MauledAgain

According to this recent story, a billionaire who is registered as an independent but who has donated to both major political parties though chiefly to Republicans has announced he is now going to support Democratic candidates in order to give Democrats control of Congress. Seth Klarman explained that his goal is to undo at least some of the policies of the current Administration.

Klarman focused on tax policy. Not unlike the handful of wealthy individuals who understand the foolishness of supply-side economics and trickle-down theory, Klarman stated, “I received a tax cut I neither need nor want. I’m choosing to invest it to fight the administration’s flawed policies and to elect Democrats to the Senate and House of Representatives.” Klarman holds members of the current Congress responsible for having “abandoned their historic beliefs and values.” One of those values is fiscal responsibility and the avoidance of needless federal deficits.

Though Klarman also has concerns about other issues, such as trade protectionism and the environment, it is his reaction to the recent tax law changes that gets my attention. It’s not that he agrees with my position on supply-side economics and trickle-down theory. It’s the opportunity he has to use money to influence or even control the debate about tax policy. Granted, he would have had that opportunity without the tax cut he received, but the tax cut gives him even more political clout. Unlike many other wealthy tax cut recipients, he has made no secret of his intent to step up his political campaign contribution and related efforts. Though I applaud him for his transparency and honesty, as well as his tax policy position, his disclosure inspired me to think about how tax policy, which affects everyone, is in the hands of a small group of Americans who have the resources to control legislatures and executive branch officials. Of course, this is a problem not only for tax policy, but for other issues, such as environmental, trade, labor, health, transportation, and housing problems.

The flaw in the system is the infusion of money into the political process. Perhaps every time someone uses money to try to influence a legislator or executive branch official, that person must bring along someone who holds the opposite view on the issues being discussed. Or perhaps wealthy individuals who fund political decisions should be required to provide funds to those whose voices are suppressed because they lack the financial resources to bring their views to the table. Oh, wait. There is an easier way to do that. Instead of giving the wealthy tax cuts that provide even more money to use in controlling the political process, repeal those tax cuts and instead provide substantial tax relief to the unvoiced, so that they can use their new-found economic gains in part to bring their viewpoints to bear on the decision makers.

One of the principal purposes of the income tax is to eliminate the wealth and income inequality that almost destroyed the nation’s economy during the era of unregulated wealth when a paradise existed for robber barons. By distorting the income tax, Congress has, over the past three and a half decades, reopened paradise for the wealthy. Congress claims to act on behalf of everyone, but it acts in accordance with the conditions imposed on the funding its members receive. One of those conditions is to make it even easier for the wealthy to restore the oligarchy of feudalism, which is their paradise.

Does it matter that Klarman is trying to undo the tax cuts? Does it matter that he has more economic power to do so because of the very thing he is trying to undo? It is a conundrum, for him and for all of us. Who should be deciding tax policy?

Too often, the anti-tax crowd portrays opposition to tax as beneficial for society. A frequent social media meme claims that before the income tax was enacted, people “kept all their earnings.” They fail to see that people paid more for goods and services than they otherwise would have paid because they were paying tariffs passed through by retailers, wholesalers, and manufacturers. They fail to see that they were paying for goods and services they otherwise would not have needed to purchase because there were no taxes to provide economy-of-scale social benefits that would remove the need for those purchases. An example is the reduced cost of tires, wheels, and axles and the reduced need to purchase and repair them once highways were improved with tax-based funding. People willing to pay ten times as much to fix pothole-caused damages than they would pay in pothole-prevention taxes demonstrates the short-sightedness and narrow-mindedness of the anti-tax emotion.

Recently, as recounted in this report, the state of Kentucky has provided a lesson the significance of taxation and the risks of not understanding what taxation involves. Two weeks ago, both houses of the Kentucky legislature, facing a budget shortfall, enacted a tax bill that cut both the individual and corporate income tax rates and increased and broadened the sales tax. It also increased the cigarette tax. Opponents of the legislation pointed out that the changes would increase taxes on poor and middle-income residents. The governor vetoed the bill, but not for those reasons. The governor wants a more comprehensive set of changes. He wants a tax system that is not “arbitrary and complicated.” He also argues that the legislation provides for hundreds of millions in spending that the state cannot afford to spend. It did not take long for the legislature to override the veto.

At the root of the problem is a simple concern. The governor claims that the legislation allows for spending that the state cannot afford to spend. But the question is whether that spending is spending that the state cannot afford not to spend. Without the tax revenue, spending on schools, prisons, Medicaid, and other essential programs would be cut in ways that would generate long-term costs far exceeding the tax costs.

