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Monday, March 14, 2011

Getting Specific with Tax-Related Deficit Reduction Ideas: Making Section 85 Fairer and Simpler 

The Congressional Budget Office has released its Reducing the Deficit: Spending and Revenue Options, in which it sets forth dozens of ideas for reducing the federal budget deficit. Some of the ideas relate to spending cuts, and others relate to tax increases. Almost every tax increase proposal has its opponents, some well organized and some probably being galvanized into organizing if their particular special tax favor comes under increasing scrutiny. Of the 35 tax-raising ideas, most have been around the block more than a few times. Suggestions to raise individual rates, to reduce or eliminate the tax break for capital gains, to phase out the mortgage interest deduction, to eliminate the state and local tax deduction, to impose additional limitations on the charitable contribution deduction, to tax carried interests as ordinary income, to replace the exemption for interest on tax-exempt bonds with a direct subsidy to state and local governments, to name but a few, have been around for years, if not decades. Each time one of these proposals moves into the spotlight, those who benefit from the tax break jump in to preserve the advantage that it gives them.

One option that caught my eye did so because it is something that I’ve advocated for a long time. One of the ideas floated by the CBO is to tax social security and railroad retirement benefits in the same way that distributions from qualified retirement plans are taxed. When Congress first decided to include a portion of social security benefits in gross income, its legislation contained a complicated algorithm that put into gross income the lesser of half of the taxpayer’s social security benefits into gross income or half of the excess of the taxpayer’s modified adjusted gross income over a threshold tied to the taxpayer’s filing status. I questioned this approach, and argued that the easiest and fairest way to hand the matter was to permit taxpayers to receive tax-free social security benefits until they had received back the contributions they had put into the system, which come out of after-tax dollars. Thereafter, everything that the person receives is “profit,” because it exceeds the investment the person has made. One objection to my approach was that it would cause low-income retirees to be taxed when they ought not to be taxed. My response was simple. If the standard deduction and personal exemption deduction, when combined, are sufficient to prevent taxation of truly low-income individuals, then there would be no taxation of low-income retirees. Another objection to my approach was that people don’t know how much they have paid into social security. My response, that the Social Security Administration has that information and provides it annually even to those who have not yet retired, fell on deaf ears. Instead, those who value the theoretical over the practical prevailed, and the Congress enacted its convoluted approach, meaning that a retiree not entitled to social security benefits whose income consisted of interest would be taxed whereas their neighbor receiving social security benefits would not be taxed. To make matters worse, some years later Congress, in need of revenue to fund some other tax breaks, increased the one-half element of the computation to 85 percent, but in an even more byzantine manner that necessitated creating another set of thresholds and arithmetic gyrations that required more time and expense for retirees and challenged everyone’s patience with the tax law. These computations generate a “bubble” that, in effect, imposes a higher marginal tax rate on lower-income taxpayers than is faced by upper-income and wealthy taxpayers, as described in The Joys of IRC Section 86, and in More Joys of IRC Section 86.

Thus, the option put forth by the CBO is one that taxpayers should welcome. The CBO goes so far as to propose that the SSA could provide social security recipients with the amount of the benefits that are taxable. The computation would be patterned after the one used for private pensions. Using actuarial factors, the retiree’s expected return from the social security system would be calculated. The total that was paid in by the retiree using after-tax dollars would be divided by the expected return to provide a percentage reflecting the portion of each payment that would be excluded from gross income, leaving the rest of the benefit taxable. This approach works for private pensions, so there is no reason it cannot work for social security, which is, in effect, a public pension.

The CBO points out three disadvantages with the option. First, there would be some retirees not currently filing tax returns who would be required to file them. Though no statistics are provided, I would not be surprised to discover that most retirees file tax returns in any event, for a variety of reasons, including claiming credits to which they are entitled. Second, some low-income retirees would end up paying taxes, but to me, that is no reason to exclude social security from taxation while taxing retirees’ pensions and interest income. Instead, if low-income individuals are paying federal income taxes, it’s because the standard deduction and personal exemption deduction aren’t sufficient to shield them. Third, some retirees would view taxation of social security as a reduction in benefits, but that concern existed when social security benefits were first brought into the tax base, and has not proven to be a serious issue. Fourth, the SSA would have more work to do, but I’m confident that its computer systems could generate the necessary information with a minimum of programming adjustments.

On balance, the CBO option is fair, simple, and efficient. It eliminates one of the absurd bubbles in the tax law. It makes sense. Even if I had not been advocating this approach for the past several decades, I still would support the CBO option. The simplification will be welcomed by the millions of retirees who either slog through the long worksheet or pay a tax professional to make the computations for them. The simplification also will be welcomed by tax law students, and many tax practitioners. It will bring into gross income the social security benefits that represent “profit,” including the social security benefits of upper-income taxpayers, who end up excluding 15 percent of their benefits even if some portion of that 15 percent represents a return exceeding what was paid in using after-tax dollars. In short, there is no reason to treat the computation of taxable social security benefits any differently from the computation of taxable private qualified retirement plan benefits.

Friday, March 11, 2011

The Logic and Illogic of Tax 

On Tuesday, the new governor of Pennsylvania, Tom Corbett, revealed his budget plans. As reported in multiple sources, including this article, Corbett took a three-fold approach. He omitted any tax increases. He restored suspended tax reductions, and resumed the film tax credit, which I lambasted most recently in When Spending Exceeds Revenue, Hand Out Tax Credits? Really?. He chopped enormous sums from state spending on assisting the mentally ill and educating future generations, and plans to seek pay reductions for the public workers after he cuts 1,500 state jobs.

Critics predict that the proposed cuts, if enacted, will require local governments to increase taxes. Otherwise, thousands of mentally disturbed individuals will go without treatment and supervision and students will be packed into classrooms because of reductions in teaching staffs, to mention just two of the impending crises looming for Pennsylvanians. Though Corbett tried to make his budget cuts look like a gift to the middle class, and supporters tried to liken his plans to a middle class family trying to cut spending in difficult times, the cost of his plans will fall on the middle class, either through increased local taxes, decreased services such as lower quality education for their children, or a combination of both.

Corbett was compelled to cut spending drastically because of his refusal to increase taxes. Thus, although, as reported in this article, surveys show at least 60 percent of Pennsylvanians support a tax on Marcellus Shale natural gas extraction and production companies, Corbett continues to dismiss the idea of requiring corporations to pay for the social, environmental, health, and other costs of their activities in the state. The logical case for taxing Marcellus Shale producers has been made by many, including myself. In Tax? User Fee? Does the Name Make a Difference?, and again in Giving Up on Taxes = Surrendering Taxpayer Rights?, I suggested that a key to breaking the stalemate with respect to the Marcellus shale issue could be reliance on user fees rather than a tax. Later, in Life for My Proposed Marcellus Shale User Fee?, I described how even some Republican legislators had owned up to the need to compel Marcellus shale producers to bear the burden of the costs they have been imposing on Pennsylvanians, including the yet-to-be-determined and possibly catastrophic costs of dumping into the state’s waterways, according to this report, mystery fluids that have not yet been tested. Even the reality that every other state in which natural gas is produced taxes the producers doesn’t overcome the total resistance of the governor to taxing natural gas extraction.

Corbett’s reasoning for his refusal to support a tax, or user fee, on Marcellus shale producers defies logic. According to this article by Joe DiStefano, Corbett wants gas companies to “move here and use the state as a base to drill deeper, to the gassy Utica Shale.” He hopes that “Big Gas will ‘make Pennsylvania the Texas of the natural gas boom,’ as long as ‘we don't scare off these industries with new taxes.’” Why does this analysis defy logic? Consider the two choices now facing gas producers. Choice one: Don’t go to Pennsylvania and thus don’t make the money that could be made by conducting operations there. Choice two: Go to Pennsylvania, make money, don’t pay any taxes. This is an easy decision. Choice two wins. Now consider the two choices facing gas producers if they were subject to a tax or user fee to compensate the state’s citizens for the environmental, health, road system, and other damage caused by gas production. Choice one: Don’t go to Pennsylvania and thus don’t make the money that could be made by conducting operations there. Choice two: Go to Pennsylvania, make money, pay some taxes representing the true cost of doing business, and still make lots of money. This still is an easy decision. Choice two wins. Corbett seems to think that gas producers would select choice one. But does he really think that? Of course not. Then what is he thinking?

What Corbett apparently is thinking are memories of the past few months. According to this report, oil and gas producers pumped $835,720 into Corbett’s campaign to become governor. One driller alone gave $305,000 to Corbett. That driller will never be subject to tax because he sold his company to Royal Dutch Shell for $3 billion. It’s difficult to imagine that if the driller in question, or more precisely, his corporation, had been compelled to pay user fees for the damage that it has caused to, and the usage it has imposed on, Pennsylvania, that the prospect of walking away with “only” $2.9 billion would have deterred him and his corporation from digging for money in Pennsylvania. According to the same report, seven years ago, when Corbett first entered politics, he was the beneficiary of a $480,000 donation from an Oklahoma gas driller. How happy should Pennsylvanians be that an Oklahoman’s money can dictate the outcome of Pennsylvania elections? There is no question that these “campaign donations” are not gifts. The “contributors” want something in return, and it’s very clear what that is. They want to make money without bearing the burden of the true cost of making that money. Sound familiar?

