MauledAgain

Proposals to increase the gasoline tax are back in the news. They've been percolating through this blog for many months. I made the suggestion back in May of last year, long before anyone had met Katrina or Rita. I made it again in January of this year. I repeated my suggestion for increased taxes on the use of non-renewable energy in March of this year, and defended my position in two follow-up posts (here and here). I revisited the issue last month, and extended the discussion a few days later in a post responding to a criticism of my position.

The topic moved into the spotlight even earlier, as I argued against proposals to DECREASE the gasoline tax. I explained the silliness of these proposals in March of 2004 and I attacked a similarly ill-conceived plan in Hawaii to cap gasoline prices back in August of this year.

I suppose I could write a book. In the meantime, others have been keeping the gasoline tax increase proposal fires burning (oh, well, sorry). An editorial in Sunday's New York Times advocating an increase in the gasoline tax to encourage conservation and to wean the nation from dependence on foreign energy sources has generated an interesting set of reactions from subscribers to the Oil Drum web site. Many of these subscribers are expertised in the energy industry, or are close followers of energy policy issues, so it makes sense for a tax person to pay attention to their perspectives.

The Times editorial doesn't raise any new arguments. The ideas that energy conservation is a good thing and that dependence on foreign energy is not have been around for much longer than the most recent news panic about oil, gasoline, natural gas, and diesel shortages. What may be new is that some folks who had not been paying attention now are paying attention. What's not new is that most folks still don't get it.

Conservation with respect to non-renewable resources is good not only because of the limited supply of energy, but also because oil-based energy contributes to environmental degradation. Shipping American dollars abroad to purchase oil from the Middle East puts financial resources into terrorist pipelines. The impact of higher energy prices on the economy is just beginning to be felt, and it will become worse.

The principal argument in favor of a higher gasoline tax is that it would cause the same sort of "demand destruction" as did the higher gasoline costs that showed up in the aftermath of Katrina. The current federal gasoline tax, unchanged for the past 12 years, is a mere 18.4 cents per gallon. Yet raising this tax is nearly impossible from a political perspective. The gasoline tax is regressive, because it takes a proportionately higher percentage of lower income taxpayer's income than it takes from the income of the wealthy. One problem with this perspective is that the word "tax" triggers issues that aren't triggered by the word "toll" or the word "fee." Bridge and highway tolls are regressive, but they're not regressive taxes. They are user fees. Someone suggested that the difference between a tax and a user fee is that the latter purchases the payor a direct benefit whereas a tax doesn't necessarily return to the payor an equivalent benefit. I'm not certain I agree with that definition, except to the extent taxes are used as wealth transfer mechanisms. But, for the sake of argument, using that definition convinces me that the gasoline tax is a user fee and not a tax. Other arguments lead me to the same conclusion. Persons who burn gasoline, or any other petroleum derivative, impose costs on the maintenance of highways, the retention of clean air, the safety patrolling and emergency servicing of roads and highways, and other social costs. What I cannot answer at the moment is whether these costs are somewhat more than or much more than 18 cents per gallon.

One tough issue is how to mitigate the impact of higher gasoline user fees on the poor. Although not much is done with respect to highway and bridge tolls paid by the poor, there are models that can provide guidance on alternatives available to prevent increased gasoline user fees from shutting the poor out of participation in the economic market place. Some cities and states provide reduced price public transportation to low-income individuals. The earned income tax credit is designed in part to offset the "cost of having a job" that might deter people from entering the work force at an entry level pay scale. Some of the commentators on the Oil Drum site supported some sort of give-back to the economically distressed.

According to the Times editorial, and this appears correct, each one cent increase in the gasoline user fee would raise approximately one billion dollars. What should be done with this revenue? Making highways more energy efficient is one possibility, which hopefully would include the elimination of poorly designed and horribly programmed traffic signals that compel every vehicle to get zero miles per gallon often while waiting for non-existing traffic on the cross street. Rewarding people who purchase energy efficient vehicles, or manufacturers who design and build them is another possibility. Investing in a renewable energy source "Manhattan Project" to deal with the inevitable drying up of non-renewable energy sources is yet another possibility.

The editorial concludes: "Cheap gas is no longer compatible with a secure nation, a healthy environment or a healthy economy - if ever it was. The real question is whether we should continue paying the extra dollar or two per gallon in the form of profits to the Saudis and other producers, or in the form of taxes to the United States Treasury, where the money could be used to build true energy independence." Put in those terms, it shifts the burden of the argument to those who oppose gasoline (and, seriously, petroleum consumption) user fees.

An Oil Drum poster noted that the previous day an editorial in the New York Times had advocated subsidies for heating oil for the poor. How could that be consistent with a call for an increase in the gasoline tax? The answer, another commentator said, is that "without gas, people whine, moan, and generally stay inside all day" but "without heating oil, people die."

Some of the comments on the Oil Drum site were practical. The chances of such a proposal getting support from the current Administration and Congress are slim. Though true, the importance of that comment is not to render the discussion irrelevant but to refine (sorry) the proposal so that it can be made politically acceptable. One suggestion was to use at least some of the revenue to cut income taxes. Hmmm. I wonder if the Tax Reform Panel is tuned into this discussion. Well, I say I wonder. I don't. I know. It's not. Too bad. As for the Congress, one commentator pointed out that Senator Harry Reid, who, I must add, claims he wants to make America energy independent, is singing the "let's reduce the cost of gasoline" song and dance on his website, but he seems to forget the "that will make people use more gasoline" dance that goes with that song.

Someone pointed out that the standard argument against taxes seems to be "I can spend more wisely than the government; the government will just fritter money away or hand it to the rich." Other comments certainly support this position. The fear that government corruption and incompetence and the resulting lack of confidence in government stewardship over any revenues is evident in some of the posts. Another commentator claimed that it's not the politicians who are at fault but the people who have unrealistic expectations. In some respects that's true. There are people who think there exists an infinite supply of petroleum products, and there are many more, surely a majority, who don't know what "peak oil" is. That's like not knowing what wasps are. Eventually they get stung.

The commentator who suggested the standard argument against taxes then pointed out that failure to regulate one's self invites regulation by others, and the government is quick to step in when the market place fails. But, I ask, who is to determine when the market place has failed? Is the market place for operating systems working well because Bill Gates has made money or is it failing because Windows crashes and security lapses require the inefficient expenditure of huge amounts of time by the consumers in that market? The conundrum, as one poster noted, is that a free market does not necessarily support "fairness" unless one considers the outcome of a market to be per se fair, yet supporting government intervention in a market because the outcome does not meet some other definition of "fair" suggests that something is fundamentally wrong with the free market model. The gasoline user fee, however, is not, as this poster seemed to imply, a "fairness tax" designed to make the price of gasoline fair, but a charge for the imposition that gasoline use makes on public goods such as highways, bridges, and clean air. After all, governments intervene in markets because markets do not reflect the theoretical rational person contemplated by Adam Smith but the practical modern American consumer enticed by advertising and peer pressure to react with emotion "thanks to the dumbing down of our nation's school system." Gee, there's another person who's with me on that point.

One argument against increasing the gasoline tax, or at least against increasing it significantly, is that it would thoroughly disrupt the lives of the tens of millions of Americans who are locked into their suburban lifestyles, living far from work, or working on farms that are miles from the nearest town. The idea of "moving close to work" seems sensible until one considers the two-earner family with jobs that are tens or more of miles apart. But others claimed that some people live "out in the country" for reasons other than economic necessity, as they are not farmers but simply folks who prefer to live in wide open areas.

Another comment claimed that even a 50 cent per gallon increase would trigger a recession. My question is what happens if gasoline consumption continues to increase, perhaps fueled (sorry again) by efforts to lower gasoline prices. Will that not accelerate the impending recession caused by energy shortages? What happens if natural gas shortages force manufacturing plants to close or move abroad, as already is beginning to happen? What happens when diesel fuel is rationed, as already is beginning to happen, and the trucking industry cannot ship goods that need to be shipped? My answer is, yes, a recession.

Someone asked why bother increasing gasoline prices through a gasoline tax increase when it is apparent that gasoline prices will increase on their own because of supply problems. The answer, provided by another poster, is that an increase in the tax (or user fee) will focus consumer attention NOW on planning for higher prices in the future, to "capture some of the demand in our own economy instead of sending it to OPEC," and to reduce demand and create more time for development of alternatives and to decrease vulnerability to shortages. Well put by someone named "Engineer Poet."

Should an increase in user fees be phased in? Perhaps. As one commentator noted, a small annual increase would give people time to prepare and plan, replace vehicles, perhaps move, and perhaps organize support for more efficient mass transit.

Should there be exemptions for individuals who have no choice but to use petroleum-based fuel? How should such an exemption be defined? Does it matter if the person must consume gasoline or diesel in order to do a job, such as a traveling sales representative, or should it matter if someone is "stuck" by gasoline user fees because he or she decided to live in a suburban development far from the work place? Notice how a discussion of a tax (or user fee) triggers questions about why people live far from their work places? Is it the attraction of the open country (which, ironically, then fills quickly with more shopping malls and many more homes)? Is it the supposedly better school system? Is it the cheaper cost of homes that are further from the work place? If so, does this mean that finding a cheaper home and thus incurring lower monthly housing costs puts the person in a no-win situation because commuting costs gobble up the savings?

Someone presented a problem with a per gallon gasoline tax (or user fee). Revenues would decrease as vehicle fuel efficiency increased. So perhaps the user fee should be a percentage of the retail price?

Some commentators proposed alternatives. One suggested a "feebate program" which would rebate monies to manufacturers whose manufactured fleets exceeded standards and which would collect those monies from manufacturers who did not do so. What happens, I ask, if most or all manufacturers exceed the standards? Someone suggested that the administrative costs would cause the rebates to be less than the collections. Another reaction was that the rebates ought to go to the construction of renewable facilities. Another pointed out that as those who could afford to buy the more efficient vehicles did so, their older vehicles would be the ones purchased by the poor.

Another commentator proposed a road usage tax. Ah, the semantics. You mean road usage user fee, correct? The difference between a gasoline user fee and a road usage user fee is that the latter takes into account the weight of the vehicle and thus the damage or wear and tear it imposes on the highway infrastructure. Because fuel use, though, is roughly proportionate to ton-mile, the gasoline user fee would be easier to administer. This poster noted that the per-mile tax that has been proposed in Oregon is a step backwards because it ought to be a per-ton-mile tax. After all, the idea that all vehicles impose the same burden on public goods when they travel a mile defies logic. I discussed these proposals back in November of last year.

