouts, 12 rate changes, 8 sunsets, 9 revivals, and 23 re-definitions of existing terms for special purposes that are almost certainly going to invade the tax law during the next 30 months.

Farewell to a Friend 

I should have known better. Early in the afternoon on Wednesday I posted my blog entry about the case upholding licensing requirements on on-line casket sellers. I made a quip about the death part of death and taxes.

Within minutes of posting that item, I learned that our Director of Media Services, Jeffrey Samuelsson, had keeled over and died while on his way to meet with one of my colleagues concerning some technology use matters. I've talked at times on this blog about my use of technology in the law classes I teach, including my recent foray into the world of "clickers." Jeffrey was very much a part of the entire process through which I adapted my classes to clicker use. For 15 years he was ever-present, hooking up projectors so I could use Powerpoint slides, hooking my laptop to the network, introducing me to laser pointers, and experimenting with "just over the horizon" technology that he figured would find its way into the classroom in the near future.

Jeffrey was a great guy. He'd stop by, busy as he was, to show or explain a new feature he figured I might want to use. He'd stop by and visit anyone he knew would want to learn about a new technology. He would invite us to stop by what I called the "AV Lair," a place filled with all sorts of equipment, wires, boxes, and the usual tech room jumble of things. We'd get to see the "really cool" stuff. He was into gadgets, as am I, so there was always a supply of new devices to explore. In his few spare moments he'd find interactive Internet games, and he'd share the URLs and show us what they were like. Actually, there was only one really important one, a World War 2 simulation, and I never really did learn to maneuver the tank or fly the airplane. He'd let me sit in for him and within 15 seconds, I'd lose his entire force. "No problem, we'll get some new ones" was his typical response.

Jeffrey was 41. He leaves his wife Vivian and four children, three of them still in middle school. His dedication to his family was the talk of the school. We knew his children because he'd bring them in with him. They loved getting to see Dad work. They'll miss him. So will we. When the law school community gathered yesterday to honor him, I remarked that Jeffrey's departure was a huge loss for this institution.

On the long and ever-changing journey through technology that has me at the moment blogging, using Powerpoint and clickers in the classroom, and creating web pages, Jeffrey was a reliable, trusted, caring, and informative companion. He was a fine friend. I will miss him. May you rest in peace, Jeffrey.

Wednesday, September 01, 2004

Internet: Death and Taxes 

Busy day, but I can't let this go by. It's too good an opportunity.

As seen in earlier posts, such as this one, I've babbled on about taxes and the internet. It's a topic often in the news.

But death and the Internet?

Well, here's something to fill in the death part of that famous eternal duo, "death and taxes."

A long-time friend and a reader of this blog sent news that the Tenth Circuit has upheld a state regulation prohibiting several individuals from selling caskets to Oklahoma residents over the interent without a state license. The United States Supreme Court has on its docket cases involving state regulation of on-line wine sales.

The casket case is reported here.

So there we have it: death, taxes, and wine on the Internet. Not quite a movie title. Perhaps a best seller.

I'll be back today if I can. I have things to share but it's a day with a very full schedule.

Tuesday, August 31, 2004

So What Are You?, They Ask. 

What are you politically, that is. I've always maintained that I don't fit any label. Now there's a place where one can go and get plotted onto a graph that measures left/right and idealistic/pragmatic.

Well, no surprise. I'm just a wee bit right of center and barely on the pragmatic side of the pragmatic/idealistic divide.

SEE? I keep telling people I'm (a) moderate and they don't believe me. Well, here's the proof.

Go and get yourself plotted at Chris Lightfoot's Political Survey, which takes about 4 minutes to answer 75 questions of the "Agree/AgreeStrongly/Disagree/DisagreeStrongly/NoOpinion" variety.

Thanks to Paul Caron who runs the TaxProf Blog. Curious as to where tax professors are on the graph? Visit Paul's summary.