Though there always is the issue of how tax burdens should be allocated among taxpayers, that issue does not seem to be at the center of the debate. The underlying concern appears to be the claim that taxes are bad, bad for workers, bad for business, bad for investment. Yet in every place that tax cutting has run rampant, such as Kansas, Louisiana, and Oklahoma, the longer-term consequences of cutting taxes has generated serious economic problems, and has not provided the economic paradise promised by the supply-siders.

Ultimately, anti-tax becomes anti-education, anti-health, anti-infrastructure, anti-safety, and anti-all-other-sorts-of-benefits best provided by government, that is, society. The anti-tax reply, that these programs should be turned over to the private sector, is nothing short of a death sentence for most of these programs, because the private sector yearns for profits above all else. When, for example, the private sector comes to own all streets, highways, bridges, and tunnels, the amounts people will be paying for their use will dwarf the amount that they would have been paying in taxes. They will have no voting booth into which to take their unhappiness. The return of royalty and nobility will be such a disappointment to the peasants.

A little more than a week ago, in How Not to Run a Tax System, I criticized the efforts by the Office of Management and Budget to get its hands deeper into the process of issuing tax regulations. In fact, OMB’s goal was oversight of the tax regulatory process. I pointed out that OMB does not have the tax experts necessary to deal with technical tax issues.

Late last week, The Department of the Treasury and OMB reached a Memorandum of Agreement. Under the agreement OMB’s Office of Information and Regulatory Affairs will review tax regulations that may “create a serious inconsistency or otherwise interfere with an action taken or planned by another agency,” “raise novel legal or policy issues,” or “have an annual non-revenue effect on the economy of $100 million or more.” To implement this agreement, Treasury “will submit to OIRA a quarterly notice of planned tax regulatory actions that describes each regulatory action; identifies any significant policy changes proposed or resulting from the regulatory action; and articulates the basis for determining whether the regulatory action is covered by” the agreement.

Does anyone think this will speed up the need for tax guidance? I don’t. I’m convinced it will slow it down. Even allowing for the delay to permit OMB to hire people who have the experience and education necessary to analyze tax regulations, proposed regulations will sit on someone’s desk for some period of time rather than being moved along the already slow process. If OMB disagrees, the process will take an even longer period of time.

Aside from delays at OMB, Treasury and OMB will need more time to figure out which regulations need to be diverted to OIRA. Someone will need to do computations to figure out “annual non-revenue effect on the economy.” That’s more hiring that needs to be done. Who figures out if there are inconsistencies with what other agencies are doing? Considering the extent to which Congress has dumped just about everything into the tax law, which means that Treasury regulations bear on every other federal agency, it is quite likely that Treasury and other agencies will be arguing about implementation of tax law that affects what other agencies do. Of course, the solution to this nonsense is for Congress to stop using the tax law to handle defense, health, housing, environmental, labor, and other policies, and to strip the Internal Revenue Code of provisions that have nothing to do with the collection of tax revenue, especially the “do this and get a tax credit” provisions.

As I asked Friday a week ago, “Is this any way to run a business? A government? A tax regulation process? A tax system? Of course not. How long will it take, if ever, for Americans to figure this out?” I’m willing to guess that 99.9 percent or more of the nation’s adult population is totally ignorant of the ongoing Treasury-OMB power struggle. It doesn’t make for good sound bites, it lacks marketing buzz, and its connection with people’s everyday lives is not easily understood. What looms ahead is even more uncertainty and longer periods of waiting for clarification. How’s that going to work out?

The title of the article, Why tax season is good (and bad) for Americans' health caught my eye. Expecting to read about increases in stress-related illnesses and even death in mid-April or attacks on tax return preparers, I surprised to discover that Diana Farrell focused on the use of income tax refunds to pay for health care. Citing research by the JP Morgan Chase Institute, of which she is CEO, Farrell pointed out that people who file their income tax returns early are more likely to receive larger refunds and to spend a larger portion of the refund on health care. American health care spending increases by 60 percent in the week that the refund is received. Taxpayers getting refunds in February increase health care spending over the next two and half months by 38 percent, whereas the percentage increases are lower for those receiving refunds after February. More than half of the health care spending was for services that should have been sought sooner. The conclusion, that cash flow problems cause Americans to delay their health care, makes sense. That, of course, is not a good outcome.

Farrell notes that if tax refunds are going to be used to finance health care, the timing needs to be adjusted. Farrell explains that taxpayers cannot control when they receive refunds, aside from filing early, where possible. Even filing early doesn’t guarantee that a refund will be received a week sooner than it would have been received had the filing been delayed by a week. Farrell suggests, and I agree, that it is problematic to schedule health care based on when tax refunds arrive.