Another commentator suggested the implementation of "tradeable quotas." Everyone is entitled to purchase a certain amount of fuel (whether gasoline or all petroleum products wasn't specified). Those who want to use more fuel either can purchase unused quotas from those who don't use all their allocable untaxed fuel or can pay a high tax on the excess fuel that they consume. The government would regulate the process but not collect revenue, as the system would move funds from fuel users to fuel conservers. Yes, this poster admitted, this is close to rationing, but doing nothing is putting the nation into a de facto rationing system that afflicts the poor more than the wealthy. I like the general idea, but I think that even the allocated quotas should be defined in terms of taxed fuel, set at a rate lower than the much higher rate on excess fuel consumption.

Another commentator suggested that because volatility in the gasoline retail price market is bad for the economy, the tax (or user fee) ought to be a fixed per gallon amount reduced by a percentage of the pump price. Thus, the tax would be dampened somewhat as retail prices increased, yet the total pump price would not drop so low as to encourage a spike in consumption. This is an interesting example of using a tax, or a user fee, to regulate a market, because the tax or user fee would be changing even though the impact on public goods per gallon of gasoline consumption would not be changing in the same manner. For that reason, I don't favor the idea. If the retail price increases because of supply and demand shifts, then the true price of gasoline usage ought to reflect that increase, without some sort of user fee reduction to cushion the cost and thus bias the consumer's decision making.

Yet another commentator suggested a return to the subsidization of ethanol production. This triggered an amusing exchange. A critic characterized ethanol as a very bad idea, and claimed that making ethanol rather than feeding people was selfish. The proposal's advocate replied that we have more than enough food in this country, as evidenced by the fact we are the most obese population in the world, and that farmers are having a tough time selling in the global market because of subsidized exports from the EU and cheap food from other countries. In response, another commentator claimed that what keeps American farmers from being competitive is high energy costs, which include, by the way, fertilizer and pesticides (which are made from and using non-renewable fuel). I learned that 13% of the corn crop is used to create enough ethanol to replace 1% of the nation's gasoline consumption.

So, the next commentator saluted biodiesel, but then described the adverse impact of modern agriculture on the environment, suggesting that solving one problem creates another. And, as expected, and as I've predicted, someone asked if there was a "peak water" website, because water supply would be the next natural resource crisis after peak oil. I disagree. I still think water will trigger a world war before oil does.

Still another poster claimed that the government should "help fund" the massive infrastructure projects that are beyond the ability of the private sector to risk, such as nuclear, biomass, oil shale, and mass transit. Again, it would be the tax law, I am certain, that already serves, and would continue to serve, as the vehicle for this government support. We're talking credits and deductions, such as those already in the tax law that I reviewed in March and to which a few more have since been added.

Finally, support was expressed for increasing the gas guzzler tax before increasing the gasoline tax. Support also was expressed for eliminating the "truck" tax break that treats SUVs and other vehicles as trucks.

What a mess. Ultimately, the question is whether the Congress, encouraged by the American public, takes control of this situation before this situation takes control of us. What a scary thought. What's even scarier is that most Americans don't realize the scope of the energy problem, don't understand the economic and political contexts in which the energy problem exists, surely don't comprehend the challenges of using the tax law or even user fees to deal with the problem, and who find planning for the future too difficult if the future means any time after the end of the next weekend.

As I asserted last month, "All of this will require leadership. It will be a factor in the 2006 and 2008 elections. I continue to scan the potential candidates and I continue to feed my pessimism."

The fallout from the Tax Reform Panel's proposals continues. In an ope-ed piece in yesterday's Washington Post, David Brunori explains why chopping the mortgage interest deduction is a good idea. David is vice president of Tax Analysts and a research professor of public policy at George Washington University. He knows taxes. Although sometimes I agree with David's analyses, this time I happen to disagree with the argument that he makes in defense of the Tax Reform Panel's idea.

As I pointed out in Friday's post, the problem with the Panel's approach is a combination of timidity and bias. The Panel goes half-way, in a half-hearted attempt to put some simplification paint on top of the special-interest group complexity rust of the Code. The Panel is biased, because it protects the tax breaks of most importance to the wealthy and ultra-wealthy, while taking its shots at the middle and upper middle class. In some respects, its pro-wealthy bias accounts for its half-heartedness.

David views the proposal as one that will impose financial strain on people who own homes with three-car garages, mega-kitchens, and grand entryways, and that it will make ownership of vacation homes financially more difficult. But the assumption that the "hit" from the proposal would fall on folks owning vacation homes in Rehoboth, Delaware, misses the point I made in Friday's post, namely, that the ultra-wealthy will lose far less of a tax benefit than will the middle class taxpayer who owns a far from over-imposing mansion or estate home. Likewise, the Panel's proposal will disadvantage the owner of a modest vacation home in a not-so-fancy resort far more than it will have any serious impact on the millionaires who jet from one resort to another as the planet's orbit around the sun changes the seasons.

David points out that the proposal will have the effect of removing any tax subsidy for home equity mortgages used for such purposes as college tuition for children. Now, who borrows to send children to college? The very rich? Nah, they just write a check from the petty cash fund. The very poor or the poor? No, they qualify for grants. The lower middle class? Some, though grants and other financial aid is available most of the time. It's the middle class and the upper middle class who borrow for tuition, because they have become the whipping posts of the new political order. The new political order, of course, is just another variation on the typical political order, by which the wealthy and ultra wealthy pit the poor against the middle class, buying the votes of the former in an effort to set back the latter from inching closer to the turf of the wealthy.

David is correct that the proposal to trim the mortgage interest deduction is "gutsy." It's also foolish. Telling the difference between gutsy and foolish is tough, because sometimes the two blur. Check in with the participants on MTV's Jackass series for an explanation.

David makes a great case for repealing the deduction. On this point, he and I agree. But the Tax Reform Panel isn't proposing repeal. Its plan is to trim the deduction, in a manner that afflicts the upper middle class the most, and the middle class almost as much, but that does little to the wealthy and ultra wealthy. Although it might make sense to praise a movement in the direction of repeal, it is deceptive to take a crooked half-step as does the Panel's approach.

It's when David lists the reasons for limiting the deduction that he takes the praise that's owed to a truly courageous, or gutsy, move, namely, repealing ALL benefits that skew the tax code in favor of the wealthy, and directs it to the window dressing from the Tax Reform Panel that is nothing more than a repetition of the bad tax policy that has afflicted tax legislation for the past decade and a half.

David argues that the "federal government needs the money." This is true. The question isn't whether the government needs money, as I pointed out in a recent post. The question is who should finance the federal government. The current policy, which is that the wealthy need to retain their funds so they can play games with the acquisition and sale of other people's labor and ideas, while the rest of the country foots the bill, is one that holds fast through the Tax Reform Panel's recommendations.

David then argues that trimming the mortgage interest deduction permits reform of the alternative minimum tax, keeping it from afflicting middle class taxpayers as it will if nothing is done. The problem with this argument is that it undercuts the first. If the revenue from cutting the home mortgage interest deduction is used for alternative minimum tax relief, then it's not going to be available for hurricane relief or to reduce the deficit. Because the wealthy know how to avoid the alternative minimum tax, and get assistance from Congress in doing so through provisions such as excessively low rates on capital gains, interest, and if the Panel is persuasive, domestic dividends, the middle class and upper middle class will end up financing the wealthy and ultra wealthy at least as much, if not more, than they currently do. To quote David:

Because of its lack of transparency, the AMT is a bad way to raise revenue. It is also politically very unpopular. The tax reform panel wants to see it repealed. Short of raising rates, which the president has vowed to oppose, there is no way to raise the money needed to reduce AMT burdens other than by trimming the mortgage deduction.

But that's just not so. There's PILES of revenue available if the snake-oil idea that capital gains and dividends are somehow "different" and less deserving of taxation at the same rates that apply to wages and the business income of sole proprietors and small businesses is relegated to the trash heap of bad tax ideas.

David also argues that "reducing the home mortgage interest deduction would shift the burden of paying for our government needs to those best able to pay." Again, what the panel proposes shifts the burden to the middle and upper middle class, who clearly are not "those best able to pay." Those best able to pay are proving, by being able to pay for the lobbying that generates tax code provisions favorable to the rich.

David hints at this by claiming that the rich who have high mortgage debt would balance the tax increase from the curtailment of the mortgage deduction with a tax savings from alternative minimum tax relief, and that when "the deficit eventually falls, the wealthy would recoup their losses with additional tax cuts." The problem may be in defining "rich." Why? Because the truly rich are NOT saddled with high mortgage debt. They may have other debt, designed to leverage big-time investments or contrived as part of structuring tax shelter deals, but these folks don't finance their children's education with home mortgage debt, because they are drowning in cash.

In arguing that the proposal would affect very few taxpayers, David states, "The wonderful thing about the progressive income tax is that it can be manipulated to raise revenue while protecting lower- and middle-income citizens quite easily." But let's face it. No one is protecting the middle class. OK, maybe a few members of Congress, here and there, try. The tax law favors the wealthy. Underneath the nominal higher rates on higher income that appear to make the income tax progressive, sit a variety of realities that shift the burden disproportionately ontothe middle class. Think of the bubble effects, the phaseouts, the tax breaks available to the poor and wealthy but not the middle class (such as earned income tax credits, and low rates on capital gains).

David state, "There is simply no tax policy justification for allowing large home mortgage interest deductions." But the point is that "There is simply no tax policy justification for allowing ANY home mortgage interest deductions." That's where David and I disagree. Just do it. Eliminate the deduction (and a bunch of others). Stop with the fiddle and dance, the pretensive finesse, and the manipulation. I suspect David is willing to take what he can get. I'm saying that no loaf often is better than half a loaf if the full loaf isn't available.

To make my point, David explains, "really smart people since the time of Adam Smith have warned against using the tax laws to distort markets. Perhaps it is time we listened." I agree. Take this argument to its logical end. Don't stop halfway. Repeal the deductions that have nothing to do with the generation of income.

Thus, David's conclusion that "In the end, the panel did the right thing by making these proposals." I disagree. The Panel chickened out. It held back, rather than going for the decisive blow against tax inequity and tax inefficiency. A huge disappointment.

A week ago yesterday, I commented on the many vacancies in the Treasury Department among positions affecting the development of tax policy and taxpayer guidance. I noted the disadvantages of continued delay, particularly after one candidate withdrew from the nomination process for that very reason.