Something is very wrong with the governor’s budget. It is infected by the same disease that afflicts similar proposals throughout the country. The formula is simple. Cut taxes for the wealthy, and refuse to impose taxes on multibillion corporations and multimillionaire individuals. Justify this position by claiming – without proving – that this generates jobs. As jobs decline, or barely hold steady, cut government spending, and seek pay cuts for middle class workers. Pay no heed to the accompanying consequences, as middle and lower classes then face higher costs, receive fewer services, and find the income from the jobs they do manage to find inadequate to support any sort of decent living. Make the cost of college education for the children of the middle and lower classes more expensive, if not altogether unavailable. Cut the quality of public education, hoping that fewer youngsters learn what they need to learn to become educated citizens who can see through the nonsense spewed out by those caught up in the “pay me and I’ll deliver to you” game that only the wealthy can afford to finance.

When Corbett proclaims that “Limited government means not mistaking someone else’s property for your own” as a defense of his anti-tax stance, he seems to forget that a user fee or tax on a multibillion-dollar corporation is nothing more than compelling the corporation not to treat Pennsylvania’s roads, streams, forests, wildlife, or the health or safety of its residents, as its own. The two-facedness of this approach is so blatantly obvious, one might wonder how a person whose anti-tax stance is contrary to the wishes of at least 60 percent of the population gets elected. But one need not wonder. That answer is just as blatantly obvious.

Wednesday, March 09, 2011

A Foolish Tax Idea Resurfaces 

Bad tax ideas can find their way into the tax law. It can happen for all sorts of reasons. What’s unusual is a successful effort to remove bad tax ideas from the Internal Revenue Code. Yet, that did happen. Unfortunately, that success is going to turn out to be a short-lived accomplishment if the Obama Administration has its way.

The bad tax idea in question is the nefarious phase-out of itemized deductions and personal and dependency exemption deductions. The two phase-outs in question entered the tax law in 1990, when Congress enacted the Omnibus Reconciliation Act of 1990. The phase-outs were implemented for one reason, and one reason only. They permitted Congress to enact a hidden tax increase, that is, to raise taxes without touching the tax rates in section 1 of the Code. This allowed members of Congress to tell Americans that Congress had not raised taxes, when, in fact, it had.

These sorts of phase-outs are bad ideas for several reasons. They are absurdly complicated, adding almost a dozen lines to worksheets accompanying individual tax returns. Taxpayers generally don’t understand the phase-outs, and even most tax economists from time to time erroneously describe them. The phase-outs create a “bubble,” which has the effect of creating a higher marginal tax rate on the upper middle class than exists for the taxpayers at the top of the income pyramid. By creating marginal rates in the “middle” of the income array, phase-outs create economic distortions that can produce deadweight losses.

In Getting Hamr'd: Highest Applicable Marginal Rates That Nail Unsuspecting Taxpayers 53 Tax Notes 1423 (1991), I denounced the phase-outs for the reasons described in the preceding paragraph, providing examples of how the phase-outs had the most disadvantageous effect on taxpayers other than those at the top of the income pyramid. A few years later, I responded to a call to reduce the phase-outs with a plea for a better solution, in Don't Phase Out the Phaseouts, Kill Them, 70 Tax Notes 911 (1996). As a consequence of my unbridled opposition to phase-outs, I was invited to work with the American Bar Association Section of Taxation Tax Structure and Simplification Committee’s Phaseout Tax Elimination Project, whose report recommending repeal of these phase-outs was published in July 1997. Working alongside me on the project, and in many respects making effectively us a team of two or three, was Calvin Johnson, who teaches tax law at the University of Texas. While the Project’s proposal was working its way to Capitol Hill, Calvin summarized our report in a two-part article, Simplification: Replace the Personal Exemptions Phaseout Bubble, 77 Tax Notes 1403 (1997), available on his web site, and Simplification: Replacement of the Section 68 Limitation on Itemized Deductions, 78 Tax Notes 89 (1998), also available on his web site. Our efforts to rid the nation of this unnecessary complication and inequitable consequence of attempts to deceive the public eventually succeeded. In June of 1998, the proposal was introduced as H.R. 4053, though it was not until 2001 that it was adopted. In that year, Congress enacted section 68(f) and section 151(d)(3)(E) to provide for, yes, a phasing out of the phase-outs, and also enacted section 68(g) and section 151(d)(3)(F) to provide for complete elimination of these two phase-outs for taxable years beginning after December 31, 2009.

After too many years dealing with these, to use the words of Rep. Downey as reported in Taxes Raised “Marginally” on Well-to-Do Filers, 49 Tax Notes 599 (1990), “blisters” or “pustules” infecting the tax law, and having succeeded in getting rid of them, it was disheartening and disappointing to learn that the President yet again wants to put one of them back into the tax law, although in modified form. In his Fiscal Year 2012 Budget Proposal, the President suggests a 30-percent phase-out of itemized deductions. By limiting the cutback on itemized deductions to taxpayers with adjusted gross incomes over specified amounts, the proposal re-introduces the same sort of bubble that subjects the wealthy to a lower marginal rate than the rate affecting the upper middle-class. It also puts more complexity into the Code, a strange outcome considering the President’s criticism of the tax law elsewhere in the budget proposal as too complicated. I agree with the President when he calls the tax law a “complex, inefficient, and loophole-riddled mess” but I disagree with his proposal to make it more complicated.

This isn't the first attempt to resurrect these phaseouts. Six years ago, in Objections Raised to Elimination of Legislative Tax Deceit, I criticized efforts by the Center on Budget and Policy Priorities to repeal or delay the scheduled elimination of these phaseouts. Fortunately, its efforts failed. Nor is it the President's first attempt. Two years ago, in Tax Change Ought Not Be Tax Redux, a post that disappeared from the MauledAgain archive at blogger.com but that is republished here, I opened my criticism of his proposal with a similar reaction: "Just as a foolish idea is about to fade away from the tax law, the new Administration seeks to bring it back in an even more perverse form. I'm talking about tax increases masquerading as phaseouts." The attempt didn't work then. Will it work now?

Perhaps the President thinks that a phase-out is a clever way to raise taxes without admitting that taxes are being raised. After all, it worked several decades ago. Why would it not work now? It won’t work now because a critical mass of informed tax experts, tax practitioners, taxpayers, and even politicians understand this particular game, and won’t be so easily persuaded that all one needs to do to stake a claim to “not a tax raiser” status is to leave the section 1 rates alone. The debate over tax increases should be an up-front, transparent, on and not below the table, examination of the advantages and disadvantages of enacting or repealing gross income inclusions, gross income exclusions, deductions, tax rates, and credits. The rest of the “gimmickry,” as Congressional tax staff once described the phase-outs, should be ditched as unwanted, unworthy, and unnecessary obfuscation.

What the President seeks to do can be done much more easily, simply, efficiently, and sensibly by transforming itemized deductions into credits. This removes the higher tax subsidy that deductions provide to higher income taxpayers, and gives all taxpayers the same tax subsidy. Much has been written about this approach, and I simply encourage those interested in the issue to examine those analyses. In fact, as pointed out in the Citizens for Tax Justice analysis of the budget proposal, the President’s plan to restore the phase-outs would reduce but not eliminate the discrepancy in tax subsidy. So there’s no point in bringing back the absurdity of phase-outs when a much simpler, more equitable approach is available.

Let the phase-outs rest in Pease. Yes, that’s an inside joke for the benefit of those who remember the complete story of how these two phase-outs originally came into being.

Monday, March 07, 2011

Can Tax Law Fix This Problem? 

The problem is simple. As related in this Philadelphia Inquirer article, the prices of various commodities and other items are soaring. Most people are keenly aware of rising gas prices, which are moving almost in lockstep with rising crude oil prices. The price of cotton has skyrocketed. The price of sugar has risen roughly 33 percent since last year at this time. The price of Cheese Whiz, used in those famous Philadelphia cheese steaks, is up almost 25 percent in one year. Soybeans are up 48 percent, wheat is up 62 percent, and corn, 78 percent. There’s also the implicit price increase taking place as manufacturers reduce the size of their products without lowering the price. These wholesale price increases have not yet fully hit the consumer, but they will, and soon. Also waiting in the wings are increased prices for products manufactured by Procter & Gamble, for clothing, and for maternity items.

My concern is that politicians, reacting to the already noticeable stream of price complaints that surely will grow into a resounding chorus of demands that something be done, will turn to the tax law and add a pile of credits and deductions in a fruitless (sorry) effort to hold back the tide. The naïve belief that every problem can be solved with tax law amendments is destined to make the situation worse.

The causes of the problem are simple. Demand is increasing. Supply is decreasing. Though the global economic malaise postponed the day when demand outracing supply would become overwhelming, it did not eliminate the inevitable. Demand is increasing because people in China, India, and other rapidly developing nations need and want food, clothing, concrete, electronics, vehicles, and hardware. The rate of demand is accelerating because global population is growing at an unrelenting pace. In the meantime, supply is decreasing for two reasons. Some items, such as crude oil, exist in finite quantities and are rapidly being depleted. Other items have been the victims of political unrest and devastating weather. Until I read the article, I had not known that the wheat crop in Russia, usually an exporter of a crucial global foodstuff, had been significantly reduced by heat and wildfires, or that dry weather had shrunk Argentina’s soybean crop. I knew about the price of oil going through the roof, and I had heard about the cotton shortage. But what else will soon join the list of items in short supply?

