MauledAgain

My response to the Wall Street Journal editorial alleging that the Bush tax cuts have been disadvantageous for the wealthy has generated some interesting responses. It's not worth saying much about the claim that because the statistics come from the IRS that my analysis is wrong. My analysis addressed the editorial's interpretation of the statistics, and thus the source of the statistics is irrelevant. It's amusing to see how edgy the defenders of the unfortunately-to-be-extended special low tax rates become when the holes in their theories are exposes.

A very important observation came from Michael E. Kitces of the Pinnacle Advisory Group. His credentials are numerous and a challenge to letterhead design: MSFS, CFPR, CLU, ChFC, RHU, REBC, CASL. But I don't need to rely on his qualifications to see the sense in his contribution to the analysis. I had pointed out that comparing statistics from 2002 with statistics for 2004 was misleading, and that it would make more sense to compare 2004 with, say, 1994. Michael Kitces provided another explanation of why the 2002-2004 comparison is skewed:

I just read through your latest blog comments on the Wall Street Journal editorial (which I note I haven't had a chance to read), but in my role
for a private wealth management firm, I would note one SUBSTANTIAL difference between the typical tax burden in 2002 versus 2004: investment returns.

In 2002, clients were facing the tail end of market declines that began in 2002. MANY clients had substantial losses or loss carryforwards, and still had little or no gains to recognize. By 2004, on the other hand, the markets had rebounded 25-50% (depending on your index du jour) off the Oct. 2002 lows, and many clients had absorbed some of their capital loss carryforwards in 2003 and started recognizing real capital gains in 2004.

Even more notable is the fact that stock market rebounds disproportionately affect the sampling group. Individuals with AGI in excess of $200,000/year in 2004 were far more likely to have substantial portfolios to experience the losses-in-2002-and-gains-in-2004 scenario, relative to a lower income group that would have far fewer individuals with substantial investment portfolios.

As I wrote to Michael, this is a very important consideration. It's not that capital gain income increased from 2002 to 2004 as much as the statistics appear to say. The impact of the capital loss carryforwards cannot be overestimated.

Michael also noted: "I would certainly agree that the inflation adjustment you pointed out is highly relevant, but I believe the impact of capital gains (since the benchmark for measuring income was not EARNED income but simply AGI) might even have had MORE of an impact, particularly given the sampled 2002-2004 time period." In other words, it may be that adjusted for inflation, people with AGI in 2004 exceeding the equivalent of $200,000 in 2002 did not see an increase in the proportion of income tax liabilities.

Michael pointed out another interesting aspect of the capital loss carryforward phenomenon:

I've observed the substantial shift in tax burdens from 2002 to 2004 amongst our higher-taxable-income clients due to investment returns not only on an individual basis, but on a wider scale as well. There were several local counties in our area that were also severely impacted by the effect, as local tax revenues (calculated for many Maryland counties as a percentage of Federal AGI with minor adjustments) dried up from 1999 to 2002 as capital gains income recognition disappeared, only to find tax revenues blossoming forth again by 2004 as capital gains re-appeared on many tax returns (particularly those who have higher incomes, who are disproportionately more probable to hold large portfolios).

I am, and should be, chagrined that I didn't pick up on this, considering that I've invested a meaningful portion of my professional writing career investigating the relationship between changes in federal tax law and the impact on states of those changes. It's even more proof that the changes in tax revenue at all levels of government have less to do with shifting tax burdens from the wealthy to the middle class and more to do with other economic factors, such as interest rates, international events, and natural disasters. Incidentally, though I'll probably be having more to say later, note that the Congress has decided to provide only one year of alternative minimum tax relief to the middle class while tacking two more years onto the special low tax rates for capital gains and dividends. In other words, the AMT mess will rear its ugly head again very soon but the wealthy will sit back with a presumed four more years of special low rates. I say presumed because I can't imagine those rates surviving 2008 if control of the Congress shifts.

Finally, Michael posed a related tax and budget question to me:

PS- I just spoke with a reporter about the budget bill apparently anticipated to come out of committee tomorrow, which is rumored to be raising or eliminating the AGI limitation threshold on Roth conversions (possibly with an a-la-1998 four-year averaging provision) to encourage Roth conversion as a means to raise revenue to offset other revenue costs and keep the overall bill revenue neutral. I hope your blog will express some
comments about the wisdom or concerns of making a budget bill that is balanced over the requisite 10-year period at the cost of not actually creating revenue raisers, but merely revenue "acceleraters" at the cost of future revenues when that deferred IRA tax liability would have otherwise been paid.

This sort of revenue gerrymandering is not new. The games played by Congress with the budget and tax revenues make the NFL's capologists look like amateurs. Whether it's "robbing Peter to pay Paul" or a matter of smoke and mirrors doesn't matter. What matters is that the practice of hoodwinking people continues unabated. It's a sad reflection on the shortcomings of modern American politics and the culture that tolerates and enables these practices.

Last August, I explored the fuelishness of Hawaii's attempt to cap gasoline prices. Called stupid by some, I tried to be diplomatic and called it "ill-advised." I predicted that it would not solve the core problems.

Now comes news that Hawaii has given up on its experiment. Ironically, one reason is that the cap led to higher prices. One study showed that motorists paid almost $55 million more for gasoline than they would have without the cap. Why? The price of gasoline rose to the cap. Cap supporters claim the cap saved motorists $33 million. Yet somewhere along the line some cap-supporting legislators changed their mind. They joined with cap opponents to give the governor power to suspend the cap. She did.

Bottom line: "It was a failure." So say more than a few experts. Giving credit where credit is due, at least the legislators (or some of them) recognized the mistake and fixed it. Congress, are you paying attention? It's not impossible to fix legislative bad judgment.

Back in October I commented on the remaining vacancies in the Treasury Department after having previously analyzed the issue. I wondered why it was taking so long.

Yesterday, the President announced his intent to nominate Eric Solomon to the post of Secretary of the Treasury for Tax Policy. It has been vacant since December 2003. Finally.

I continue to wonder. Have they been unable to find anyone until now to nominate? Have they found people whom they've been unable to persuade to accept the nomination? Did the background check require two years? Did they forget that there was a vacancy? Was the "remember to fill the vacancy" reminder note lost in a pile of papers?