Monday, August 30, 2004

Equitable Taxation 

My comment, in a previous blog post, that "Scholars, most economists, many lawyers, and others agree that a progressive income tax is the most equitable." brought this reaction from a reader:
I dare say that no classic Austrian economist (Mises, Hayek, Friedman, etc.) would agree with that. In my eyes, they are the only school with a constitent understanding of the negative effects of taxation on wealth creation and freedom, and they would say that any form of taxation that imposes a heavier pro rata burden on the persons that are actually creating wealth (i.e., most effectively employing capital) has a similar disproportionate effect of economic dislocation (again, by taking more capital proportionately out of the hands of the people that are best using it). Progressive taxation is wealth transfer, pure and simple. If you believe in compelled wealth transfer, then yes, I suppose you believe it is equitable - but to me (and those of a libertarian ilk) there is nothing equitable about compulsion. Don't get me wrong, relief of the poor is noble - but only when it is voluntary - again of course, in my opinion.

Indeed, a progressive income tax is not proportionate. It imposes a higher rate of taxation on those with higher incomes. Of course there is a school of thought that taxation should be proportionate. And Hence the use of the adjective "most" when describing economists. More importantly, what are the justifications for a progressive income tax? And, how can a progressive income tax be designed?

Some proponents of a progressive income tax simply advocate wealth transfer. That is, the income tax is considered to be a good measure of wealth, and higher rates are imposed on those with higher incomes so that the revenue flow to the government can be used to provide goods and services to those with less income. Other proponents of a progressive income tax, without necessarily rejecting the first approach, argue that an income tax reflects a payment for the societal costs imposed by those generating income, and that those with higher incomes impose higher societal costs.

I will set to one side the question of whether TAXABLE INCOME, which is used to compute the federal income tax, or ALTERNATIVE MINIMUM TAXABLE INCOME, which is used to compute the supplemental federal alternative minimum tax, are good measures of wealth, or even of wealth increment. I do not think that they are, because they are riddled with all sorts of exclusions and deductions that cause wealthy individuals to report low taxable income and not-so-wealthy individuals to report high taxable income. Toss in credits, most of which are variant manifestations of the same "social policy" engineering reflected in exclusions and deductions, and the computation of federal income tax liability has far less to do with wealth increment than progressive tax adherents claim. Nonetheless, let's consider an income tax that taxes income, period.

Taxation as a mere wealth transfer device seems to fly in the face of libertarian principles. It is the government's business to protect the opportunities that people make for themselves or acquire through effort. It is not the government's business to guarantee outcome. Yet that libertarian perspective must yield, as do other libertarian perspectives, to the reality that "pure" libertarianism cannot exist unless people treat each other appropriately. People, however, don't. Hence, my "right" to drive a car must be tempered by government regulation of traffic signals, speed, and licensing. Most libertarian thinkers, though not all, accept such restraints. The justification is that these restraints are a price that needs to be paid to protect the opportunity to drive (else we'd all be dead very quickly). The justification, though, rests on the notion of protection, or, in other words, safety. Returning to taxation, does not the need to protect the society that provides the opportunities to earn income warrant elimination or amelioration of abject poverty that if left unchecked would cause society to disintegrate? True, it WOULD be nice if voluntary giving and charitable works eliminated poverty, but that hasn't happened. So wealth transfer can be seen more as an investment than a mere transfer. Taxation to support education increases the pool of qualified workers available to those who have the opportunity to employ people in order to earn income. Taxation that shifts wealth can maintain or improve the health of workers so that sick day inefficiencies don't plague the enterprise. There are other examples. True, there are individuals who succumb to the temptation to "live on the dole" which is why efforts, complicated as they end up becoming, are needed to transfer the wealth in ways that benefit society and not just a free-loading individual. Defining and applying the line is a challenge.

Turning to the second approach, it is not difficult to identify the societal costs imposed by those generating income, and to show that when the income is proportionately higher, the societal costs increase disproportionately. This isn't a new idea, and I won't repeat all of the commentary. Consider, for example, the real estate developer who builds a shopping mall or commercial strip. There are societal advantages: jobs are created (though in reality jobs are shifted from other areas as stores close because of the competition from the mall), markets are expanded. But there are costs: traffic becomes congested, increasing pollution and gasoline consumption. The locality's infrastructure, from fire and police protection through emergency medical services to street cleaning, is burdened. Taxes are increased. Some are imposed on merchants, and some on the population of the locality. The developer, having pocketed the profits, is long gone. If the developer doubles profits by building a mall that is twice as large, or by building a second one "down the road," the congestion increases disproportionately. So, too, do the burdens.