This is not the first time I have questioned the wisdom of using tax law to deal with a problem that needs another solution. Three years ago, in Can a Tax Rebate Band-Aid Stop the Economic Bleeding? I criticized use of tax rebates because they do not address the underlying economic problems. My concluding paragraph touched some nerves. I wrote:
The impending shortages of critical goods and materials, including oil, clean water concrete, steel, natural gas, health care, copper, agricultural products, and similar life-essential ingredients, will only worsen the problem. An ever-increasing world population, seeking more and more quantities of these and other items, coupled with the emergence of a small creditor group and massive hordes of debtors, is a recipe for disaster. Somewhere along the way, these conditions will trigger armed conflict, pestilence and pandemics, civil disorder, and breakdowns in societal structures. No one ever promised that the Dark Ages were a one-time event.
Joe Kristan, in a post headlined by one of my favorite captions, Good Morning, We’re All Doomed, explained that ever the optimist, he was confident of human ingenuity coming to the rescue, and not very concerned because similar warnings had been issued for decades, going back at least to Thomas Malthus in the 1830s. In Can Tax Rebates Help Prove Malthus Wrong?, I responded that there are shortcomings in the supply-demand curve theory of economics, argued that government borrowing to finance rebates worsened the situation in the long-term, and suggested that "people and governments [and not just government] mobilize to deal with these issues while there still is time." I then questioned the confidence in market-based solutions because I do not think that the market is a truly FREE market.

Several months later, in If Only It Were Prices Getting Depressed, I revisited the question of supply and demand, motivated by reports of increases in the price of oil, gasoline, and food, and by news of shortages of steel, lumber, timber, polyvinyl chloride pipe, and even, good grief, chocolate, hops, and barley. Joe replied, in Good on Taxes, Not so Good on Economics, taking issue with my supposed advocacy of government direction of markets. In Keeping Free Markets Free, I noted that “I am not advocating government management of the markets,” but seeking government regulation to prevent markets from being “hijacked by speculators, cheaters, shoddy artisans, defective manufacturers, cronyism-afflicted traders, and others whose greed surpasses their respect for the market's consumers.”

Although it is possible that some of the current supply and demand disequilibrium is caused by speculators, it seems to me that it is caused by the confluence of three major trends: political unrest, weather and climate disruption, and excessive population growth. Government intervention with respect to any of these issues sparks deep controversy, aside from the question of whether government of the United States can do much of anything about them on its own. These are global problems. If they are to be solved, they need to be addressed globally. The weather in Russia affects food prices in this nation. Political upheavals in African and middle Eastern nations affects energy and mineral prices here. Rapid population growth in developing countries puts demand-side pressure on the demand-supply balance. Enacting federal income tax law credits or deductions would be much like putting a band-aid on a hemorrhage. Yet I would not be surprised to see a Congress engage in such futility for the sake of obtaining campaign-time sound bites. By the time people figure out that tax law will not fix the wheat crop in Australia, the soybean shortage in Argentina, the demand for steel and concrete in China, the increasing use of oil in India, or the “revolt of the oppressed” in nation after nation, yet another “election cycle” will have passed. And the tax practitioners, though seemingly facing the prospect of even more fees to charge to help clients deal with an over-supply of legislative tinkering, will cringe at the thought of having to muddle through yet more bad legislation. I don’t think I have been wrong about the tension in the supply-demand situation, and yet I hope I’m wrong about the prediction of Congress using tax law to deal with issues it cannot or will not face head-on.

Saturday, March 05, 2011

To Teach, Depend on, and Be Accountable to One's Self 

Last week came news, in What Harvey Dorfman did for the Phillies, of the death of Harvey Dorfman. Few people, even most baseball fans, knew who Harvey Dorfman was and what he did. Now many more people do know, thanks to the tributes pouring in from around the baseball world.

Harvey Dorfman was a sports psychologist, and, according to dozens of baseball players, an extremely good one. I understood, as soon as I read this quote from Roy Halladay, one of the Philadelphia Phillies aces, about why Dorfman succeeded. Halladay said, "He made you be accountable to yourself and accountable to him. I don't think you ever got the feeling that he was a psychologist. It wasn't warm and fuzzy, you know, it was 'Let's figure this out.' You didn't feel like you went in and told him all your problems and he gave you a solution. He teaches you to do it yourself."

The sentence, "He teaches you to do it yourself." grabbed my eye, as did the quip, "It wasn't warm and fuzzy." I thought of the many students who complain that they end up teaching themselves, somehow so blissfully unaware that it's precisely learning to teach one's self, to depend on one's self, to be accountable to one's self, is what it's all about. When I wrote about this a few years ago in Learning to Teach and Teaching to Learn, an article for the Gavel Gazette (the now-extinct newsletter of the Villanova University School of Law), I didn't address the "warm and fuzzy" issue, but "warm and fuzzy" sometimes gets in the way of learning, especially learning to teach one's self.

Dorfman drove home the point in an interview, reported in this story: "It's not like in school, where you get high grades for what you know." For all those students whose focus is on the acquisition of knowledge, here's yet another reason that properly taught law school courses – and those in other disciplines – focus on much more than knowedge. It's not what you know. It's what you do with it. It is, as Dorfman said, "what you do."

I never met Harvey Dorfman. I'm pretty sure I would have liked him. Our conversations would have been fun. Those will need to wait until the life beyond.

Friday, March 04, 2011

Tax is Relative? Tax as Relative? Relatives in Tax 

This morning came news of the death of Cynthia Holcomb Hall, who served on the Ninth Circuit Court of Appeals since 1984, and had served as a Tax Court judge from 1972 through 1981. I knew Judge Hall, whose chambers were directly below those of Judge Herbert L. Chabot, for whom I served as attorney-advisor from 1978 through the end of 1980.

During the 1980s I learned that one of my ancestral lines included the Holcomb family (with the details in this chart). Curious, I invested a few minutes this morning trying to determine if Judge Hall also belonged to “my” Holcomb family. My copy of Elizabeth Weir McPherson’s The Holcombe Family: Nation Builders, a hefty tome not only in terms of weight, did not include any information on Cynthia Holcomb. Next stop, google, which led me to a Wikipedia page that provided her birth date but not the names of her parents. Next, it was time to search the 1930 census, and I found her, with her mother, aunt, grandmother, and brother, in Hawaii, where, apparently, her father, a Navy Admiral, was stationed. From the census entry I determined that her mother’s name was Mildred Gould Kuck, so back to google! That led me to a genealogy page for the descendants of Thomas Holcombe of Connecticut. Following the links, I traced Judge Hall’s ancestry back to Gilbert Holcombe, who is known to be the brother of Christopher Holcombe, from whom I descend. Although it has not been definitively proven, many Holcomb researchers have concluded, by piecing together the evidence, that Gilbert, Christopher, and their siblings were the children of Thomas Holcombe and his wife Margaret Tretford (or Threthford). Even if that conclusion is erroneous, it does not undo the relationship between Gilbert and Christopher.

It then took only several minutes for me to set up my descent and Judge Hall’s descent from Thomas Holcombe (or whoever might be the father of Gilbert and Christopher if it turns out not to be Thomas, which is unlikely). I am her eleventh cousin once removed (she being an eleventh cousin to my father, who was roughly 6 years older than she).

My collection of “people to whom I am related” continues to grow, though I’ve yet to arrange and publish the information, aside from my My Cousins the Presidents venture. I shared a few in Relatively Speaking, Is It That Big A Deal? (fifth cousin four times removed to James Longstreet, the Confederate General, eighth cousin once removed to Georgia O'Keeffe, ninth cousin to Loudon Wainwright III, ninth cousin to Buster Crabbe, ninth cousin to Birch Bayh, Jr., and fifth cousin three times removed to Theodore Vail, founder of AT&T, ninth cousin once removed to Birch Bayh III, and ninth cousin twice removed to JonBenet Ramsey). There’s also Maxfield Parrish, Thomas Edison, Robert E. Lee, and William Butler Ogden, the first mayor of, and in many respects founder of, the city of Chicago (much to the delight of my son who presently lives there), to name but a few.

Judge Cynthia Holcomb Hall was an accomplished lawyer and judge, and also a superb ornamental garden designer. She will be missed.

Edit: Mary O'Keeffe, a public policy economist teaching -- among other things -- tax courses and blogging on tax and related issues (as well as from time to time providing comments and feedback to MauledAgain posts), noted that I had spelled Georgia O'Keeffe's name with one f. Oops. A quick google check explains how I went wrong: almost 500,000 hits using "O'Keefe" and 1.1 million hits using "O'Keeffe." Mary, who thinks she is not related to Georgia -- but I think with enough digging she may discover she is -- has several most interesting anecdotes that I hope she gets a chance to share. And, yes, I fixed the spelling in this post, but not the one from several years ago.

Another Way to Cut Taxes: Hamstring the IRS 

On the heels of the spending cuts, affecting chiefly the impoverished and the lower ranks of the middle class, paraded out last week by the spending cut advocates, as I inventories in Spending Cuts, Full Disclosures, Hearts, and Voices, comes yet another, in some respects the most absurd of them all. The wizards who surely must be trying to dismantle government, and reintroduce the culture of the wild, wild West, now seek to cut the IRS budget. According to this Philadelphia Inquirer story, even though the IRS brings in $10 of tax revenue from noncompliant taxpayers for every $1 that is spent, House Republicans want to cut the IRS budget by $600 million in 2011 and by even more next year. Translated, according to the IRS Commissioner, this amounts to a reduction of at least $4 billion in annual tax revenues, giving the spending cut advocates yet more excuses to cut even more federal spending, other than, of course, spending that benefits their own districts and their campaign fund contributors.

Inadequate funding of the IRS has plagued this nation for decades. A significant portion of the accumulated federal budget deficit, also known as the national debt, consists of taxes that should have been paid under existing law but that have not been paid by tax scofflaws, some openly defying their obligations to function as responsible citizens and some, with the assistance of the tax shelter and tax evasion industry, wiggling through loopholes and sometimes flouting the law in order to shift their public duty onto the rest of the nation’s taxpayers.

