Wednesday, September 29, 2004

A License to Tax? 

Or a tax license?

The getting-very-famous (or at least more famous than MauledAgain) TaxProfBlog has run into a tiny problem. It seems that an accounting professor at Rutgers has a "TAX PROF" vanity license plate, causing Paul Caron of the TaxProfBlog to ask, in all good humor, for a volunteer intellectual property lawyer. Take a look at the photo and comments by Paul.

A former colleague, who years ago taught me tax and who died a few months ago, proudly motored about with "TAX MAN" imprinted on his vanity Pennsylvania plate. Years ago I asked him why he wanted the world to think he was a tax collector, or perhaps a Beatles fan enamored of one particular hit.

Another colleague, still very much alive, reminded me that one of our recent graduates had "TAX CHIC" on her license. I checked in with her today, and, yes, she still has it. And, yes, she is practicing tax. Not much of a surprise, considering she lived and breathed tax as she progressed through the J.D. and LL.M. programs.

So I've set out to make a list of actual tax-related vanity license plates. There are more than a few web sites with lists, large and small, of vanity license plates. Some are geographically limited. There are very many web sites devoted to license plates generally, particularly collecting and trading.

Here's what I've found so far, after allowing myself no more than one hour to wander into an exploration that could become a month-long project. Maybe I can get funding for "Law and Tax Vanity License Plates: An Extrapolation of Cultural Perspectives on Taxation at the Halogen Headlight Level." Sounds scholarly.

TAX RFND on a Red Acura NSX in Los Angeles, CA (from this site)

B4RTAXS Before our taxes, on a new Mercedes (from this site)

NY: FELIXTAX (from this site)

TAXGUY (from this site)

The following are from the official West Virginia list:


These three are from this site) (and I particularly like the first):

IH8 TAX (Sudbury, Ontario) - [ on a tax accountant's car, parked at Legislature )

This just in: In Virginia, a TAX GEEK plate has been observed.

So if you have any ACTUAL tax vanity license plate information, please send it along. I'll periodically update the list.

Losing Trust: A Wobbly Feeling 

A new poll reveals that 61% of us have lost faith in leaders and institutions during the past four years. It isn't clear if that's 61% in addition to those who lost trust more than four years ago.

Quotes in the news report make it astoundingly clear that people are skittish. No wonder.

It's not really news, though. That's why I ask about the meaning of the 61%. By now, it wouldn't surprise me if 98.6% of us have lost trust. The list of folks in whom trust has almost disappeared is the same list I've seen at various times during the past few decades: politicians, corporate executives, lawyers, entertainers, and journalists. Oh, yes, lawyers come in pretty much at the bottom. I didn't see a mention of schools or religious institutions in this report. Or law professors. Or tax law professors.

So who DOES get trusted? A person's own family and firefighters, followed by neighbors, police and doctors.

The poll suggests that the reasons include the situation in Iraq, the 2000 election mess in Florida, white-collar crime, and terrorism.

Why make something so complicated? To me, it's easy to understand. Trust has diminished because people react to the inability of other people to accept responsibility, act honorably, put duty and honor above "it's all about me" selfishness, and to take pride in their efforts. Layer onto that the insulation that protects people responsible for a mess from the people whom they've hurt, sprinkle in the "no fault" mentality that represents "it's anyone's fault but mine" post-modern philosophy, and there's a recipe for carrying a mirror so one can watch one's back.

Wouldn't it be nice if a customer whose account has been butchered can talk to the clown who makes the mistakes? Wouldn't it be nice to talk to the programmer who still doesn't quite understand what the software user really needs? Wouldn't it be nice to talk with the faceless bureaucrat who is hidden away behind a screen? It's so much easier to shirk responsibility and to let one's self get by on a lesser standard when the aggrieved person is a concept and not an actual being with a face and personality.

It's simply this: the depersonalization and incorporation of American has eroded trust. Trust reflects a personal relationship. Post-modern society has chopped away at these foundational legs of culture. It's getting very wobbly.

Just a Mistake? 

News that a "Top Tax Lawyer Pleads Guilty to Felony Tax Evasion" may come as a surprise to some, but for me it's only in the who and not the what. After all, lawyers as a group do not have a stellar compliance record when it comes to taxes. As I mentioned in a previous post,
...the worse thing to do when in financial trouble is to avoid paying taxes by hiding income.
In this instance, though, it doesn't appear that the lawyer in question was in financial difficulty.

His former partner describes his tax woes as "some mistakes" and attributed the problems to his being "a little bit careless in his bookkeeping." I wonder why, if it was a matter of carelessness and mistakes, and not wilfulness, why he would plead guilty to a crime. By doing so he faces up to two years in prison. And he may end up being suspended or disbarred.

According to federal prosecutors, he failed to report as much as $1.5 million in gross income over 4 years. That's a pretty big mistake. Even for someone who is not one of the nation's top tax and estate planning experts, let alone for a tax attorney.

If it genuinely was carelessness, it is possible that an undiagnosed health problem, perhaps one associated with getting on in years, could be the culprit. If so, it's unfortunate that jail time awaits a person who would have been best served by medical care.

There are more lessons here than simply "don't omit gross income from the tax return." We need to learn to pay attention to those with whom we interact and to watch for changes in behavior or personality that might signal a need for medical or other attention. Maybe that's what happened here. Maybe not. After all, if it is what happened, the guilty plea makes no sense. And we need to learn that any one of us, no matter how skilled or famed, can get into trouble very quickly if we let our guard down.

I doubt we'll ever know the complete story. It is a sad ending to an otherwise fine career.

UPDATE: Some readers have questioned whether I'm cutting "slack" to this tax attorney that I would not allow to other taxpayers who commit tax fraud. I certainly don't intend to cut any slack, but until the facts are known, I'm simply giving the benefit of the doubt to the partner who used the terms "mistake" and "carelessness" to describe what was done. If compelled to take a stance without having additional facts, I'd consider the seriousness of a guilty plea and the pattern of tax fraud indictments not being issued without very strong evidence, and conclude that indeed, there was fraud. If there is a plausible "carelessness" argument, a guilty plea is not the expected reaction.

And if it's shown that what was done involved deliberate and wilful evasion, then my reaction to the use of the terms "mistake" and "carelessness" will be revised, and my disdain for trying to make fraud appear to be mere negligence will be very obvious. Back in November 2003, when the indictment was issued, I posted to the ABA-TAX listserve a comment that I had read the indictment and found nothing that explained what was done (or not done) that led to the indictment. It is a very brief and generic indictment, which is available here. The only clue is that taxable income was allegedly understated, which means that it could be a matter of understated or omitted gross income, overstated deductions, overstated credits, or some combination.


The press release from the Department of Justice gives some additional information about the situation. The attorney in question understated business receipts, and did not use the business and bank records of the actual receipts. He also failed to report gain from selling an interest in his law practice to another attorney. And he also failed to report receipts deposited into his personal bank accounts that represented payments from clients for services provided before the other attorney became a partner.

The guilty plea includes an acknowledgement that these omissions were made knowingly and willfully. Under these circumstances, it is extremely difficult to understand the other attorney characterizing what was done as a "mistake" on account of "carelessness."

Monday, September 27, 2004

Net Federal Spending by State: Correlations? 

Today, Paul Caron's TaxProf blog carried an item analyzing net federal spending by state with the state's character as a "red state" (electoral votes won by Bush in 2000) or "blue state" (electoral votes won by Gore in 2000). Paul points out that of the 32 states (including D.C.) that benefit from net federal spending (more federal expenditures in state than are paid in federal taxes from the state), 76% are red states (17 of the 20 states with the highest net federal spending are red states). Paul also points out that of the 16 states that are are disadvantaged in terms of net federal spending (paying in more taxes than receiving in federal expenditures), 69% are blue states (11 of the 14 states with the highest net tax pay-in are blue states.