The user fees that I have long advocated would solve these problems. However, they would be resisted vehemently by developers. The true cost of most development, and of many other enterprises, causes many to be far less profitable than they appear to be. Consider Microsoft. It is very profitable. But most of its profits reflect the shifting to end users and corporate IS staffs the burden of fixing the mistakes in products rushed to market that aren't ready for prime time. The societal cost in the millions of hours wasted while Service Pack 2 downloads, verifies, unpacks, prepares to install, install, reconfigures, reboots, and then crashes, or while some other fix is installed or bug researched, almost outweighs so-called productivity gains generated by the software. Again, a user fee as I have proposed, such as a $n fee for each time Windows crashes, would obviate the need for an income tax. But it won't happen, will it?

One can also argue that the user fees for some government services, unlike a bridge toll user fee, would be more heavily imposed on those with higher income (assuming income was measured properly as a wealth increment). For example, from an economic perspective military defense is of disproportionately greater value to those with more to lose. Consider that even the provision of human capital to the military is a disproportionate tax on the not-so-wealthy.

So one can see why "most" economists (and others) conclude that a progressive income tax is the most equitable. It is not, however, the most efficient. In its current form, the income tax is horrendously inefficient. And inequitable. Because it is not an income tax but a "tax on the income of those who lack the resources to prevent themselves from being taxed." The earned income tax which I was condemning is the federal income tax taken to its logical extreme: only wages are taxed, because interest, dividends, capital gains, and pensions escape taxation (or are taxed at token levels) because their recipients have the political power and resources to wiggle free of a genuine income tax base. And it was in that posture that I described the earned income tax as violating, in effect, the principles of everyone, whether advocating progressive taxation or proportionate taxation. There simply is no justification for taxing earned income and not other forms of income. None. Period.

I don't like the federal income tax as it now exists. Or has existed. I don't like state and local income taxes. Or earned income taxes. I prefer user fees. I understand that user fees are "regressive" because they claim a higher share of a lower-income person's income than they do of a higher-income person's income. But so, too, are the fees for food, clothing, and other necessities. User fees, after all, are simply the prices charged by a supplier who happens to be a government. (Yes, I know that privitization of many government functions makes sense, and would shift charges from a "user fee" to a mere "private sector price" but I don't want to stray into that discussion at this time.)

There is, however, one sort of income tax that I could support. It is on its face not progressive but it is when it is carefully analyzed. To the advocates of wealth transfer I argue: If income is being used to measure wealth increment as a basis for taxation, then let's accept what it means to be "wealthy." A person is "wealthy" if they have something left after paying for food, clothing, medical care, shelter, and the like. So what's left over (assuming income is measured properly) is what should be taxed. To the advocates of "income tax as paying for societal costs" I argue: "Those who pay for what they eat or wear, etc., are paying societal costs as built into the price. So let's deal with what's left over."

With a goal of minimizing the current paperwork and compliance nightmare that stalks the income tax, the notion of requring each person to keep track of what they spend would be contrary to simplification goals. A poverty level income is calculated annually by the government. Take a percentage of it, say 125%. Each person computes income, subtracts this amount, and pays a tax of, say, 30% of the excess.

Is it progressive? Of course. Let's say the 125% level amount is $20,000. A person with $18,000 of income has no tax. A person with $25,000 of income has a tax of $1,500 (30 percent of $5,000). That's 6% of income. A person with $40,000 of income has a tax of $6,000 (30 percent of $20,000). That's 15% of income. A person with $500,000 of income has a tax of $144,000 (30% of $480,000). That's 28.8% of income. Looks awfully progressive to me.

As for revenue, with exclusions eliminated and deductions limited to the cost of generating income, a lot more goes into the initial computational base. I used numbers that were easy for computation. It would not be too difficult to determine a number that is revenue neutral.