For years, I have lamented the short-sightedness of the Congress. Seven years ago, in Getting It Right, I asked, in connection with complaints about the high rate of erroneous answers provided by IRS employees, “Does the IRS have enough funding to handle the millions of calls that it receives?” Just last month, in The Problem with Income Tax Vehicle Credits, I criticized the failure of Congress to provide the IRS with sufficient funding to administer the dozens of tax credits enacted by the Congress to deal with matters under the jurisdiction of other executive departments and agencies.

Several years ago, in Taxing High-Income Individuals, I advocated, among other things, a way to reduce the federal deficit without raising tax rates. I explained what Congress needed, and still needs, to do: “Increase funding for the IRS so that it can track down and deal with tax shelter promoters, offshore schemes, fraudulent returns, and other gimmicks used to make a person with high income pay taxes at rates lower than those imposed on the middle and lower income echelons.”

How serious is this problem? How much more serious would it be if those lacking a wide perspective on public finance have their way? Tax evasion arrangements will grow, and eventually only the foolishly honest will be paying the taxes that they should be paying, as success or even perceived success at tax avoidance and evasion by others tempts those not yet playing the tax cheat game to jump in. In Triple Tax / Tax Times Three, I analyzed the growing success of tax evasion schemes:
Who creates this stuff? To paraphrase Cal Johnson, who teaches tax law at Texas, it's a bunch of very bright people paid big bucks to outsmart IRS employees. The IRS, not permitted nor funded to pay big bucks, can't compete. The IRS is being out-brained. And it's being out-numbered.

So, the IRS wants more money to do this enforcement. They're asking a Congress that annually REDUCES the IRS budget. What fools. There has been a cadre of politicians who earn votes by running for election and re-election on an anti-IRS platform. It plays well to the crowds who don't realize that they're being persuaded to vote for someone whose chopping of the IRS ultimately will shift the tax burden from the tax cheats to these voters. Except that polls show a majority of Americans are willing to cheat on their taxes. Big surprise. Honesty isn't exactly king (or queen) in this nation anymore (and no political party is free of responsibility).

During the past 8 years, the number of IRS revenue officers is down 27%, the number of special agents (who investigate criminal tax fraud), down 13%, and the "tax gap" is officially $311 billion. Unofficially it's surely twice that or more. Budget deficits? Why blame enacted tax cuts when most of the deficit arises from "self-appointed tax cuts." How do you react to the idea of paying a higher bridge toll to offset bridge toll losses from people driving through the EZPass lane without paying, while the bridge revenue authority fires all its toll takers and police officers? Well, that's where things have been headed. What's really outrageous is that the IRS bashing that led to the funding cuts were orchestrated by hearings at which witnesses presented what is now admitted to be fraudulent testimony about alleged IRS abusive treatment of taxpayers. Not only did most of the stuff not happen, but there are clowns in Congress who think it is abusive for the IRS to send a letter to someone who owes taxes and to ask for payment. How DARE they ask someone to pay a bridge toll? Amazing.
If the House Republicans succeed in cutting IRS tax law enforcement, what will flourish in its place? I answered this in Triple Tax / Tax Times Three:
Let's have some fun. Here's a list of the sort of stuff the tax evaders get into (and note that no one would do any of this but for the saving of taxes with schemes that aren't economically feasible other than the tax evasion and avoidance effect): In the area of reducing taxable gain, they use arrangements with names like Tempest, InsureCo, Basis Importation, 79-21, BLAST, B-FLIP, Asset Monetization/Asset Protection (Triple By-Pass), 501(c)(15) Co., LADD, Leveraged Disposition, Othello, Prepaid Lease, Mixing Bowl, Enhanced Mixing Bowl, CPLS II, Basis Leap, Busted 351, Venture Capital Planning, Leveraged 704(c), PIF, SC2 Gain Mitigator, and PERX. To avoid or evade taxes in the international arena, they resort to things with names like U.S. Withholding Tax Eliminator, A&M Base Shifting, Alhambra, Pathfinder, and Short Option. To jack up losses and deductions, there's CCB, 172(f), Mitigation, 382, FEIGHT, CLC, Dot-Bomb-Monetization, and PALS (partnership allocating loss strategy) -- Income Absorption. Or how about Insureco, 501(c)(15) Captive, PINSCO (Personal Insurance Company), Captive Tune-Up, 21% Solution, WITS, E Replacement (WITS for Homebuilders), and Employee Benefits Captive? They take S corporations and use them for what they weren't intended to do, with things like SC2, SC2 Variation #1, SC2 Gain Mitigation, SC2 CLAS, S-corp Basis Enhancer, and SC2 Redemption Strategy. And then there's the finance and leasing stuff: AF-EXO (Alternative Financing for Exempt Organizations), Dot-Bomb-Monetization, Enhanced Venture Leasing, Inbound Cross Border Leasing, LIFT, PERX, PIF (Partnership Investment and Financing Structure), SLOTS (Sale Leaseback of Tenant Improvements), TAT. Or they go the accounting strategy route, with Bad Debt Reserve Acceleration Strategies, Inventory Methods Review, Contested Liability Acceleration Strategy, California Franchise Tax Acceleration, MEALS, Acceleration of Prepaid Expenses, Service Company Strategy, and IBNR: Incurred But Not Reported. These things sound like Pentagon weaponry, cleaning products, and video games. But it's no game. The last one says it all: "incurred but not reported." The last time I jumped on tax avoiders (namely, the tax protest crowd), I got all sorts of email from people who had fancy ways of telling me I was wrong to criticize them for wanting a free ride from the rest of us.
And that, I contend, is what all of this is about. Some people think that they deserve to pay less and get more, even if it comes at the expense of those lacking the political power, the economic clout, the cerebral understanding, or the firm conviction to learn about, expose, and oppose this arrogance.

The Administration wants to increase IRS funding. Why? Aside from the creation of jobs, it would cut the deficit and restore moral balance to the revenue system. Think of it. Every dollar brings back ten. What advocate of the free market would walk away from such a deal? One dollar brings back ten. The private sector wouldn’t toss that opportunity aside, and neither should the fiduciaries of the public trust. America deserves no less.

Wednesday, March 02, 2011

When Spending Exceeds Revenue, Hand Out Tax Credits? Really? 

So what’s a state to do when it faces a budget deficit, with revenues trailing expenditures? One choice is to raise taxes, but that approach brings howls of protest from those who oppose taxes and the common weal to which they are directed. Another choice is to cut spending, but that approach brings howls of protest from those who understand both the short-term and long-term adverse consequences to individuals and to the state of putting an economy into reverse. The worse thing to do would be to increase spending or to cut taxes, especially when the tax cut is not an across-the-board rate decrease but a credit targeted to a special interest group in what amounts to the equivalent of increased state government spending. That is why it boggles the mind of anyone who understands public finance to learn, as reported in this Philadelphia Inquirer story, that tax credit applications approved by the state’s previous administration and put on hold by the new governor would be processed and approved. Did not Wisconsin get itself into a fiscal mess – converting surplus into deficit in a non-miracle reminiscent of a similar switch-a-roo at the federal level ten years ago – by enacting tax credits and other tax breaks targeted toward a certain preferred group, as described in this article? Is this the path the governor of Pennsylvania intends to follow? Is it a path that Pennsylvania may end up following unintentionally?

I have previously explained why tax credits for the film industry are contrary to best public finance practices. In You’ve Gotta Give 'Em (a Tax) Credit?, I questioned the assumption that without the credit, film companies would go elsewhere, considering that Pennsylvania has nothing to offer companies wanting Rocky Mountain backdrops but has all sorts of features that should attract film companies in any event. I questioned the role of tax credits as incentives. Most important, I questioned why film companies were getting tax breaks not available to other businesses that do as much, if not more, for the state’s economy. An disheartening example of this special treatment occurred in 2007, when the then-governor of New Jersey vetoed legislation that would have extended to producers of digital content the benefits of a tax credit in place for the film industry, highlighting the inequities I criticized in Do Profitable Companies Need Tax Breaks?. Unfortunately, the legislative process did not and does not give that governor the opportunity not only to block expansion of the tax credit, but also to revoke its availability to the film industry.

Four years earlier, in Using Taxes to Rescue a Non-Drowning Film Industry?, I had lambasted the California legislature for handing out tax breaks to the film industry, something it felt compelled to do because other states had started dishing out tax credits to the film industry. I noted that “Economic growth isn't nurtured by states fighting with each other for a piece of the existing pie.” Perhaps there’s a clue in this analysis to yet another factor in the economic malaise gripping the country. I argued that to have “growth in the film industry.” There need to be “more people [who] want to see films,” and better films. I also noted that, “Tax incentives have nothing to do with [the] growth [in movie attendance] because no state has “enacted a tax credit for going to the theater or for watching a movie on cable.” Finally, I pointed out that, “The film industry is rolling in money[, and] can afford to pay outrageous salaries to its ‘stars’ and if times get tight, those ‘stars’ ought to take pay cuts.” Surely they are in a better position to absorb those cuts and are of less importance to the future of this nation than are school teachers and skilled workers.

It is possible to argue that the tax credits had been enacted, and that the governor should simply have accepted the decisions that had been made by the previous administration. However, the spending process permits the governor to examine those expenditures. Unlike the former governor of New Jersey, who could veto expansion of tax credits but not revoke those available to the film industry, Pennsylvania’s governor had an opportunity to show by action what he has been preaching in terms of cutting state expenditures. Tax credits for a narrow group of taxpayers are simply disguised spending increases, and it’s well known that Pennsylvania’s governor wants to decrease, not increase, state spending. So why did he permit these credits to go forward? One plausible explanation is that that they were already authorized, and he had no choice. I don’t think that is the case. I don’t think that is the case because, during the campaign, the advocate of shrinking state government had supported the tax credit for the film industry. Why? What is so special about the film industry? Fortunately, representatives of the governor have declined to confirm that the credit will survive the next budget proposal, and though some members of the governor’s party, who had opposed the credit, now support it, others continue to question the wisdom of having taxpayers finance a private enterprise. Other states, including New Jersey under the leadership of a new governor, have suspended credits or are tackling legislation designed to suspend or terminate film credits, in the face of large state budget deficits.