The net federal spending report, from the Tax Foundation points out that the net federal spending or net tax pay-in for a state is affected by political factors such as the power of the Congressional delegation from the state and the state's ability to finesse its spending to maximize federal funding, and non-political factors such as age (social security benefits), per capita income, and percentage of federal employees (D.C., Virgina, Maryland). I would add factors such as weather (hurricane relief to states such as Florida and Alabama), and federal land ownership (western states).

Though I haven't figured out how to post a colorful graphic as Paul has, here is a listing of all the states (and D.C.) along with the partisan composition of their Congressional delegations and the governorship (and the 2000 electoral vote). I'll let readers decide for themselves if there is a correlation with any of these characteristics:
StateFed Expenditures per
Dollar of Taxes
New Jersey $0.62 7-6-02-0-0DD
Connecticut $0.64 2-3-02-0-0RD
New Hampshire $0.680-2-00-2-0RR
Nevada $0.73 1-2-01-1-0RR
Illinois $0.779-10-01-1-0DD
Minnesota $0.774-4-01-1-0RD
Massachusetts $0.79 10-0-02-0-0RD
Colorado $0.79 2-5-00-2-0RR
California $0.81 33-20-00-2-0RD
New York $0.81 19-10-02-0-0RD
Delaware$0.85 0-1-02-0-0DD
Wisconsin $0.87 4-4-02-0-0DD
Michigan $0.906-9-02-0-0DD
Washington $0.916-3-02-0-0DD
Texas $0.9216-16-00-2-0RR
Indiana $0.993-6-01-1-0DR
Oregon $1.004-1-01-1-0DD
Florida$1.00 7-17-0*2-0-0RR
Georgia $1.015-8-01-1-0RR
Ohio $1.026-12-00-2-0RR
Wyoming $1.050-1-00-2-0DR
Rhode Island $1.062-0-01-1-0RD
North Carolina $1.07 6-7-01-1-0DR
Pennsylvania $1.08 7-12-00-2-0DD
Vermont $1.12 0-0-11-0-1RD
Utah $1.14 1-2-00-2-0RR
Kansas $1.14 1-3-00-2-0DR
Nebraska $1.19 0-2-0*1-1-0RR
Arizona $1.20 2-6-00-2-0DR
Maryland $1.206-2-02-0-0RD
Iowa $1.22 1-4-01-1-0DD
Tennessee $1.24 5-4-00-2-0DR
Maine $1.312-0-00-2-0DD
Missouri $1.324-5-00-2-0DR
South Carolina $1.322-4-01-1-0RR
Idaho $1.34 0-2-00-2-0RR
Louisiana $1.442-5-02-0-0DR
Kentucky $1.462-4-00-2-0RR
Oklahoma $1.47 1-4-00-2-0DR
Virginia $1.473-8-00-2-0DR
Hawaii $1.522-0-02-0-0RD
Arkansas $1.53 3-1-02-0-0RR
South Dakota $1.59 1-0-02-0-0RR
Alabama$1.61 2-5-00-2-0RR
Montana $1.64 0-1-01-1-0RR
West Virginia $1.742-1-02-0-0DR
Alaska $1.82 0-1-00-2-0RR
Mississippi $1.842-2-00-2-0RR
New Mexico $1.89 1-2-01-1-0DD
North Dakota $2.031-0-02-0-0RR
District of Columbia $6.17n/an/an/aD
Partisan composition data as of 2004 fromhttp://www.thegreenpapers.com/G04/composition.phtml

Spending data for 2002 from http://www.taxfoundation.org/ff/taxingspendingupdate.html

* 1 vacancy

Bush Pages Through the Tax Code? 

Paul Caron has an item on his TaxProf blog this morning, citing a Washington Post article that quotes the President describing describing the tax code as "a million pages long." He's wrong, because it's supposedly only 17,000 pages (as if that's an improvement).

Had the President described the tax code as being more than a million WORDS long he would have hit paydirt. As of 2000, the last year for which I have a count, the Code contained 1,669,514 words. In 1954, when its predecessor (the Internal Revenue Code of 1954) was enacted, there were "only" 409,421 words.

The number of pages, of course, depends on page size, font size, kerning, and a bunch of other variables. To many people, it feels like a million pages. Perhaps the President uses the large print edition, with one or two words per page. Or perhaps he uses the illustrated edition that has a photograph page for every word. Ever see a picture of adjusted basis?

As of 2000, tax regulations contained 7,307,000 words. In 1954, tax regulations had already crossed the million-word mark at 1,033,000.

I've never seen a count of the words in IRS rulings, court opinions dealing with taxation, and tax commentary. I'd guess more than a hundred million words. My publisher tells me that I've contributed more than a miniscule portion of that total (and that's not counting the legislation and regulations I drafted several decades ago).

So it's partly my fault.


Friday, September 24, 2004

Tax Revenues and D.C. Baseball 

Very low on the national news headline radar, but getting some attention in the sports pages, is the allegedly imminent move of the Expos from Montreal to Washington, D.C. Though baseball's cerebral challenges and its bucketloads of statistics have always interested me, it's the public finance and taxation aspect of the story that gets my attention today.

Negotiations between major league baseball and D.C. officials have progressed so far that the location for a new stadium has been identified. It would be on the shores of the Anacostia River south of the Capitol.

The new stadium would cost more than $400 million. Some of that cost would be expended to acquire the site, which consists of more than two dozen parcels used for a variety of purposes. All are privately owned. This news surely pushed up the value of these parcels. Yet some of these owners don't want to move, and don't want to sell. Unless, of course, they get much more than current market value. If that happens, the price of the stadium goes up.

Major league baseball wants D.C. to fund the stadium. D.C., an area that has had, and continues to have, serious financial problems, which depends on the Congress for appropriations to assist it in balancing its budget, and which can barely provide services to its residents, is being asked to come up with money to pay for a stadium to be used by a bunch of multi-millionaire team owners and their almost-as-wealthy employees. In addition to charging the team rent for use of the stadium, a tax on concessions, D.C. proposes to impose a tax on other businesses, and has set out to try to "sell" this plan to them. In the meantime, three candidates for D.C. Council who oppose public funding won their elections last week. Surprise. The citizens have spoken. So now D.C. is trying to rush this deal to completion before the newly elected members of the council take office.

Once upon a time, if a business chose to move one of its facilities, it found a location, negotiated a price, worked out any zoning problems, and carried on in true free market tradition. That's not how it happens anymore. Businesses that choose to move approach two or more governments and bargain for public financing and/or tax breaks. Sports teams are among the most notorious for seeking public financing of their private enterprises.

The argument that is used by the sports teams and by other businesses is that they are bringing "economic growth" to an area. Therefore, so the argument goes, because they are improving the economic condition of the community, the community ought to pay. Through the government. So governments trip over each other trying to entice the business to their neighborhoods.

There are three huge flaws in the argument.

First, there is no guarantee that the newly arrived sports team or business will bring economic growth. Yet any attempt to obtain a pay back of the governmental financial assistance if the promises of the sports team or business aren't met is rejected. Why can't the team or the business put its money where its mouth is? Simple. They want the risk to be shifted to the taxpayer.

Second, the community gets its chance to pay without the need for tax revenues to be funneled to the team or business. If the team or business is selling something that people want, they will come. They will buy tickets or pay for the goods or services being sold. They will patronize the subsidiary businesses that sprout up around the principal team or business location. They will watch the team on television, pushing up ratings, and increasing the amount of money that networks and advertisers are willing to pay to the team. A tax, in contrast, is a forced extraction of money that lacks the voluntariness of the free market.