There are other advantages to such a system. I wrote about those advantages in Section VI of TAX AND MARRIAGE: UNHITCHING THE HORSE AND THE CARRIAGE, 67 Tax Notes 539 (1995) and I'll let you go read it. That was almost ten years ago. Of course nothing has happened to move us closer to a sensible tax system.

Friday, August 27, 2004

The Troubles of Social Security 

In remarks (here, here, and here)unlikely to rise as far above the distant horizon as they ought, Alan Greenspan has dangled the prospect of cutting or delaying social security benefits to the 77,000,000 baby boomers born between 1945 and 1964. Noting the impact of longer life spans on the cash flow of the social security system, Greenspan suggested that if benefits are to be cut or the retirement age extended, it ought to be done now rather than later so that people have a chance to plan alternative sources of retirement income.

Greenspan's comments criticized promising more than can be delivered. But, Mr. Greenspan, isn't that what happens every day in every walk of life? Isn't every new TV show, computer program, automobile feature, airport check-in system, newly signed free agent, or $9.95 cleaning solution touted as far more than what it turns out to be? Oh, you're right, of course, Mr. Greenspan, but we live in a culture that likes the hype, and doesn't understand why enabling the hype produces the very disappointment of which the hype-lovers complain.

What Greenspan sees is the shadow that forms over every Ponzi scheme beginning to darken the distant horizons of social security. By 2035 the over-65 population will have doubled (if I'm around, I'll be one of them, so I can't make any jokes about highways and cruise ships, can I?). If social security benefits remain unchanged and the retirement age remains unchanged, there are three choices: (a) the system goes bankrupt, (b) higher taxes are imposed on workers and employers, (c) the government borrows a lot of money.

Without going into detail, each of those choices is bad. Very bad. So bad that the very security of the nation could be threatened. When 10 people are trying to bake 1,000 pies for 10,000 people but have only 4 hours and 2 ovens, it isn't going to happen. That's why Greenspan proposes that people stay in the kitchen a little longer, reducing the population in the dining room.

Will it happen? I doubt it. It will be studied. It will be debated. It will be discussed at conferences. It will be the subject of articles and press releases. But can the Congress figure this out and come up with a solution that works? I doubt it. No matter the solution, someone is going to be unhappy. And Congress doesn't want to make anyone unhappy. After all, we live in a culture that dictates happiness as some sort of condition the lack of which is the end of the world.

Notice that I didn't mention returning social security to the "I" part of Federal INSURANCE Contributions Act (FICA). As I wrote on a related topic a few months ago:
None of this would have happened had Social Security been left as an insurance program designed to assist those whose pensions and other income were insufficient to support them after retirement. Social Security was enacted, after all, as the Federal INSURANCE Contributions Act. Yep, the I in FICA means INSURANCE, not entitlement.
It's amazing how much a mess is created when the grabbing outpaces the growing, when the reaping outpaces the planting, and when the using outpaces the production.

I will do my part. I will never retire. I will put students through the paces until they cart me away. I will grind out MauledAgain blogbits for as long as my fingers can move (even if my brain quits, so beware!).

Relax, I was joking. After all, they can cart me away while I'm still breathing. And they probably will try.

Taxes and Trash 

Imagine living in a city, paying taxes, watching your neighbors' trash get collected by the city without charge, and having to pay a private hauler to remove your trash.

That's what life has been like for people living in condominium and cooperative units in the city of Philadelphia. At least it was until City Council enacted a bill providing no-fee trash collections not only for the neighbors living in single family homes, duplexes, and row homes, but also for the people living in the condos and cooperatives.

Fair? Of course. The tax collections are paid from general revenues, which are funded by taxes imposed on all property owners. So of course people living in condo units ought not be required to pay private haulers to remove their trash.

If that doesn't make sense, consider the user fee approach, which is the system used in some other municipalities. Would it be difficult to see as unfair a system that imposed a trash collection fee on people living in condos and cooperatives but that required them to pay private haulers to collect their trash?

So what's the big deal?

The big deal is that the mayor of Philadelphia refuses to comply with the legislation and refuses to allow the city trash collectors to pick up trash from condos and cooperatives. So, this is great, City Council sued the Mayor.

When the bill was enacted and sent to the mayor for signature, he returned it unsigned but without having exercised a veto. He informed Council he would not enforce the bill, claiming that City Council has no authority to dictate that revenue be spent on a specific activity.