Yesterday, the Treasury announced three new appointments in the Office of Tax Policy. Treasury named a Tax Legislative Counsel (Michael J. Desmond), an International Tax Counsel (Harry J. "Hal" Hicks III), and a Senior Advisor to the Assistant Secretary for Tax Policy (Robert H. Dilworth). Good news. It's a start. There remain five of the seven vacancies that were noted in last week's post:

• Assistant Secretary of the Treasury for Tax Policy
  
• Deputy Assistant Secretary of the Treasury for Tax Policy
  
• Benefits Tax Counsel
  
• Assistant Secretary for International Affairs
  
• Assistant Secretary for Public Affairs

At a pace of three appointments a week, the vacancies ought to be filled by mid-November. That, however, is unlikely, because several positions require Congressional action.

In his Philadelphia Inquirer column this morning, Andy Cassel asks a question which I am going to try to answer. But, first, here's the background for the question.

After reviewing the unsurprising reaction to the recent proposals floated by the Tax Reform Panel, though without specifically mentioning mine, Andy focuses on the proposal to reduce the cap on the amount of mortgage loans on which the interest would be deductible and the proposal to convert the deduction into a credit equal to 15% of the interest on the first $x of the mortgage, where $x is an amount that varies by county. Presently, the various $x amounts fall between $200,000 and $300,000.

According to Andy, this is the "bottom line: Owners of low- and moderate-priced homes would either get a bigger tax break or see no change. But owners of deluxe houses with jumbo mortgages would lose much of their current subsidy." He quotes the Tax Policy Center for the proposition that the taxpayers most likely to scream about this proposal are not "all American taxpayers" but "just the rich ones" and that 83% of the tax savings from the mortgage interest deduction benefits people whose income is in the top 20%.

Andy notes that "most Americans get little or no government help paying for their houses, outside of programs such as Section 8 for the very poor. But those with incomes above six figures receive tax benefits that can average $7,000 or $8,000 a year." He also points out that if the mortgage interest deduction is reduced, it paves the way for another proposal, namely, reducing the top tax rate and lower taxes on already lower-taxed capital gains.

Lastly, he notes that the ultimate impact would be on real estate, because a reduced mortgage interest benefit many people will refrain from borrowing huge amounts to purchase houses and will be less likely to bid up the price for luxury housing. The effect would be a slower increase in housing prices. This brings Andy to his question:

And that's why home builders and real estate agents are leading the charge to save the mortgage-interest deduction. In any market where the government props up prices, it's mainly sellers and brokers who benefit, while buyers pay extra. Shrinking the deduction would remove that prop and simply let the housing market function on its own. Anyone want to explain to me why that's a bad thing?

So here goes.

It's a bad thing so long as the hundreds of other tax breaks that the Tax Reform Panel does not address are left in place and if the additional proposed reduction of taxes on the wealthy, in the form of a zero tax on dividend income, further reductions in the tax on capital gains, and the reduction of tax on investment interest are implemented. The mortgage interest deduction is not the only unwarranted subsidy in the tax law, but removing it while turning a blind eye to the others skews the marketplace. The tax law currently props up McMansion purchases, exurban sprawl and the resulting energy waste, and inflated vacation home markets, but the tax law also props up an inefficient energy exploration and production industry, the construction of shopping mall after shopping mall and excess commercial and office building capacity, a variety of supposedly beneficial and favored social behavior, and a long list of other special interest group favorites. What happens if the reduced demand for home mortgages causes banks to lend their money to shopping mall developers or the builders of unnecessary commercial and office building space?

Let me step back. I'm no fan of a complexity-riddled tax law that reflects Congressional payback to the special interests that purchase their advantages rather than earning them in the marketplace. I'm all for repealing outright the mortgage interest subsidy and all other subsidies, leaving as deductions the cost of generating income. THAT would be true tax reform. The proposal is bad because it targets one group in the hope that the status quo advocates will be able to use that maneuver as ammunition to deprecate tax reform advocates as "having gotten what they wanted and coming back for more." That's why it's so important for tax reform advocates to resist these half-hearted gestures, because it distracts the country from the core issues.

It's also important to understand that the proposal is not an elimination of the mortgage interests subsidy but a curtailment that affects the upper middle class more than it affects the wealthy. Consider five homeowner named Low, Low Middle, Upper Middle, High, and Very High. Low owns a modest home, with a mortgage of $120,000, paying annual interest of $6,000. Low Middle owns a somewhat larger home, with a mortgage of $180,000, paying annual interest of $9,000. Upper Middle has two personas, one owns a typical McMansion, with a mortgage of $350,000, paying annual interest of $17,500 and the other owns a modest home in California with the same mortgage and annual interest. High owns an estate home, with a mortgage of $800,000, paying annual interest of $40,000. Very High owns a mansion, with a mortgage of $3,000,000, paying annual interest of $150,000.

Under current law, with the mortgage interest cap set at loans of $1,000,000 (leaving aside the $100,000 home equity wrinkle), all of these taxpayers except Very High deduct all of their interest (putting aside any other deduction limitations). Very High deducts only $50,000, reflecting 1/3 of the interest, because the $1,000,000 cap is 1/3 of the $3,000,000 mortgage. Assuming that Low is in a 15% marginal bracket, Low's $6,000 mortgage interest deduction saves Low $900 in taxes. Assuming that Low Middle is in a 25% marginal bracket, Low Middle's $9,000 mortgage interest deduction saves Low Middle $2,250 in taxes. Assuming that Upper Middle is in a 28% marginal bracket, Upper Middle's $17,500 mortgage interest deduction saves Upper Middle $4,900 in taxes. Assuming that High is in a 33% marginal bracket, High's $40,000 mortgage interest deduction saves High $13,200 in taxes. Assuming that Very High is in a 35% marginal bracket, Very High's $50,000 mortgage interest deduction saves Very High $17,500 in taxes.

Under the proposal, assuming that all five taxpayers live in the same county, assuming that $x is $250,000 for that county, and assuming that the interest on $250,000 would be $12,500, Low would be entitled to a credit (i.e., tax savings) of $900 (15% of $6,000), leaving Low's tax situation unchanged. Low Middle would be entitled to a credit (i.e., tax savings) of $1,350 (15% of $9,000), leaving Low Middle with increased tax liability of $900 ($2,250 minus $1,350). Upper Middle would be entitled to a credit (i.e., tax savings) of $2,625 (15% of $17,500), but limited to $1,875 (15% of $250,000), leaving Upper Middle with increased tax liability of $3,025 ($4,900 minus $1,875). High would be entitled to a credit (i.e., tax savings) of $6,000 (15% of $40,000), but limited to $1,875 (15% of $250,000), leaving High with increased tax liability of $11,325 ($13,200 minus $1,875). Very High would be entitled to a credit (i.e., tax savings) of $7,500 (15% of $50,000), but limited to $1,875 (15% of $250,000), leaving Very High with increased tax liability of $15,625 ($17,500 minus $1,875).

Low's mortgage interest tax subsidy is unaffected by the proposal. Low Middle's mortgage interest tax subsidy is reduced by 40% ($900/$2,250). Upper Middle's mortgage interest tax subsidy is reduced by 61% ($3,025/$4,900). High's mortgage interest tax subsidy is reduced by 86% ($11,325/$13,200). Very High's mortgage interest tax subsidy is reduced by 89% ($15,625/$17,500). Looks good, right? Yes, because the conversion to a 15% credit is cutting the tax subsidy to 15% of the allowable mortgage interest. Forced to accept either a mortgage interest subsidy in the form of a credit or in the form of a deduction, I'd go for the credit, for this reason. But the issue is the reduction of the cap. What does this do?

Working backwards, it pretty much tells Low that Low can still take into account all of Low's $6,000 annual interest. It tells Low Middle that Low Middle can still take into account all of Low Middle's $9,000 annual interest (though the conversion to a credit will increase Low Middle's tax liability). It tells Upper Middle that Upper Middle can take into account only $12,500 of Upper Middle's $17,500 annual interest, thus taking 28% ($5,000/$17,500) of Upper Middle's mortgage interest out of the equation. It tells High that High can take into account only $12,500 of High's $40,000 annual interest, thus taking 69% ($27,500/$40,000) of High's mortgage interest out of the equation. It tells Very High that Very High can take into account only $12,500 of the $50,000 mortgage interest that High took into account before the proposal, thus taking 75% ($37,500/$50,000) of Upper Middle's mortgage interest out of the equation. Still looks good?

Wait, there's more. For Upper Middle, 28% of Upper Middle's mortgage interest ($5,000/$17,500) is taken out of the tax subsidy picture by the proposal. For High, 69% of High's mortgage interest ($27,500/$40,000) is taken out of the tax subsidy picture by the proposal. For Very High, 25% of Very High's mortgage interest ($37,500/$150,000) is taken out of the tax subsidy picture by the proposal. What do we have here? Why, it's the same "bubble" effect that is generated by the various phase-outs, that is, another instance where the tax burden or the pain of a tax subsidy or deduction suppression hits the upper middle class far more than it hits the very wealthy.

Now let's add two fistfuls of salt into the wound. First, for the very wealthy (let's call the person Absurdly High) who purchase with cash and do not incur mortgages, the proposal does nothing whatsoever. Second, it is Very High and Absurdly High who will rake in the tax savings from the proposed zero tax on domestic dividends, the further reduction of taxes on capital gains, and the reduction of taxes on investment interest. Before someone tells me that Low will escape taxes on savings account interest, I will reply in advance that the $30 or $40 tax reduction that Low or Low Middle obtains from that reduction is less than the crumbs from the table thrown to the dogs when compared to the succulent feast of tax savings enjoyed by High, Very High, and Absurdly High.

So when Andy suggests that "The ironic part is that upper-income people end up paying most of the taxes anyway. So to some extent, they are actually subsidizing themselves," I disagree. The lows, low middles, and upper middles are subsidizing the highs, very highs, and absurdly highs. Such as it has been throughout history, except this time it's the upper middles who are hit hardest. Why? They pose the greatest threat to the high, very high, and absurdly high crowd, because they are the closest to breaking through that economic ceiling.

Andy is correct that a tax subsidy for mortgage interest impedes the ability of the housing market to function as a free market. Releasing the housing market while not releasing other markets will kick the inter-market economic balance out of kilter. ALL government subsidies that interfere with markets must be removed, or replaced by direct grants that let the voters know who is getting what from whom. Any social behavior regulation of which can be justified, such as laws against bank robbery, ought not be the topic of a tax law provision. For example, yes, it's "nice" to give tax credits to people who adopt children, but people ought to adopt children because they want and love the child, not because they're being paid to do so. If the argument is that children are expensive (and they are), then the income tax law ought not tax people whose incomes fall below the poverty level (or a higher percentage thereof) for the appropriate family size. The argument that "they want children and without a tax law subsidy they can't afford to do so" should not carry any more weight than "I want to own a baseball team and without a tax law subsidy can't afford to do so," and before someone argues that adopting a child is "nicer" or "more important" than acquiring a baseball team, I'll hasten to note that the economic benefits flowing from a well-run baseball team (I live near Philadelphia if you need a clue here) can enable dozens or hundreds of families to afford to have children (through whatever means, including adoption).