Third, the idea that governments need to cave because the team or business otherwise would not locate in the area is tempered by the fact that the team or business needs to locate somewhere. There are only so many cities that can support a professional sports team. Most businesses need to be near a port, or an airport, or a good highway system, or the source of raw materials. No one city can "grab" all the teams or all the businesses, and when a city gets too big in that respect, businesses begin to avoid the city because its success in attracting businesses breeds its rewards of congestion, higher infrastructure needs, crime, and other disadvantages. In the long run, it balances out.

It is interesting that D.C., which could use revenue to fund schools, playgrounds, and other beneficial social services, is expected to come up with revenue for a baseball stadium when it hasn't been able to find the revenue to meet more important needs. And that is one of the reasons there is opposition on the current D.C. council that makes it less than a slam dunk that the proposal would get the necessary approval.

Although other teams have persuaded other cities or states to pay much or almost all of the stadium cost, such as Camden Yards for the Baltimore Orioles, or the new Padres stadium, the tide is turning. The teams in Philadelphia, Pittsburgh, and St. Louis are getting less than half the costs from publicly financed sources. The San Francisco Giants failed to get any money out of San Francisco or California to build their new stadium. What? Government fiscal sanity in California? Indeed.

The history of public funding of private enterprise sports facilities in D.C. is inconsistent with what major league baseball is trying to get. The NHL and NFL arenas were built with private money, though a relatively small amount was spent by public authorities on roads.

One of the reasons D.C. is getting attention from major league baseball is that the other locales trying to lure the Expos are not offering 100 percent public financing. But they are offering a good-sized chunk.

For critics, including myself, the idea of taxing citizens, directly or through business taxes passed on in increased prices, to build a facility for a private enterprise is nothing more than a breach of public trust. The argument that the local or state government is making an investment that will bring returns has been refuted. Andrew Zimbalist, an expert sports economist, does as much in his many writings, and summarizes his findings in this interview. And the citizens of D.C. who had an opportunity to vote sent a concordant message when they elected three council members who oppose the use of public funds to shore up private enterprise.

Let's face it. The Montreal Expos are a business that fell on hard times, mostly through mismanagement and the impact of the player strike. The team cannot survive in Montreal, and it lacks the money to move elsewhere. Hence, major league baseball is trying to make everyone else, but mostly folks in D.C., bail out the team. Why not have the players and owners, whose foolishness led to the strike that catapaulted the Expos into financial oblivion, bail out the team? Is major league baseball playing on the sympathy of low and middle income D.C. citizens to make them willing to bail out a bunch of millionaire and multi-millionaire owners and players? No, with negative D.C. Council reaction looming on the horizon, major league baseball and its cronies in government are trying to rush something through and jam it down the throats of the citizens before the newly elected Council members are seated. THIS is democracy?

Even supporters, such as Michael Wilbon, in his Washington Post article, A Stadium Grows, a City Will Blossom, admits that the economic benefits he claims will result from the proposed deal will not flow back to the citizens. He writes:
I'm not about to argue that any stadium built for a professional sports franchise is going to benefit working class and poor people. Primarily, it's going to benefit folks who own the franchise, and people who entertain in luxury boxes that lease for $200,000 or more per season. But it can greatly benefit businesses that attach themselves to sporting palaces.
It doesn't take much to see where this is going. I admire Wilbon's honesty. I don't understand his sympathy for taxation designed to enrich the already rich.

While the baseball dealings swirl and whirl, the D.C. United soccer team announced that it intended to seek approval to build a new soccer stadium in the vicinity of the proposed baseball stadium. The stadium would be privately funded. How refreshing. Oh, for those who don't know, major league soccer players earn far less than do major league baseball players, whether measured by averages, medians, or maximums.

Thursday, September 23, 2004

Tax Woes for Philadelphia Restauranteur 

Somehow, it never fails. A person's financial problems make the news, and sometime later the other shoe drops: the person has tax problems.

A story in today's Philadelphia Inquirer reports that Neil Stein, famous for his several popular, elegant restaurants, was indicted for skimming receipts from his businesses so that he could avoid federal income taxes. He's been charged with filing false tax returns. He's also being investigated for possible mail and bankruptcy fraud charges, as well as more tax charges.

The amount involved in the federal income tax fraud case is $120,000, but the IRS contends that Stein owes $4.5 million in back taxes. It's possible, of course, for tax fraud charges not to attach to all of a taxpayer's unpaid taxes. Plus, the city of Philadelphia and the Commonwealth of Pennsylvania have already obtained rulings that Stein owes $1.1 million in city taxes and $773,000 in state taxes.

Each semester I explain to my students that the worse thing to do when in financial trouble is to avoid paying taxes by hiding income. It's better to file a return without paying the taxes. No fraud, no crime. Lots of aggravation, but no jail time. Stein's bankruptcy lawyer is one of my former students, who is getting a first-hand look at what happens when someone tries to outsmart the IRS.

Wednesday, September 22, 2004

Maule on Legal Education 

Yippee! I published again. No, not the sort of "scholarly" work that gets the usual attention. It's another "soapbox" column in the Law School's weekly newsletter. Gee, what a surprise. Jim Maule delivers a "soapbox" column.

It's not a surprise because this is the fifth in a series of essays on legal education directed primarily toward law students. Anyone interested in what at least this law faculty member is trying to do while educating future lawyers should take a look. Just click on the column title. Monday's column is at the top of the list, and they progress in reverse chronological order.

Doing Puzzles While Learning and Practicing Law, The Gavel Gazette, at 1 (Sept. 20, 2004)

Time Can Be on Your Side. Or At Least By It, The Gavel Gazette, at 1 (Feb. 16, 2004)

Learning to Teach and Teaching to Learn, The Gavel Gazette, at 1 (Sept. 29, 2003)

Crumbling Myths & Dashed Expectations, The Gavel Gazette, at 1 (Sept. 3, 2002)

Money for Nothing and Work for Free?, The Gavel Gazette, at 1 (March 5, 2001)

Yes, there will be more.

The Joys of IRC Section 86 

Today in the Introduction to Federal Income Taxation class it was time to tackle section 86 of the Internal Revenue Code, which specifies the extent to which social security benefits are included in gross income. Though the students may think I delight in dragging them into the morass of computational complexity and policy pitfalls that characterize the provision, I wish it did not need to be done. Until this point in the course, one which inspires high anxiety or fears of boredom for many students, the experience, though a bit obscure at times, generally is positive. Students learn that much of tax is not simply "just numbers," that there are unresolved issues, that tax affects almost everything in life, and that it can, at times, be fun.

Then section 86 appears. And dark clouds cover us.


Section 86 is a testament to legislative inefficiency. The first step is easy. Should social security benefits be taxed? There are good arguments for yes, and for no. The better outcome is yes, because after all, it isn't all that different from a pension. The next question is, what should be taxed? The answer should be, the excess of what a person gets over what a person pays in. In other words, the net gain, or profit. That's pretty much how pensions are taxed.

Did Congress do it that way?

Of course not.

Congress decided that it would be too complicated to have people figure out how much they had put into the system. Hmmm. Every year we get a statement from the Social Security Administration that tells us what its records show, and gives us a chance to correct the records. So that information exists. What's the problem? Probably the realization that a lot of people would have a lot of social security gross income. And they'd be unhappy. And Congress fears the outcome.

So Congress made two decisions. First, it would tax 50% of social security benefits. It's not a rough approximation. It guarantees that almost no one would be taxed on as much as they gained. Second, it decided not to tax social security benefits if the taxpayer's modified adjusted gross income, increased by tax-exempt income, which I'll call "modified aggregate income," does not exceed a base amount ($25,000 for unmarried taxpayers). Why? Because "poor people shouldn't be taxed on social security." Well, poor people shouldn't be taxed on ANY KIND OF INCOME. Congress avoided the real issue, which was the need to increase the standard deduction and/or personal exemption so that a poor person, no matter the type of income, would not be taxed. The notion that different kinds of income should be taxed at lower rates is not something new that arrived with the low rates on dividends. The folks that enacted low rates for dividends had mentors... the ones who decided social security income should be treated differently.