Former student Nakul Krishnakumar directed my attention to a Wall Street Journal editorial by Stephen Moore, "How to Soak the Rich (the George Bush Way)." Moore's message is the usual supply-side argument that cutting taxes increases tax revenue. The question is whether this counter-intuitive assertion can be proven. Nakul essentially asked that question, in a rhetorical sort of way, in his latest missive to me.

The problem with real-life proofs is that they usually don't provide the control group or placebo effect alternatives that laboratory testing permits. Even if tax revenues increase after a tax cut, there's no way to demonstrate that they would have increased even more without the tax cut, or that they would have increased less or possibly decreased in the absence of the tax cut. There's no way to go back with a "redo" in the manner researchers in the hard sciences can attempt duplication. In fact, one of the hallmarks of research in the hard science is the opportunity to replicate an experiment.

Moore drags a pile of statistics past his readers to make his point. He explains that "between 2002 and 2004, tax payments by those with adjusted gross incomes (AGI) of more than $200,000 a year, which is roughly 3% of taxpayers, increased by 19.4% -- more than double the 9.3% increase for all other taxpayers."

My response: Comparing 2002 with 2004 makes no sense. Better to compare 2004 with, say, 1994. That would highlight the impact of the rate changes.

Moore next asserts that "[b]etween 2001 and 2004 (the most recent data), the percentage of federal income taxes paid by those with $200,000 incomes and above has risen to 46.6% from 40.5%."

My response: Because the population grows and because of inflation, there will be more taxpayers and more income in the over $200,000 category. Thus, there will be more tax liability for people in that category. Better to adjust the $200,000 for inflation. Better yet to compare tax liability as a percentage of income rather than look at total taxes, which standing alone is a meaningless number. Remember that most of the folks newly joining the "over $200,000 club" aren't any better off in terms of what they can buy because they are simply walking the inflation treadmill. If the trend continues, by 2035 ninety percent of the population will be earning more than $200,000 and paying 95% of federal income taxes. Of course, bread will be $20 a loaf and gasoline $50 a gallon. Using this sort of data to defend tax cuts for the wealthy is nonsense. It works only to the extent Americans don't understand economic analysis, statistics, and tax policy. Moore claims that the reason more Americans have moved into the "over $200,000 AGI" category is the Bush tax cut, and though admitting that inflation has not been taken into account, he claims it "wouldn't alter much" the analysis. Hogwash. Adjust for inflation and there's not much left to Moore's numbers. Moore's similar point about the tax share paid by millionaires is no less flawed.

Moore continues: "In other words, out of every 100 Americans, the wealthiest three are now paying close to the same amount in taxes as the other 97 combined."

My response: It might sound so heart-breaking to say that out of every 100 Americans, the wealthiest 3 (technically, the 3 with the highest income, as wealth and income don't line up) pay as much as the other 97. But consider that the wealthiest 3 have income that is many times what the other 97 earn, and have wealth that is many many times what the other 97 earn, and it isn't the bleak thing Moore tries to make it appear. Moore's point would be well taken if the wealthiest three earned half of what the other 97 earned. That's not the case. Does it make sense for the wealthiest three to earn (or have wealth) that is 2 or 5 or 10 or 20 times that of the other 97 and pay the same amount of tax rather than 2 or 5 or 10 or 20 times the amount of tax?

Moore then turns to the main objective of his editorial, defense of the special low tax rates for capital gains and dividends. He presents statistics that explain "capital gains receipts from 2002-04 have climbed by 79% after the reduction in the tax rate from 20% to 15%. Dividend tax receipts are up 35% from 2002 to 2004, even though the
taxable rate fell from 39.6% to 15%." and relies on this data to conclude that the supply side Laffer Curve effect has been vindicated.

My response: The data on dividends and capital gains don't tell us what really matters: that more and more of the dividends and capital gains are earned by those top 3 of 100. Tax receipts are up because dividends and capital gains are up, a consequence not of tax policy but of world economics. They'll be collapsing soon as the energy disaster takes full effect, low tax rates notwithstanding.

Anticipating the argument that the wealthy pay more taxes because "they have hoarded all the income gains," Moore claims that the share of total income earned by the "richest 1%, 5% and 10% of Americans is lower today than in the last years of the Clinton administration."

My response: Is that the case if tax-exempt interest, untaxed foreign investment, and income from other "loopholes" is taken into account? Where are the statistics on the other income classes? Their incomes have fallen when adjusted for inflation.

Moore attacks the unassailable fact that the richest one-tenth of one percent of Americans received a tax cut five thousand, yes, five thousand, times the tax cut received by those earning less than $50,000. He claims that this fact "can only be true if one assumes that there were no economic benefits from the tax cuts whatsoever." He points out that the tax cuts generated increases in stock values, increases in business spending, increases in employment, increases in capital flow into the country, increases in corporate dividend payments, and increases in venture capital funding.

My response: Capital flow into the country? Is he referring to the dollars flowing to China like the water from a broken dam? Increases in employment? Is he referring to those still looking for work? Why doesn't he refer to what really has taken off? Yes, compensation for corporate executives, who justify the increases by pointing to the very same things that Moore claims are the result of tax cuts. If all of those wonderful things have happened, then perhaps Moore should be arguing that corporate executives should reduce their salaries and benefits to an inflation-adjusted 1995 amount. Even to the extent that some of what Moore claims has happened is in fact the case, the cause is the combination of federal budget deficit spending and the Federal Reserve's monetary policy.

Moore closes with a reference to tax collection data for the twelve months ending March 2006, which shows a 14.4% increase over tax collections for the twelve months ending in March of 2005. He claims this proves that the Bush tax cuts "have been among the most successful policies to soak the rich in American history."

My response: Let's see how much of the increase arises from some combination of a delay in tax payments in the spring of 2005 from March to April and an acceleration of payments in 2006 from April to March. Let's see how much of the tax collections reflects the settlement of amounts due from previous years, the closing of some international taxation loopholes, the crackdown on corporate tax shelters, and the infliction of the alternative minimum tax on more and more middle-class American taxpayers.