Farrell proposes a solution. She thinks that “policymakers and employers should consider making changes that would allow consumers to access funds throughout the year. Policymakers might consider offering periodic tax refund payments -- perhaps quarterly payments so that families wouldn't have to defer care until tax season.” She also proposes permitting taxpayers to receive advance refunds on an emergency basis. Another proposal she offers is to permit filing earlier and receiving a refund based on “year-to-date” income.

Though well-intentioned, the first proposed solution presents too many disadvantages. Implementing it would require more forms, more filing, more IRS employees, and more aggravation. Because the amount of the refund is not known until the beginning of the following year, advance refund payments would need to reflect estimation, speculation, and guesses. Worse, if too much is paid during the year, April could bring the shock of owing money. The second proposal poses similar challenges. The third proposal is unworkable. Imagine trying to obtain “year-to-date” Forms 1099, or computing partial-year deductions. Worse, it would mean filing another return for the entire year, thus at least doubling the number of returns being filed and the time invested in filling out those returns. Talk about increasing health risks by doubling the amount of stress to which a person is subjected.

The solution is much easier. Tax refunds exist because more tax is paid or withheld during the year than is owed. Too many taxpayers use tax withholding and estimated tax payments as a way to force themselves to save money, even though they earn no interest on the money. Does it not make sense to reduce the withholding and estimated tax payments, and to simultaneously put the reduction into an account dedicated to health care? Taxpayers subject to withholding could achieve the same, or a better, outcome by asking employers to reduce tax withholding to a more appropriate level and to put the difference into an account, whether or not it is a tax-favored account. This helps those without budgetary discipline experience forced savings without using the IRS as a bank that prohibits withdrawals until tax refund season.

Granted, that solution would be unnecessary if the American health care system were fixed so that premiums were paid evenly throughout the year and care could be obtained when necessary. How can that be done? A variety of solutions have been proposed, but rather than getting into an extensive analysis of the health care system, I will simply point out that what Farrell’s Institute has discovered is yet another instance where a non-tax problem ends up burdening the tax system.

Waiting for Congress to fix things is like waiting on the side of a desert road for an ice cream truck to appear. Better for Americans to turn to self-help, fix their withholding and estimated taxes, put money into accounts – an idea Farrell also suggests – and obtain timely health care that promises long-term health improvements and long-term reductions in health care costs.

One of the best examples of how trickle-down supply-side tax policy is a total failure is the Kansas experience. I have written about the terrible outcome in that state on several occasions. In A Tax Policy Turn-Around?, I explained how the Kansas income tax cuts for the wealthy backfired, causing the rich to get richer, the economy to stagnate, public services to falter, and the majority of Kansans to end up worse than they had been. In A New Play in the Make-the-Rich-Richer Game Plan, I described how Kansas politicians have been struggling to find a way to undo the damage caused by those ill-advised tax cuts for the wealthy. In When a Tax Theory Fails: Own Up or Make Excuses?, I pointed out that the Kansas experienced removed all doubt that the theory is shameful. In Do Tax Cuts for the Wealthy Create Jobs?, I described recent data showing that the rate of job creation in Kansas was one-fifth the rate in Missouri, a state that did not subscribe to the outlandish tax cuts for the wealthy that Kansas legislators had embraced. In Kansas Trickle-Down Failures Continue to Flood the State and The Kansas Trickle-Down Tax Theory Failure Has Consequences, I described how large decreases in tax revenue, the opposite of what is promised by the supply-side theorists, triggered cuts in public education, and in turn stoked the fires of voter frustration. The voter reaction, however, did not push out of office enough supply-side supporters. In Who Pays the Price for Trickle-Down Tax Policy Failures?, I described how the governor of Kansas, who claimed that tax cuts for the wealthy would generate increased revenues, proposed to deal with the resulting revenue shortfall by cutting spending for essential services. In Kansas As a Role Model for Tax Policy?, I described how, despite the failures of supply-side economics in Kansas, its then governor, the chief architect of implementing the policy in his state, hailed his failure as a role model for the nation.