Then Congress realized that if a taxpayer's modified aggregate income was $25,100, it would trigger taxation of 50% of social security benefits, which is quite a high price for that extra $100 of income. So Congress limited the social security gross income to the lesser of 50% of the benefits or 50% of the excess of modified aggregate income over the base amount.

Complex, but manageable. Tough to defend as a matter of policy, or efficiency in administration. But at least I could teach it, and the students could understand it well enough to comprehend the underlying sausage factory environment, in about half a class (25 minutes) plus the time they need to invest outside of class (another hour to hour and a half in preparation and assimilation).

But then someone in Congress needed a revenue raiser to offset a revenue loser, and their eyes turned to section 86. It was proposed to raise the 50% to 85%, an amount much closer to an "average" rate of gain for the typical social security benefits recipient. Others howled. Horrible idea. So we get a compromise. Use 85% rather than 50% if the social security benefits exceed an "adjusted base amount" ($34,000 for the unmarried taxpayer). But, again, a few dollars of modified aggregate income could push someone from 50% being taxed to 85% being taxed, so an absurdly complex provision was added to ensure that the inclusion rate scaled or stepped smoothly from 50% to 85%. They put it in section 86(a)(2), drafted it as an alternative, and then labelled it as an additional tax. It's an alternative, not an addition to what's in section 86(a)(1), so what's the problem with using some accurate language?

We didn't get to the 85% stuff today. That's on Friday's schedule.

By this point students are in mental pain. I risk being in physical pain when things fly (but that's never happened). I give them a bunch of examples. I don't and won't test them by asking them to do the computation. Computer software can do that. They can, too, though they don't believe it, for all they need to do is to follow the form.

But following the form makes much more sense if one understands WHY one is doing what the form asks. That's one of the things I want the students to figure out. The WHY of it.

But there's something else I want them to understand. It's the bubble effect. Only after I explain this mess can I explain the bubble. The bubble happens when someone with modified aggregate income under the base amount (or adjusted base amount) has an increase in income, which happens if the retiree needs to go back into the workforce in order to make ends meet or to pay extraordinary expenses. The person's taxable income increases not only by the amount of the additional income, it increases by the increased social security gross income caused by the increase in the person's aggregate modified income. Instead of having a tax liability increase equal to the additional income multiplied by the marginal tax rate, the person ends up with a tax liability increase equal to the additional income multiplied by as much as 185% of the additional income. I'm not going to do the computations here, but in a law school class I'm not going to say "trust me" to the students. I want them to see the WHY of it, to look at the arithmetic so that they can understand the phenomenon. I want them especially to understand the significance of the question, "So why is this retiree couple scraping by on a few tens of thousands being taxed at an effectively marginal rate far greater than that imposed on a multimillionaire picking up a few more thousand dollars of income?" How can that be justified under any philosophical, moral, or theological canon?

After all, it is the inability of most Americans to understand the bubble phenomenon that permitted certain members of Congress to enact phaseouts and scale-downs that, to quote one of them, "let's us increase taxes without increasing rates" so that people will think taxes were not raised when in fact they were. We don't reach the phaseouts until late in the semester. About the time we cover marriage penalties and marriage bonuses. By then the students are either rolling along with me or sick to their stomachs, or both. And yet I continue to insist we ought to be teaching Real Civics in our high schools.

When we begin this topic there usually are some questions about social security. Some students know what it is and how it works, and others have only a vague idea. So I explain it, of course with my bias that emphasizes the "I" in FICA. The word Ponzi is heard. References are made to the problem that looms when the number of social security recipients will be only 1.4 times the number of workers rather than the 41.9 to 1 it was in 1945 or the 16.5 to 1 it was in 1950 or the 3.something to 1 it's been recently.

Most of my students are in their early 20s. Most have held jobs, but mostly as part-timers. They're just about ready to enter the full-time workforce. The idea that each group of three of them must support two retirees doesn't appeal to them. The fact that the funding of the social security program has been woefully inadequate, costing far more than its proponents admitted, doesn't sit well with them. Or me, but I don't count, because I won't be around when these students are in their 80s. If I am, I'll be so old and decrepit I won't know that I'm around, that I'm old, or that I'm decrepit.

The date is voluminous and worth a read. Take a look at the 2004 OASDI Trustees Report, especially at IV, B, 1 Annual Income Rates, Cost Rates, and Balances. Lots of numbers, some nice charts, intense text, and alarming news. But we knew that because Alan Greenspan drew our attention to it, as I pointed out in one of social security posts. Or at least he tried. Most folks weren't and aren't listening. Those that are try to soundbite the issue and play to the electorate.

The impending doom of the Social Security program doesn't stand alone on the horizon. It's wrapped up with general government revenues and expenditures, simply because for a while the program has had a surplus. It's far too small, of course to fund its obligations, but it exists and it was invested. In what? Mostly in loans to the rest of the government. What happens when social security needs to tap its surplus when social security tax revenues begin to slip behind payments to beneficiaries? The government will need to issue debt. I'm not going to do the entire macroeconomic analysis. Suffice it to say, it won't be pretty. My guess is that China will own the nation. Yes, that's alarming, but go look at the numbers. There are numbers in the TENS OF TRILLIONS. That's a LOT of money. Even for Bill Gates. Well, hmm, now that I mention him, if China doesn't own us by then, Bill will.

Some serious reform is needed. Not just of tax, but of expenditures and programmatic decisions. Should social security be treated as an entitlement or as insurance? How should it be financed? Bruce Bartlett points out the alarming truth in A New Money Machine for the U.S.; The old ways can't keep up. We need a value-added tax to meet revenue demands. We need SOMETHING.

Politicians speak of tax reform. Yes, speak. And they get hard-working, intelligent officials in Treasury to prepare tax reform proposals. Proposals that are unlikely to become law, even if they generate discussion in the political arena and find a temporary home in a Congressional committee. The proposals are alternates so there's a lot to read and ponder. Each one has its advantages and disadvantages. Some I like more than others, and some I dislike. Does it matter? Practitioners generally want to, and need to, deal with the law as it exists. Some get involved in studies to refine or repair a narrow technicality. A few pay attention to the big picture and lift their eyes to the horizon. Politicians can't think past the next election. In the meantime, the tax system has become more complex, more inequitable, and more inefficient. Tick tick tick

It's sad, but we have a long history of a nation of being unprepared and then needing to scramble, quickly, painfully, expensively, and fatally, to solve the problem. Oh, and then there will be a commission to figure out what went wrong. But this time perhaps there won't be any money to fund a commission. Or a Congress.

That doesn't sound very optimistic, does it? And supposedly I'm am optimist, a Saggitarian who when getting a box of pony dung figures the gift of the pony isn't far behind. (Someone told me that years ago and it stuck. The analogy, not the pony stuff.)

It's not as though the system CAN'T be fixed. It's that too many people can't or won't set aside personal agendas for the common and better good. When asked what I would do if I were the "tax czar" my response usually includes a comment that it wouldn't matter, because reform needs to come from within each citizen rather than being imposed from above (or below, depending on one's perspective).

I hang on to one shred of hope. Modern technology, linking people together in ways far different from the communications of the past, provides an opportunity for people to organize and coalesce around issues that matter. Perhaps I'm wrong and most Americans like the current system, look forward to the impending economic failure of social security, await with glee the financial collapse of the nation, and think Grandpop and Grandmom should indeed be taxed on their part-time earnings at two or three times the rate the millionaires and multi-millionaires are taxed on their capital gains and dividends. I could, after all, be wrong. It wouldn't be the first time.