In Using Taxes to Rescue a Non-Drowning Film Industry?, I explained:
In order for the tax burden of the film industry, for example, to be reduced, the tax burden of other taxpayers must be increased. Or, state tax expenditures on health, safety, education, and other essential and legitimate government services need to be cut, shifting the cost to the population generally, particularly through increases in local taxes. This puts upward pressure on the wage demands of workers in the state, it puts upward pressure on prices charged by other entrepreneurs in the state, and it puts upward pressure on interest rates as localities increase borrowing to cope with the impact of the state income tax incentive. Though the arrival of a production in the state brings a temporary boost to that state's economy, particularly that of the area in which the production exists, it isn't necessarily sufficient to offset the negative impact of the true cost of the specialized tax incentive. After all, the decision to bless one industry, thus shifting costs to another industry, may encourage those other industries to leave the state.
Advocates of the credit claim that the credit creates jobs, and that terminating the credit will cause jobs to disappear. Is not the deduction for compensation paid sufficient to reduce tax liabilities for film producers? Apparently not. Is the film industry incapable of surviving without the credits? Perhaps we will find out, and soon. One advocate for the handout to the film industry claims that ending the tax credits would “wreak havoc on the industry.” So the better choice is to wreak havoc on the taxpayers who foot the bill, or on the school teachers and other public sector employees who will lose their jobs so that the credit can continue to be financed with public dollars, or on the school children whose programs will be cut because the money is needed to fund the credit, or on the impoverished who will go without food and health care so that state money can finance an industry that pays salaries to “stars” that dwarf the allegedly “excessive pay” that permits a skilled worker or school teacher to barely make ends meet?

Monday, February 28, 2011

A Slimy and Dirty Sales Tax Issue 

Anyone who has explored the world of sales tax exemptions knows that the distinction between taxable and non-taxable items often is a fine line so thin and delicate that it requires an electron microscope to detect the boundaries. Two recent rulings, from two different states, provide an interesting glimpse into a world that many tax practitioners and most taxpayers have not entered. It’s worth the visit.

In New York, §1105(a) of the Tax Law subjects all retail sales of tangible personal property to the sales tax. An exemption is provided by §1115(a)(3) for “[d]rugs and medications intended for use, internally or externally, in the cure, mitigation, treatment or prevention of illnesses in human beings … and products consumed by humans for the preservation of health but not including cosmetics or toilet articles notwithstanding the presence of medicinal ingredients therein….” The New York Sales and Use Tax Regulations, specifically 20 N.Y.C.R.R. §528.4(b)(1) defines drugs and medicines as “articles, whether or not a prescription is required for purchase, which are recognized as drugs or medicines in the United States Pharmacopeia, Homeopathic Pharmacopeia of the United States, or National Formulary, and intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in humans.” They also provide that “[t]he base or vehicle used (oil, ointment, talc, etc.) and the medium used for delivery (disposable wipe, syringe, saturated pad, etc.) of a drug or medicine will not affect its exempt status.” In examples of drugs and medicines exempt from taxation, the regulations list “antiseptics.” The regulations, in 20 N.Y.C.R.R. §528.4(d) define “cosmetics” as “[a]rticles intended to be rubbed, poured, sprinkled or sprayed on, introduced into, or otherwise applied to the human body for cleansing, beautifying, promoting attractiveness, or altering the appearance, and articles intended for use as a component of any such articles are subject to tax.” Finally, they define “toilet articles” as “[a]ny article advertised or held out for grooming purposes and those articles which are customarily used for grooming purposes, regardless of the name by which they may be known,” and give soap, toothpaste, and hair spray as examples of are taxable toilet articles.

In Virginia, as in New York, retail sales of tangible personal property are subject to the sales tax. Similarly, §58.1-609.10(14)(a)(i) of the Virginia Code provides an exemption for “[a]ny nonprescription drugs and proprietary medicines purchased for the cure, mitigation, treatment, or prevention of disease in human beings.” Section 58.1-609.10(14)(b) provides that “The terms ‘nonprescription drugs’ and ‘proprietary medicines’ shall be defined pursuant to regulations promulgated by the Department of Taxation.” and also provides that “The exemption authorized in this subdivision shall not apply to cosmetics.” Virginia Tax Bulletin (VTB) 98-4 (5/15/98) defines nonprescription drugs “as any substances or mixtures of substances containing medicines or drugs for which no prescription is required and which are generally sold for internal or topical use in the cure, mitigation, treatment, or prevention of disease in human beings.” Tax Bulletin 98-4 also provides that cosmetics, toilet articles, devices, food products and supplements, or vitamins and mineral concentrates sold as dietary supplements, other than those sold pursuant to a written prescription by a licensed physician, are not within the exemption. The bulletin defines cosmetics as “articles applied to the body for cleansing, beautifying, promoting attractiveness or altering the appearance (includes makeup, body lotions, cold creams, and hair restoration products),” and toilet articles as “products advertised or held out for sale for grooming purposes (includes soaps, toothpastes, hair sprays, shaving products, colognes, deodorants, and mouthwashes).”

The revenue departments in both states were asked to consider the status of antibacterial soap, antibacterial hand gel, antibacterial hand spray, antibacterial hand lotion, antibacterial hand wipes, hand gel sanitizers, conditioning hand sanitizers, hand sanitizers, and antibacterial hand foams. The antibacterial soap considered by the New York Department of Taxation and Finance was described as follows:
Each of the products’ drug facts label lists an active ingredient of either alcohol, between 68% -72%, or triclosan 0.3%; identifies its purpose as “Antiseptic;” and describes its use as “to decrease bacteria” on hands or skin. The product labels variously indicate that the products leave hands “feeling clean and virtually germ-free;” “clean, soft and virtually germ-free;” “clean, lightly scented and virtually germ-free;” “deeply cleansed and feeling smooth and soft;” “clean and conditioned;” “gently cleansed and conditioned;” “lightly scented, feeling moisturized and looking younger, while effectively fighting germs;” “lightly scented, deeply cleansed and feeling smooth and soft, while effectively fighting germs;” and “lightly scented, gently cleansed and conditioned, while effectively fighting germs.” Many of the products also tout their skin nourishing and softening effects.
The petitioner in New York was either the same entity or one working in concert with the petitioner in Virginia, because the Virginia Department of Revenue explained:
Each of the product's drug facts label lists an active ingredient of either alcohol, between 68%-72%, or triclosan 0.3%. The label identifies the product's purpose as "antiseptic;" and describes its use as "to decrease bacteria" on hands or skin. The product labels from the different categories indicate that the products leave hands "feeling clean and virtually germ-free; "clean, soft and virtually germ-free; "clean, lightly scented and virtually germ-free." Many of the products also advertise their skin nourishing and softening effects.
In both instances, the petitioner argued that alcohol and triclosan are treated by the FDA as over-the-counter drugs, and has proposed to include them in products that help mitigate the risk of disease and infection. In Virginia, the petitioner also pointed out that Public Documents (P.D.) 99-32 (3/18/99) and 05-135 (8/10/05) provide that the Department of Revenue “considers” FDA guidelines when classifying products, and that Tax Bulletin 98-4 specifically treats rubbing alcohol and antiseptics, which are contained in the antibacterial products under consideration, as exempt from the sales tax. The petitioner claimed that the products are marketed for their antibacterial products, and that customers purchase the products to avoid illness.

In its ruling, the New York Department of Taxation and Finance decided that if the antiseptic ingredient were removed from the products, they would be classified as cosmetics or toilet articles, because in that condition they would be “expressly designed to cleanse, beautify or promote the attractiveness of a purchaser, or for grooming purposes.” The Department concluded that adding the antiseptic ingredients did not transform the products into drugs or medicines, because the regulations state that cosmetics and toiletries are not exempt “notwithstanding the presence of medicinal ingredients therein.” The Department cited previous rulings in which it concluded that lotions are taxable but antiseptic gel is not if its sole purpose is treatment of minor burns, scratches, cuts, insect bites, and other minor skin conditions.

In its ruling, the Virginia Department of Revenue explained that “only those nonprescription drugs and proprietary medicines purchased for the cure, mitigation, treatment or prevention of disease in human beings qualify for the nonprescription drugs exemption. Cosmetics and toiletry items, except those that contain medicinal ingredients and that are principally used for medical purposes, are taxable. A product that is a cosmetic is not a medicine even though it may have medicinal properties.” The Department decided that if the antiseptic ingredient were removed from the products, they would be classified as cosmetics or toilet articles, because in that condition they would be “expressly designed to cleanse, beautify, or promote attractiveness of the purchaser, or they are used for grooming purposes.” Clearly, the staff at the Virginia Department of Revenue had read the ruling issued three months earlier by the New York Department of Taxation and Finance.

The Virginia Department of Revenue elaborated on its position by giving an example from its Nonprescription Drug Exemption Question and Answer Summary. That document distinguishes between a cosmetic containing an acne treatment and an acne treatment product intended solely for use in treating or preventing acne. It also cited a previous ruling in which it concluded that toothpaste containing a nonprescription drug is not exempt because toothpaste is generally sold for grooming purposes and that the nonprescription drug added to help prevent gingivitis was a secondary function to the intended use of the product. The key point, according to the Department, is that the “primary purpose of a product” is controlling.