Take a look at Currents and Undercurrents: Changes in the Distribution of Wealth, 1989–2004, a report by Arthur B. Kennickell, Senior Economist and Project Director, Survey of Consumer Finances for the Federal Reserve Board. It's long, it's technical, it's one of a long series, and it's proof that a short editorial and a short blog post cannot do justice to a complex topic. But if simplified information is useful, the report shows that between 1989 and 2004, the percentage of the nation's wealth held by the top 1 percent grew from 30.1% to 33.4%. At the same time, the percentage of wealth held by the those in the bottom half of wealth ownership dropped from 3% to 2.5%. In fact, no matter how sliced, the top 1% got richer, and everyone else got poorer, measured in terms of proportion of wealth ownership. There's nothing wrong with short editorials and short blog posts, provided they don't distort the facts. And when they do, silence is not an appropriate response.

Addendum: No sooner had I posted this than Paul Caron's morning email with annotated TaxProf Blog posts turned my attention to the CBO's monthly budget review. It appears that some of the surge in revenues are the result of "calendar-related shifts in the timing of certain payments." What a great guess. On the revenue side, the most notable increase was in corporate income tax revenues. Could the crack-down on corporate tax shelters be a factor as I suggest? The report does not say. This sentence, though, was as reassuring of my position as it was discomforting in its implications: "In addition, growth in incomes in 2005 may have been concentrated more than expected among higher-income taxpayers,"

My colleague, Mike Carroll, who teaches contracts and intellectual property courses, has entered the world of law professor blogging. He is set up at Carrollogos, and has been at it since April 27. He's been contemplating this move for a while, and I'm delighted to see him take the plunge.

Mike has a special interest in copyright law, especially as it relates to music. He's also into music. So am I, as you'll note from my blog description. So this is very good news.

I've put a link to Carrollogos on the main page so that even as this post slips down and eventually to an archive page, you'll still find it easy to visit Mike's blog. Do that.

In my post about the good and bad in yesterday's flurry of tax news, I wrote:

Good news: The Pennsylvania Senate voted 40-9 yesterday for approval of a tax reform plan that would open property-tax rebate check relief to many more over-65 taxpayers, and that eventually would use slot-machine revenues to reduce property taxes for all homeowners.

No news (yet): The House votes on the proposal today.

I should have written "The House is expected to vote on the proposal today."

Why?

Because the House never voted! According to this report, the House Republican leadership refused to bring the proposal to a vote. I'm sure it all has to do with Parliamentary procedure and Roberts Rules of Order, but it seems to me that the essence of a democracy is free voting. So why not let the House members vote?

Apparently the Republican leadership doesn't like the proposal because "[t]he true majority in the House feels we can do more and can do better." Isn't that something for the full House to decide? If that is what the "true majority" thinks, then it can so vote. As I pointed out in yesterday's post about the proposal, it has its flaws. But it's a start. If the members of the House didn't think it was good enough, fine, but say so with a vote and not with an autocratic dictatorial decision. If one waits for perfection, one will do nothing, accomplish nothing, go nowhere, impress no one, fulfill no duties, and die as a cipher. Crafted by a bipartisan committee with unanimous approval, the bill was far better than the long parade of failed ideas tossed about in Harrisburg for the past several decades.

With the primary elections days away, it appears to be a political move. House Republicans, describing the bill as inadequate and meaningless for most of their constituents, have kept the bill's passage off the Democratic Governor's "things accomplished" list. I suppose re-election to seats in the legislature is far more important than responsible governance of the Commonwealth. Pennsylvania's track record on tax policy and tax legislation is embarrassing, and this latest maneuver does nothing to change it.

Charges are flying from Republicans, Democrats, incumbents, challengers, and everyone else with an interest in politics and taxation. The proposal, the first unanimous bipartisan report to be rejected in more than three decades, likely will not resurface. Perhaps some of its provisions will show up in another bill, but the odds are that such a bill would end up in the same place as its predecessors: nowhere.

If this is any preview of what federal tax reform efforts face, one wonders whether the open voting of democracy will ever trump the back-room power addiction and hallway gossip methods of running things. There's a phrase for legislative "leaders" who pull the plug on a legislature's right to vote: arrogant fools. Considering citizen discontent with the Pennsylvania legislature's "sneak" pay raise, per diem games, and a variety of other perks that have offended more than a few voters, the November elections could get very interesting.

Bad news: Republicans in Congress have reached an agreement to extend the special low tax rates on capital gains and dividends. The cost? $70 billion for two years (2009, 2010).

Hilarious news: This is all very meaningless if Republicans lose control of the Congress in 2008 (or even in 2006), because there is nothing that would prevent the next Congress or the one after it from eliminating the special low tax rates for poor rich investors.

Not-so-bad news: Congressional negotiators on the tax bills have agreed to reduce the number of taxpayers who otherwise would be hit by the alternative minimum tax in coming years.

More bad news: Unlike the two-year extension of the special low tax rates for capital gains and dividends, the alternative minimum tax relief would be in place for only one year. So everyone gets to go through this inefficient process yet again, very soon.

Great news: Republicans in Congress are giving up on their $100 rebate plan to placate voters unhappy with gasoline price increases. Maybe they are reading my criticisms of the rebate plan, or perhaps those who did read it are among the people sending Congress the many negative reactions it has received. The House majority leader, a Republican not in favor of the plan, explains that his constituents had spoken and "They thought it was stupid." No kidding. A spokesperson for another legislator quoted a voter: "Do you think we are prostitutes? Do you think you can buy us?" Wow, I thought I could be intemperate. Give that person a blog.

Still more bad news: Republicans by the chamber-load are claiming never to have supported the idea. I predict that by the end of the week there will be no one in the Congress who owns up to having floated or supported the idea. Why bad news? Somewhere along the way honesty got lost, and now it's being buried.

More great news: Republicans, to quote this report, are "tr[ying] instead to convince voters there was no immediate remedy for the pain at the pump." No kidding.

Good news: The Pennsylvania Senate voted 40-9 yesterday for approval of a tax reform plan that would open property-tax rebate check relief to many more over-65 taxpayers, and that eventually would use slot-machine revenues to reduce property taxes for all homeowners.

No news (yet): The House votes on the proposal today.

Yet more bad news: Most of the changes won't happen for several or more years. It is unlikely that slot-machine revenues will being flowing any sooner than 2008.