But if most Americans share my fears about the tax system and the larger national economic situation, and want true tax reform, it will require that many of those who understand the smoke and mirrors be willing to explain the game to the tens of millions who don't. Those who are invested in the current tax system, even though its failure will take down rich as quickly as it takes down poor, include too many who understand (and created) the smoke and mirrors and who have the skills to use them to their advantage.

And, so, it comes back to the need for education. I guess as long as I keep trying to explain section 86 to second and third year law students I must think, at least deep down inside, that there is indeed some glimmer of hope.

Monday, September 20, 2004

Taxes and Education: Children Left Behind 

One could write a book on the complex relationship between taxes and education. Actually, it's been done. Several times. At one end of the spectrum are issues involving the selection of the type and amount of tax imposed to fund public education. At the other end are issues involving income tax exclusions for scholarships, deductions for educational expenses, exclusions for employer-assisted education, credits for lifetime learning, and a long list of similar provisions, both at the federal and state level. Somewhere along the line between the two are sales tax exemptions involving education, and estate and gift tax charitable contribution deductions for gifts to educational institutions.

I'm not going to write another book. I want to focus on provisions that connect the public education financing side of the spectrum with individual income tax deductions and credits on the other end. Specifically, I want to consider tax credits and deductions for school supplies purchased by teachers for use by their students.

What turned my attention to this question was a news report today with this headline: Teachers lose tax breaks for class expenses. The news was that the California legislature has suspended a state income tax credit (limited to $1,500) for teachers who purchased school supplies for use by their students. There are similar credits (or deductions) in a few other states.

Note: The news article erroneously states that there was a federal deduction (limited to $250) that has expired. For federal income tax purposes, there has been and continues to be an employee business expense deduction for supplies purchase by teachers. What expired was a provision that permitted this deduction to be taken in computing adjusted gross income for taxable years 2002 and 2003. The deduction remains as an itemized deduction subject to the 2% floor and the overall 3%/80% limitation on miscelleaneous itemized deductions.

What's not news is what anyone who pays attention to education issues already knows: teachers spend hundreds of dollars of their own money providing supplies to students that schools do not provide (even though the supplies are necessary) and that, in some instances, students and their families cannot afford. The scale of the problem is alarming. Students cannot learn if they lack the required supplies, and many taxpayers are unwilling to pay increased taxes so that the schools can provide the supplies. Though the problem afflicts all sorts of schools, it is most acute among public schools.

The article also reports more information that is not news. Sometimes teachers and their unions oppose enactment of tax breaks because they prefer increases in public school funding. I agree with this position. First, tax breaks do not provide full reimbursement, and teachers continue to bear a burden that should not be theirs to bear. Second, tax breaks hide the problem, whereas school funding debates get the spotlight that the issue needs to have.

The school funding issue is another example of the "we want it, and we want it cheaply" demand of the post-modern culture now dominant in the country. Taxpayers complain about teacher salaries, and point to salary figures that are deceptive because they don't reflect the portion of the salary that is spent by the teacher making up for employer omission. How many of these complaining taxpayers would be happy if they were required to purchase supplies for their clients and customers on a regular basis?

People want inexpensive goods and services, but when corporations seek to lower costs so that prices can be lowered, they turn to outsourcing, and an uproar begins. How long until children begin to get their schooling through outsourced public education? It's already being done in a few rare instances of home schoolers getting their children connected via the Internet to cultural, educational, and historical sites outside the U.S.

People want inexpensive airline flights, but when corporations seek to lower costs by cutting unprofitable routes, seeking worker give-backs, or lobbying for public financial support such as tax breaks and government-funded facilities, all sorts of objections are lodged. Today's cheap flight on the other airline will become tomorrow's expensive flight once the undercutting has put the more expensive airline out of business. And the person making the boatload of money, like the developer who leaves behind for the rest of us the traffic congestion and related costs caused by the development, will be long gone.

Inexpensive public education buys cheap learning. Cheap learning guarantees that the country will lack the informed, capable citizens and leaders of the next generation that it needs. Let's add up all the things we demand of our schools and put a price tag on them. Then calculate what taxes would need to be if the public bore the full burden, rather than shifting some of it to the teachers. Logic and common sense dictate that the list of "wants" be pared to the essentials, but emotions get in the way. An anecdote: when I was about 9 or 10, I overheard a discussion among the adults in the extended family about the "stupidity" of putting carpeting in an public elementary school (which was also getting a full-sized Olympic quality swimming pool). I have never forgotten the bluntness of one of the adult's comments (I think it was one of my aunts): "Who in their right mind would put carpeting in a place where at least every other day some kid throws up?" Indeed. Who in their right mind.

Somehow right minds need to prevail and alter the spending so that it is done with logic and common sense. The "everything for everybody" and "make each person happy" emotional mantra causes public education to invest in (or at least in some instances to be pressured into investing in) each full-fledged athletic facility or extracurricular activity program that is wanted by the parents of any given child. So schools end up with football fields, baseball fields, hockey rinks, Olympic swimming pools, spinning rooms, ...... In the meantime, driver education programs are discontinued for lack of funding.

Someone has decided that athletics and certain other activities are more deserving of funding than supplies for the academic programs. Perhaps it's the parents who put far more energy into working for successful school athletic programs (measured by won-loss record and occasionally by number of athletic scholarships earned) than into working for successful academic programs. Ever wonder why the high school football or basketball team's game makes the headline and the National Merit scholars might get a tiny mention at the bottom of a column on an inside page?

This tension between academics and everything else has existed for a long time. It exists not only in the public K-12 schools but also in higher education. We hear that athletics "teaches" valuable character traits, and I suppose in some instances it does (though I doubt that such is the case at some schools, such as one out near the Rocky Mountains). Character, however, can be taught, and sometimes is more easily taught, under adverse conditions. Successful progress in academic courses cannot be accomplished, however, when the requisite basic tools are missing.

I suppose I'd be less aggravated by the short end of the deal that teachers are getting if I thought that the current system of K-12 (and higher education) in this nation was turning out a nation of highly educated individuals. I teach at the terminal end of the system, in graduate and post-graduate education. The information and analytical deficiencies that I see in our "best and brightest" is sad, alarming, and unjustified. Class attendance and learning (in contrast to "getting a grade") rank too far down the priority list for most college students. I wonder where they learned their priorities?

An income tax credit is NOT the place to solve the problem. Giving small tax credits to teachers is a poor substitute for schools taking responsibility for education. In the case of public schools, that means the public taking responsibility for education. That responsibility belongs both in the civic arena (school funding and expenditure issues) and in the household (determining spending priorities for individual education expenses).

In the meantime, the teachers in California are faced with this choice: watching their students suffer because they need to cut back on their purchases of school supplies by the amount of the suspended tax credit, or cutting their own household expenses (including spending for their children's necessities) to make up the difference.

Maybe the professional athletes who got to where they are because their schools gave them the opportunity can jump in with 1% of their multi-million dollar salaries in an "Athletes Grateful for their Schools" program that would fund these supplies. At least in the short term that might bring some relief to people in need of the tools for learning how to be tomorrow's informed electorate.

After all, children without the necessary school supplies are far more likely to be children left behind. And all of us have a responsibility to say and do something when children are getting the bad end of the deal.

Friday, September 17, 2004

Annoyed by Software Developer But No Damages in Sight 

In my post about taxpayers being awarded emotional damages because the IRS tried to collect discharged tax debts, I stated that the making of mistakes and failure to respond with corrective action was as prevalent in the private sector as with government agencies. As an example, I share this story.

Early in the year it became apparent that the 7-year-old software I used for generating HTML documents was useless with Windows XP. Yes, I know Word and WordPerfect documents can be converted to HTML, but they come with too much overhead and it's more convenient using software designed for HTML composition and programming.

