Friday, November 28, 2008
Consider vesting, that is, the determination of when a person has a nonforfeitable right to the amount credited to his or her account in an employee retirement trust. One approach is to require an employee to remain employed for a certain period of time, say 5 years, at which point the employee becomes fully vested. This is cliff vesting. It's a simple rule, but it has an unfortunate effect on the employee who leaves four years and eleven months into the job. A less harsh rule is more complicated. This is stepped vesting. One could provide that the employee vests in one-third of the account after three years of employment, in an additional one-third after the fourth year of employment, and in the entire account after five years of employment. Though still disadvantageous to someone who leaves before completing three years of employment, it permits someone who stays that long to acquire at least something even if he or she doesn't remain for five years.
A story in Wednesday's Philadelphia Inquirer, A Fall Through Insurance-Coverage Gap, caused me to think about cliffs and steps in another, but similar, context. According to the story, a man named Phil Venezio became disabled after struck by an illness. Because he could not work, he lost his health insurance. He receives $1,988 each month in Social Security disability, but after paying other expenses, he has insufficient money to purchase health insurance. When he sought Medicaid, he was denied because his income of $1,988 exceeded the maximum income limitation for Medicaid qualification in New Jersey, namely, $1,911. So, because his monthly income is $77 more than the limit, he cannot get any health insurance. In other words, Phil Venezio goes over the cliff. A person with disability income of $1,912 per month gets nothing, whereas someone with monthly income of $1,911 qualifies. What a difference a dollar makes!
Surely there needs to be some sort of limitation. A person with monthly income of $30,000 ought not receive Medicaid assistance. Is there some alternative to letting one additional dollar of income put a person in a situation of no assistance whatsoever with respect to health insurance? Yes, there is.
Suppose that the rule were revised as follows. A person whose income exceeds $1,500 a month obtains 100 percent of the available benefit. A person whose income exceeds $1,600 a month obtains 70 percent of the available benefit. A person whose income exceeds $1,700 a month obtains 60 percent of the available benefit. A person whose income exceeds $1,800 a month obtains 50 percent of the available benefit. A person whose income exceeds $1,900 a month obtains 40 percent of the available benefit. A person whose income exceeds $2,000 a month obtains 30 percent of the available benefit. A person whose income exceeds $2,100 a month obtains 20 percent of the available benefit. A person whose income exceeds $2,200 a month obtains 10 percent of the available benefit. A person whose income exceeds $2,300 a month obtains no benefit. The numbers can be adjusted, but the point is that an increase in income causes a more manageable impact on the benefit that the person is qualified to receive.
The tax law has many examples of stepped adjustments. Most phase-outs of deductions or limitations apply incrementally, or in steps, rather than in one single drop over the cliff. For example, the reduction in the amount of the personal and dependency exemption is increased by 2% for each $2,500 increase in the excess of adjusted gross income over the threshhold amount. The phase-out of itemized deductions is computed in a similar manner. There is a phase-in for the inclusion of social security benefits in gross income. The $25,000 active management exception to the passive loss limitation is phased out $1 for each $2 increase in the excess of adjusted gross income over $100,000. Numerous other phase-outs and phase-ins follow similar patterns. They make the tax law more complicated, but if they serve a defensible purpose, they arguably are more equitable. Of course, some of the phase-outs are nothing more than disguised tax rate increases and serve no defensible purpose other than deception of the public.
Something needs to be done. Venezio's appeal of the decision certainly will be rejected, because the limit is "hard and fast" according to a state official. It's worse. His income is a bit too high to permit him to qualify for pro bono legal representation from the Community Health Law Project. His medical bills continue to pile up.
Venezio is not alone. Hundreds of thousands are in similar straits. And as they become eligible for Medicare after waiting for the specified two years, others join their ranks.
It could happen to anyone. For Venezio, it was back pain that turned out to be an infection that had created a mass on his spine, eating away at the bones. Though doctors performed surgery, it wasn't enough to prevent him from ending up in a wheelchair with a 30 percent chance of regaining the ability to walk and from suffering other side effects.
Most likely, if Venezio is thinking about steps and cliffs, they're not the sort of steps and cliffs that should be considered for addition to the Medicaid law. But if something can be done to remedy the crushing impact of $77 "too much income," perhaps he'll have a better chance of again climbing steps and perhaps even scaling cliffs.