The conclusions, and the reasoning, in these rulings are questionable. Do not most people purchase toothpaste in order to prevent cavities, and not simply to whiten their teeth? Would not a person without gingivitis or the risk of that disease purchase a toothpaste that does not contain the medicine? Very few people purchased antibacterial soaps and gels until outbreaks of assorted influenzas generated advice from government agencies to use those products for the purpose of fighting the spread of disease. Even Fairfax County in Virginia, in this publication was among those jurisdictions that recommended the use of antibacterial soaps and gels in order to prevent the spread of disease. Under these circumstances, is not the primary purpose of these products the prevention of disease? A consumer interested only in cosmetic purposes would purchase the cheaper, non-medicinal product. If asked, “What is the reason you switched to antibacterial soap?”, would not the answer be, “Because I wanted to reduce my chances of picking up a disease” or something similar? The fact that sales of these products soared after government agencies and public health officials – and probably individual physicians – recommended their use in face of threatened influenza outbreaks disproves the assertion that people have been purchasing them primarily for cosmetic or grooming purposes.

These rulings, however, illustrate a more serious problem than simply disagreement over the question of why people purchase antibacterial products. That question arises because there is a sales tax that has exemptions requiring retailers, shoppers, and revenue departments to distinguish between medicines and cosmetics. The existence of products that are both compel revenue departments to issue regulations or other guidance, and many chose to rely on a “primary purpose” test. The difficulty with a primary purpose test is that it ultimately requires exploration of the mental state of consumers, a task that not only is daunting and impossible to administer efficiently, but also alarming when one things of technology on the horizon that will permit reading people’s thoughts. Understandably, a test that looked simply to the presence of medicinal ingredients would invite manufacturers of all sorts of products to inject antiseptic or other pharmaceutical substances into the product. As horrible as it sounds, might not the solution be a repeal of all sales tax exemptions, which would permit a reduction in the overall rate and the streamlining of revenue department sales tax divisions? A quick scan of exempt and non-exempt items for each state’s sales tax reveals not only inconsistencies between states – something that adds to the cost of retailing in multiple states – but also hundreds of these “fine line” definitional conundrums that distract taxpayers, their advisors, retailers, and revenue department employees from other, more productive, activities.

Finally, for those who think tax is “nothing but numbers” or “all about numbers,” even those who think – often wrongly – that they are mathematically challenged and cannot “do tax” should be surprised and delighted that there are tax experts focused not on computations but on whether antibacterial soap is a medicine or a cosmetic, whether Clearasil is a medicine or a cosmetic, whether gingivitis-fighting toothpaste is a medicine or a cosmetic, whether, oh, never mind, there’s no point in trying to list all of them. That would take the “fun” out of it for those yet to discover the secrets of sales taxes.

Friday, February 25, 2011

Tax Profiteers Resume Takeover Attempts 

The attraction to the private sector of the revenue stream generated by certain public sector activities, such as tolls from toll roads, continues unabated, as do attempts by the private sector to hijack the public trust. Though private operation of public sector function has been an abject failure for centuries – think of the ineffectiveness of private sector fire protection in colonial Philadelphia and the collapse of the privately-owned and operated Lancaster Turnpike – the advocates of corporate expansion from the private sector into the public sector continue to press for government surrender of its commonwealth role. Emboldened by the successes of, and reaping the benefits of funding and backing from, the anti-tax and anti-regulation crowd, these privateers demonstrate that the lure of ostensibly easy cash never loses its luster when viewed by those addicted to money (or the power that money buys).

This is not my first attempt to explain to citizens and voters the dangers of letting the private sector take over, among other things, highways. If left unchecked, by the time most people realize that they’ve been taken for a ride, it will be too late to undo the deals. Unlike government, where there is at least a chance for dissatisfied citizens to exercise their right to vote to make changes, the corporate world is impervious to the unhappiness of the electorate, because its decisions are made by an oligarchy to which 99.9 percent of the nation’s population does not, and cannot, belong. Unfortunately, most people go numb when they read the fine print, and thus become no less vulnerable to being conned than they are when they are propositioned by the world’s small-time versions of Bernie Madoff and those of his ilk.

Among the various posts that examine and de-bunk the myth of private sector superiority when it comes to dealing with public assets are Selling Off Government Revenue Streams: Good Idea or Bad?, Are Citizens About to be Railroaded on Toll Highway Sales?, Turnpike Cash Grab Heats Up, Selling Government Revenue Streams: A Bad Idea That Won't Go Away, Turnpike Lease: Bad Policy and Now a Bad Deal , How Do Toll Road Lessees Make a Profit?, The Pennsylvania Legislature Gets It Right, Killing the Revenue Idea That Won't Die, Are Private Tolls More Efficient Than Public Tolls?, and More on Private Toll Roads. In those posts I explained, among other things, why the alleged economics of these deals don’t add up, why the argument that presumed but unproven private sector efficiencies more than justify the private sector profit extracted from the public good doesn't survive careful scrutiny, and why the fable of the golden goose is a lesson still worth learning. Most important, I directed attention to the failed private sector toll road experiments in places like San Diego, Orange County, and South Carolina, and warned that these demonstrations of a theory going bad when put into practice provide more than sufficient reasons to reject any more attempts to siphon public revenue into a small segment of the private sector.

Now comes another article by Joe DiStefano, Builders Extolling Private Highway Projects, in which he points out plans to put tolls on existing toll-free highways to permit private companies to take over these roads. According to DiStefano, the movers and shakers behind this plan are “using the antitax, spending-cut mood gripping voters” to “push for” this privatization. The irony is that voters would be sucked into a deal by which taxes are cut, say, $10, collectively contributing to the public sector’s inability to maintain roads, but making citizens happy, only to be met with tolls of $15. What a trade-off. Pay less in taxes so that the tax savings, and more, can be diverted into the hands of the oligarchy. The public sector does not need to include a profits component in taxes or tolls, and the argument that the private sector can make up the difference through efficiency fails because the folks at Enron, Adelphia, Goldman Sachs, AIG, Worldcom, et al have demonstrated that inefficiency, waste, and fraud are not the monopolies of government as the “free enterprise means free to do what I want without limit” philosophers would have people believe.

The irony is that the advocates of so-called “public-private transportation partnership boards,” according to DiStefano, “acknowledge this could cost more, over time, than having the government borrow the money and build the projects through tax-free bonds.” No kidding. It would cost more because it puts more money into the hands of the oligarchy than it would acquire if the public sector retained ownership, control, and guardianship of public assets. Advocates claim it is better to have “the driving public” pay tolls, rather than to have “cash-strapped governments” pay for the roads. The lack of logic in this assertion is appalling. The driving public would be paying, one way or the other, either through tolls, gasoline taxes, or even the mileage-based road fee. Not only is the driving public no less “cash-strapped” than are governments, they would, as explained in the preceding paragraph, be paying more. Why? Because they would be shifting even more wealth to the oligarchy, who are, of course, responsible for governments being cash-strapped, considering the oligarchy’s persistent campaign to reduce, and eventually eliminate taxes. With taxes eliminated, all government functions would be shifted to the oligarchy, in a quiet revolution too few have been noticing.

Advocates also admit that states could become more efficient by contracting out the design and construction planning phases of highway improvement and repair projects. But we are told that “public-private projects are expected to be more profitable for builders.” Why should citizens rally around something more profitable for builders if the alternative is to let the process be more profitable for the state, thus permitting reductions in tolls and taxes? Because, we are told, shifting profits from the state to the private sector “will help attract more private investors.” And who will those private investors be? Low-income drivers? Middle-class union members? Folks in the swelled ranks of the unemployed? Seriously, who has the money to invest in a money-making privatized road deal? In fact, when “typical” citizens invested in these deals, they ended up being the ones “holding the bag” when the projects in San Diego, Orange County, and South Carolina tanked.

In the meantime, DiStefano tells us, the legislation introduced in Harrisburg to permit this encroaching takeover of government by the oligarchy, stands to be amended so that politicians can sit on the “public-private transportation partnership boards” notwithstanding their lack of expertise in transportation planning, highway design, road construction, street maintenance, or much of anything else that is required. The private sector has always made money doing contract work for state highway departments, sometimes using contacts to get selected, so what’s at issue isn’t so much the influence of politicians on the selection process, but the reinforced indebtedness of politicians to the oligarchy that benefits from the privatization process.

And for those who think that I’m being an alarmist about the doors being opened by this takeover of highways, consider what one of the advocates has promised. “ ‘In a couple more years we’ll be looking at these [to put] courthouses and state colleges’ and other public facilities, and their funding, in private hands.” At least this advocate is being open, perhaps more open than his clients prefer. Folks, the oligarchy wants to buy state highways, courthouses, public schools, police forces, and just about everything else that government does. Corporations owned by the oligarchy will run those things, unhappy citizens will have no one to turn out of office during an election in response to being gouged while getting bad service highlighted by needing to make 911 calls to some foreign country, unions will be broken, wages for the most people will be lowered, for those fortunate enough to have jobs, and the nation, no, the world, will be at the mercy of the handful of wealthy people who have bought the world. And when those who consider these people as heroes and their positions on tax policy to be the Holy Grail of opportunity discover that they have been had, there won’t be any place to find redress, because the oligarchy will own the courts, the police, every form of travel and communication, everything. The planet will have become one big plantation. Alarmist? If you think so, wait. Wait a few years. Then decide. If, of course, you’re willing to stand aside while this public asset grab moves into high gear.