Even still more bad news: For some retired homeowners, the property tax relief is too little, and may be too late.

Worse news: The plan requires each school district to hold a referendum on the question of whether additional property tax relief should be funded through an earned income tax or an income tax. Why would anyone continue to advocate earned income taxes? Oh, wait, they're imitating the Congress.

Horrible news: The planned back-end referendum, which would permit voters to approve or reject school district spending increases exceeding the inflation rate, is so riddled with exceptions that it is for all intents and purposes useless.

Pile-on the bad news: The Governor of New Jersey, a state mired in budget deficits, has proposed a hospital tax. The tax would be a $1,424 monthly fee on each hospital bed. Let's see. If hospitals add this fee to the cost of services, health insurance premiums will rise, and some uninsured people who might otherwise cover the cost of their hospitalization will be unable to pay. Unlike most activities on which user fees are levied, getting sick is not a voluntary choice. Unlike most user fees, which transfer from a user to the provider of a service some or all of the cost of providing that service, the Governor's plan permits the state to charge a fee without providing any sort of service to the hospitals for which they are not already paying. Many hospitals assert that they would be forced to close.

A bit more good news (I think): Most states don't use New Jersey as their role model for state and local taxation and spending.

This morning I learned that the folks at Jurist are in a tight race for the award in the LAW category of the 10th Annual People's Voice Webby Award. Jurist, which is the brainchild of Bernard Hibbitts at the University of Pittsburgh School of Law, is the ONLY entry in this category which is sponsored by a law school, moderated by law faculty, and staffed by law students. They work hard and do a great job. Check out the Jurist site and you'll see what I mean.

Hopefully the fact that Jurist picked up my comments on the Social Security debate back in early 2005 and my comments on net-literacy for lawyers aren't impediments to electoral success for Jurist! Seriously, here's a chance to express an opinion without having to write a blog commentary, pen an op-ed piece, or grab a soap-box.

You can vote at the People's Voice web site. Easy to do. Voting ends on Friday, May 5. Results are announced on May 9. Good luck, Jurist.

Thanks to Albert S. Golbert for passing along this tip: If you are curious about what the federal government does with the taxes that you pay, take a look at the Where, oh where, will my money go? FEDERAL BUDGET CALCULATOR.

Remember to enter you total tax liability, not the additional amount, if any, that was due with the return. And, no, I haven't yet discovered web sites that do this with state and local taxes. If you know of any, send along the URL. Thanks.

They're at it again. Members of Congress, that is. Here come more ideas to add to the long list of "are you kidding me?" proposals to deal with the inevitable run-down of worldwide oil and gas supplies showing up in the widely-reported gasoline price increases. The latest "solutions"?

Sen. Bill Frist wants the government to send a $100 cash "rebate" to unmarried taxpayers earning less than $125,000 and married taxpayers earning less than $150,000.

From Rep. Steve Chabot comes H.R.5203, intended "[t]o amend the Internal Revenue Code of 1986 to allow individuals a credit against income tax of at least $500 to offset the cost of high 2006 gasoline and diesel fuel prices."

How does either one of these proposals do anything to increase the supply of oil and gasoline or decrease demand? If anything, these proposals mask the crisis, and lull people into thinking that there's no need to take seriously the growing chorus of warnings about the energy supply disruptions looming ahead. The rebate proposal makes even less sense because it will be sent to people who don't purchase gasoline and thus don't have any purchase price to be rebated. It also makes no sense because it would provide the same amount to someone facing $200 of additional annual gasoline costs and someone facing $500 of additional annual gasoline costs. Frankly, it appears to be nothing more than a bribe, an attempt by nervous politicians facing elections in November to win votes from an electorate they have served poorly with respect to the energy issue for quite some time. The credit proposal is worse, in terms of dollar amounts and in terms of creating another tax return "entitlement."

Notice how, once again, Congress turns to the tax law to deal with a problem. One proposal would add yet another credit to the Internal Revenue Code, but because no bill language is available at the moment, it's tough to say how complicated it would be. The other proposal uses tax return information to generate the list of those who would receive rebates, and, again without specific language available, probably will use the IRS to administer the program.

If the tax law must be used to "solve" the problem, why not attack the causes? There already exist a variety of credits in the tax law for doing things that conserve fuel and energy. Expand those provisions. How about a credit for the purchase of a bicycle, manual push-mowers (provided the gasoline mower is traded in), or even brooms (if the gasoline-powered leaf blower or snow blower is surrendered)? How about a credit of $5 for every 100 miles of reduced driving, measured by comparing 2005 mileage with 2006 mileage and verified by the odometer readings taken by states for purposes of vehicle inspections? Indeed these could be complicated provisions, but so are the rebate and credit proposals, and if there's going to be complication, it ought to be for something worthwhile that mitigates the demand for energy rather than enable the addiction, to borrow a word from the President's State of the Union speech in January.

I shared some of my other ideas in Wednesday's posting. Strange, isn't it, that politicians aren't paying much attention to it. It makes sense, but it might not win votes. [begin sarcasm]Proposals that make sense but don't win votes? That's no way to run a country, is it? [/Sarcasm over]

The recent furor over rapidly escalating gasoline prices, which has been widely reported in stories such as this one, has generated an interesting assortment of "solutions" none of which address the underlying problem and none of which will make a difference. Not surprisingly, the word "tax" pops up in many of these fanciful schemes.

The core problem is fairly simple. Gasoline is refined from crude oil. There is a finite supply of crude oil, and as the easiest-to-extract oil is rapidly exhausted, the remaining oil becomes more expensive to find and to extract. Many of the places on the globe where oil is abundant are beset by political and military unrest that interferes with the exploration, drilling, and extraction functions. There is a shortage of refinery capacity. Demand for oil and oil products is rising, in part because the economies of developing nations are shifting to oil-fueled activity and in part because the population of the planet is increasing.

None of this is or should be a surprise. I provided a lengthy analysis back in October. I even predicted that gasoline prices and related issues would be factors in the 2006 and 2008 elections. Yes, I admit, that wasn't a difficult prediction, nor have I been alone in making it.