One of the problems I noted in Kansas As a Role Model for Tax Policy? was the adverse impact of the supply-side tax policy legislation on the state’s public education system. Because the tax cuts reduced state revenue, the outcome predicted by critics of supply-side economics, proposals to cut funding of public education ended up being litigated. As reported in this article, the Kansas Supreme Court held that the state’s $4 billion funding allowance was insufficient to meet the requirement of the Kansas Constitution that the state provide a suitable education for every child in the state. Faced with the prospect of the court ordering a stop to distribution of state funds so long as the funding was not increased, in effect shutting down all state schools, some of the Republicans in the state Senate, all of the Democrats in the Senate, some Republicans in the House, and a few Democrats in the House voted to increase school funding by $534 million, the bill passing each chamber by very narrow margins.

Republicans who opposed the measure, which was endorsed by the state’s Republican governor and its Attorney General, are worried that they will need to raise taxes to generate the funds. Democrats who opposed the measure are concerned that it does not provide for enough funding to satisfy the Supreme Court’s order.

Some supporters of the funding increase think that tax revenues will increase sufficiently to provide the money. How that will happen has not been explained. Apparently belief in failed supply-side economics dies hard. Some people continue to believe that the planet is flat. Perhaps they went to underfunded schools. What a pity.

The other day, listening to Philadelphia’s news radio station, I heard a commercial for a retailer in Delaware. One of the featured parts of the commercial, repeated and emphasized, was the proposition that people should “come to Delaware” to make the purchase because, in addition to the other advantages of patronizing this retailer, the purchases would be “tax free.” I cannot find a recording or transcript of the commercial.

The proposition that the purchase is tax-free is true for Delaware residents, because there is no sales tax in Delaware. The proposition that the purchase is tax-free for Delaware nonresidents traveling from Pennsylvania, New Jersey, or other states is not true, because those purchasers are subject to a use tax in their home state. That the commercial is directed to potential purchasers beyond people living in Delaware is demonstrated by the use of “come to Delaware” as part of the sales pitch.

As I listened to the commercial, I immediately wondered whether the retailer had an obligation not to mislead purchasers with respect to their use tax obligations. If Pennsylvania, for example, identified a Pennsylvania resident who made a sales-tax-free purchase in Delaware and failed to remit Pennsylvania use tax, could that person sue the retailer for misleading the person into failing to pay the use tax? Or is the retailer absolved by the Pennsylvania resident’s independent obligation to know, and comply with, Pennsylvania use tax law? If the resident, when arriving at the Delaware store, is told that there is a use tax obligation in Pennsylvania, could the purchasers sue the retailer for a misleading commercial? If Pennsylvania revenue officials get wind of the commercial, could they, should they, initiate proceedings to compel the retailer to change or remove the statement about the purchase being tax free?

For the moment, I won’t answer or try to answer the questions. Someone might want to use this a moot court problem or as an examination question. I won’t, because I haven’t been teaching tax courses since 2016.

In theory, the process of administering new tax laws works. Congress amends the Internal Revenue Code, and the Treasury Department, in cooperation with the Office of the Chief Counsel to the Internal Revenue Service, interprets the changes to the extent that the Congress directs the Treasury Department to do so or to the extent the language of the law does not answer the questions that arise when the law is applied to real-life situations. In practice, it has almost worked that way most of the time. Occasionally, there would be a snag. Treasury and the Office of Chief Counsel might disagree on the interpretations. Public comments might delay issuance of guidance. The principal guidance shows up in what are called Treasury Regulations.

But now, the reality of incompetence, greed, power addiction, and egos threatens the implementation of recent tax legislation. In an article with a technically incorrect headline, White House Turf Battle Threatens to Delay Tax Law Rollout New York Times writers Alan Rappeport and Jim Tankersley explain how two Administration officials are making a mess of the tax law implementation system. Technically, the tax law has been enacted. It has been rolled out. What has not been rolled out is the guidance necessary for taxpayers and their advisors to comply with the law in situations not specifically addressed by the legislation.

What’s the problem? The Treasury Department is prepared to function as usual, drafting, proposing, and issuing Treasury Regulations. However, the head of the Office of Management and Budget wants oversight of the process. Though the Treasury Department and the Office of Chief Counsel to the Internal Revenue Service are staffed with tax experts, the Office and Management and Budget doesn’t have the experience and the staff to deal with technical tax issues to the same extent and to the same depth as does the Treasury Department. If it prevails, it will need to hire tax attorneys, a process that will add even more delay to the issuance of guidance.