Wednesday, November 26, 2008
INTP - The ThinkersThough there's not to question about what's said in the first four sentences, somehow my criticism of the Congress ended up as the bellweather for how I deal with people generally. Oh, well, the truly bizarre aspect of the outcome is the P in INTP. My Meyers-Briggs tests, though sometimes generating an I and sometimes generating an E, always turn up with NTJ. The J is so strong that it amuses me to discover that someone (or is it someTHING) brands me as a P. Anyone that reads MauledAgain knows that a good chunk of my "J" side turns up.
The logical and analytical type. They are especialy attuned to difficult creative and intellectual challenges and always look for something more complex to dig into. They are great at finding subtle connections between things and imagine far-reaching implications.
They enjoy working with complex things using a lot of concepts and imaginative models of reality. Since they are not very good at seeing and understanding the needs of other people, they might come across as arrogant, impatient and insensitive to people that need some time to understand what they are talking about.
And thanks to a link from Joe Kristan's Tax Update Blog, specifically, his Macho Macho Tax Blogs post, I found my way to Genderanalyzer. This site doesn't profess to identify four personality traits as does Typealyzer. It's content with trying to identify the gender of the blog's author. It fails miserably. Joe's post is hilarious. I quote a bit. In response to the site's conclusion "We think http://www.taxgirl.com is written by a man (80%)," Joe notes, "Hmmm. Artificial intelligence has a ways to go. You'd think 'TaxGirl' would have some weight in the analysis, though technically Kelly can be a boys name too." When Genderanalyzer concluded, "We think http://www.taxguru.net is written by a woman (62%)," Joe commented, "It must be that picture of Kerry Kerstetter holding a cat (the full beard notwithstanding)." So although Joe had already cranked MauledAgain through the site and reported the results, I did for myself. The result was the same: "We think http://mauledagain.blogspot.com is written by a man (81%)." So I join the 53% who reported that Genderanalyzer correctly identified their gender. That's not much better than a coin flip. And what's this 81% factor? The site doesn't explain what the number represents. Is the site saying that it is only 81% confident of its conclusion?
Over at the Blog Readability Testsite, MauledAgain gets a "GENIUS" label. I can live with that, ha ha. Last year at this time, in Clients to Lawyers: We Don't Understand You, I mentioned that I had put MauledAgain through that site, obtaining "COLLEGE (UNDERGRAD)" after someone else had used the same site to get a "HIGH SCHOOL" outcome. The blog has surely evolved during the past year! At the same time, I put MauledAgain through the tests at Readability.info and obtained these results:
readability grades:Now, a year later, here is how MauledAgain is measured:
Flesch Index: 63.6
Fog Index: 12.6
Lix: 43.5 = school year 7
8177 words, average length 4.60 characters = 1.44 syllables
392 sentences, average length 20.9 words
51% (201) short sentences (at most 16 words)
18% (74) long sentences (at least 31 words)
5 paragraphs, average length 78.4 sentences
11% (44) questions
45% (178) passive sentences
longest sent 146 wds at sent 384; shortest sent 1 wds at sent 33
to be (261) auxiliary (141)
types as % of total: conjunctions 5(419) pronouns 7(590) prepositions 11(906)nominalizations 2(167)
pronoun (77) interrogative pronoun (18) article (57)
subordinating conjunction (19) conjunction (12) preposition (36)
readability grades:According to the info page on the site, the Flesch Index uses a 1-100 scale, with "standard English documents" averaging 60-70. SMOG-Grading and Fog Index scores are school grades.
Flesch Index: 55.3
Fog Index: 15.3
Lix: 49.1 = school year 9
17033 words, average length 4.74 characters = 1.49 syllables
681 sentences, average length 25.0 words
50% (346) short sentences (at most 20 words)
21% (148) long sentences (at least 35 words)
30 paragraphs, average length 22.7 sentences
9% (65) questions
53% (367) passive sentences
longest sent 167 wds at sent 674; shortest sent 1 wds at sent 77
to be (556) auxiliary (274)
types as % of total:
conjunctions 5(936) pronouns 8(1286) prepositions 12(2063)
pronoun (153) interrogative pronoun (30) article (101)
subordinating conjunction (36) conjunction (35) preposition (58)
So it seems that my writing has become a bit more complex and more difficult to read, but that the posts have become much longer, with many more paragraphs containing many fewer sentences. According to the Flesch index, my writing is slightly more difficult to read than the average document. In both instances, the Fog index puts my writing at the "too hard for most people to read" level. Yet if the Lix and SMOG outcomes are accurate, they suggest that most people find material written at high school reading levels to be too difficult. Can that possibly be true in a country with so many college graduates?