Before looking at the proposed solutions and explaining why they won't work, I want to ask a question. Why are people angry about rising gasoline prices? I can understand worried. I can understand anxious. I can understand puzzled. But anger? My only sensible guess is that people who think they are entitled to cheap gasoline feel offended because someone, somewhere, somehow, is trampling on their entitlement right. The irony in all of this is the fact that gasoline prices in this country are cheaper than they are in most other countries, the gasoline tax is lower than it ought to be because it has not been adjusted for inflation, and the real-dollar inflation-adjusted price of gasoline is not at an all-time high. What we have here is further proof of what happens when people are spoiled and then reality crushes the pretensiveness of fantasyland.

So let's examine the "solutions" being tossed about. Do they work or are they simply soundbites with emotional appeal? These are in no particular order.

Solution number one is the imposition of a windfall profits tax. This is a counter-productive measure and there is a track record to prove that assertion. Every dollar taken in a windfall profits tax gives energy companies an excuse to invest one less dollar in exploration, drilling, extraction, or development of alternative fuels. The tax would also mean lower investment returns for pension and profit-sharing funds holding energy stock, and for retirees living on the dividends paid by energy stocks. There was a windfall profits tax in the late 70s and it is one of the reasons that today there is insufficient refinery capacity, insufficient refining reserves, and less exploration and development than there could have been. Perhaps if "profits" were defined to include a reduction for these expenditures the perception that energy company profits are "too high" would shift to something more reflective of an understanding of basic accounting.

Solution number two is to pressure Saudi Arabia to release more oil. Unless the proponents of this solution have information not available generally, Saudi Arabia not only is pumping oil at a maximum rate, it faces the prospect that one of its major fields is on the brink of "pumped almost empty" collapse. Take a look at the many discussions of this issue on The Oil Drum, a peak oil site with one of the highest signal-to-noise ratios of any public forum website I've visited.

Solution number three is to open up drilling in the Arctic National Wildlife Refuge. Even if environmental damage can be minimized, and it almost surely can be, this is the equivalent of putting a band-aid on a heavily bleeding gash. Who's to guarantee that opening up ANWR or drilling in the continental shelf areas presently closed by law will not trigger output reductions by Venezuela, Russia, Saudi Arabia or other producing countries?

Solution number four is to boycott Exxon-Mobil. This is one of the most ridiculous ideas circulating on the Internet, unless the boycotters plan to reduce their gasoline purchases rather than buy at another supplier. What happens if no one goes to Exxon-Mobil stations? They go to other stations, those stations raise prices because demand at their sites has increased, they purchase the gasoline that Exxon-Mobil has available, and prices go up even more. When I read things such as the "boycott Exxon-Mobil" proposal it causes me to wonder not only about the widespread ignorance of economic theory prevalent among the citizenry, caused, of course, by deficiencies in high school and undergraduate education systems, as discussed in this previous post, but also about the dangers inherent in a democracy that theoretically permits a population to vote for policies that constitute national suicide.

Solution number five is a proposal to increase competition in the oil and gas industries. Legislation to this effect has already been introduced in the Congress. The end result, I suppose, would be the dismantling of large energy companies. We would be left with many small energy companies. Could these companies bring sufficient resources to explore and develop high-cost deep-sea fields, which are one of the last frontiers in the search for conventional oil sources? I don't know. Years ago, it was decided to break up AT&T. What happened? It has re-emerged.

Solution number five is a proposal to authorize an FTC investigation to determine if there has been price gouging and price fixing. This is a recycled idea. None of the previous investigations turned up any evidence of price fixing. I doubt this one would. Gasoline stations operate on a narrow margin. The truck arrives, drops its load into the tanks, and gives the owner an invoice. The owner looks at the price, figures out the fixed costs of running the station, and increases the retail price. If asked why the price increased, the wholesaler points to the mandated use of more expensive ethanol, the costs of cleaning tanks and tankers so that the ethanol, which is highly prone to water and dirt absorption, is not fouled. And no matter the outcome, these investigations would do nothing to increase supply or reduce demand, or to generate production of alternative fuels. Nonetheless, the President has ordered the investigation to proceed.

Solution number six is to take oil out of the Strategic Reserve. Here's another absurd idea. There's a saying among farmers, probably lost in a post-modern world in which too many people think food is "made" at the grocery store: "don't eat the seed corn." What's the point of exhausting the reserve when doing so might reduce prices by a penny or two per gallon for a short period of time? Other than, of course, getting attention for the politicians who spout this nonsense. Perhaps this is why the President has ordered a suspension in replenishment deposits to the Reserve, a move that does little to affect the supply, does nothing to reduce demand, and will do nothing to affect prices. Yes, it looks good. So does a painted-over rusty pipe.

Solution number seven is to suspend the gasoline tax. Yes, yes, finally, it's a tax issue. I've explained the counter-productivity of this idea so many times that I will simply point to my previous posts on the subject: September 2005, March 2005, another one from March 2005, May 2004, and March 2004.

Solution number eight is to cap sales taxes on gasoline, a proposal already underway in New York. Yes, another tax matter. This one is interesting. If gasoline prices rise 50 percent, the sales tax increases by 50%, creating windfall revenue for the state. Holding the sales tax at the amount payable on the lower, pre-increase, price would not deprive the state of tax revenue as would a suspension of a fixed gasoline tax. Of course, this solution only works in states that have a percentage-based sales tax on gasoline. My guess is that because it involves a few cents, it won't cool down the anger that many drivers are feeling about gasoline prices.

Solution number nine is to require auto-makers to manufacture fuel-efficient vehicles and alternative fuels vehicles. This is a wonderful idea, ten years ago. It might make things easier ten years from now, when gasoline is at $23 per gallon. As a short-term solution, it is useless. As a long-term solution, better late than never. Of course, where are the almost-bankrupt American automobile manufacturers going to get the capital to invest in making these changes?

Solution number ten is to repeal the recently-enacted tax breaks for energy companies. This is an appropriate thing to do because these companies don't need tax breaks. So it should be done. But let's not fool ourselves into thinking that it has any effect on supply, demand, or price.

Solution number eleven is to temporarily set aside EPA requirements, presumably to mitigate the impact of the switchover to ethanol. This action, already ordered by the President, will alleviate the spot shortage problem, but won't do much to change the price. It's a stop-gap and a band-aid. And, of course, it means somewhat dirtier air.