The Office of Management and Budget wants to impose its cost-benefit analysis rules on the Treasury Department. Until now, the process of tax regulation issuance has not been subject to those rules. Underneath this debate is a political struggle, an attempt to control the scope of the tax breaks enacted in the tax law. Some members of Congress, and it takes one guess to identify them, want interpretations as favorable to taxpayers as possible, and see the Office of Management and Budget as the gateway to such an outcome. The Treasury Department has already issued rules designed to prevent hedge funds and private equity funds from circumventing provisions in the recently enacted tax legislation designed to curtail the carried interest tax break that the wealthy owners of those funds use to pay low capital gains rates on income generated from performing services, a tax break not available to most taxpayers. The reality of Washington politics is that as soon as someone cracks down on abuse, those being restricted look for every angle to wiggle out from the restrictions. Their lobbyists look for the weak spots. It appears they have found one, though these days the nation’s capital is flush with them.

Experts agree that if the Office of Management and Budget gets into the process, the process of interpreting tax laws will slow down even more, and taxpayers and their advisors will be making decisions blindly for even longer periods of time. Extending periods of uncertainty is the last thing the precarious national economy needs. Extending the regulations issuance process also has the effect of bringing more lobbyists into the picture. As one commentator put it, “The swamp is going to be enriched by this one.” Not, of course, that the current Administration has been draining any swamps, as it has been too busy enlarging them.

Is this any way to run a business? A government? A tax regulation process? A tax system? Of course not. How long will it take, if ever, for Americans to figure this out?

For almost fifteen years, I have advocated the enactment of mileage-based road fees to replace the increasingly less effective and less efficient liquid fuels tax. One slice of my reasoning is not unlike the realization, a long time ago, that reliance on taxes imposed on telegraph messages wasn’t going to work once newer technology came along. I have explained how the mileage-based road fee works, and why it is the best solution on the table, in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, and Understanding the Mileage-Based Road Fee.

Now comes news that Oregon, which has been experimenting with the mileage-based road fee, has decided that its pilot program is now ready for implementation. As part of the next step in the process, Oregon is working out an arrangement with neighboring Washington to coordinate application of the fee to interstate driving. The state of Idaho and the city of Surrey in British Columbia are also involved in discussions to work out ways for each state to receive its share of the fees. Participants have concluded that the technology is ready but express concerns that the public isn’t ready to shift from paying taxes on fuel to paying fees for road use.

The only question is when, not if. As liquid fuel tax revenues decrease and highways continue to deteriorate, at some point enough drivers will demand legislatures do something other than continuing with a failing system. Opposition exists because there are those who see threats and those who see opportunities. Those who see threats fear the loss of their interests vested in the existing system. Those who see opportunities are those falling over themselves trying to privatize the system so that large, faceless, unresponsive, and unaccountable corporations can take over yet another public function.

Three and a half years ago, in Employee or Independent Contractor Issue Stripped Down, I described a judicial decision in which a federal district judge held that strippers are employees for labor law purposes. I described the judge’s reasoning:

According to the decision by a federal district judge in Philadelphia, the strippers are employees, and thus must be paid minimum wage, must be compensated for overtime work, and are entitled to retain all of their tips. The judge based this conclusion on these facts:

-- the club at which the strippers work determines the price paid by customers, and dictates the length of lap dances.
-- the club requires the strippers to share their tips with the club’s DJ, “house mom,” and “podium host.”
-- the club fines the strippers for arriving late, leaving early, using cell phones, chewing gum, entering and leaving the stage other than through the stairs, or not wearing their hair down.
-- the club specifies how the strippers are to make themselves appear physically, providing a salon on the premises for this purpose.
-- the club requires strippers to work at least four shifts a week to avoid paying shift fees.
-- the club keeps each stripper under management review.

The bottom line is that the club controlled the strippers’ work. That is the same principle that underlies the approach taken for tax purposes.

I then pointed out that

Though there are some differences between the tests used for labor law and for tax law purposes when trying to decide if someone is an employee or independent contractor, the analysis in the case is quite similar to that found in tax cases. It is reasonable to assume that when the tax aspects of these arrangements are raised, that the analysis will end up bringing a court to the same outcome.

And I predicted:

That the IRS and state revenue departments will be paying attention to this decision is evident from the amount of money involved. There’s quite a bit of FICA, unemployment compensation tax, worker compensation premiums, and withholding when an employee stripper can earn, according to the club, as much as $1,600 per shift. With a minimum of four shifts per week, the arithmetic suggests a stripper could bring in north of $300,000 in a year.

Although I’ve not seen any reports concerning the status of the club’s federal and state taxes for the years in question, I did notice a few days ago a story about the labor law cost of the misclassification. The strippers, described this time around as erotic dancers, sued the club for the wages they should have received had they been properly classified as employees. A federal district judge agreed, and awarded 353 dancers $4,594,722.73 for wages attributable to their work from 2009 through 2012. It is not unusual for cases to take years, as this one has, before being resolved. Nor is this one over, because it would not be surprising if the club filed an appeal.