So, it appears that my MauledAgain persona is a thinker who writes complex stuff. Oh, and apparently he's a guy.
Monday, November 24, 2008
The planned suspension of tax cuts does not appear to have triggered the same level of opposition or alarm. The issue, though, demonstrates the conundrum in which state and local governments find themselves as they try to deal with huge deficits. Philadelphia's projected deficit, for example, is close to a billion dollars. By keeping taxes at current levels, about half of that deficit can be avoided. Or can it? Will businesses and residents leave the city to avoid tax burdens higher than those for which they had planned? Empirical data on this question does not appear to exist, though one can make arguments based on analogies to behavioral patterns during previous economic crises. The difficulty with these analogies is that the present economic disequilibrium isn't necessarily in the same ballpark as have been those of the past. One of the factors on which proponents of the city tax cuts relied when advocating for the gradual reduction in business and other taxes was the willingness of other municipalities to encourage businesses to pack up and relocate in their areas on account of lower tax burdens. In the present economic climate, though, are there any municipalities in a position to offer tax breaks? If suspending the planned tax cuts indeed does cause businesses and residents to leave, will that not further reduce tax revenue, thus contributing to a reduced deficit shrinkage or even a larger deficit?
The condundrum is not unlike that facing the nation and its citizens. Consider the following dialogue. The first person opines that people ought not spend beyond their means, because that is what contributed to the problem, namely, a run-up in credit and the massive debt loads borne by consumers. The second person points out that if people follow this advice, they will reduce consumer spending, which in turn would reduce business receipts and compel businesses to cut back hiring, reduce purchases, lay off workers, and pay fewer taxes because of diminished profits. The first person agrees, but suggests that infusions of money by the federal government into state and local government programs, unemployment, industry bailouts and other stimulus programs would trickle down to consumers and fund continued purchases. The second person explains that in order to fund this infusion, the federal government would need to print money, thus triggering inflation, raise taxes, thus negating the impact of the stimulus, or borrow more money, thus pouring more gasoline on the raging credit crisis fires. The first person voices a thought that has popped up in more than a few places, namely, that the crisis is unmanageable and because no one knows how to deal with it, the economy will continue to roll down the hill until it tumbles over a cliff.
At the root of the problem, of course, is something more profound than living beyond one's means. It's the disequilibrium caused by consumption exceeding production. Ultimately, if prices, that is, what people pay, exceed incomes, causing people to incur debt, it is because demand exceeds supply. If people reduce what they pay to what their incomes permit, it causes the incomes of other people to decline, and if those people reduce their spending, the downward spiral deepens and accelerates. Rather than spending money in futile efforts to balance something that cannot be balanced, perhaps governments ought to be taxing, and even regulating into oblivion, consumption that does not generate production. This requires an examination of the extent to which the so-called free market genuinely measures the value added by those who are paid for goods and services. It's one thing to produce value or to move goods from where they are produced to where they are needed, but it's an entirely different thing to move assets from place to place as a part of complex schemes to make money on someone else's back, to hide assets in order to avoid taxes and creditors, to milk the market for more than the value of what is being inserted into the marketplace, or to shift economic burdens onto consumers and other purchasers by selling products that perform inadequately because money was pumped into profits rather than quality research.
Can government regulation and taxation remove the factors that fetter the free market and that prevent the market from self-correcting? I suspect not. More regulation invites more scheming by the self-anointed privileged who through questionable means take more than they give. We're told the credit markets aren't working because banks don't trust most loan applicants, and even other banks. It's no wonder, isn't it? The cultural tones of a nation define and shape the depth and breadth of the trust that is required for a free market to be free. Let's face it. Compared to the situation six months ago or even two years ago, the amount of raw material, manufactured goods, and other tangible items on the planet hasn't changed very much. Nor has the population changed very much. Yet somehow, owners of stock are 30 to 40 percent poorer, some retirement plans are worth half what they were worth six months ago, the value of real property has dropped, and yet pretty much all the buildings still exist and corporations still own their assets. What's the problem? The problem is that value reflects not only supply and demand but perception of the future. At the moment, collective perception of the future is dismal, and nurtures an environment friendly to pessimists.