If it seems as though there is no easy solution, that's because there isn't. I'm not alone in reaching this conclusion. Folks posting at the Oil Drum have been pointing this out for quite some time. And at least one politician, Representative Bob Beauprez, even so stated, a remarkably honest and courageous but politically risky comment.

Why is it risky? Americans don't want to hear bad news. Perhaps that's why Americans are angry. Deep down they know that upheaval looms. It will not be life as usual. Gasoline prices, like oil prices, are not going to return to 1995 levels. Or 2002 levels. They are going up, up, and away. When one considers the changes that must be made, it's no wonder many Americans are distressed, frustrated, scared, and thus, yes, angry.

What are those changes? In other words, what are the near-term solutions? Forget about hydrogen cars available in 2012, or some alternative fuel developed for production in 2015. Forget about coal-to-liquids that might be feasible by 2014. Focus on 2006. On 2007.

Let's start with the easy ones. The ones many people don't do because they don't think of it, don't have time, are too lazy, or otherwise don't think it matters. Perhaps if people understand that the fewer easy steps that are done the sooner the more difficult steps will be compelled, they will pay attention to these things.

First, cut back on speed. I'm not talking the 40 mph on an Interstate nonsense or the people doing 50 in the left lane of a 65 mph highway. I'm talking speeds of 60, 65, 70. Yes, at 65 and 70 fuel economy generally is not the best for many vehicles. I'm talking about the clowns who go by at 80, 85, 90, not on wide open western highways but on urban freeways. Not only are they a safety menace, they are squandering a scarce resource. For what? To go 15 miles in 42 fewer seconds? And where are the highway troopers? Is there a shortage of police? A shortage of radar? Huh?

Second, properly inflate tires. Easily done, though I do know more than a few people who do not know how. Sad. Here's another "subject" that should be taught in high school. The 10-minute, no-credit course.

Third, keep the car engine properly tuned. Most vehicles have sufficient warning lights and other indicators to alert the driver that something is wrong or that it's time for maintenance. With gasoline prices at $3 a gallon and headed higher, the cost of the maintenance will pay for itself.

Fourth, fix traffic signals so that they are fuel-efficient. What's the point of stopping traffic when there is no cross-traffic? What's the point of stopping traffic when the vehicle that triggered the "turn the light" sensor has already made a right turn on red and is no longer in need of a turn in the light? What's the point of programming a light to stay green for at least 90 seconds when there is no traffic needing the green and there are cars sitting at red lights? Remember, most vehicles get 20 to 30 miles per gallon when they are moving. The reason many vehicles get overall mileage ratings of 16 or 18 or 22 is because EVERY VEHICLE GETS ZERO MILES PER GALLON when sitting at a red light.

Fifth, combine errands. Eliminate the impulse, one-item rush to the store trip.

Sixth, let the children ride bicycles to soccer practice, and to school. Walk where possible. This will require installation of sidewalks and bike paths in places that are dangerous for bikers and walkers, but let's get it done.

Seventh, use manual lawn mowers instead of gasoline-powered machines. Use brooms, not gasoline-powered leaf blowers, to clear leaves from driveways. Use snow shovels, not snow blowers. And welcome the beneficial side effects of exercise, weight loss, and the good feeling that comes from natural endorphins.

Eighth, turn up the thermostat when using air conditioning and turn it down when using heat. The savings in natural gas and electricity consumption will translate to lower oil prices.

Ninth, for those understandably upset with the huge amounts of compensation, pension, and severance payments made to energy company executives, write to Congress and urge it to pressure the IRS to enforce the "reasonable" part of the restriction on business expense deductions for compensation. I wonder if the amounts being paid will change if they are not fully deductible. Of course, this isn't going to make a difference in supply, demand or price, because the compensation of Exxon-Mobil's CEO, apportioned over the gallons of gasoline it sells, is a fraction of a penny.

So these are the things that can be done in the short-term, without the need for legislation, government investigations, or other "let someone else fix it" approaches to the problem. There's a very good analysis of these and some not-so-short-term lifestyle changes (such as moving closer to work) that's well worth the read.

I conclude with a challenge toward those who think that windfall profits taxes on energy companies is the answer. Are you willing to apply the tax to all companies? Will the measure be profit percentage? In 2005, Exxon-Mobil earned a whopping 36.1 billion dollars of profits on 328.2 billion dollars of revenue, for a net profit margin of 11%, as reported by MSN Money Central. By comparison, also according to MSN Money Central reports, Microsoft earned a "mere" 13.1 billion dollars of profits on 41.4 billion dollars of revenue, for a, yes, 31.6% net profit margin. Folks are upset about a company earning 11 cents on the dollar, while another company earns 31 cents per dollar? The irony is that the gasoline supplied by Exxon-Mobil almost always works as promised. The stuff supplied by Microsoft is buggy, security-deficient, poorly planned, and poor in quality. Does Microsoft escape scrutiny because it "buries" the cost of its product in the cost of a computer? Maybe Exxon-Mobil ought to work out an arrangement with the car dealers: buy a car, gasoline comes with it. The cost? Oh, an additional $7,000. Clever, no? Note that Microsoft is not the only non-energy company hauling in profits at rates multiple the Exxon-Mobil rate. Microsoft, though, is a good counterpoint because it's big, it's intrusive, and its products are far from excellent. So why are people yelling about Exxon-Mobil and the other energy companies and saying so little about Microsoft? Are the folks who want to break up the half-dozen large oil companies that dominate the domestic gasoline market willing to break up the only large software company that dominates, no, totally controls, the domestic software market?

What a marvelous test of consistency, logic, and common sense. It will be interesting to watch this story develop. Trust me, it's still in the first chapter, and it's going to get much, much worse.

Oh, and just to add fuel to the fire (ha), let me propose another way to reduce demand. It's one of my favorites. Impose a user fee on energy users for the cost of using the energy. Translated, increase the gasoline tax to reflect inflation since the last time it was increased. Then let the market adjust. Otherwise, it won't be too long before there is rationing, empty gasoline stations, stranded motorists, and chaos to make the crisis of the late 70s look like a mere warm-up.