So I found a replacement. I downloaded it. I tried it. I liked it. I paid for the Professional version. All was well, though the "better" professional version would slow down after it was in use for a few hours.

On Wednesday I received an email from the company inviting me to download a FREE "upgrade" to my paid version of the software. The upgrade included a few new features but, more importantly, fixed numerous bugs. Good, I thought, this might solve the slow-down problem.

I went to the URL provided in the email. It was a web page that invited me to download the trial version of the software. Don't need that. I looked through the company's site and did not find an upgrade download. So I clicked on the "contact us" link in the email, came to a web page permitting the sending of messages, and sent my message. There was no reply.

So I looked again at the trial version download page, and it was described as the version number of the upgrade. I downloaded it. I installed it. I clicked on Help, and then About. It showed itself as the upgrade, with a September 14 date. Excellent. Except for one thing. It also described itself as an unpaid trial version.

How nice. A supposedly FREE upgrade to fix problems in a purchased product ends up demoting me to a trial version.

So I decide it's time to contact the company again. By now, I am more than annoyed. Are the company's programmers too incompetent to distinguish between paid users getting the upgrade and first-time users downloading a trial version of the upgraded software? Apparently so, for all users reach the same trial version download page.

Before sending the message I check my email. I have a response from the company. Great. Great? Noooo. It is an automated response telling me that my email sent from the company's "contact us" web page went to an obsolete email address and that I should use a different address. Huh? If you change the email address, why not go to the web page and change it there also? Don't treat me as though I was the one who decided to send the email where it went. The company's web page did that. Now, of course, the programming staff's stature fell more. A lot more.

So I sent an email to the new email address and explained the situation, much more elegantly than I did in this post. Have I had a response? Nooooo.

So I may end up having to change programs yet again. How I wish I could sue for emotional distress. I can't. I didn't have any. Being dumbfounded at the incompetence of others isn't a cause of action. If it were, I'd own the world by now, for I'd have sued Bill Gates so many times.... ha ha, maybe Bill Gates bought the company that developed the HTML software I was trying to update. Hmmmmm.

I haven't named the company. I'm sure if I did, it would sue ME, because it would be OFFENDED that I dared to criticize it. After all, they're perfect and their parents told them that the world was all about them.

Just checked my email again. Nope, no response.

UPDATE (Wed 21 Sep 2004): I received a reply from the software developers. They claim that even though the trial version and the update are the same file, that the program was not demoted to a trial version. There's no way to prove or disprove that until the trial period ends. So, we'll wait and we'll see.

Emotionally Distressed by the IRS 

Blogs are very useful. Paul Caron’s TaxProfBlog brought news about an article written about a bankruptcy case decided in May. It’s now September, so the case had flown under my radar, but after reading Paul’s summary curiosity got the best of me.

The case, In re Torres, 209 Bankruptcy Reporter 643 (2004), involved taxpayers who filed for bankruptcy in September 1992. In January 1993, they received a discharge of all their liabilities, including almost $14,500 in 1985 self-employment taxes and $7,100 in 1989 through 1992 self-employment taxes. Discharge means that the debts are absolved, and need not be paid.

At first, the IRS suspended its collection activities on the discharged debts. Why not close the case? Closing the case would have prevented the next part of the story.

Three and a half years later, in September 1996, the IRS began to send notices to the taxpayers, requesting payment for the taxes that had been discharged. The taxpayers responded each time with a telephone call to the IRS. The IRS then notified the debtors that a refund due to them for 1995 was being held by the IRS so that it could be applied against the taxes that the IRS claimed were due. Then the IRS sent a final notice of levy to the taxpayers.

The taxpayers brought an action seeking to have the IRS held in contempt for violating the discharge injunction. The IRS conceded to a willful violation of the discharge injunction. The bankruptcy magistrate awarded damages to the taxpayers for emotional distress, but rejected their request for attorneys' fees and costs because they had not exhausted their administrative remedies. On appeal, the court affirmed the damage award and reversed the denial of fees and costs, sending the latter issue back for determination of the fees and costs.

Nothing is more aggravating than when a clerk, bureaucrat, or other administrator makes an error as to which there is no room for discretion, and then fails to admit the error and fails to fix the error. In this instance, the IRS heaped insult onto injury by trying to collect taxes and then holding back a refund.

The bad news about this case is that the award for emotional distress is authorized under bankruptcy law and thus is available only in the limited number of cases in which the taxpayer dealing with the mistake is in, or has gone through, bankruptcy. The good news is that perhaps a message will get through to the IRS.

I am among the first to defend the IRS when it deserves to defended. It is underfunded, it is charged with administering a mess of a tax law, it is treated as though it wrote the foolish provisions in the tax law, and it is a favorite scapegoat of Congress for the latter’s tax legislation incompetence. But when the IRS does goof, it gets the headlines, and leaves the world thinking it’s like this all the time.

There probably are no other cases, or perhaps just a few, in which the IRS has pursued collection of taxes that had been discharged. What happened?

First, the case should have been closed. Second, an employee made a mistake. Third, the mistake was not corrected.

True, the blame can be attributed to high turnover among IRS employees, miscommunication, inadequate funding (thanks to the Congress) for employee education, and perhaps ignorance concerning the meaning of “discharged debt.” Before hauling the IRS up on charges, consider that this sort of nonsense goes on in every company, and is the reason for many, many customer service calls, Better Business Bureau complaints, and lawsuits.

The individual employees who erred won’t be paying the bill. The odds are they no longer are with the IRS. They were not identified. Their current employers surely don’t know of the problem they caused. While we cheer the award of damages to taxpayers whose lives were made miserable by incompetence, we might forget that WE, yes, WE, are paying the bill. That’s because the employees involved in this mess are protected. Wouldn’t some ACCOUNTABILITY be nice here? Just as it would be in the private sector?

Modern culture needs to stop rewarding incompetence, laziness, greed, and crime, it needs to stop pretending something bad is good, and it needs to elevate the values of individual responsibility and accountability to the same level to which their counter-balancing forces, freedom and independence, have been raised. Why society is so reluctant to be intolerant of incompetence, laziness, greed and crime puzzles me. Far more good is done in the long-run by confronting the problem head-on and dealing with it than is done by protecting the sensitivities of an employee who isn’t helped by pretending that reality is a fantasy.

Oh, No, There are All These Hurricanes!!! The World is Ending! 

They called it Ivan the Terrible, a hurricane noted not only for its own powers of catastrophic destruction but for its identity as a camel-back-breaking straw, coming on top of three previous hurricanes with the past several weeks. Reporters tripped one over the other in bringing the alarm to a fever pitch, typified by this quote from the Guardian:

"unprecedented ferocity and frequency of the hurricanes that have battered the Caribbean this year"

Anyone looking for proof that studying history has value need look no more. Students of history know that a burst of hurricane activity and intensity is nothing new. People born after 1960 and ignorant of hurricane history (a way too big proportion of the population) see the current hurricane activity level as some sort of doomsday event that cries for immediate measures of prevention.

Of course, the favorite scapegoat is global warming (which hasn't yet been proven to be true, as intense, or as calamitous in effect as predicted). Predictions such as this one, in which the Red Cross contends that 1-in-50 year hurricanes will occur once every 10 years. The notion that global warming is responsible for all perceived increases in natural disasters suggests that before, and in the absence of, global warming there would be no such disasters, and rests on the premise that there has been an increase in natural disasters.

But is global warming the cause? And if it is, would stopping or reversing it change hurricane activity levels?

The answer simply is that global warming is not the cause of the seeming increase in the number or intensity of hurricanes. Even during the when global warming allegedly has been taking place, the number of hurricanes had been decreasing. The fact is simple: hurricane activity follows a cycle.

Historical records show that the explorers of the Spanish Empire encountered frequent and strong hurricanes. Global warming?