Note that I haven't lobbied for that baseball acquisition provision for myself. Why? I don't have the money to buy the subsidy. Here's what's ironic. The subsidies chiefly go to those who have the money to lobby for them, with a few crumbs tossed in the direction of the poor and very poor so that the gluttons don't feel too guilty about their gorging.

So, going a wee bit down a road camouflaged to look like a path to tax reform is far more dangerous than doing nothing. If the Congress and the Administration lack the courage or desire to go all the way down the tax reform path, then at least they ought not make things worse. The Tax Reform Panel's mortgage proposal is a half-baked, half-hearted, window dressing palliative. That is why it is a bad thing.

Well, the press has released enough news about the Tax Reform Panel's upcoming report to trigger reactions not only from tax pundits but also from political commentators. Of course I'm going to join in. I will try to bring a different perspective to the analysis that does the rest of the tax blog world. For example, Dan Shaviro has shared some predictions on the political viability of the proposal, along with a short commentary on each of the major components. Joe Kristan sees "business as usual" in his initial reaction to the plan. Vic Fleischer thinks that the plan could fly, if particular political forces think past their traditional positions and array themselves in a tax reform alignment.

From my perspective, the question is whether the Tax Reform Panel has lived up to its charge.

When the President established the panel in early January of this year, it was, to quote from the Panel's web site, to "advise on options to reform the tax code to make it simpler, fairer, and more pro-growth to benefit all Americans." The policy options, as a group, were to be revenue neutral. More specifically, the options were to meet these three goals:

simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws;

share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and

promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.

How can anyone take issue with these goals? Simplification, reduction of compliance burdens, job creation, and all those other lofty ideals. So let's see how the Panel fared.

The panel's suggestions consist of these proposals:

* Cut back, but do not eliminate, the exclusion from gross income of employer payments for employee health insurance premiums and health care.
* Widen and simplify tax-free savings plans.
* Increase and index for inflation the limit on gain excluded from gross income because it arises from sale of a principal residence.

* Eliminate the deduction of state and local taxes by individuals.
* Make the charitable contribution deduction allowable in computing adjusted gross income, but only for contributions exceeding 1% of income.
* Reduce the home mortgage interest deduction limitation from interest on the first $1,000,000 of mortgage loans to interest on the first $x of mortgage interest, where $x is the maximum amount that can be insured by federal mortgage insurance programs, an amount that varies by county. In the Philadelphia area, $x is approximately $235,000.
* Permit all individuals to deduct health insurance premiums.

* Eliminate the alternative minimum tax.
* Reduce the number of tax brackets from 6 to 4, with the top rate at 33% rather than 35%.
* Reduce the tax rate on interest income to match the rates currently applicable to dividends and capital gains.
* Reduce the tax rate on domestic dividends to zero.

* Enact a simplified family credit that expands the existing child credit.
* Replace some deductions with credits.
* Replace the personal and dependency exemptions with credits.
* Create a refundable savings credit for low-income taxpayers.

In general, one does not need a detailed analysis of these provisions to evaluate the package. Those who want more detail should take a look at Dan Shaviro's helpful summary.

So here I go:

Simplification

1. This is not simplification, aside from elimination of the alternative minimum tax and elimination of the deduction for state and local taxes by individuals. However, this deduction is one of less complicated provisions in the code, or at least it was until the sales tax deduction was restored, so its repeal isn't quite cleaning up the tax code mess.

2. Reducing the limitation on mortgage interest deductions is more complicated because of the tie-in to the variable mortgage insurance limit.

3. Changing a full exclusion for employer-provided health care to a limited exclusion necessarily adds complexity.

4. Shifting the charitable contribution deduction from an itemized deduction to one allowable in computing gross income adds complexity.

5. Expanding the deduction for health insurance may or may not be complicated, depending on how it is drafted. My guess? It will be complicated.

6. Reducing the number of tax brackets doesn't do anything with respect to simplification.

7. Reducing the tax rate on interest income adds complexity because it will be necessary to define interest income that qualifies for the reduced rate. The definition will not be one sentence.

8. Eliminating the tax on domestic dividends also adds complexity because, again, it will be necessary to define domestic dividends qualifying for this zero tax treatment.

9. Guaranteed, simplification of the family credit will not be simple.

10. Replacing deductions with credits in and of itself does not affect the complexity built into the definitions and requirements for the deduction or credit benefit.

11. If the refundable savings credit is anything like the parade of other credits recently added to the Code, it will not be a victory for simplification.

12. And what about the complicated, inconsistent, bewildering array of provisions affecting education of which the panel made a big deal a few months ago?

Score: F, and I wish there were an F- grade.

Reduction of the Cost and Burden of Compliance

1. Let's see. OK, the alternative minimum tax form disappears, so that's a plus. And the 2 minutes required to compute the deduction for state and local taxes gets added back to the lives of tax return preparers and to the lives of taxpayers who would be digging around for the check or receipt. That's a tiny plus.

2. Employers will need more time and money to figure out how much gross income must be reported to employees on the W-2 on account of employer-provided health plans, and there will be one more line on the return for that.

3. New and enlarged forms for the savings credit, tax-free savings plans, and the family credit adds to the cost and burden of compliance.

4. A deduction for health insurance premiums means more record-keeping and another line on the return.

5. Figuring out what is interest and what is a domestic dividend takes time, records must be kept, Schedule B must be modified to separate one kind from another, so it grows. Pages of special rules meshing these proposals with pass-through entities will do nothing but complicate tax planning and compliance for partnerships, S corporations, trusts, REITs, etc.

If all of this happens, there will be more forms, and more lines on existing forms, despite the removal of the alternative minimum tax form from the inventory.

Score: F.

Share the Burdens and Benefits of the Federal Tax Structure in an Appropriately Progressive Manner

Do any of these proposals heighten progressivity?

Yes, these appear to have that impact:

Cutting back the exclusion for employer-provided health care, eliminating the deduction of state and local taxes, reducing the home mortgage interest deduction cap, creating a refundable savings credit for low-income taxpayers, converting deductions to credits.

Do any of these proposals reduce progressivity?

Yes, these have that impact:

Eliminating the alternative minimum tax, reducing the top rate and the number of tax brackets, reducing the tax rate on interest, eliminating the tax on domestic dividends.

Putting these together, it's more likely to decrease than increase progressivity. So the challenge is to define the word "appropriately" in the phrase "appropriately progressive manner." Considering that I consider lower rates for dividends and capital gains to be inappropriate, more of the same also is inappropriate.

Score: D

Recognizing the Importance of Homeownership and Charity in American Society

The proposals do not eliminate the deduction for mortgage interest, and by turning it into a credit, the panel suggests something that, at least in theory, will make home acquisition economically easier for those most under-represented in the housing market, namely, low-income taxpayers. Adjusting the exclusion amount for home sales helps, but perhaps the amount should not be so high?

Making charitable contribution deductions available to taxpayers who do not itemize deductions might encourage more charitable giving, but will it? Most taxpayers who do not itemize are low-income taxpayers, and those taxpayers might not be in the best position to increase their charitable giving. And why not make the charitable contribution deduction a credit?

It would have been nice to see a wholesale re-write of the charitable contribution deduction. It is a forest of tangled threads, a contraption with which almost every Congress has tinkered, and a trap for the unwary.

Score: C

Promoting Long-Run Economic Growth and Job Creation

When was the last time a tax bill was not tagged as promoting economic growth and job creation? When was the last time a tax bill in fact triggered economic growth and job creation? Get out the tea leaves, the cards, the crystal balls, and the palms of your hand. This one will be debated until debating the proposals is moot, and then the debate will morph into more law review articles and commentary.

Score: Incomplete

Better Encouraging Work Effort, Saving, and Investment

Now, seriously, who is going to undertake or increase work effort because taxes on capital gains, dividends, and interest are lower? Or because the top rate would be 33%? Or because there would be 4 rather than 6 tax brackets? Or because a portion of employer-provided health insurance would be taxed? Or because deductions become credits? I don't see it.

Yes, those with money to spare might be tempted to invest rather than consume. Eliminating the tax on domestic dividends and reducing the tax on interest might have that effect. The problem at the moment is that most Americans don't have money to spare. Some could, if they cut back consumption, but is cutting back consumption the answer? Wouldn't that make the economic status of those producing the consumed goods and services a bit less pleasant?

Score: D

Strengthening the Competitiveness of the United States in the Global Marketplace

Perhaps what is contemplated is the following. The proposals will encourage investment, and that investment will be plowed into domestic production, creating domestic jobs. Consumption would be discouraged, and somehow that means China sells less stuff here, so that China acquires fewer American dollars. In the meantime, the new domestic production has Chinese citizens falling over one another trying to buy American products. Something like that.

Well, guess what? The Chinese prefer to either pirate the American product, counterfeit the American product, or purchase the source of the raw materials used by Americans to create product. Guess what? Even if the rest of the world wanted American-produced stuff that it currently isn't purchasing, where will Americans find the labor force to create it? The tool and die industry is withered, for every petroleum engineer coming out of college there are 100 lawyers coming out of American law schools, the number of American students majoring in science and engineering has dropped almost off the face of the earth, and energy costs threaten to make the entire economy go under.

Score: F

What Would I Do?

I'd make taxes as much of a non-factor in business and personal economic and social decision-making. I would repeal most exclusions and deductions, retaining deductions for the cost of generating income. I would eliminate depreciation on property that typically does not depreciate, such as buildings. I would index adjusted basis for inflation. I would include unrealized appreciation in the final return, and eliminate the estate tax. I would provide a flat exemption equal to a percentage (100% or higher) of poverty-level income. I would create more, not fewer, tax brackets, so that there would be less incentive to manipulate taxable income from one bracket to the next. I would require that any attempted use of the tax law to encourage or discourage specific non-economic behavior be proposed as a credit, and be advertised to all citizens in full-page newspapers, and through radio, television, cable and internet messages, with the words, "Senators A and B and Representatives C, D, and E propose to give credits of $x to people who do (or don't do) y, and this credit will require increasing the taxes of other taxpayers by $z," limiting the passage of such legislation to instances where there was overwhelming support. I might be persuaded to tack on a referendum arrangement. You get the picture. No more tax games because the tax playing field gets closed. The panel wants to mow the grass a little shorter. Ho hum.

And So?