It will take a different sort of government function, namely, leadership, to get the nation and the world past this greed-is-good culture and into an economic system that fairly values the contributions of all productive individuals rather than one that permits redistribution in favor of those who have taken advantage of deregulated markets, consumer ignorance, government lethargy, and cultural inequity to shift value from production to consumption. It will take a strong, articulate, intelligent, and persistent visionary to convince the nation and the world that if we don't play and work fairly we may end up neither playing nor working. Or perhaps it will take thousands of such leaders, in city and town across the country, doing in neighborhoods and organizations what needs to be done throughout the globe. It will take more than curtailment in spending and freezing tax cuts to make the Philadelphia budget rescue plan succeed. It will take leadership to persuade businesses and residents that leaving the city would be a long-term futility hidden inside a short-term mirage.
Friday, November 21, 2008
I enjoy your commentaries; keep them coming.Once again, I learned something from a reader. Though I would have guessed that many tax advisors share with their clients the disappointment and frustration triggered by the mess that is the Internal Revenue Code, it was the first time I encountered a tax advisor who apologized on behalf of the Congress for the thoroughly unacceptable job that it has done with the tax law. In my reply to the reader, I shared this opinion: "It's quite noble of you to apologize on behalf of Congress." It ought not surprise me that as increasing numbers of people look to blame everyone but themselves for their own mistakes and failures, the task of apologizing falls on someone else. I'm not focusing on the standard "I'm sorry" that is offered when someone mentions that they have been the victim of another person's ineptitude or malfeasance. That reaction amounts to "I'm sorry that you are hurting" and not "I'm sorry for the wrongdoer's idiocy or evil-mindedness." It's one thing to commiserate with the client by saying, "I'm sorry that your tax liability is higher than you thought it would be." It's quite another, and very admirable thing, to offer to the client an apology for the way in which Congress has treated the tax law. For someone who is enduring a wrong or a hurt, the "I'm sorry" reactions can come from everyone, but only the true apology can, and should, come from the person or persons who caused the pain.
Twice this week, I found myself apologizing to clients for bad tax law written by Congress.
The first was a client who is an employee with no company-paid health insurance. He asked why the insurance he bought on his own was not an adjustment to income rather than a deduction like his self-employed neighbor. I shrugged and said "bad law."
The next was a couple who received a CP-2000 notice reporting a $3000 gambling winning that was not listed on their tax return. Several apologies here: "I'm sorry you cannot deduct your losses since you don't itemize." "I'm sorry you have to pay tax on $4500 since you are in the Social Security phase-in range." "I'm sorry Social Security is taxable since I don't think President Roosevelt intended it to be." "I'm sorry that the 25000/32000 threshold has not been indexed."
Last tax season I had a client who was furious that her U. S. Civil Service disability pension did not quality her for the stimulus rebate while others with Social Security disability pensions did. I apologized and said "call your Congressman."
The list could go on and on.
If Congress passes laws which I have to apologize for, I submit that they are not doing a good job (maybe I am stating the obvious).
Indeed it is noble for someone not a member of the Congress to extend a "mea culpa" on behalf of the Congress. I confess that my reaction when students groan in reaction to the bewilderment and frustration sweeping over them as the course works its way through just a small bit of the tax law surely is not an expression of remorse on behalf of the Congress. No, I yield to the temptation to criticize the consequences of the inattention, the ignorance, the vote-grabbing, the currying of favor with special interests, the sloppiness, and the last-minute rushing on the part of Congress that causes the nation to have such an abysmal tax law.
For example, every time I teach the course, students ask me why certain fixed amounts in the Code are indexed for inflation and others are not. They deal not only with the personal exemption and the standard deduction but also the social security taxation threshholds, the capital loss limitation, and the limitation on the active management exception to the passive loss limitation. The former are indexed for inflation. The latter are not. Why? It probably has something to do with budget games being played at the time of enactment, but it surely doesn't reflect any sense of a coherent wholeness to the Code. When students suggest that they could write a paper, I tell them that it would not be particularly difficult to identify all of the fixed amounts in the Code and then to classify them as indexed or not indexed. But, I warn them that such an effort simply gives them the first part of the paper. The second part of the paper would be an explanation of why there is this difference, how it could be justified, and why the arguments for eliminating the difference should or should not be rejected. In other words, they would be asking "What were members of Congress thinking?" And the answer is my favorite response to that sort of question, namely, "Why do you assume they were thinking?"