Some scientists suggest that eventually global warming will have an effect, such as a 5-12% increase in hurricane intensity, but that hasn’t happened yet. And it might not happen. But other studies show an inconclusive connection between global warming and hurricane development.

No matter, global warming would not account for an increase in the number of hurricanes. Even the scientists who predict future increases in hurricane intensity on account of global warming agree on this point.

It even is possible that in the long-run, hurricanes might even offset global warming. Perhaps global warming during the 70s and 80s into the early 90s is in part attributable to the lower frequency and intensity of hurricanes during that low side of the hurricane cycle.

Far more significant is the ATTENTION that hurricanes get. Hurricanes get attention because they cause death and property destruction. What HAS changed since the last high point of the cycle are phenomenal increases in the number of people living in, and the amount of property constructed in, areas prone to hurricane activity. More than 45 million people now live in hurricane-threatened areas, and the population continues to grow. Add tourists and vacationers, and the number of people at risk increases significantly.

What is unprecedented is the amount of property damage as measured in dollars. Fortunately, there has not been a corroborative increase in deaths and injuries. Because of improved technology, weather forecasters can give warnings and people can evacuate. Without modern communication, hurricane hunter planes, satellite imagery, and other improvements in forecasting, the circumstances that brought more than 8,000 deaths in Galveston alone when a hurricane showed up in 1900 would have generated tens or hundreds of thousands of deaths with the approach of Ivan.

The bottom line is that global warming is not the culprit. Many people are so attacted to the idea of tagging global warming as the cause of whatever ills happen to come upon the world that their limbic system goes into overdrive, causing logic and reason to wither because the brain chemistry is re-tuned to synchronize with the fear, awe, anger, distress, and other emotions triggered by the impact of seeing and experiencing hurricanes.

What’s missing is common sense. Common sense, along with reason and logic, tells us to educate ourselves about hurricanes and their history. It tells us to deal with the reality of having more at risk, economically, than the gross domestic product, to say nothing of human lives, and to take precautions. Common sense tells us not to ride out a Category 3, 4, or 5 hurricane. Common sense tells us not to build or re-build on barrier islands, coastal wetlands, and fragile ecosystems. Common sense tells us to preserve and rebuild dunes. Far better for the energy devoted to chasing the phantasms of global warming to be dedicated to protecting dunes, opposing government subsidization of ocean front flood insurance, and eliminating tax provisions that encourage activities that increase the risk of hurricane deaths and destruction.

After all, most people living in hurricane-threatened areas have never experienced a hurricane. Trust me, it is an experience best avoided.

Wednesday, September 15, 2004


There's something I don't understand about the job market. The buzz is all about lost jobs, and people looking for work who can't find it.

Yet on the other side of the equation are people looking to get work done and who can't get it done. It's not just the time wasted on hold because a megagiant corporation fired all but two of its customer service representatives. It's trying to find small business owners with time and desire to take on small tasks. If they're too busy to meet demand, why not hire help?

I have a gas fireplace insert that won't work. The plumber who fixed the leak in the gas line to the insert couldn't fix it. The company that does my heating, air conditioning and plumbing won't work on it because "we didn't install it." The fellow who installed it retired and isn't in business anymore.

I have gutters that need to be cleaned. I find someone to do the work, and then when I try to bring the person back the following year, they're unavailable. Either I cannot find the person, or the person doesn't get back to me, or they put me on their schedule and don't show.

Problems in finding small task contractors abound. It afflicts neighborhood housing services organizations, schools, and homeowners trying to adapt housing for disabled children. It reflects a nation-wide labor shortage in the construction industry?

These aren't instances where the shortage of building materials prevents taking the job. It's a problem that extends beyond small home repair tasks. Similar labor shortages exist in the home care, assisted living, adult foster care, and nursing home care industries.

How can there be a labor shortage if there are people looking for jobs? If there are jobs that need to be filled, or jobs that need to be done, and people who need money, why aren't the jobs being filled?

Because they don't match up.

The problem, and it is a problem, is that there is a mismatch between the available jobs and the skills that are needed. It's not just outsourcing. It's not just legal and illegal aliens "taking the jobs from Americans." It's a matter of many Americans not wanting jobs where services are needed. Gutters need to be cleaned and broken gas appliances need to be fixed.

What happened?

What happened is that American culture has made college the next step of choice for a substantial number of high school graduates. In 1992, 96% of high school students expected to attend college: "...people have come to believe that most or all high school graduates should go to college."

College experiences, as presently constructed, do not necessarily prepare students for all the things that need to be done. College graduates supposedly hold an edge when it comes to hiring, but how is a college education helpful if it has the effect of steering job-seekers away from available jobs?

It isn't the money. Gas appliance contractors and even gutter-cleaners can charge amounts that generate annual incomes exceeding that earned by many college graduates. It is no secret that students graduating with majors in certain disciplines discover that the world doesn't have much of a demand for their skills.

It's the prestige. As more students go to college, more people shift the "prestige" onto graduate school. There are students in law school, for example, who are there for reasons other than wanting to be a lawyer, practice law, or use legal analysis skills in another profession. To quote a parent at a recent graduation, "Finally, we now have a lawyer in the family." I suppose that moves the family up the prestige ladder. Meanwhile, the graduate is grimacing and I'm biting my tongue, for I wish to say, "No, you have a law school graduate in the family. That's different." This, or something like it, has happened far more than once. In several instances the law school graduate has not sat for the bar exam. In one situation, the graduate took a position with a landscaping contractor.

As a nation, we are not investing our education dollars well. Education includes not only college, not only trade school, and not only other formal learning environments, but also life experiences. It makes sense for children to take summer jobs when they are in high school. Discover the world. Some do. Many don't. I've heard all sorts of arguments why students should not work, even in the summer. Perhaps parents fear that students will discover a fulfilling life and career reached other than through the path of formal education.

Whoa! I teach in graduate and post-graduate programs and I'm suggesting not everyone attend? Yes, indeed. It is wrong to try to sell a product or service to someone for whom it is not right, or for whom it is too soon. Recently, educators have noticed that more and more college students are "nontraditional," that is, they are returning after stints in the work place. College, and graduate school, have more value when they are experienced in the context of having had practice world experience, even if the practice is working for a plumber while in high school, pumping gasoline, repairing cars, or organizing a company's files (been there, done that, on all four).

The issue isn't the need to create jobs. The jobs exist. The issue is how to match people wanting or needing jobs with the jobs that exist. That issue requires discussion of what sort of life and career guidance parents, schools, counsellors and society are giving to our children and our young adults. This is a discussion that for some reason seems to escape the political debates. There's a reason for that and I'll leave it for another day. I need to go find someone to clean my gutters and fix the gas fireplace insert.

Monday, September 13, 2004


"George Bush gave police officers his word that he would keep the ban. But when it came time to extend it, Bush’s powerful friends in the gun lobby asked him to look the other way. He just couldn’t resist, and he said 'sure.' He chose to make the job of terrorists easier and make the job of America’s police officers harder."

--John Kerry, September 13, 2004.

"If he wanted the ban renewed, he could have called on Republican congressional leaders to pass it."

--Nancy Pelosi, House Democratic Leader, September 13, 2004.

March 3, 2004: Vote on S.1805, Protection of Lawful Commerce in Arms Act:

Voting (in effect) to extend assault weapons ban:
5 Democratic Senators, 3 Republican Senators

Voting (in effect) to let assault weapons band expire:

41 Democratic Senators (including Kerry), 48 Republican Senators, 1 Independent Senator

Not voting: 2 Democratic Senators (including Edwards)

Not entitled to vote and not voting: George W. Bush, James Edward Maule, and just about every other American citizen.

To repeat my initial charge: the failure of this bill was a BIPARTISAN effort. When there's so much to debate, on the merits, why toss misinformation unless the goal is to capitalize on confusion and emotion?