In early 2003 (before the MauledAgain blog existed so I didn't get to write about it back then), City Council sued the Mayor in an action for mandamus, seeking a court order directing the Mayor to have the trash collected. Council moved for preemptory judgment and the Mayor moved for summary judgment. The Common Pleas judge held for Council on its motion and denied the Mayor's motion.

The Mayor appealed to Commonwealth Court. On Wednesday that court affirmed the Common Pleas Court, in The Council of the City of Philadelphia v. Honorable John F. Street. Read the opinion if you like, but the upshot is that the court distinguished between legislation directing that the trash collection services provided to some residence owners be extended to others, which Council can direct, and legislation directing HOW the trash is to be collected, which Council cannot direct.

Supposedly there will be problems. One report notes that the city collects trash once or twice a week, and that means the condo and cooperative owners with limited trash storage space accustomed to daily pick-ups would have a storage problem. The incoming president of the Philadelphia Condominium Managers' Association suggested that the city reimburse condo and cooperative owners for their trash pickup costs. He noted that such a plan would "anger" city unions. To that I add a concern that the reimbursement could not be for more than what other residents get (once or twice a week), else taxpayers would be subsidizing condos for their trash storage space shortage.

Though the Mayor rests his legal arguments on City Council's alleged lack of authority, the bottom line is that the Mayor claims that there isn't enough money to provide trash collection service to the condos and cooperatives. OK, let's charge cars arriving at the toll booth $4 but then refuse to let some cross because there isn't enough money to pave the bridge (while spending the money on some other project). Supporters of the trash collection legislation speculate that without it there will be more incentive for people to leave the city of Philadelphia and live elsewhere. Perhaps. But wherever there is a locality with a nice tax system in place, it will become as has the quiet beach resort suddenly discovered by thousands: not what it used to be. People will flock to the place, demand for services will increase, taxes will increase, and someone's trash won't get picked up. The rest, as they say, is history in the making.

Oh, the Mayor of Philadelphia plans to appeal the Commonwealth Court decision. Warning to the Pennsylvania Supreme Court: trash headed your way.

Wednesday, August 25, 2004

Good News, Bad News 

I'm still catching up on the tax news that arrived while I was away and shortly thereafter. When I read this news from two weeks ago, I thought, "There's good news and bad news in this report."

The news came from a Department of Justice press release. The United States Court of Appeals for the Ninth Circuit affirmed a federal district court preliminary injunction barring Irwin Schiff and two associates from selling their tax evasion scheme. This is the ploy that rests on a very mistaken notion that a person need pay federal income tax only if he or she wants to do so. Not only were Schiff and his comrades prohibited from advertising or selling the “zero-income tax return” plan, they were barred from preparing tax returns for others and from assisting others to violate the tax law, whether by providing instructions on how to file fraudulent returns or otherwise. To top it off, the injunction requires Schiff et al to provide a copy of the injuntion to each of their customers, to post it on their websites, and to provide the government with a list of their customers.

As of the time the district court issued the prliminary injunction in March of this year, more than 3,000 persons had use the plan, and $56 million in taxes had been evaded. The ACLU came to Schiff's defense with respect to his book ("The Federal Mafia"), arguing that the First Amendment protects its sale. The court explained that the First Amendment does not protect fraudulent commercial speech. Nor, according to the Ninth Circuit, did it violate the First Amendment to require Schiff to post the injunction on his website.

The bad news? The bad news is that there are people willing to pay for this nonsense, and who think that the impossible is fact. All citizens have an obligation to know their civic obligations, and it isn't difficult to find an educated tax practitioner who can explain the dangers of following Schiff's advice. Perhaps pointing out that some of the individuals who used Schiff's plan were themselves convicted of criminal tax fraud would make an impression on these folks who follow the pied piper of tax protest. I wonder if this injunction will put an end to use of this plan, and I wonder how many more plans will pop up because there is a market of customers who so desperately want to ride for free.