No sooner had I posted Why Is Taxation Almost Always the Solution of First Resort?, criticizing use of the tax law to solve problems that are not tax problems, than the General Assembly of Maryland, according to this report passed a bill, which the governor plans to sign, permitting Maryland taxpayer to deduct as much as $7,500 when computing Maryland taxable income if they donate bone marrow, or all or part of a liver, kidney, intestine, pancreas, or lung. There are multiple problems with this approach to encouraging organ donation, which, by the way, I fully support.

For one thing, the legislation ignores other organs and tissues, donation of which is no less important than donation of the listed organs. The legislation encourages donation of organs that can be donated while alive. But what about other organs and tissues, such a hearts, heart valves, veins, corneas, skin, ligaments, tendons, and bones? Why not a tax break for the estate or heirs of a person who agrees to donate organs and tissues that cannot be donated until death? There is no less a need for those organs and tissues. What about a deduction for donating blood, another item often in short supply?

For another, the deduction is more valuable to taxpayers in higher brackets. Does that mean that the organs of higher income taxpayers are somehow more valuable than those of lower income taxpayers? How about taxpayers who don’t need more deductions because their income is so low? Are they not to be encouraged to donate organs and tissues, and not to be rewarded?

The donation of organs and tissue, while alive or at death, is a good thing to do. There are thousands of other things that are good things to do. Ought not each of these good things be the target of a tax break? If not, is the legislature proposing that some good things are better than other good things?

If the Maryland legislature wants to encourage people to donate organs and tissues, or to reward them for doing so, it would be much easier and simpler to announce that the state will send a check (or electronic funds transfer) for a particular number of dollars if and when a resident provides certified proof from the appropriate medical facility that a specific organ or organs, or tissues, have been donated. In the case of organ and tissue donation at death, the check would be issued to the donor’s estate. This simpler approach eliminates what otherwise would be even more complexity in the Maryland income tax, which, though not as absurdly complex as the federal income tax, is no paragon of simplicity. Sending a check also makes the process more transparent, and removes any discrepancy between the value of a donation to a higher income taxpayer and to a lower income taxpayer.

In his commentary about cryptocurrencies, Mark Zandi not only explained why digital currencies, despite some periods of rapid growth in value, are a bubble, but also shared a bit of tax trivia that enlightened me. In describing what would be necessary for bitcoins to be a serious component of national economies, Zandi explained, “A real test of bitcoin would be if any government allowed citizens to pay taxes in cryptocurrency.” He then answered a question I had not previously thought of asking, by explaining, “As far as I can tell, there is only one small Swiss town that does, and payment values cannot exceed a few hundred francs.”

It appears that the small Swiss town is not alone. According to several reports, including this one and another one, California permits the use of cryptocurrency for financial transactions, including tax payments. Even though the number of jurisdictions accepting tax payments in cryptocurrencies is perhaps as low as two, it probably will not stay that way. As reported in several articles, including this one, the Arizona and Georgia legislatures are considering statutes that would permit the payment of taxes with cryptocurrencies. According to another report, similar legislation is pending in Illinois.

One downside to paying taxes with cryptocurrencies is the tax that will be due on the gain recognized from using cryptocurrency acquired for a price less than its value when used to pay the taxes. This effect is particularly disadvantageous to the very many cryptocurrency investors who currently are failing to pay taxes on their gains from selling cryptocurrencies, as revenue authorities struggle to keep pace with the digital money transactions.

Most Americans know very little, if anything, about cryptocurrencies. Will that change? Or are cryptocurrencies a fad and a bubble? Time will tell.

Readers of MauledAgain know that I am not a fan of using taxes as a mechanism to encourage or discourage behavior. Taxes, user fees, tolls, and similar revenue sources should be tied as closely as possible to the benefits, direct or indirect, that they provide to the taxpayer, individually or as a member of society. My position is based not only on a desire to reduce tax law clutter but also on the unsuccessful track record of these sorts of efforts.

Now comes a report that Governor Cuomo of New York wants to impose a tax on prescription medicines that contain opioids and also on some medicines used in treating opioid addiction. His rationale is that the revenue would offset some of the cost of treating opioid addiction. The problem is that the tax, though paid by manufacturers, would be passed through to those who use opioids, including the many who fortunately do not become addicted. Studies also claim that the tax would increase health insurance premiums and health insurance costs in New York.