Wednesday, November 19, 2008
First, the legal background. Under Internal Revenue Code section 262, personal, living, and family expenses are not deductible. In contrast, under section 162, ordinary and necessary expenses paid or incurred in carrying on a trade or business are deductible, subject to a variety of limitations and exceptions. Under section 212, ordinary and necessary expenses paid or incurred for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income are deductible, also subject to a variety of limitations and exceptions. Under section 280A, if a person uses his or her residence for trade or business purposes, only the portion of residence expenses properly allocable to the trade or business are potentially deductible. The deductions are disallowed to the extent they exceed the gross income generated by the trade or business.
Second, the factual background. A married couple purchased a home and used it as their principal residence. The property included a swimming pool. The wife is a piano teacher, and gives piano lessons at the home. The husband is a former IRS agent, and operates a financial investigation business from the residence. The couple's tax return included a Schedule C for each business. Each Schedule C included deductions related to the operation of a trade or business in the residence. Among those deductions on the Schedule C for the piano lesson business were "swimming pool supplies and maintenance."
Third, the proceedings. The IRS disallowed these, and other, deductions. The dispute ended up in the Tax Court.
Fourth, the outcome. At this point, it makes little sense to try to paraphrase or improve on the Tax Court's reaction:
Mr. Langer testified and attempted to explain how these items were related to the piano teaching business. His arguments are beyond belief and contrary to all reason. We need not address each of the disputed items, but we give one illuminating and representative example. Petitioners argue that $2,446 spent for pool supplies and maintenance are related to Mrs. Langer’s piano teaching because the parents of the students would sit by the pool while waiting for their children to finish a lesson.Though the argument may seem "beyond belief and contrary to all reason," consider the expenses incurred by a health care professional to provide amusement to patients who are waiting to be seen, or waiting for their child or elderly parent to finish with a physical examination or other medical care. Is the cost of the television in the waiting room deductible, either as a section 179 first-year expensing deduction or under sections 167 and 168 through depreciation deductions? What of the amounts paid for books purchased for children to read? What of the amounts paid for the magazines purchased for patients and their parents or adult children to read while in the waiting area? Are these various amounts in fact deducted? I think so. So why the difference in outcome? One difference is that the expenses of maintaining a swimming pool are not affected by the presence of people sitting near it from time to time. Another difference is that the swimming pool is used for personal purposes whereas the television and reading materials in the health care professional's reading room are used by the patients or their family members and not by the professional who is working in some other area of the office. There is one wrinkle in this analysis. It is not uncommon for health care professionals to subscribe to various general magazines, to read them, to put them in the waiting room when they're finished with them, to pay for them through the business, and to deduct the expense. Technically, the cost of these magazines is not deductible, but it is doubtful that very many, if any at all, of these deductions get attention from the IRS.
I suppose one could say that Mr. Langer's arguments supporting the pool maintenance expense deduction were all wet. One might say they did not flow logically from the Code and regulations. But they have at least made a splash on this blog.
Monday, November 17, 2008
Now, along comes Verizon, which has decided it no longer is the dominant provider of telephone service. It points out that it has been losing more than 35,000 customers each month, as people turn to cable providers and the Internet for phone service. The state attorney general has undertaken to review Verizon's decision to stop paying these local taxes. Considering the impact of the current economic downturn on town finances, this news could not have come at a worse time.
One wonders why a tax would be imposed only on the dominant provider. Was it an attempt to disadvantage the market leader in order to boost the competition and level the playing field? It is a rather interesting way to spread the wealth. Imagine an income tax imposed only on the largest software company, the biggest bank, the top-paid baseball player, and so on. If the tax is intended to put costs on those enjoying the benefits, it ought to be imposed without regard to the market position of the company. If the tax is a charge for the "ugliness" of telephone poles and overhead wires, it ought to be imposed on all companies that have poles and wires. That would include all land-line telephone companies and all cable companies, except to the extent the equipment was underground. But I suppose a user fee could be invented to cover the costs of dealing with the inconveniences of underground wires.
But it gets even more interesting. In digging through title 54 of the New Jersey Annotated Statutes, I discovered some taxes that I've not seen on other lists of taxes (one such list being republished in Deconstructing Tax Myths). In chapter 47B, there is an excise tax on white potatoes. Chapter 47C brings us a tax on asparagus. There is a tax on apples in chapter 47D, and a tax on sweet potatoes in chapter 47E. It appears that these taxes are imposed in order to provide benefits to the industries growing and selling these items. I doubt these are taxes designed to discourage consumption of these products. Nor could they be considered "sin taxes" such as those imposed on cigarettes and alcohol, because I did not see a tax on brussel sprouts. Imagine, eating baby cabbages. For shame! But I suppose there's no tax on those delicacies because people who eat them are doing a favor for those of us who are more than happy to sacrifice brussel sprout consumption for the nutrition of others.