Wednesday, February 23, 2011

Spending Cuts, Full Disclosures, Hearts, and Voices 

Last month, in Cutting Taxes + Failing to Identify and Enact Spending Cuts = Default?, I noted the dilemma presented by candidates who espouse spending cuts but refuse to identify the programs that would be cut. This coy approach survives after the candidate is elected, until, hopefully, the electorate no longer connects the vague promises with the actual realities of the actions undertaken by the candidate turned legislator. The challenge to the advocates of spending cuts is to avoid losing votes by being forthcoming with their hit lists, as I explained in Cutting Taxes + Failing to Identify and Enact Spending Cuts = Default?:
So perhaps it would be helpful to learn what spending items the Republicans wish to eliminate. After all, they want to use their opposition to an increase in the debt limit as leverage to compel spending cuts. According to this report, when asked which programs could be cut, Boehner replied, “I don’t think I have one off the top of my head. But there is no part of this government that should be sacred.” Aside from the continued refusal to identify spending cuts, surely out of fear that lobbyists for those adversely affected by such cuts would descend on their Capitol Hill offices in a stampede, the Republicans are being boxed into a corner by their leader. When Secretary of Defense Robert Gates announced plans for a very small increase in the military budget for next fiscal year, plans that include shrinking the size of the Army and Marine Corps and cutting two major weapons systems, as explained in this story, Republicans objected, suggesting that the proposal puts the nation at risk. Is it possible to imagine how Republicans would respond to a proposal to decrease total defense spending when they go ballistic over smaller than expected increases? Do they truly think nothing in government is sacred? In The Grand Delusion: Balancing the Federal Budget Without Tax Increases, I invited “the advocates of using spending cuts as the sole solution to the budget deficit crisis to identify sufficient cuts to bring the budget into balance.” I’ve had no replies from those advocates that identify specific cuts or even general spending reduction ideas. I’m not surprised.
I’ve been trying to get answers for quite some time. More than a year ago, in Some Insights into the Tax Policy Mess, I warned:
The deficit cannot be eliminated merely by cutting spending, unless Congress wants to strip the military down to pretty much nothing, eliminate Social Security and Medicare, and put an end to a variety of other programs. The nation faces huge deficits not only because tax rates on the wealthy are lower than they need to be, but also because the deficit reflects eight years of taxes that should have been collected but that were forgiven by a Congress anxious to reward the economic elite and ballooning interest payments on the debt undertaken to finance the deficits generated by trying to finance a war while cutting taxes.
A few months later, in June of last year, I challenged politicians and commentators from every spot on the spending-taxation spectrum to nominate their candidates for program reduction and elimination. In FICA, Medicare, and Payroll Taxes, I wrote:
Advocates of continued and increased spending need to identify the tax increases that will permit that to happen in the absence of a deficit, and it will take more than the return to the pre-2001 rates and the elimination of capital gains preferences that I support. Advocates of tax cutting need to identify the cuts they would make to balance the budget, and if they don’t touch defense, Medicare, Social Security – and they’re stuck with the interest payment on the debt – there’s not enough to cut.
The response was overwhelmingly quiet. No spending-cut advocate candidate had the courage to make his or her axe list public, because getting votes is much more important than getting honest. Having failed to get the specifics onto the table during the election, in November of last year, anticipating the continued stonewalling in response to requests for specific identification of programs on the chopping block, I challenged spending cut advocates, including but not limited to candidates and legislators, to step up and let Americans know what they planned to do. In The Grand Delusion: Balancing the Federal Budget Without Tax Increases, I explained the fallacious reasoning and misperceptions that cause Americans to think that by cutting waste and aid to foreign nations the federal budget can be balanced. I also explained why cutting spending would be insufficient to eliminate the budget deficit.

Finally, the spending cut advocates who have taken control of the House of Representatives have had to put their cards on the table. In GOP Bill Pairs Budget Cuts, Regulatory Rollbacks, we learn not only which programs are the targets of the spending axe wielders, but also that they intend to eliminate all sorts of rules that protect ordinary citizens from predatory wheeler-dealers, who find taxes and government regulation to be annoyances that get in the way of their objectives. I suppose they’re not unlike the folks who found the newly-arrived sheriffs in Wild West towns to be an annoyance.

So what does the House majority want to cut or eliminate? Check out the list, which is based in part on a Center on Budget and Policy Priorities report:

  • A 15% reduction in Head Start funding, in addition to the expiration of funding provided by 2009 legislation, requiring the dismissal of 157,000 children from Head Start education, health, and nutrition services.
  • A 6% reduction in funding to assist K-12 education, including termination of Mathematics and Science Partnerships and Educational Technology State Grants, reductions in assistance to special education, funding for literacy programs, Special Olympics, and a long list of initiatives designed to help American’s future generations learn what they need to know and understand in order to compete globally with the future generations of places like India, China, Korea, Germany, and Brazil, to name but a few countries whose students are performing better than are America’s children.
  • A 24% reduction in Pell Grants, which will compel at least some of the 9.4 million college students receiving grants to drop out of college, and forcing unmeasured millions to decide not to attend college.
  • Cuts in programs that assist high-school dropouts to become contributing members of the economy, including elimination of the Tech-Prep and Workplace and Community Transition programs.
  • A 6% reduction in funding for community mental health services block grants and substance abuse and treatment block grants, reducing assistance for the mentally ill.
  • Reductions in the special supplemental nutrition program for women, infants, and children, which, until now, has been able to provide women, infants, and children under age 5 with necessary food and health care that has reduced infant mortality and improved birth outcomes and diets.
  • A 43% reduction in the Public Housing Capital Fund, thus removing almost half the funding required to make emergency and other repairs to public housing units primarily occupied by low-income senior citizens and disabled individuals.
  • A 10% reduction in the HOME Investment Partnerships program, which assists local governments develop, acquire, and rehabilitate low-income housing.
  • A 30% reduction in block grants to assist low-income Native Americans and Native Hawaiians living on reservations, tribal areas, and home lands.
  • A complete termination of the Low Income Home Energy Assistance Program.
  • A complete termination of the low-income Weatherization Assistance Program.
  • A 56% reduction in funding for the EPA’s clean water and safe drinking water programs.
  • A 19% reduction in funding for local law enforcement, courts, prisons, crime victim and witness initiatives, and other initiatives designed to reduce crime.
  • A 10% reduction in funding for the Centers for Disease Control and Prevention, the agencies that deal with pandemics, food poisoning outbreaks, and other serious public health matters.
  • A 10% reduction in funding for the Food and Drug Administration, the agency charged with protecting the quality of the nation’s food and drug supply, which already is suffering from insufficient funding to deal with the significant increases in food-borne illnesses.
  • A 9% reduction in funding for the Food Safety Inspection Service, which is the agency charged with inspecting farms, food factories, and other components of the nation’s food supply.
  • A 4% reduction in funding for the National Institutes of Health.
But it wasn’t enough to slash spending in ways that will increase costs in the future and that will increase class sizes in K-12 education, cause mortality rates among low-income individuals to increase, and leave the next generation less prepared to compete in a global economy. The House majority also took the opportunity to block the EPA from curbing greenhouse gas emissions, to negate EPA rules designed to prevent the growth of algae in Florida’s lakes and streams caused by excessive use of fertilizer and other pollutants, to stop the EPA from implementing a plan to clean up the Chesapeake Bay – putting fishermen, crabbers, and others who make their living in the Bay at risk of going out of business so that farmers and others who in making their living dump all sorts of waste and poisons into the Chesapeake Bay watershed – and to terminate plans to remove hydroelectric dams from the Klamath River. The House majority also acted to let mining companies that slice off the tops of mountains continue to do so even if it increases water pollution.

The Economic Policy Institute claims that, if enacted, the legislation would cause a loss of 800,000 jobs. Not surprisingly, leaders of the House majority attacked the Institute’s methodology, and in a response, the Institute not only defended its analysis, but noted that close to one million jobs would be lost.

Most observers doubt that the House-passed legislation will be enacted, because it is likely to face sufficient opposition in the Senate to fail to get to the President’s desk. And if did get to the President, there is almost unanimous consensus that the bill would be vetoed. So, perhaps, knowing this, the House majority is having its moment in the sun, grandstanding for the benefit of its backers who want at least a show of support for the “let me do whatever I want” philosophy. That will permit them, during the next campaign, to argue, “I tried, but the evil people who want clean water, safe food, nutrition for starving children, health care for at-risk infants, education for students who the hope of tomorrow, and all other sorts of ‘bleeding heart’ nonsense outnumbered us and stopped us, so join with us to take over the Senate and the White House so that we can cut spending to the point where Americans will need either to pay more state and local taxes or watch the quality of life for all but the wealthy go down the tubes.” Oh, wait, their campaign managers will take out that last part, and replace it with “so join with us to take over the Senate and the White House so that we can make America a wonderful place the same way the tax cuts we advocated made the economy roar.” Oops. That won’t work, either, will it? So perhaps, “join with us to take over the Senate and White House so that we can do all sorts of wonderful things,” leaving out the “which will have effects we won’t share with you, just as we didn’t tell you what programs we would be cutting until after we extracted your vote back in 2010.” I wonder what the 2010 election results would have been had, during the fall, candidates announced they were in favor of a polluted Chesapeake Bay, more crowded K-12 classrooms, termination of low-income energy and weatherization assistance, reductions in Head Start, Pell Grants, food for starving children, and funding for the agencies charged with protecting an already endangered food supply system. I wonder what would have happened had the candidates been forthcoming. Perhaps the outcome would have been different. Or perhaps we would have learned that a majority of Americans prefer polluted waters, starving children, more homeless low-income people, tainted food, worsening education, and increased illiteracy and innumeracy. Perhaps there are fewer and fewer “bleeding hearts” because there are fewer and fewer people with hearts. I doubt it. I think Americans with hearts need to find their voices. And soon.