It is disappointing that when the nation, or a state, encounters a problem, one of the first, if not the first, responses is to cry, “Tax!” Obesity a problem? Tax soda. Gun violence a problem? Tax guns and ammunition. Smoking a problem? Tax cigarettes. Opioid addiction a problem? Tax opioids. Yet, in the long run, these approaches don’t solve the problem, sometimes make the problem worse, and too often generate unwanted, and perhaps unexpected, adverse collateral consequences.

So what’s the answer? The answer is education. The answer is helping people learn why it is foolish to be obese, to smoke cigarettes, to use and handle guns irresponsibly, to listen to bad advice about drugs of any sort. Our education system is in horrible condition. By that, I mean not only the K-12 systems, but also higher education, trade schools, mass media, social media, preaching, speech delivery, and water cooler gossip. For reasons that fly in the face of the logic of natural selection, humans increasingly rely on misinformation and are decreasingly exposed to guidance, advice, knowledge, and comprehension that can reduce, in some instances significantly, many of the problems that are not going to go away simply because a tax is enacted.

There are some basic principles of tax law that every teenage and adult American should know and understand, though it might be expecting too much for that to happen. However, there is no question that lawyers should know and understand these basic tax law principles. One of those principles is the prohibition against deducting the value of income not generated. The reason is simple. The tax law accounts for income not generated by not requiring taxpayers to include in gross income the value of income they have not generated. A related principle is that the tax law does not allow a deduction for the value of labor provided to a charity. The reason is that the tax law does not require the taxpayer to include in gross income the imputed value of the labor that has been provided.

So it was disappointing to discover what happened in Bradley v. Comr., T.C. Summary Op. 2018-13. The taxpayer, an attorney operating as a sole proprietor, provided services as a litigation consultant. He chargedd $250 per hour for his services. During the taxable year in question, he performed 100 hours of pro bono legal research, reviewing evidence, and preparing expert testimony regarding the standard of care owed to plaintiffs for a civil action in the District of Columbia. He did not pay or incur any expenses related to this pro bono activity. On his tax return, the taxpayer deducted $25,000, describing the deduction as “Research on Cases 100 Hrs @ $250 per hr.” The IRS disallowed the deduction.

The Court addressed the deduction by pointing out that “It is well established that section 162 does ‘not permit a business expense deduction based on the value of the taxpayer’s own labor,’ citing several cases. One of the cases also involved an attorney who deducted the value of his time devoted to a pro bono activity, and who failed to convince the Tax Court to overturn the IRS determination that the deduction was prohibited. Similarly, the court rejected the taxpayer’s attempt to claim the value of his pro bono labor as a section 174 research and experimental expenditure deduction, not only because legal research is not within the scope of section 174 but also because the taxpayer did not pay or incur any expenses.

The prohibition against deducting the value of one’s time, whether on account of not having the opportunity to be paid for one’s labor, or on account of providing services to a charity or for a charitable cause, is a topic that gets attention in basic federal income tax courses. It is important not only because it is a principle of widespread application, but also because it illustrates several basic underlying concepts of federal income taxation. So I wonder if the taxpayer did not enroll in the basic tax course, enrolled but somehow didn’t learn this principle, enrolled and learned this principle but forgot it and failed to research the validity of the deduction, or knew very well that the deduction was not permissible but nonetheless claimed it thinking, perhaps, that the IRS would not notice it.

From the scant record in the case, it appears that the taxpayer is not a tax lawyer. I suppose that makes the case a bit less alarming than it otherwise might have been.

Update: Bryan Camp, in his commentary on the case, describes the taxpayer as a "former detective for the Washington D.C. Metropolitan Police Department." The court described the taxpayer as a "litigation consultant" who did "legal research." Often, people trained in a non-legal field, such as engineering, medicine, or criminal justice, obtain law degrees as part of the process of increasing their skills as forensic experts and enhancing their marketing efforts. I have not been able to confirm one way or the other whether the taxpayer attended or did not attend law school, obtained or did not obtain a law degree, or was or was not admitted to the bar.

The headline did not mention tax, but something about it, Jersey Shore ice cream wars. Who gets to sell?, caught my eye and I read the Philadelphia Inquirer article. Perhaps “ice cream” was the catalyst, though “Jersey Shore” might also have sparked my interest.

Whatever the reason I read the article, imagine my delight when taxes came into play. There was no surprise, of course, because taxes are everywhere. If there was a surprise, it was that the tax issue did not involve a tax on ice cream, though I should bite my tongue lest some revenue-generating mind-storming committee get an idea.