Friday, November 14, 2008
The first story broke on Wednesday. In a press release, the Department of Justice announced the indictment of Raoul Weil, a senior executive of an international Swiss bank, for allegedly conspiring with other persons to assist approximately 20,000 taxpayers conceal $20 billion of assets from the IRS. The indictment charges Weil with ordering his employees to enlarge this line of business, even though he knew it would cause them to violate the law. These practices generated annual income of $200 million for the bank. Weil and others at the bank used nominee entities, encrypted laptops, and counter surveillance techniques. More than 3,800 trips to the United States were made by the bank's employees to assist the U.S. taxpayers in dealing with their Swiss bank accounts. Those clients filed false tax returns, omitting the income earned on those accounts and failing to disclose their existence.
The second story has been developing over the past several weeks, and every day brings a new wrinkle. In Potential grows for lame-duck session of Congress, three CNN correspondents explain the twists and turns through which proposals to provide additional assistance to domestic auto manufacturers have journeyed. Though the proposals are as varied, ranging from funding the Big Three's health care costs to supporting a re-tooling to manufacture energy-sensible vehicles, the reaction has generated a divide between those who see additional assistance as opening the door to a bailout of every industry and those who see financial failure of even one of the manufacturers as the trigger for a catastrophic economic collapse.
The third story also broke on Wednesday. As reported in numerous places, including this report, the Secretary of the Treasury announced that none of the $700 billion provided by the bailout legislation would be used for the purposes for which the bailout legislation was enacted, namely, the purchase of mortgage loans and mortgage-linked securities. Instead, the money has been used to purchase stock in banks and to assist AIG. The Secretary of the Treasury noted that perhaps non-bank financial institutions not currently within the scope of the program would be assisted through capital acquisition, including life insurance companies, and property and casualty insurance enterprises. Other plans include some ill-defined concepts of increasing liquidity for certain areas of the credit markets and for supporting new securities lending.
The fourth story, Nutter Goes After Top-50 Business-Tax Ddelinquents, reports that the largest unpaid Philadelphia business tax bill is owned by a defunct medical business, one of whose principals is now practicing through a separate entity. In Physician Says He's Trying to Heal Himself of Tax Mess, Gregory Nelson explained that the former business ceased to exist because of tax problems, though it is unclear if it declared bankruptcy. He attributes the failure to pay taxes as the outcome of trying to provide medical care to patients in poor areas of the city, to the consolidation of the health care industry, to reduced insurance reimbursements, and to higher medical malpractice insurance premiums. In addition to the city taxes, Nelson and his former business have both been named in filings by the federal government for failure to pay over employee withholding taxes. According to the article, the government produced evidence that Nelson earned $800,000, and after Nelson pleaded guilty to wilful failure to pay taxes, he continued to spend money on a center city apartment, a fur, and overnight stays at one of Philadelphia's best hotels. Evidence also showed that he owned more than $300,000 in commercial real estate, an automobile worth more than $50,000, another costing roughly $80,000, and a family home worth roughly $600,000, which eventually was sold in a sheriff's sale. The court had ordered Nelson to live on a set allowance and use the rest of his income to reduce his tax debt, but he did not do so. The city of Philadelphia put his business into receivorship in order to obtain some of the unpaid taxes. At present, the unpaid balance exceeds two million dollars.
When these four stories are considered against the backdrop of how citizens relate to the government in a financial sense, it is not difficult to see how that relationship has gone awry. Some industries that mismanage themselves or that make bad decisions, such as the mortage lending business and the automakers, find ways to get back from the government amounts that are sufficient to eliminate tax liabilities and to cause cash paid by other taxpayers or borrowed from abroad to flow into these industries. This encourages other large industries to jump onto the bailout bandwagon. Other businesses, generally much smaller, convinced that they are not in a position to lobby for similar breaks, take it upon themselves to engage in self-help bailout by ignoring their tax liabilities. Facing what they claim are adverse conditions, they choose to put governments at the bottom of the list of bills that they plan to pay. Their claims of adverse conditions are not unlike those made by the industries that have obtained and that are seeking bailout money, both in terms of the nature of the circumstances and in the inability to accept blame or responsibility for their own actions. In this respect, all of them mirror modern culture, in which the game is to blame everyone but one's self. The mortgage industry blames Congress for the fraudulent and irresponsible lending practices in which it engages. The auto industry blames consumers for its decisions to manufacture vehicles that are energy inefficient even though somehow the Japanese and certain other car companies managed to avoid taking the same path.