The bottom line? I'm not impressed. That's no surprise. I saw this coming. On January 12 of this year, days after the panel was appointed, I wrote, "So back we come to tax reform. I hold out little hope." On April 25 I pointed out that it would have been "far less expensive, and far less time consuming" had the Tax Reform Panel "Simply ... Read My Books" after the panel concluded that there were "too many deductions [and] credits" in the code. As I predicted, "It's time for change. It probably won't happen." And just last week, when the first of the proposals began to see the light of day in the press, I wrote:

With this sort of work product, the panel should refund to the taxpayers the public funds it has wasted. Charged with reform, this panel seems dedicated to window dressing that masks maintenance of the status quo for their friends and financial backers. America is being short-changed.

The rest of the proposals don't change my opinion.

My prediction is that the combination of the erosion of the Administration's political capital and the power of the vested interests will combine to do one of two things. Either the proposal will collect dust somewhere, probably in the Congress, or the subset of Republicans who are anti-tax will join forces with certain vested interests to enact what the powerful want, namely, reduced or no taxes on investment income, modification of the alternative minimum tax so that it applies to the middle class but not the wealthy, and reduction of the top rate, in exchange for a refundable credit of some sort directed to low-income families. In other words, more of the same, at least so long as the same chefs are working in the tax kitchen.

A long-time reader sent me a tip for this story. It seems Deborah Combs of Loveland, Ohio, did not pay $1.16 in local income tax that she owed to the city of Loveland. Apparently she also had not filed city income tax returns for five years. Although it is unclear from the story if the city communicated with her in an attempt to collect, though her reference to how much the city had "spent in stamps" suggest that it had, the city obtained an arrest warrant and had her arrested. The tax amount of $1.16 is small, but according to the report she also faces "hundreds of dollars" in fines, though at the moment she does not owe any fines because none have been imposed.

So she's arrested for not paying $1.16 in taxes. The city manager, though, argued that it's a matter of principle and not quantity. "We have laws. The laws have to be complied with. At what cost do you stop enforcing the law?" That's a question that police and prosecutors answer every day as they exercise police discretion and prosecutorial discretion.

Curious, I began digging around, using google, to see if there was more to the story. Searches turned up dozens of websites with the same story, picked up from the same news distributor. Even most Ohio-area news web sites carried the same release. But on the web site of the Dayton Daily News, more information appears.

Combs faces up to 18 months in jail and $4,000 in fines, far more than "hundreds of dollars." She has been ill and out of work. So she concluded she did not owe taxes. The $1.16 relates to tax year 2003, apparently before she became ill.

Her trial is set for October 20 in Mayor's Court. If she was recuperating from her illness, this might just set her back.

There's no indication Ms Combs poses a threat to anyone. Clearly the city is sending a message. But what's the message?

Perhaps it is this: "Don't forget. If we're willing to arrest someone who owes $1.16, what do you think we will do when we discover YOU owe hundreds or thousands of dollars?"

Somehow, I think it would be cheaper in this instance to levy on her property. If the goal is to send a message, of any sort, it would be cheaper to rent space on a billboard. It's not as though the unpaid tax and the fines will cover the cost to the city of the trial.

Hopefully we'll get news of what happens when she goes to court.

Readers of this blog know that I've been touting Andrew Mitchell's tax charts because they are useful, visual, and well-done. My previous postings are numerous: here, here, here, here, and here.

Andrew has announced there now exists a Tax Charts by Topic access point. And of course the main tax charts entry page continues to provide an entry.

I suppose this email from one of my readers, a former student, will persuade tax students, faculty, and practitioners who appreciate visualization that Andrew's efforts are well worth a visit:

After reading your blog yesterday, I was checking out Andrew Mitchell's website. I had never looked at it before. Well, it didn't take me long to realize this was a great resource. My learning is always enhanced through visual representations of transactions. I forwarded the site to my M&A partner and he loved it. He forwarded it to the other M&A associates and recommended that they save it as good resource. See how you continue to help me along even when I am not in your class - thanks!

Indeed, the whole point of this blog is to help people. Oh, OK, and to give me a space in which to express myself. Which often, though not always, helps people.

Anyhow, quoting Andrew, here is the list of tax chart topics:

• 1. A Reorganizations
  
• 2. B Reorganizations
  
• 3. C Reorganizations
  
• 4. D Reorganizations
  
• 5. F Reorganizations
  
• 6. Triangular Reorganizations
  
• 7. Spin-Offs
  
• 8. Continuity of Interest
  
• 9. Section 351 Exchanges
  
• 10. Section 338 Elections
  
• 11. Pre-Sale Distributions
  
• 12. Liquidations
  
• 13. Redemptions
  
• 14. Entity Classification
  
• 15. Form vs. Substance
  
• 16. International

Yesterday a member of the ABA-TAX listserve raised a question about the proper, or at least appropriate and effective, response to clients who fail to provide tax return preparation information in a timely fashion, and yet who expect the return to be finished and ready for signature almost instantaneously so that the filing deadline can be met. Understandably, clients who approach their responsibilities in this manner are frustrating. Because the tax law has no monopoly on such clients, it is interesting, and perhaps useful, to consider whether the suggestions proposed for dealing with tardy tax clients work with tardy clients in other areas of the law.

For many tax practitioners, it seems that it's the same people who wait until the last minute to get their information to their tax return preparer. The issue popped up at this time of the year because October 15 is the deadline for taxpayers who have obtained a two-month extension to tack onto the automatic four-month extension of the April 15 due date to August 15. Although sometimes there are extenuating circumstances such as disasters, deaths, illness, or another person's failure to provide a K-1 or similar information, in most instances these clients fit the stereotype of disorganized, procrastinating, and unfocused.

The stories would be legends were they not so common. A taxpayer who not only has an individual return to file but also has a corporation and limited liability company whose returns are past due, calls a tax return preparer on October 13 and asks her to "file something so we can deal with it later." Another practitioner had a client who he had been "nagging" for three days to bring in his information. At 2 in the afternoon of the due date, he faxes some information to the practitioner, and while the fax continues to print the incoming data, the client calls the practitioner and announces, "I just faxed the info you needed. I am on my way to pick up my returns."

One practitioner has proposed a plan under which clients receive letters explaining that if they fail to provide all information required to complete the return by a specified date, a surcharge will be added to the fee. If the information does not arrive by the specified date and arrives by a later date, the surcharge is doubled. The same practitioner explained that rather than using a surcharge, she simply raised her fees. The consensus of other respondents is that premium fees are applied to clients who create time-pressured situations by their procrastination. One practitioner suggested taking a retainer. Perhaps this would work as an incentive for these clients. Another practitioner explained that in addition to using surcharges, his firm also imposes rush fees if the information arrives very late.

Considering that in the experience of the practitioner proposing surcharges, these clients also are the ones who are slowest to pay their bills, the impact of this approach may not be as effective as desired. Another practitioner noted that the procrastinators are disorganized but not necessarily late in paying fees. Yet another practitioner explained that until the fee is paid the return is not released to the client, a practice that is fully explained in the engagement letter. This practitioner compares leaving with a completed return without paying to shoplifting.

The practitioner who raised the question noted that if surcharges cause clients to go elsewhere, so be it. Another practitioner informed the group that the process of making September 30 the drop dead date for October 15 returns caused the loss of only one client, a grouch whom they were not unhappy to see go. Yet another practitioner who uses surcharges explained that the clients paid, and that most clients do not incur the surcharges two years in a row. So perhaps the attempt, as another practitioner phrases it, to wean clients from their expectation of 24-hour service is working. In response, still another practitioner explained that she perhaps had not raised her fees enough for late clients because "even [her] brother" brought in his information at the last minute, but at least she got dinner, Godiva chocolates, wine and flowers as "kiss-up gifts." Well, I suppose we make allowances for family!!!

What does appear to happen, though, at least with some clients, is that they "throw temper tantrums" when they show up on October 14 with their boxes and bags of paper and expect that the return will be done in time. Clients have been known to be abusive with receptionists, secretaries, and the preparers. To me, this is a clue that if people have a history of getting their own way, through bullying or parents giving in to tantrums, they will continue to do so until someone stands up to them.

But does this work with other clients? The primary determinant is the existence of a deadline. What happens if a young married couple stop by for a will, but never follow up with the necessary information? My guess is that unless the attorney reminds the clients of the need for the information, the will won't be completed. If the attorney is otherwise busy, these clients' planning may fade into the background. But suppose there is a deadline? What does a criminal defense attorney do if the accused isn't cooperative? At what point does the attorney jettison the client, and is that even a possibility in most situations? Ultimately, the attorney will explain to the court that he or she does not have the required information. It might mean a client does not make bail. But it could be worse.

Rather than launching into another commentary on how folks come to be disorganized procrastinators who expect the rest of the world to serve at their beck and call, I hasten to add that sometimes it works in reverse. Sometimes it is the client who is frustrated by a practitioner who does not get back to the client, fails to get pleadings or other documents filed on time, lets tasks slide, or misses statutes of limitation expirations. And before this becomes an invitation to jump all over the legal profession, or tax practitioners, this phenomenon of the unresponsive professional extends to contractors, medical personnel, civic organization organizers, and a long litany of either overworked or under-organized business entrepreneurs.

Unfortunately, because too many students leave the K-12 systems bereft of organization skills, respect for the calendar and clock, and consideration for others, it's left to the rest of the educational system to try to pound the point home. Yet, at least from the vantage point I have teaching in a graduate and post-graduate school, the rest of the system also fails. What are students to think when deadlines are waived? They learn that the world revolves around them, when in fact, in practice, it does not. Whether it is medical school, business school, or some other institution doing the teaching, it is important to remember that some of the clients who are late with their tax information are at the same time complaining about the fact that the plumber hasn't yet returned a phone call from the previous week.

I wonder how much of the procrastination and disorganization is a subconscious rebellion against the fast pace of life today. If life today is so much more hectic, pressure-packed, and overwhelming than it was, say, one hundred years ago, why is that? Too much to do and too few people willing to do it? Or is the notion that life has become more frenetic simply an illusion? Yes, our great great grandparents did not face daily commutes of 2 hours a day, but on the other hand they rarely left their villages, had to deal with perpetual illness and medical emergencies, needed months to cross the continent, expended hours making meals rather than grabbing "fast" food, and probably complained that life had become too complicated, too demanding, and too busy when compared with the lives of their great great grandparents.