Kerry did not serve himself well today. After all, does he mean that the 41 Democratic Senators who voted against the bill looked the other way because they were asked by George W. Bush? Wow.

They were asked to look the other way by the NRA. Without public debate. Through direct communication with the members of the Senate. In language referring to re-election. And that takes us back to my initial charge. This is no way for a legislature to run a country.

To Our Collective Health 

Coming on the heels of the announcement that Medicare premiums would increase by 17% was news of former President Clinton's heart surgery. This news has spurred a surge in cardiac health checkup appointments and inspired Andrew Cassel of the Philadelphia Inquirer to write a thought-provoking Philadelphia Inquirer column on health care costs. He makes some very important observations, including the increase in health insurance premiums that quadruples the inflation and wage growth rates, that the economy cannot sustain a continued pattern of annual double-digit percentage increases in health costs, and that these increases account for the low job growth in the current economic recovery. He then proceeds to answer his question of "who's to blame" by identifying employers (who choose to stay in business by hiring part-timers and outsourcing work, neither of which requires subsidizing health care, rather than going bankrupt by taking on the open-ended health care commitments inherent in full-time hiring), insurers (he doesn't say why), hospitals (ditto), doctors (ditto), and malpractice lawyers (ditto again). Yet he need not explain why for the latter four because there's been a flood of commentary on the reason one or another of these groups bears some or all of the blame for health care cost hyperinflation. And he points out we health care consumers are to blame because we want "the latest techniques, the best equipment, the most skilled caregivers."

Clinton's surgery is a good example of health care costs. Health care is expensive. The cost of bypass surgery can reach $50,000 or more. Yet, as Andrew Cassel points out, when it comes to dealing with the life of someone in our family, we want to pay whatever it takes.

Yet Clinton's surgery is a sad example of another cause that didn't get mentioned. I made a passing reference to it a few days ago in my post on the Medicare premium increase. As I wrote:
Second, we make the cost of medical care much higher than they would be were we to adhere to lifestyles that reduced the chances of illness and disease afflicting people. People smoke, they ride motorcycles without helmets, they drive cars without wearing seatbelts, they get into arguments and shoot each other, they fatten the coffers of vendors of disease-enhancing foods, they use drugs for recreational purposes, and they engage in all sorts of activities that jeopardize health.
It's our culture. We've been taught and encouraged to seek the easy road, to avoid the tough choices, to let someone else solve the problem, to seek solutions in a magic pill, and to deny reality in face of a theoretical no-fault paradise. Now the piper wants to be paid.

It is cheaper to prevent disease than to cure it. Though some diseases cannot be prevented, others can be avoided and still more can be delayed in onset or diminished in effect. If health care resources are limited, does it not make more sense to fund prevention programs where prevention is possible so that there are the necessary resources to deal with the diseases that cannot be prevented? I think so. Most health insurers structure programs to encourage prevention, and the medical profession encourages prevention. So I'm not alone on this one.

It isn't easy to do the health-right thing, and perfection isn't possible. I know. I try. I succeed most of the time. I have incentive. Like Andrew Cassel, I watched my father deal with heart health. I'm not trying to preach, I just want to encourage some serious thinking and self-reflection. I want our public debate and political decisions on health care to reflect more than simply how much can or will we pay, through the private sector and through taxes, to deal with the consequences of disease.

For me, sugar and chocolate (surprise) continue to sing their siren song, though recent news that chocolate is good for heart health, though perhaps not in cookie form (drat), has me hoping that similar news will make my genetic sweet tooth a blessing in disguise. But I know that won't happen, no more than we'd hear tomorrow that smoking tobacco increases health and longevity. For Bill Clinton, the siren song was sung by "junk food."

But the key is try. The only thing guaranteed about not trying is not succeeding.

Clinton exercised, though how regularly isn't all that clear. So he tried. And perhaps the genetics are indeed as strong as they appear to be with respect to so many other medical conditions. Those genetics can curse us, or at least condemn us to a life of trying even harder, because we have much less leeway to skip the exercise, chow down some grease, or stop taking a required medicine. And I wonder about the stress, though I'd think if the stress was going to get Bill Clinton, it would have been a few years ago and not now, for surely it is much more stressful to be President, let alone to deal with impeachment, than it is to be a retired President who can go through life at a more relaxed pace.

Yet it's not just what we do individually. It's not just what we teach through words and example. Science has yet to determine, with any certainty, what all those above-ground nuclear tests did, though I continue to wonder at all the cases of cancer hitting otherwise healthful young people. As a culture, we simply don't consider physical and mental health to be as worthy of devotion, attention, and rigorous discipline as we do the acquisition of wealth, the exercise of power, the purchase of influence, and watching a few others get paid big bucks to give us vicarious participation in entertainment or sport.

We're killing ourselves, slowly but surely. We are killing our bodies and our minds. And we are killing our economy. As easily as one can ask what can be done with the money expended to fight war, one can ask what can be done with the money expended to fight health problems that would not have existed had health-damaging behavior been avoided or controlled. I marvel at how some houses are better maintained than are our bodies and minds (remembering that the cost of treating mental disorders has tripled during the 1990s). We'd recoil in horror if and when the house were trashed by out-of-control partying, yet we don't react in the same way when our bodies get invaded, mistreated, or put at risk.

Surely our bodies and our minds are more important than our houses, or our cars. Houses and cars can be replaced (even when they are built on the rim of a volcano or in a flood plain). We're learning to value prevention as a value more cost effective than cure when it comes to constructing hurricane and tornado-proof homes, and putting airbags in automobiles, so why can't we be that way when it comes to health?

Is it simply a matter of personal autonomy and individual freedom? Is it that we don't care, and that many physical illnesses are simply outlets for a deeper pyschological malaise? Is it a matter of a youth-focused culture that values a dangerous but "fun" short life more than it does a steady and more likely longer life? Is it a subconscious slow-lasting suicide attempt? Is it a weakness of will? Is it laziness? Is it some combination or something else? These are deep questions, involving theological concerns and chocolate chip cookies, and yet they bear heavily on a question of economics and taxation. The clock is ticking.

Friday, September 10, 2004

When is 23% Really 30%? 

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

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

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

Looks like a 23% rate, right?


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

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

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

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

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

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

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

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

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

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

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

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

Hobbes: Did you?

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

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

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

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

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

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

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

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

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

Trucks, Accidents, and Money 

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

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

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

Taking a Shot at Both Parties 

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

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

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

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

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

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

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

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

Yet More on Outsourcing Legal Research 

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

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

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

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

Dear Prof. Maule:

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

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

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

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

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

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

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

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

* * *

Best Regards,

N. Ramaswami
Advocate & Patent Agent

I replied:


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

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

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

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

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

Good luck with that.

Jim Maule

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

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

I thank you very much for the very prompt email.

Please just call me Ramaswami in future correspondence please.

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

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

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

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

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

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

I thank you again for the prompt response.

Best regards,

N. Ramaswami

And so, not surprisingly, I continued the conversation:

Dear Ramaswami,

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

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

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

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

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

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

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

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

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

* * *


Jim Maule

Shortly thereafter, I received this email:

Dear Prof. Maule:

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

Please see what you wrote in your mail below:

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

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

I beg to disagree with you with due respect.

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

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

Technology has improved enormously.

Best Regards,

N. Ramaswami

I could not resist continuing the dialogue:

Dear Ramaswami,

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

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

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

Jim Maule

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

Dear Prof. Maule:

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

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

Best Regards,

N. Ramaswami

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

Dear Ramasawami,

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

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

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

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

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

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

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

Jim Maule

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

Dear Prof. Maule:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Regards,

N. Ramaswami

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

Dear Ramaswami,

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

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

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

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

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

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

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

Jim Maule

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