Monday, February 21, 2011

Truly, Tax Ignorance Is Frightening 

Last week, Paul Caron’s TaxProf Blog published Maule: The Tax Consequences of Congressional Sleepovers, in which I explained that additional factual analysis was required before any conclusions could be reached concerning the tax consequences of members of Congress sleeping in their offices. It is not uncommon for people to seek conclusions before all the requisite facts are known. Recently, for example, a tax practitioner posed a question to a tax listserve, and in my response I identified facts that needed to be resolved before an analysis could be undertaken that would lead to a conclusion. I encounter this problem frequently, when I get calls and emails from lawyers who want “the answer” but who are dismayed when I ask questions that in the aggregate constitute an inquiry as to “what, really, is going on here?” Otherwise, discussion is restricted to a discussion of the, for example, 81 possible analyses arising from the application of law to three possible factual determinations with respect to four key questions. I use the term “restricted” not because the discussion is constrained – to the contrary, it is 81 times as long as it would be had the necessary facts been determined – but because the discussion, though useful intellectually, does nothing for the client who needs an answer, and who is likely to balk at paying for 81 times as much discussion as is necessary.

That is why it is even more offensive to listen to people jump to conclusions, that is, proclaim outcomes without knowing the facts. In many instances they don’t even realize that there are facts they need to know, because they haven’t bothered to do the analysis. That’s probably because they don’t realize that there is analysis that needs to be done.

A brilliant example of the “speak without knowing what you need to know” nonsense has emerged in connection with the debate over members of Congress catching shut-eye in their offices. On Thursday, Paul Caron’s TaxProf Blog published a link to a “conversation” between MSNBC commentator Lawrence O’Donnell and Representative Jason Chaffetz of Utah. In MSNBC Calls Congressmen Who Sleep in Their Offices “Tax Criminals”, the lack of tax law knowledge was alarming, not merely because lack of tax law knowledge often is per se dangerous, but because the two people involved are in positions that demand they not speak unless they understand what they are describing. A commentator who, for whatever reason, lacked any sense of sections 119, 132, or 162 of the Internal Revenue Code, made accusations against a member of Congress who is entrusted with the responsibility of being a lawmaker. Chaffetz, who before agreeing to the interview, ought to have brushed up on the applicable law, or at least consulted with a tax professional, made absolutely no attempt to raise the issue of excludable fringe benefits or the principle that criminal tax fraud charges won't stick when there is doubt about the applicable outcome (the latter being something to which O’Donnell, too, should have paid attention). O’Donnell made a big deal of Chaffetz’ failure to request tax advice from the IRS, though he didn’t bother to ask whether Chaffetz had sought advice from some other professional source. I suppose I could ask O’Donnell whether he had obtained any information about the applicable tax law, for example, by having an MSNBC intern do some research, perhaps even taking a look at Maule: The Tax Consequences of Congressional Sleepovers. At least O’Donnell vowed to ask the IRS for an opinion. It will be interesting to learn if he followed through, if he obtained any sort of answer, and what the IRS says.

One of the reasons so many bad decisions have been made with respect to this nation’s tax law, economy, national security, and other concerns is that far too many people choose to issue proclamations without taking the necessary steps to be informed about the information that needs to be known in order to issue a proclamation that is sensible and correct rather than nonsense. It’s one thing when two people in a bar toss about silly assertions with respect to the local professional sports team. If they’re both full of nonsense, so what? But when a national cable news commentator, viewed here and abroad, and a member of Congress toss about silly assertions and demonstrate ignorance, it’s not only an embarrassment, it’s also dangerous. Why? It adds to the national culture of ignorance that has become frighteningly pervasive. Somehow, in the effort to score faux debating points and rile up “the base,” commentators and politicians neglect their obligation to speak from an informed perspective. Their fiduciary duty to the citizens of this nation demands nothing less.

And in the meantime, too many politicians are trying to cut funding for education, goaded by a significant segment of national commentators. One wonders who benefits from these efforts? Could it be that widespread ignorance is useful to a select few? Truly, ignorance, including tax ignorance, is frightening.

Friday, February 18, 2011

On Deficits, Taxes, and Government Spending: Looking Back at the 1940s 

Last week, in So Where Have the Tax Reductions Gone?, I focused on the fact that federal tax receipts, as a percentage of gross domestic product, had fallen to a 60-year low of 14.8 percent. As recently as 2008, the share had been 17.5 percent.

Now comes news that the Administration’s proposed budget would generate a deficit of $1.65 trillion, roughly 10.9 percent of GDP. That would be the highest since 1945, when it reached 21.5 percent of GDP. In 1945, the nation was at war, a war that was declared and a war that was financed, to the fullest extent possible, by taxation representing increases over pre-war levels.

Slightly different numbers emerge from other analysts. For example, the US Government spending web site puts the 1945 deficit as 24.07 percent of GDP, following 1944’s 22.35 percent and 1943’s 28.05 percent. During those same years, according to another chart on that site, government spending as a percentage of GDP during 1943 through 1945 amounted to 46.68, 50.02, and 52.99 percent of GDP. Rough computation tells us that tax receipts accounted for the difference. Thus, in those three war years, taxes represented 18.63 percent, 27.67 percent, and 28.92 percent of GDP.

Comparing those war year numbers with the current situation, using the Administration’s budget as the benchmark, taxes represent 14.8 percent of GDP, spending represents 25.7 percent of GDP, and the resulting deficit constitutes 10.9 percent of GDP. Do these numbers suggest that government spending is out of control, as certain segments of the electorate and of the business world contend? Hardly. Considering that the nation remains at war, in fact a war fought on at least as many fronts as was the war being waged in the 1940s, it makes sense to compare how responsible politicians managed the economy sixty years ago with how irresponsible politicians manage it today. During the last year of the war, government spending had reached 53 percent of the economy and taxation had reached 28.92 percent of it. Now, spending as a proportion of GDP has been cut by 51.5 percent (53 to 25.7), and taxes by 49 percent (28.92 to 14.8). In other words, both taxes and spending have been cut by roughly the same amount, and yet the anti-tax movement wants even more tax cuts.

What gets little attention in the mainstream media, on most blogs, and from most commentators, especially those supporting further reductions in taxation, is the impact on the deficit of not only the refusal of Congress to raise taxes in time of war, as happened in the 1940s and again in the 1960s, but also its foolish move to reduce taxes during a time of war. Not only did the series of resulting and continuing annual deficits contribute to the total accumulated deficit, the interest payments on those deficits have literally and figuratively compounded the problem. Five years ago, in A Memorial Day Essay on War and Taxation, a commentary which not only I have quoted on several occasions but which has been mentioned occasionally by other commentators far from the mainstream media, I explained why the failure of politicians to demonstrate leadership and ask for sacrifice from all citizens, and not just the dedicated members of the Armed Forces, was unwise and destined to create systemic economic and national security problems for the country:
I wasn't around during the last full-fledged, unlimited global conflict. Yet I've listened to as many tales as were shared with me by those alive at the time as I could find, and I've read and watched a lot. So I've heard and read about rationing, double shifts, postponed plans, substituted products, and sacrifice. Every tax practitioner, and every citizen, should understand that during World War Two income tax rates skyrocketed, wage withholding was introduced, and the entire revenue-expenditure structure was altered. War hung as a cloud over every life, and over every dollar. Is that good? I think so. Why? Because war is so serious and so terminal a course of action that it should not be permitted to recede to the background.

Yet the current global war has not been managed in the same manner. Politicians have chosen to fight without increasing revenue, imposing rationing, or deferring projects and activities. In their defense, they argue that none of these things are necessary, that a nation can have its guns without giving up its butter. I disagree, and I happen to think that politicians are reluctant to do what needs to be done because they are more concerned about maintaining their position in office than in making the tough decisions that war requires. So our national leaders have chosen to put the cost of the current war on our children and grandchildren. Those who decry the huge deficits, triggered in part by war and in part by the almost insane concept of decreasing tax revenues (mostly for the wealthy) during wartime, pretty much focus on the economic impact. They ask if, or suggest that, our grandchildren will be facing income tax rates of 80 percent in order to reduce an unmanageable deficit. I think it will be worse. I think our children and their children and grandchildren will become subservient to our nation's creditors. The sovereignty of the United States of America is far from guaranteed, and is at risk. Were these considerations discussed when those in power decided that war can be done on the cheap?

War cannot be done on the cheap. War is not free. War ought not be purchased on a credit card. War is a national commitment. Hiding the true cost of war in order to influence a nation's willingness to engage in war is wrong. Ultimately, the price to be paid will be dangerously high.
Though sometimes when I re-read things that I have written, especially things written years or decades ago, I recognize where I could have used different words that would have made the piece better. Every once in a great while, I realize that I have changed my mind, or would have presented a different analysis. But every time I re-read what I wrote in A Memorial Day Essay on War and Taxation, I wonder what happened that day. Something inspired me. Something made me deeply concerned and almost angry. Perhaps it was the fact that while Americans were dying, and continue to die, most of the nation was rolling along, almost oblivious to the realities of the world. Something, culturally, is very wrong, and it’s not the efforts of a nation to help those who are in need, which is what some people want to eviscerate as the national price for waging war while lowering rather than raising taxes. Something, morally, also is very wrong. Leadership requires something more than gathering votes by telling people the nation asks less of them. Our parents and grandparents responded unselfishly. Can we not honor them by doing likewise?

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