So perhaps, even if there are societal overtones, it is a question of individuals' personalities. Some people can get to appointments on time, some can't. Some people can organize things, whether thoughts, paper, or digital files, with little effort, while others simply stare at the piles. It's not a congenital defect. People can learn how to organize. They can become disciplined with respect to day and time so as to minimize the inconvenience they impose on others. But these remedies require education, from every direction, be it parents, schools, places of worship, or legal authorities. What gets in the way are those who see these remedial efforts as unjustified intrusions on an individual's "freedom" to behave however he or she sees fit. At least with respect to tax return preparation, this is one instance where the forces of a "free" market might accomplish what formal education cannot or will not do, and that is to break people of bad habits.

Yes, there are many reasons I no longer have clients other than those with whom I relate vicariously through my communication of advice to practitioners. The behaviors described by the folks on the ABA-TAX listserve are among those reasons. I salute the practitioners who shared their experiences and coping devices, for they demonstrated creativity and again permitted me to engage in vicarious practice.

Although there are other types of tax shelters, one of the more common arrangements is an investment in a partnership which borrows money, uses the loan proceeds to acquire assets, claims depreciation deductions, and passes those deductions out to the partners. Assuming either additional facts that make the passive loss limitations not apply or assuming that the partner can make use of passive losses, the arrangement usually is "sold" with promises of immediate tax-savings benefits. Because under section 752 the partner is treated as having a share of the liability (and even a limited partner can have a share of a nonrecourse liability) and thus acquires additional adjusted basis in the partnership interest these sorts of shelters will pass out more deductions than the amount invested by the partner. This is why this sort of tax shelter is more attractive than a straight-up charitable contribution (even assuming that the charitable contribution limitations don't apply).

But eventually the shelter "burns out." Over time, depreciation deductions diminish and then terminate, while revenue usually increases. At some point, the partnership is passing out net income rather than net deductions. Sometimes this is not a problem, because the partner may have need of passive income and if the income is passive the shelter continues to serve a tax-savings purpose. Often, though, the partner does not want the net income, has no need of passive income, and wants out. The partner's adjusted basis is low, or even zero, because of the deductions. And the capital account probably is negative.

So what's a tax shelter partner to do?

1. The partner could sell the interest to a new partner who does want income, passive or otherwise. But because of the low or zero adjusted basis, the selling partner will be compelled to recognize gain. The deficit capital account will pass to the new partner. In some states, a transfer tax may apply to the sale. It's easy to understand why this option isn't popular.

2. The partner could seek a liquidating distribution from the partnership. In most instances, the partnership agreement does not allow for this transaction and it is unlikely that the partnership or other partners would agree. No matter, for if they did, the same problem would exist, namely, a distribution to a partner with low or no adjusted basis in the partnership interest. There would be gain. Another option gets rejected.

3. The partner could make a gift of the partnership interest. Because the donee takes the donor partner's adjusted basis, this simply passes the problem along to a natural object of one's bounty. If that person happens to have need of the income, in both an economic and tax sense, there might be some sense in doing this. However, the gift tax looms if the value of the partnership interest exceeds the annual exclusion, and though the unified credit may be available to negate a tax, its use has long-term adverse consequences on future estate planning. Additionally, many partnership agreements and federal and state securities laws stand in the way of many such gift transfers, because the donee does not satisfy the requirements for transfers of private placements or other restrictions.

4. If the interest is donated to a charity, which pretty much eliminates the gift tax problem, there would be gain to the extent that the partner's share of the partnership liability exceeds the partner's adjusted basis in the partnership interest. Because the partner's adjusted basis is low, or even zero, the likelihood of gain is high. Some charities would reject the gift because of state law or charter restraints. Others would reject it because it would open the door to unrelated business taxable income. So this is an option that is very limited.

5. Once upon a time, domestic relations lawyers who understood why the basic tax course is a prerequisite for practicing domestic relations law advised divorcing clients to pass the burned out tax shelter interest to the other spouse. Aside from interesting ethical questions, which arise if the other spouse is not represented, this maneuver became obsolete once the rest of the domestic relations bar caught on and fended off the attempt to leave the recipient spouse with a ton of gain that exceeded the cash outlay of the interest.

6. The classic advice was to hold the partnership interest until death. Then the step-up in basis that occurs at death in effect would "wipe out" the gain. That's true in theory. But because of the intricacies of partnership taxation, the heirs' high adjusted basis does nothing to help negate the impact of tax income that the heirs, as partners, must report, even if there are no or few distributions. One way of dealing with this discrepancy between the partnership's inside operations and the heirs' outside adjusted bases is the section 754 election. However, that election requires consent of the partnership (other than when it is required in situations that do not apply to these sorts of tax shelters). Where is the guarantee that the partnership, or, technically, the other partners, will agree? Often, they will not agree. Although I suggest to my students that when dealing with a business partnership (or LLC treated as a partnership), they put a provision in the partnership requiring that the election be made the first time the issue arises, because at the outset everyone is neutral in terms of what event may take place to set up the possibility, it is far less likely that an investor in a marketed tax shelter partnership will be in a position to bargain for such a provision. A tax shelter partnership agreement that is well-crafted from the promoter-general-partner's perspective surely also contains language that prevents the limited partner investor, or the heirs, from dissolving the partnership.

So, perhaps the answer is that sometimes the price must be paid. All those tax-reducing deductions reported by the investing partner generated savings. Eventually, offsetting gain must be reported. Even so, from the perspective of time value of money, deductions in one year offset by income in a later year is a good deal unless the applicable rate in the later year is so high that it offsets the interest factor. If the delay is five, ten, or more years, it would take a huge increase in rates to offset the time value of the tax savings.

What is troubling is the reaction of taxpayers who throw fits about the income, though they (or their decedent) basked in the joy of the deductions. What the taxpayers want is a deduction for nothing. When cleared of the subchapter K partnership taxation haze, the request is equivalent to a claim for a charitable contribution deduction when nothing was transferred to a charity. The latter is easy to see as an outrage, but the former, masked by the complexities of partnership taxation, isn't so easily understood as indefensible. Even when told that the income would be taxed at low capital gains rates, as sometimes would be the case, even though the deductions reduced ordinary income, taxpayers balk.

Yet I do understand how taxpayers get to this point. The person marketing the tax shelter talks up the tax-savings, and brushes aside as "no big deal" or as "far in the future" the issue of the eventual income and gain that will be taxed. Oh, it's there in the fine print, but how many taxpayers read the fine print? Very few. How many take the deal to a tax advisor who reads the fine print and explains it to their client? Some. But afflicted with the short-term vision so prevalent in today's culture, most taxpayers will not, no, cannot, juxtapose the immediate benefit with the long-term consequence. In this respect, tax shelter investing isn't all that different from many other activities in which individuals, institutions, and governments play to the short-term at the expense of the long-term. The problem is that today's future becomes tomorrow's today. The future is now, and the piper asks to be paid.

So pay. Ultimately, there just isn't something for nothing.

Shortly before 11 this morning, I questioned the wisdom of leaving five tax policy positions in Treasury vacant and criticized the slowness of the confirmation process that caused one nominee to withdraw.

Later in the day, Treasury announced that it had appointed a Deputy Assistant Secretary for Financial Institutions Policy. It then announced that it had appointed a Legislative Affairs Deputy Assistant Secretary for Banking and Finance.

Interesting timing.

The tax positions remain vacant.

It seems that the tax world clock ticks at a faster rate than do those marking time for many, if not most, other areas of life. The Bankruptcy Code gets amended every several decades, the copyright statutes gets a major change several times a century, the law of future interest changes in a big way once every several centuries, and yet the Internal Revenue Code is amended multiple times each year, with major changes coming every year or two. The IRS cranks out administrative material, in the form of regulations, revenue rulings, private letter rulings, revenue procedures, announcements, news releases, and a flood of at least four dozen other types of issuances, at a pace that compels Tax Notes, BNA Daily Reports, and other commercial tax reporters to publish sizeable daily updates.

Law faculty who teach tax and seek to publish in that area face a tough decision, because the student-edited school-affiliated law reviews usually are months or years behind, and can cause an accepted tax article to become obsolete while it crawls through the editing and publication process even though publication in those law reviews is, for many tenure reviewers, the hallmark of "scholarship." In contrast, the tax journals that take a realistic approach to keeping readers current can crank out an article in a matter of weeks, but yet are held in some disregard by certain academics who view them as somewhat inferior. Perhaps it's because there are no third-year law review students doing the editing? And how long does it take to edit an article? The answer is "not very." What happens in most law reviews is that the article sits in a series of "waiting to be examined" piles for much of the time.

This lack of any sense of urgency also afflicts many bureaucracies, including government processes. And although the foot-dragging usually afflicts an individual person or entity, sometimes, as in the case of Katrina, it affects large groups of people, almost always to their detriment. And occasionally, it affects the entire nation, even if it doesn't quite get the headline in the mainstream media.

About six days ago, the mainstream media barely picked up on Philip Morrison's withdrawal as a nominee for the post of assistant secretary of the Treasury for tax policy. This MSNBC report was the only one I could find, and it simply announced the withdrawal in three short paragraphs at the end of another story. It noted that the reason Morrison withdrew was that the process was taking too long, and that the Treasury would be without someone in its top tax position when the tax reform panel's recommendations are issued.

Three days ago, BNA issued a far more comprehensive report on the story, in which it not only reported the withdrawal, but also put the story against a much larger backdrop. Morrison, who was nominated on May 26, explained that he had cleared FBI investigation, IRS review, and Office of Government Ethics requirements before he was nominated and that four months was too long a time to hold things in abeyance. Morrison will turn his full attention back to his tax practice at Deloitte Tax. A spokesperson for the Senate Finance Committee, which needed to issue a report before the full Senate could consider the nomination, explained that the question was on the agenda for an Oct. 18 hearing and that the committee "reject[s] the claim that the nomination process took too long" without giving any further explanations on account of alleged "confidentiality constraints."

The BNA report also noted that, according to a Treasury official, the nomination had "boosted morale" at Treasury and "might help Treasury recruit new workers." In his remarks this official characterized the nomination as giving the Treasury's tax policy division "stability." The BNA reporter, putting together other information, then summed up the report by pointing out that ALL of the following positions in Treasury are vacant:

• Assistant Secretary of the Treasury for Tax Policy
  
• Deputy Assistant Secretary of the Treasury for Tax Policy
  
• Tax Legislative Counsel
  
• International Tax Counsel
  
• Benefits Tax Counsel
  
• Assistant Secretary for International Affairs
  
• Assistant Secretary for Public Affairs

Whoa!! So who's minding the store? According to the BNA report, Eric Solomon serves as Acting Deputy Assistant Secretary of the Treasury for Tax Policy while also fulfilling his responsibilities as Deputy Assistant Secretary for Regulatory Affairs. I must admit that until I read this BNA report I was unaware of this problem. I am confident that few, and I mean very few, Americans know that one officer is piloting a tax policy ship that calls for a much larger crew.