For a very long time, the town of Ventnor has sold licenses to veterans and retired firefighters, permitting them to sell ice cream on the town’s beaches. Each seller pays an annual $55 fee. And then someone had an idea. Licenses would no longer be issued to the veterans and retired firefighters. Instead, the right to sell ice cream on the beach would be limited to one vendor. Relying on the experience of neighboring Margate, Ventnor expected to raise $85,000. According to one official, the goal was to offset annually increasing real property taxes. The official explained that there are 10,000 homeowners in the town. So, by my calculation, each homeowner would save $8.50 a year so that a monopoly could take over ice cream sales on the beaches.

Fortunately, this time more than a few people pointed out that the idea being floated was a bad idea. That doesn’t happen often enough in the world. This time, hundreds of people reacted negatively and eventually more than 12,000 people signed a petition against the proposal. And the people organizing the petition gathered those signatures in four days. That’s impressive. That’s how democracy can work, when it hasn’t been monopolized. And it worked. The idea was “tabled,” a nice way to jettison a proposal. An official predicted that the idea “won’t be brought up in the near future.”

The sad news in the story is that the shift from individual vendors, almost always veterans, have been displaced in almost every Jersey shore town but for a handful. The mayor of one of those towns predicts that that the issue will be popping up, because that town has stopped issuing new licenses. Eventually, there will be an insufficient number of vendors on the beaches.

A lesson can be learned from another town, Brigantine, where the same idea of selling a monopoly to the highest bidder was adopted. What happened? The town ended up with no one selling ice cream on the beaches because no one bid. Though that was surprising, as one would think some oligarch somewhere would jump at the opportunity to sell $30 ice cream cones to parched and overheated beachgoers, what was even more surprising was the requirement that anyone selling ice cream on the beach was to be arrested.

Is there a lesson? Yes. Hurting several dozen people so that people who own beach homes can save $8.50 a year is foolish. It’s not what this nation should be about.

The intersection between tax and biotechnological developments, and between tax and technological development generally, has always captured my attention. More then 35 years ago, in Federal Tax Consequence of Surrogate Motherhood, 60 Taxes 656 (1982), I had the opportunity to share my thoughts about the tax consequences of an early form of assisted human reproduction. Since then, advances in medical technology have brought additional opportunities to focus on these issues. Tax issues arising from two newer forms of assisted human reproduction were the subject of at least two of my commentaries, Are In Vitro Fertilization Expenses Deductible?, and The Taxation of Egg Donations. The tax issues in all of these techniques have involved issues of gross income, medical expense deductions, and dependency exemption deductions.

Recent news stories have added another twist to the tax issues that are raised by assisted human reproduction. Within the past two weeks, reports have emerged of possible damage to frozen eggs and frozen embryos at fertility clinics in Cleveland and in San Francisco. Thousands of eggs and embryos were involved in refrigeration failures and nitrogen problems at the clinics.

Assuming, as appears to be the case, that the eggs and embryos in fact have been damaged and thus cannot be used, are the taxpayers who own these eggs and embryos entitled to a casualty loss deduction? The answer isn’t very easy to determine. Casualty loss deductions require, among other things, that the taxpayer’s property be damaged or destroyed. That leads to the question of whether human eggs and human embryos are property. It is likely that human eggs are property. However, theologians, scientists, ethicists, and others have been debating whether human embryos are property. Though there are court decisions, chiefly in divorce situations, concluding that they are property, the specific circumstances of those cases precludes a determinative sweeping definition of human embryos as property. If they are property, the casualty loss deduction should be available, assuming other requirements are satisfied, because the casualty loss deduction is in play when there is damage or destruction of animal embryos. Making the answer even more difficult to find is the possibility that a human embryo could be treated as property for some purposes, including taxation, and not for other purposes. If human embryos are characterized for tax purposes not as property but as humans, a casualty loss would be no more appropriate than it would be if a taxpayer’s child were intentionally or negligently injured or killed.

Already, as reported in in this story, litigation has started. Class action status has been sought in at least one case. It remains to be seen whether the litigation proceeds as a matter of recovering for damage to property or seeking damages for the death of a child. Again, the outcome will not necessarily answer the tax question, because the terms of the contracts between the fertility clinics and their customers will help shape the analysis.

As often happens in other situations, it would not be surprising if the tax question reached the courts before the contract, tort, property, and other issues are resolved in other cases. So there is yet another example of why perceptions of tax law practice being a dance among numbers is so misplaced. Resolving the casualty loss issue has little to do with numbers and a lot to do with an unresolved, perplexing, controversial, and difficult question.