A little more than a year ago I shared an analysis of the tax consequences of home makeovers experienced by families whose applications were accepted by one of the several network television home remodeling and reconstruction shows. Some of my arguments were responses to contrary or alternative analyses offered by subscribers to the ABA-TAX listserv. Two days later I posted a follow-up to respond to questions posed directly to me by a nearby CPA.

Here's the gist of what I concluded: The recipients have gross income because (1) it is income, (2) no exclusion, including the section 102 gift, and section 280A(g) de minimis rental, and section 109 leasehold improvement exclusions, applies, and (3) it is a prize, the value of which is expressly included in gross income under section 74. I noted that it was unlikely the networks would pass up a substantial advertising expense deduction in order to preserve a gift exclusion for the recipients even if the networks could bring about such an outcome. I also noted that it would not be all that surprising if the IRS pursued the tax issues with the recipients, especially if the networks issued Forms 1099 and the IRS computers detected a mismatch. I also predicted that "politicians, especially the 'eliminate the IRS' crowd, would jump all over this" issue.

Thanks to Paul Caron's TaxProf Blog, I've become aware that the IRS recently released a September 2005 letter it had written to Representative Marsha Blackburn in response to her inquiry about the issue. The letter's release comes months after its transmittal because of the process required to delete taxpayer identities and other information.

It seems that a constituent of Rep. Blackburn wrote to inform her that the network producers were telling the makeover recipients that the value of the improvements and the cash paid by the networks are excludible under section 280A(g) and to request that Congress "close this loophole." Rep. Blackburn, as members of Congress often do in these instances, wrote to the IRS asking for an explanation.

The IRS response is a more succinct version of what I posted back in March of 2005. The letter states:

Section 61 of the Code provides that, except as otherwise provided by the Code, gross income means all income from whatever source derived.

Section 74(a) of the Code specifically provides that gross income (as generally defined in section 61) includes amounts received as prizes and awards. Under section 1.74-1 of the Income Tax Regulations, prizes and awards includible in gross income include, but are not limited to, amounts received from radio and television giveaway shows.

Section 280A(g) of the Code provides, in part, that if a d welling unit is used during the year by the taxpayer as a residence and is actually rented for less than 15 days during the taxable year, then the income from such rental is excluded from the taxpayer’s gross income.

To the extent that the value of the improvements constitutes a prize or an award, however, it cannot also be considered rent, and therefore could not qualify for the exclusion from gross income under section 280A(g) of the Code.

What the IRS did not ask is how the transaction could be anything other than a prize, as I pointed out in my earlier post. Nor did the IRS disclose if it has audited any taxpayers on this transaction, though it did point out in the letter that it is prohibited by law from disclosing that sort of information.

The temptation to gloat is real, but I'm trying to shove it aside. I'm more concerned about the bad tax advice that network producers are giving to the prize winners. Actually, I'm even more concerned about the bad tax advice the network producers' attorneys or other advisers are giving to them and, directly or indirectly, to the prize winners. If the networks want kudos for doing the wonderful things they are doing for the folks in need of home makeovers, they should be thorough and make certain that the winners have sufficient cash with which to pay the federal and state income tax liability arising from the prize. Anything less would make the seemingly marvelous gesture somewhat hollow.

And here's a wish that none of the folks telling the winners that they have no gross income are former students of mine. Maybe they're graduates of law schools higher in the U.S. News rankings and next year adjustments will be made to reflect this impact on law school reputation? Yes, that was sarcastic, it was intended, but in light of Friday's post too difficult a jibe to resist.

It's that time of the year again. Yes, it's law school ranking season. After U.S. News and World Reports issues its compilation, the critics and analysts jump in, with no shortage of comparative charts to extract, things not to like, suggestions and questions on what law schools should do to improve their position, and alternative ways of measuring a law school's position in the hierarchy. It is indeed unfortunate that prospective students, and others, give any deference to the fact that one school is ranked sixth and another fifth, a point nicely made by David Bernstein.

Paul Caron has posted summaries of the biggest jumps up and down in the latest rankings. Bill Henderson, in a Conglomerate analysis questions the emphasis placed by law schools on cranking out more and more scholarship when his comparison of the numbers indicates that law schools rarely move much from year to year in the U.S. news rankings despite the shift in emphasis to scholarship. Dan Filler, in his Conglomerate post compares the newly released rankings with those from 1995 and 1998, and concludes that little movement occurs in the academic reputation component of the U.S. News rankings. An interesting de-cluttered version of the U.S. News rankings has been compiled by J. Gordon Hylton. But those in turn have been criticized, as in this review by Andrew Morriss andthis followup.

Brian Leiter, in his comparison of reputation rank with overall rank, discovers several "oddities" with the explanation perhaps resting on things such as public v. private status, size, and expenditures. Dan Solove, in his Concurring Opinions take on rankings labels the U.S. news rankings as "stupid" but then gives the editors credit for coming up with a magazine-selling gimmick that ends up influencing legal education because law schools play along rather than develop alternatives.

Dave Hoffman, in a Concurring Opinion pieces asks law school deans to identify where the money should go: scholarship? facilities? marketing? scholars? Alfred Brophy concludes that the money should be spent on law journals, because he has determined that as the number of citations to a law school's journals by other journals increases, the school's position in the rankings similarly begins to rise.

Speaking of alternatives, Brian Leiter has an extensive system in place which uses different factors and different weights. Whether or not one agrees with his methodology or results, one must admire someone who does more than gripe by trying to create something better. David Bernstein shared his idea at The Volokh Conspiracy that publishers from every corner should do law school rankings. Yet Ann Althouse questions whether Princeton Review's competing rankings can dislodge U.S. News.

An interesting discussion has gotten underway between those who think citations to a law school's journal is indicative of some component of quality, and those who prefer using statistics on downloads from SSRN, as nicely explained in this post by Alfred Brophy. Brian Leiter, among others, has carefully explainedthe flaws of using SSRN as a measure of too much.

Personally, I think the entire business of ranking law schools is not only stupid and silly, but dangerous. Graduates of allegedly top-notch law schools have been known to be professional failures in all sorts of ways. Graduates of schools ranked in the lower tiers, shunned by the supposed elites when it comes to hiring faculty, have joined the ranks of successful lawyers, business entrepreneurs, public servants, and law reformers. As I was told years ago, once someone is more than a few years out of law school, what counts among practitioners, and should count among academics, is what the person has accomplished. If rankings are defended as useful to employers of law graduates, my response is that employers need to find better ways to evaluate talent.