Something is very wrong with this picture. Actually, I think some things are very wrong. There are two very serious issues, one that may be somewhat more momentary and one that is systemic and far more dangerous.

The first problem is that one person is trying to do the work of two people while five, count them, FIVE senior tax positions of leadership with responsibilities for guidance, approval, review, and management sit unfilled. The people who hold these offices are the people who bring the views of the executive branch to bear on the development of tax law. Often, even if the same political party controls the White House and one or both houses of Congress, the Treasury serves as a counter-weight and devil's advocate to the proposals of the legislature and its staff. Treasury usually brings a collective "tax practice with taxpayer clients" experience when it visits the Hill that for many years has been in short supply on the east end of Pennsylvania Avenue. With no intent to comment on the efforts of the overworked Eric Solomon, who according to the BNA report has earned genuine praise for holding down the fort while his superiors leave him unreinforced, the nation and its taxpayers are not being well served when this sort of vacuum exists.

There are all sorts of reasons for this problem. One may be that it's difficult to find willing appointees, but, hey, if they need a list, I have one. Another might be that those who do accept and get confirmed discover that Administration tax politics permeate the Department to the point of making the position one of total frustration, and so they resign, so on second thought let me rethink that list. Yet another may be totally unavoidable circumstances such as health or family issues. And now it appears that still another reason is the adverse consequences of sitting around waiting for the nomination process to get going.

And thus the second problem, which is the slow pace of the nomination process. Unquestionably, the need to do thorough background checks means that some amount of time must elapse before a person can be confirmed. However, according to Morrison, he already had his background clearances by the time he was nominated. So what's going on? My guess is that it's the endless recesses and home visits that keeps Congress and its staff from getting to their duties, while nominations sit on desks or in computers much the way tax articles cool their heels on the desks or in the computers of student law review editors. Like those law reviews, Congressional Committee staffs are afflicted with a high rate of turnover, which often causes a "start over" mode to kick in. That, coupled with another shared characteristic, namely, learning on the job, contributes to the slogging pace with which tasks are accomplished.

Yet when the Administration and the Congress really do want to move a nomination or a piece of legislation, they do so. Between the time Morrison was nominated, with background checks in hand, and the time a hearing on his nomination supposedly was going to be held, the White House managed to nominate two people for the Supreme Court and the Senate found time to confirm the first of the two. Yes, I know the Supreme Court is important, and even supreme, but the country is in no less need of a fully staffed tax division at Treasury. It's not as though the Finance Committee handles Supreme Court nominations.

There's a lot of blame to go around, but that's not important other than in giving clues as to the more deserving question: what should be done? The answer, perhaps to the chagrin of many, is that elected officials and their staffs need to get their act together. Priorities need to be reset, something that many Administrations and Congresses have not demonstrated an ability to do. Considering all that looms ahead, especially matters with respect to which tax policy decisions need to be made, the folks in Washington need to develop and embrace a sense of urgency. Otherwise, for which one or more of these issues will resolution remain on a distant horizon while the gates are besieged: Katrina relief, tax reform, energy shortage amelioration, energy supply and delivery remediation, health care maintenance, mutant avian flu pandemic, future natural disaster relief planning, .....?

Until and unless Washington, and most, if not all, state capitals, streamline and update their procedures and culture, the increasing flood of crises, disasters, and citizen needs will slowly overwhelm the political system. As citizens increasingly come to understand that not only are offices vacant but things aren't getting done, there is a higher likelihood that they will react in ways not limited to the ballot box. Increasingly I strengthen my belief that neither major political party has lived up to its duties, promises, or voter trust. After gridlock comes collapse.

The Tax Reform Commission is entering its home stretch, and news of its first few decisions is beginning to show up in various places, including this Philadelphia Inquirer story picked up from Bloomberg News. There are several highlights, which for some folks, and in some instances, for me, could be called lowlights.

First, the panel chose to reject a national sales tax. I know folks who will be very disappointed by this decision. I'm not. A national sales tax, unless it is modified to become another engine of complexity, shifts the burden of financing government from those with moderate to tremendous wealth to those who have little or no wealth.

Second, the panel "expressed reservations" about a value-added tax. I'm not sure what that means. The reservation expression, that is. It's not a rejection, because the panel knows how to indicate, and did indicate, rejection. Is it a warning? Is there a delay in rejection because there is some support on the panel for such a tax that its opponents want to quiet so that the panel can appear to be unanimous? Stay tuned.

Third, the panel agreed to reduce the $1,000,000 limitation on the amount of mortgage debt interest on which is deductible. I noted that the news story didn't report it this way, and was written in a manner that suggests $1,000,000 is the cap on the deduction, which it is not. Nothing, it seems, was said about the additional $100,000 of mortgage debt interest on which is deductible under current law if that debt qualifies as home equity indebtedness.

The point of this limitation reduction is to remove tax benefits for acquisition of expensive (read, more than $400,000) homes. Unfortunately, this proposal seems to be made by folks who don't understand that in today's real estate market, $400,000 doesn't purchase much of a home. Worse, in some markets there are no homes available under $400,000 other than shacks. In other markets, $400,000 might purchase a residence in a rather nice upper-class neighborhood. Is it time for geographic-based indexing?

The recommendation, however, goes further, and proposes to add more absurd complexity to the Code. The deduction would be limited so that it would reduce taxes by no more than 25% of the deduction. This will require another form, separate computations, dozens more lines of text in the Code, and the hiring of additional IRS employees to focus efforts on compliance with this creature of theoretical musings. Has anyone on the panel done their own or anyone else's tax returns? It is beginning to appear, as I feared, that this panel will do more of the fiddle-and-fidget dance that has afflicted tax legislation for the past 20 years.

If the goal of this proposal is to reduce investment in energy-consuming McMansions with those heat-wasting, brutally difficult to clean or reach the light fixtures for replacement 20-foot ceilings, it will fail. Limitations on mortgage interest deductions do nothing to affect the purchase of homes by the ultra-wealthy who plunk down cash or its equivalent when their "I want it" impulse takes charge of their checkbook.

The proposal, though designed to "clearly redistribute" tax benefits for home ownership to lower-income Americans, does so at the expense of the middle class, not the ultra-wealthy. This flaw in the proposal is especially galling when considering the panel's claim that it is being done to finance reform of the alternative minimum tax which was designed to end tax avoidance by the ultra-wealthy. In other words, alternative minimum tax relief for the middle class will be accomplished by cutting back on tax breaks for the middle class. It's becoming quite apparent whose agendas are driving the panel.

The panel also announced agreement on a deduction limitation for employers who pay medical plan premiums for employees. The existing exclusion of this benefit from the employee's gross income apparently would not be changed. The panel is considering a cap equal to the $11,000 maximum health care premium paid by the federal government for its employees. How a deduction cap would have an impact on the millions of employees who work for tax-exempt organizations (governments, schools, research facilities, charities, churches, etc.) is not described.

Again, though this proposal also was included in the statement that the change would finance alternative minimum tax reform by redistributing tax benefits for health care to lower-income Americans, it makes no sense. Employers who have expensive plans will cut the benefits back, or cut back their contributions, and who's in better financial shape to absorb the increase in the employee-funded portion? Yes, the ultra-wealthy and the upper middle class. How this assists lower-income Americans is beyond me.

If the goal of this proposal is to cut health-care costs, it won't work. People don't behave in logical patterns that generate healthier lifestyles because employer financing of health care has been cut. People will continue to patronize fried fast food joints, tobacco sellers, and tanning booths while avoiding gyms, outdoor recreation, and adequate sleep.

The root of the problem is exposed by this statement from the panel's vice chair, John Breaux, a veteran of the fiddle-and-fidget approach to tax legislation: "We have a concept. We know where to go. We just don't have the details." My advice to the panel, not that it will be heard or followed, "A concept is no more valuable than the quality of its application to reality in the form of details." In other words, the panel could just as easily announced that it would make deductions for time travel part of the tax code, and then explained that, "We have a concept. We know where to go. We just don't have the details."

With this sort of work product, the panel should refund to the taxpayers the public funds it has wasted. Charged with reform, this panel seems dedicated to window dressing that masks maintenance of the status quo for their friends and financial backers. America is being short-changed.

I'm amazed. Startled. Bewildered.

They just don't get it.

Why?

An editorial in this morning's Philadelphia Inquirer, written by no less than the seemingly eternal and ever-present Larry Kane, simultaneously decries the failure of this nation to deal adequately and appropriately with energy management and conservation, and yet suggests that oil-producing nations which have received the benefit of U.S. military protection against terrorism, get an invoice stating: "Total Due: a reasonable schedule of oil production that will avoid gouging, maintain profits, and protect the sanctity of the world economy." Huh? Yes, I agree that this nation, and its politicians, have been about as successful with energy management as they have been with tax reform, hurricane relief, and just about everything else they have succeeded in trashing. But what's this notion that oil-producing nations can jack up oil production at will? Larry, oil is a finite resource. More is used each day than is discovered. Arguments among the peak oil crowd aren't about the truth of the "we're running out" problem but about the date (or year) that oil production has or will have peaked. Anyone seriously interested in this issue ought to visit the Oil Drum website.

It's this simple: There is not enough oil and gas to support the current demand, even if natural disasters, accidents, and other events do not arise and damage the energy infrastructure. There is even less capacity to support projected future demand as China, India, and other nations jump on board the oil and gas consumption train.

It's that simple.

Larry Kane specifically points to Saudi Arabia, but the chatter is that it has passed the peak with most of its fields, and that is why it is beginning to drill offshore. Much of what's left is so-called "sour crude" which does not refine as easily as "sweet crude" and which cannot be refined in existing refineries without major alterations to the equipment. The pipe dream of endless supply, whether oil, water (shortages of which I continue to believe will trigger a global conflict), or food (another report in today's news talks about the tens of thousands of farms that have disappeared in recent years) and the advocates of that pipe dream need to be exposed.

Sensibly or not, we've environmentalized ourselves out of coal and nuclear. We've underfunded ourselves out of solar, wind, and biomass. The nation has stuck to its "don't look past the end of its nose" outlook while condemning or shunning long-term planners and thinkers as "Jeremiahs" intent on breaking up the party. Well, I (and others) do think the party is over. So the anger that Larry Kane saw on his most recent gasoline station visit, and which he describes in necessarily masked quotations, reflects a genuine ignorance (i.e., "a not knowing") on the part of the consumer. Who's to blame? That's easy. The education system, the government, and the main stream media. Rather than telling the truth, they'd rather sugar-coat the news, and they defend their decision because the truth might generate panic, as though it's better to foment anger than panic. A little panic might not be a bad thing. I know I'm alone, or in the minority, on this point. There are times when it is foolish to put comfort above common sense and reality.