Yet another similarity exists between the taxpayers who choose to evade taxes by hiding assets and income or by ignoring tax payment obligations and the industries that claim receipt of bailout money is essential not only to their survival but to the economic health of the nation. Somehow, though presenting a picture of financial misery, the captains of these industries enjoy the same luxurious life style as that in which the tax evaders engage. Executives of AIG were enjoying visits to a high-end resort while present and future taxpayer dollars were bailing out the company. Taxpayers stashing assets in secret Swiss bank accounts continued to enjoy the good life. Someone who chose not to pay federal and city taxes because of alleged financial difficulties managed to own multiple commercial properties and to make high-end purchases.
All of this suggests to me that the problem isn't financial, economic, or monetary. The problem is cultural. The "me generation" has taken root deep within society and most of its institutions. The same mentality that lets some people think they can jump the line by going straight out of the left turn lane causes too many people to think that they are entitled to whatever they can grab and to hang onto it despite laws requiring true freedom in the markets, the payment of taxes, full disclosure, and honest transaction structuring. It's too easy for those acquiring wealth to overlook the contributions others have made to their so-called success. None of this should be surprising. The professor who taught my American Civilization course when I was at Penn, whose international stature escaped me until I read his obituary a few years ago, predicted this outcome. There is a sadness in how quickly the nation evolved from one in which its greatest generation, sacrificing to ensure the nation's survival through depression and world war, predominated to one in which a the country is overshadowed by so many who did not learn the value of sacrifice and the long-term disadvantages of greed.
The solution isn't one of bailouts, tax law changes, or government purchases of ownership in private enterprise. The solution is one of education, the teaching of lessons about short-term and long-term analyses, about the benefits of sacrifice and the evils of greed, about the complex interconnections that make personal wealth accumulation futile in the long run, about the values of cooperative endeavor, about appreciation for how no one succeeds without the assistance of others, about the benefits of truth and the dangers of manipulation, and about the inadequacy of money grabbing as a solution for psychological insecurities. Where and how that gets done is a challenging question. Whether it could be done with sufficient alacrity to avert the next economic manifestation of the underlying problems is problematic. But someone, somewhere, somehow, needs to step up and persuade the American nation that bailout after bailout isn't going to have much more beneficial effect than putting band-aid after band-aid on a stab wound. Slowing the bleeding isn't enough. Stopping it is necessary. And that cannot happen if knives continue to be plunged into the national fabric.
Wednesday, November 12, 2008
When the proposal to issue tax rebates first emerged, before the arrangement was renamed stimulus, I questioned whether it was the appropriate response to what ailed the economy in late 2007. In Who Should Get a Tax Rebate?, I suggested that funneling money to taxpayers made sense only if taxpayers would make better use of the money than would non-taxpayers. That concern eventually went away, when the legislation was modified to funnel the rebate checks in ways that included people without tax liability. I expressed a reservation that the rebate or stimulus program would increase and already bloated federal budget deficit. I noted that the proposal did not address the underlying problem:
So long as consumption exceeds production, so long as more wealth, particularly dollars, flow out of the country than flow into the country, so long as certain items remain in short supply and project to remain that way, the nation's economic and financial health will worsen. Tax rebates will not increase the supply of clean water, oil, natural gas, or any of the other resources mismatched to the demands of the world population.Unfortunately, the during the ten months since I posted that observation, the nation's economic and financial health indeed worsened.