If, however, rankings are to exist, and I admit that they surely will continue to be published, then the metrics need to be fixed. The idea of using SSRN data disturbs me. It measures very little that is informative to the legal profession. SSRN data measures a very, very narrow bundle of a certain type of legal writing. It does not measure legal writing directed to the legal profession. It omits scholarship not published in student journals, though some elites think that the only writing that can be classified as scholarship is that which is published by third-year students who know little or nothing about what the legal profession needs to read and who rarely can get anything published in a timely manner. In specialized fields, where practicality must trump the philosophers, timely publication in professional journals is the mark of someone making a contribution to the law that should be reflected in the reputation of the author's institution.

In some ways, the debate between those advocating SSRN download counts and those tallying law review citations to other law reviews are living in a very isolated and increasingly irrelevant world. It is 2006. Law is being discussed, analyzed, and influenced not only by professional publications but also by blogs, listservs, wikis, and a variety of other channels that are at least as indicative, if not more indicative, of quality reasoning, excellent writing, and outstanding teaching.

Think about it. The debate concerns the ranking of law SCHOOLS. Yet rather than measure the effectiveness of the teaching, the evaluators put much of the emphasis on a very narrow slice of legal scholarship. SSRN and law review citation counts might be helpful in rating think tanks. Law schools should be, and are, much more than think tanks, though during the past two decades they have slid precariously away from their primary mission as the race to "out-Harvard" Harvard (or is it "out-Yale" Yale?) shifts faculty time and resources from innovative teaching to running in place on the "convince third-year students to publish you or forget about tenure" treadmill.

The true measure, though admittedly tough to get, is what judges, lawyers, and clients think of a school's graduates during the three-to-five-year window of law practice following graduation. Why 3 to 5 years? By the time someone has been in practice for 6, 7, 10, or more years, that person's reputation and accomplishments are no less a function of the mentoring and education experienced after graduation than they are of the school from which the person has his or her J.D. degree. Surely bar examination pass rates matter, though many law schools usually claim they aren't "teaching for the bar." Assuming bar exams are decent gateways for determining who can practice law, then what are law schools "teaching for?" Well, I've been told that law schools exist to train legal philosophers. Excellent. The world is just craving more legal philosophers. There's such a shortage, they command such salaries, it's amazing that anyone can find some to hire. Sorry for the sarcasm, but if there's something the world doesn't need, it's more legal philosophers.

Yes, even if everyone agreed that the metric should be a reputational evaluation of law school graduates in the few years after graduation, it is unlikely agreement could be reached on how to measure it. That's very true. Yet it also proves the stupidity and silliness of ranking law schools. Every law school in this country offers a quality legal education. Law schools should strive to be different rather than trying to fit the U.S. News (or any other rank maker's) mold. A school that emphasizes trial litigation preparation very well could be the ideal place for a gifted applicant who could qualify for admission to an elite school but whose goals are consistent with the education offered by the school focusing on litigation. In other words, what's a fine school for one person might be an inappropriate place for someone else. The notion that LSAT scores, undergraduate GPAs and similar predictive characteristics should match in lock-step with the hierarchy of law school rankings is nonsense.

The law school ranking business, unlike hierarchical sortings that reflect objectivity, is absurdly subjective. The outcome of the rankings is no different from those lists of "most beautiful women" or "most handsome men" that certain magazines and newspapers publish. Yes, someone could do metrics on distance between eyes, degree of eye roundness, curvature of cheekbones, density of hair, shape of nose, and other things that some researchers claim predicts "attractiveness" but ultimately I may think beautiful someone you think plain, and vice versa. Even if we might agree generally on categorization, trying to pick between two people who are similarly attractive is like trying to decide if Harvard or Yale is the better school.

And, ultimately, who cares? No one cared until the editors at U.S. News found a money-making gimmick, disservice that it is to the nation. I surely don't care. Nothing in the U.S. News rankings is affected by or affects the quality of, or demand for, my writing, my blog posts, my listserv messages, or my courses. And I do hope that the rest of the law faculty in this nation can adopt the same attitude. Do what is right, and don't sell out to the rankings game.

Thank to KC Jenkins, a regular participant on the ABA-TAX listserv, my attention has been drawn to an extensive collection of tax cartoons. They range from mildly amusing to downright hilarious.

Now that "Tax Day" is behind us, it's time to laugh about it, no? It's always time to laugh about taxes. What other productive choices are there?

For years, I have cut cartoons and comics from the papers and have posted them outside my office door. See, I'll do anything to prevent people from zooming past "the tax place." This practice inspired students and a few faculty to bring me cartoons they had clipped from newspapers and magazines that often I had not seen. There are now so many cartoons on the wall that I had to consider renting wall space from my colleagues who don't post things. Yes, even though many of us post assorted things outside our doors, a few don't.

But now, I suppose, the digital revolution has caught up with Maule's Wall of Tax Funnies. So I expect that over time the wall will have fewer additions. And I suspect that when we move into the planned-for-many-years-will-it-happen new law school building, we might find ourselves prohibited from defacing the decor with humor, political commentary, announcements or any other sort of posting. And how could I complain, when digital bulletin boards have existed for years to serve the same purpose?

P.S. Don't blame me if the boss gets upset that you're spending your time reading through all of those tax cartoons at the cagle site. Just don't laugh so hard that the boss comes by to see what's funny. Unless, of course, the boss appreciates tax humor.

Tax days may come and go, but Andrew Mitchell's tax chart production hums right along. The April 2006 entry is "a draft flowchart that deals with multi-step reorganizations where stock is acquired and then the Target corporation is merged or liquidated." Andrew welcomes comments on this particular chart, particularly as it is in draft form. Visit his site, and contact him through that portal.

There are three ways to access the overall chart collection:

By Topic
Alpha-numeric order
Date uploaded

If you haven't read my previous accolades for Andrew's charts (see here, here, here, here, here, here, here, here), and here, take a look. As those who have followed my endorsement of Andrew's tax law visualization efforts know, I and others (e.g.,here) hold them in high regard.