Larry Kane is right in pointing his finger at politicians. But they're not alone. They've been enabled. And the enabler is no less "guilty" than are the politicians. The energy crisis is simply a symptom of a deeper cultural failure, namely, the decades-old message that life comes without cost. It is time to start electing public servants who will take their servant-leadership skills into the public arena. Easy to propose, tough to do. After all, the powers-that-be will need to be pulled out of office, kicking and screaming, because with only a few exceptions they continue to believe in their own majesty.

But perhaps I am wrong. Perhaps tomorrow or the next day some exploration company will announce the discovery of an oil and gas field with several hundred million hypergigagazillion barrels of product that will meet the needs of a 15-billion person world for the next 10,000 years. Nah, this is one time I'm very certain that I'm not wrong. Wish I was.

Last month, I pointed out the challenges of coming up with the dollars to rebuild the Gulf Coast. Early in the month, in a posting that drew more than the usual attention, I argued that with an expected demand for federal spending in the wake of Katrina, it was time to eliminate the capital gains and dividend tax rate preferences, and to postpone a vote on eliminating the estate tax. Within a few days, as I reported in this post, the estate tax permanent repeal vote was postponed. No news appeared about the proposed extensions of the capital gains and dividend tax rate preferences.

So, a few days later, I expressed hope that Congress would postpone any votes for extending the tax cuts for dividends and capital gains. Later in the month, I penned another post, one in which I criticized the idea of increasing federal spending while holding fast to, or extending, existing tax cuts.

Not that I dare take any credit for the postponement of the estate tax permanent repeal vote, but surely the powers-that-be in the Senate aren't listening to my advice with respect to capital gains and dividend tax rate extensions. This latest bit of news is enough to assure me that my opinions about estate tax repeal either weren't read by Senators and their staffs, were read but ignored, or were read and embraced by those who at the moment are powerless to do anything with them.

The news that triggers this dismay comes from a BNA Report, the headline of which evokes concern. When I read "Senate GOP Leaders Confident Tax Cuts Can Go Forward" I begin to wonder whether the Twilight Zone's parallel universe concept is playing out in some sort of hazy way. According to the report, Senate Republican leaders and the Finance Committee insist that legislation extending the capital gains and dividend tax rate preferences will move forward, even though members of both parties are urging that Congress re-think the wisdom of doing so. Hmmm. Maybe some folks are reading my ideas. Or perhaps, knowing that I don't hold a monopoly on them, they are reading the commentary of folks who share my disdain for taxing capital gains and dividends at lower rates. In Washington, the buzz is that Senator Rick Santorum is the architect of the idea that the revenue attributable to not extending those preferences be used for Katrina relief. Whodda thunk? Hmmm. But within days, he relented, because he was "assured" that the "cost" of extending the tax rate preferences would be "offset" which he said makes him "feel a lot more comfortable."

Well, it doesn't make me comfortable and I doubt it makes very many Americans comfortable. After all, where does the offset come from? Leaving the alternative minimum tax hidden tax increase in place? Raising taxes on someone? Who?

The silliness of the argument supporting these rate preferences and their extension is evident in the statement made by Senator Charles Grassley. He "fears" that failure to extent these rate preferences "could cause a ripple effect and discourage investment in the wake of Hurricane Katrina." Excuse me, Senator, are you saying that without these rate preferences the investors who are swimming in funds to invest would invest in China? In Europe? In oil refineries? In anyplace but the Gulf Coast? In jars buried in the backyard and paper bags in the mattress? You see, Senator, these folks who have amounts to invest need to invest somewhere, and even if they plunk their money into bank certificates of deposit, the banks can in turn loan the funds for the construction that needs to be done. Why reward investors for doing what they would do in any event? Your logic, sir, suggests that if we don't lower the tax rates on earned income to as low as those on capital gains and dividends, that everyone with compensation income would simply stop working.

When the buffet table is loaded up, we often don't notice, or if we do notice often don't mind or say anything about, the person who is loading up his or her plate to the breaking point. But when the buffet table is lean on supply, we do expect the loaded plate crowd to back down and to have some sense of balance and equity. In polite society, we ask kindly before taking the last serving from the bowl. Why is it that some folks, especially folks who seem to be getting their way so often in how things are done, seem unaware of, or willing to ignore, the sort of civil behavior that is at the root of the orderly society they also claim to admire?

That, of course, is a rhetorical question.

As many people in the tax world know, one of the tax topics in which I have serious interest is the question of alleged Tax Court bias. Six years ago, in response to an article that challenged a letter to the editor in which I asserted that the Tax Court was not biased in favor of the government, the University of Tennessee Law Review published "Instant Replay, Weak Teams, and Disputed Calls: An Empirical Study of Alleged Tax Court Bias," (66 Tennessee Law Review 351 (1999), see here), in which I presented carefully culled empirical evidence that demonstrated that the Tax Court was not biased in favor of the government, and that if there was a bias, it was a slight bias in favor of the taxpayers.

In the intervening years, other commentators have explored questions that space limitations kept out of my 1999 article. For example, in "Political Affiliation of Appointing President and the Outcome of Tax Court Cases," (84 Judicature 310 (May/June 2001), available here), the quartet of Mark P. Altieri, Jerome E. Apple, Penny Marquette and Charles K. Moore explored in detail the impact on tax court decisions of the political party of the president who appointed the judge. In "Empirical Research on Judicial Reasoning: Statutory Interpretation in Federal Tax Cases," (31 N.Mex.L.Rev. 325 (2001), see here), Dan Schneider explored whether judges favored any one method of interpreting the Internal Revenue Code over other methods, and whether specifically identifiable personal characteristics nudged judges to use a particular method. In "Assessing and Predicting Who Wins Federal Tax Trial Decisions," (37 Wake Forest L. Rev. 473 (2002) and 96 Tax Notes 1147 (2002), see here), Dan Schneider explored whether the outcome in a tax case was affected by a judge's gender, attendance at an "elite law school," previous work experience, race, years as a judge, or appointing president's political party affiliation.

The topic continues to fascinate researchers, commentators, and, I would hope, taxpayers and their advisors. Recently, Robert Howard, of Georgia State University's Department of Political Science took on the question of whether, and if so, why, tax decision outcomes in Tax Court cases and District Court cases might differ. In "Comparing the Decision Making of Specialized Courts and General Courts: An Exploration of Tax Decisions (26 Justice System J. 135 (2005), available here), he concludes that the Tax Court, as a specialized court, is "free from any practical structural constraints" and "uses its expertise to allow a much freer hand in decisions for its judges' policy preferences." He finds that this is not what one would have expected from a goal of having an expertised court decide cases without ideological influences. He also concludes that "while there has been some concern that, like the tax court, specialized courts would be no more than extensions of the IRS and thus likely to exhibit bias in favor of the agency, and while the U.S. Tax Court might issue more rulings in favor of the IRS than the U.S. District Court, the reason might be as much due to ideology as any bias based on structure or experience."

Howard bases his conclusion on the results of his empirical research. He discoverd that the Tax Court and district courts are "slightly conservative in their decisions, ... confront roughly the same types of cases, [and that] more than two-thirds in both courts are from individuals, with roughly one-fourth of the dockets of each composed of business matters." He also notes that in Tax Court 36% of taxpayers act without counsel, whereas only 10% of taxpayers do so in the district courts. In addition, "more than twice as many tax-shelter and tax-protester cases are heard in the tax court (21 percent) than in the district court (10 percent)." Finally, his data showed that "the taxpayer ...l won 20 percent of the time in the tax court and in 32 percent of the cases in the district court."

From this data Howard generates some interesting observations. "As expected, the more liberal the judge, the greater the likelihood of support for the Internal Revenue Service, while the more conservative the judge, the greater the likelihood of support for the taxpayer. Tax court judges are more ideological in deciding cases than are district court judges. Finally, the hypothesis that liberal judges would react more negatively, and conservatives more positively, to tax-protestor or tax-fraud issues was confirmed for both courts." He also notes that when taxpayers in the Tax Court have an attorney, it is more helpful to them than in the district court, suggesting that the district court relies more on the IRS whereas the Tax Court judge can "appreciate and understand the arguments of counsel." He also noted that "the district court was more sensitive to the type of litigant, being more likely to support a business or a trust or estate, than was the tax court."

What this does to the oft-repeated thought that taxpayers have more success in district court because the judges, and their clerks, are far from expert with taxation, and tend to be more sympathetic to taxpayers, remains to be seen. Howard concludes that Tax Court judges indeed are more expert. Yet he also concludes that the judges in both forums are roughly the same, ideologically speaking.

There is good news. Affirming one of the conclusions I reached in my 1999 article, Howard states, "prior IRS experience does not matter for type of judges." He also refers to me as a "scholar" and as a "tax scholar," and brands my 1999 article as a "scholarly examination" of the issue. Note to self: photocopy, enlarge, and hang on office door.

As Howard points out, more research comparing specialized and general jurisdiction courts is necessary. A particular question worth exploring is "the issue of congressional and executive control[, because t]he fifteen-year tenure of nineteen tax court judges, as opposed to the lifetime tenure of more than 600 district court judges, allows Congress and the president to modify and alter the small tax court's ideology more quickly than the ideology of the district courts[,and g]iven the volatile and highly politicized issue of taxes, the ideological rulings of the tax court might be due to congressional design, and the decisions might deliberately match congressional and executive preference."

It is gratifying to see that my 1999 article, the first in which a comprehensive, systematic, extensive, and thorough empirical exploration of Tax Court decisions was the basis of the arguments (in contrast to articles such as the one in which the author "flipped through" several volumes of Tax Court decisions), has inspired other scholars to examine other factors. I'm told that this is the way tax commentary and dialogue ought to work. Propositions are made, debated, affirmed, or discredited. Mine appears to have survived.

It is an important question. Despite the seeming "academic" tone to most of these articles, and despite the fact that this is one work product I sent to student-edited law journals rather than the usual places I send my manuscripts, it deals with an issue of serious practical concern to taxpayers and tax practitioners. The decision to contest an IRS deficiency in Tax Court or district court, which is affected by a variety of factors, not the least of which is ability to pay the tax so that a refund can be claimed and suit brought in district court, is one that has faced taxpayers for decades. Frequently affected by anecdote, tax "lore," and personal experience, these decisions can now be considered against the backdrop of empirical research and conclusions offered by an ever-growing body of analytical works that inform those dealing with tax litigation issues.