The good news? The good news is that the tax protest movement, which some considered to be a harmless expression of discontent, is finally finding itself under the hammer because it has moved from mere protest to violation of law. Every dollar that goes unpaid because someone doesn't want to satisfy their legal obligation is a dollar that gets added to another person's tax bill, that gets subtracted from another person's benefit, or that gets added to the federal deficit.

If all taxes that should be paid each year were paid, the federal deficit would shrink, and for most years, disappear. If all taxes that should have been paid during the past 30 years, and that have not been paid, were collected (even without interest and penalties), the government would be awash in money and could cut taxes significantly while reducing the federal debt substantially.

Yes, pulling that much money out of the economy would have a shock effect, but that shock would be mitigated by the money being put back into the economy. What would happen is that the money would be taken from people who ought not have it and get transferred to those who have been financing the deadbeats for all these decades.

Of course, as a practical matter, most of the people who "protested" by not paying have little or nothing in the way of assets. I'm certain they were advised not to stash the cash where it could be found when the piper stopped piping.

Several years ago, after receiving email from strangers who sought my imprimatur on tax evasion schemes, and after dealing with their unhappiness after I declined to do so and explained why the schemes were wrong, I posted a page on my Law School web site explaining why it is, in the long-run, wrong and futile to follow the pipe dreams of someone like Schiff. (Go to the web page, select professional projects from the left-side menu, and then click on "FOR WOULD BE TRAVELLERS ON THE NONCOMPLIANT FEDERAL INCOME TAX PROTESTER PATH:" to read my exposition on the matter.

I think this posting will make me as many new friends as did that web page. Sorry about the sarcasm. And thanks in advance to the several people I know will be emailing me with words of thanks and encouragement.

Monday, August 23, 2004

Sales Taxes, Again 

My previous posts on the proposal to restore the sales tax deduction (here and here) generated some interesting responses.

A colleague at another law school recommended David Brunori's new book "Local Tax Policy: A Federalist Perspective" (Urban Institute Press). David is the editor of State Tax Notes, and has been the recipient (and publisher) of several missives from me. In his book, according to my colleague, David, who supports use of the property tax, explains that some states have accommodated people on fixed incomes by letting them postpone payment, with interest, until death, with a lien in place to protect the government's economic interest. That reminds me of a reverse mortgage. It's not as forgiving as something along the lines of a low-income tax relief provision, but it works.

This same colleague reports he suggested this idea recently at a dinner party, and the group "largely was repulsed by the idea of not being able to pass along their house to their children at death, though they likewise did not support property tax increases." Three questions that I'd like to ask. One, would this group cut school and other government spending or use some other revenue source? Two, why would the existence of a lien necessarily prevent passing the house to the children, and would it be any less of an obstacle than a mortgage or reverse mortgage? Three, how many children really want the parents' house? I'm guessing very few. Children live elsewhere. Children have their own homes. Children, and their families, probably don't want to move. I'm guessing what children want is the economic value of the house. Had the parent paid the property taxes (and sold the house) the net asset value passing to the child would be the same, aside from the interest on the tax payment postponement.

A practitioner in Texas pointed out that utnil the alternative minimum tax is fixed, allowing a deduction for sales taxes would be about as useful as the education credits enacted during the Clinton Administration. He's right, assuming that the sales tax deduction is treated for AMT purposes as is the income tax deduction. The proposed legislation as it now stands does just that.

If a defender of the proposal replies that taxpayers not subject to the AMT would benefit, I would counter with something along the same lines as the comment from the practitioner in Texas: Most of the taxpayers not subject to the AMT are claiming the standard deduction. So, they, too, get no benefit.

So what's the proposal about? It's about politicians crowing that they "did something to help their constituents, to lower taxes, to foster fairness,...." In fact, they've done nothing, with little revenue cost. Nice ploy. Here's hoping the citizens pick up on this gambit and see it for what it is.

I told my students this morning that "tax policy" gets considered in the course because all of us react to a piece of tax law with the one-word question, "Why?" The tax policy answer, I continued, necessarily involves tax politics. I trust that by the end of the semester my students will understand the smoke and mirrors that masks so much of what REALLY is happening with the tax law. Give me another 1,000 years of teaching and 200,000 students (each with 30 clients) and I just might get this message across to enough people.

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