In Something Better Than a Tax Rebate?, I explored Len Burman's proposal to deal with the financial mess by accelerating the termination of the 2001 federal income tax cuts. The theory is that investors, facing higher capital gains taxes, would sell their assets in 2008 in order to avoid the higher taxes, and would use the sales proceeds to make purchases of what I call high-end assets. I explained my reticence to endorse the proposal for this reason:
My hesitation is that I'm not convinced there is a net long-term benefit from increases in the sales of high-end consumer goods, or perhaps even from increases in the sales of consumer goods generally. Increases in the sales of consumer goods translates into more energy use, more demand for increasingly scarce resources, and more dollars flowing out to the countries producing these consumer goods. Aren't these included among the things causing the lack of confidence that has triggered the recent stock market slide? In the long-term, can the planet handle a never-ending, sometimes slowed upward spiral in the consumption of its resources? At some point, the combination of the federal deficit, the trade deficit, the ensuing decline in the value of the dollar, the declining supply of oil, clean fresh water, copper, and similar resources, the growing world population, and the widening gap between haves and have-nots and the concomitant disappearance of the middle is going to cause something in the highly tensed global and national economic systems to snap. When something snaps, there's no easy prediction as to where the pieces land or what else gets broken. The scary question is whether something already has snapped and we're just now beginning to realize it.It turns out something had snapped. And it turned out that investors did sell, but for a totally different reason, and under circumstances that did not generate much in the way of capital gains.
Eventually, in Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, though expressing a preference for Burman's idea over the legislation that was crafted, I continued to criticize the tax rebate plan because it would, and it did, increase the federal budget deficit, probably would not be used to make retail purchases but would end up in banks and with creditors as people either saved the money or paid off debt, and predicted that banks and creditors would then loan those deposits in ways that increased consumer debt, which I tagged as a "one of the glaring imbalances in the national economy." Imbalance, indeed. I predicted that it would become much more difficult to borrow, asking, "From whom will they borrow?" I also predicted " the emergence of a small creditor group and massive hordes of debtors" and characterized it as "a recipe for disaster." What I failed to recognize was the extent to which the creditors in that situation would be no better off than the debtors, for there's no economic advantage in being a creditor whose debtors are totally tapped out.
What seems undeniable is that simply transferring cash to individuals, whether through rebate checks or reduced tax withholding, will have the same insignificant impact on the economy as did the earlier stimulus package. Having the money end up in banks, through savings or loan repayment, simply makes the ocean of bailout money flowing to bank shareholders somewhat, and unnecessarily, deeper. Having the money end up abroad to the extent it is used to boost the consumer goods production in other nations does little to create jobs in the United States, one of the few specific goals mentioned by advocate of a second stimulus package. Transmitting the money to state governments simply removes the question to the next level but doesn't address its ultimate disposition.
If direct tax reductions are set aside, there are two core questions that must be addressed. One is whether it makes sense for the federal government to increase its budget deficit by spending money. The other is whether the money, if spent, should be focused on one or more projects at the expense of others.
My thoughts about the infusion into the economy of money borrowed by the federal government need not be repeated. Just as it makes no sense to ask one bankrupt corporation to bailout another, it makes no sense to have a government itself in serious debt borrow more money in order to assist an economy that is debt-stricken. The catch in this reasoning is the assumption that the economy is in debt. It's not. Some segments are in debt, some people are in debt, and some companies are in debt, but the economy still has net positive wealth. Its distribution is awry, and the more skewed that distribution has become, the more the economy has failed to function properly. On a global scale, and on a national scale, the shift of resources from the have nots and the have lesses to the have even mores has been accompanied by a long list of economic ills. This isn't a new phenomenon. Consider the points made in John Steele Gordon, "The Great Crash (of 1792)", in which speculation, credit squeezes, greed, and double-crossing corrupted the economy and, as pointed out in the print version of the story, promises of job creation through the floating of debt failed to come to fruition.
As for spending money, if it's to be spent, does it not make sense for the government to spend its money in ways that permits it to acquire public assets? Is there some sense in funding public works undertakings, through which the nation's bridges, highways, tunnels, libraries, recreation centers, public health facilities, port security assets, firehouses, and other infrastructure is repaired and improved? Would this not create a substantial number of jobs in this country? Would this not increase state and local tax revenue?Would this not put the government in a position, when the economy recovers, to impose user fees on those who benefit from use of these facilities? Would it not amount to a loan by the government, not to bank shareholders and wealthy investors through a bailout plan, but to the American public in the form of useful assets? Is it not better to build and repair tangible assets than to chew through wealth in the form of consumption?
Put to a choice between, on the one hand, tax reductions in the form of rebate checks or withholding reductions, and on the other hand, investment in national infrastructure with future user fee cost recovery, I would select the latter. It will be interesting to see what, if anything, the Congress does.
Monday, November 10, 2008
For many taxpayers, tax appears to be an irrational subject, one that triggers emotions in a serious way. The recently concluded presidential campaign demonstrated that tax is no less a hot-button topic as are the several other issues that can polarize discussion and threaten to polarize a nation. Though it may appear that the principal emotion evoked by the mention of tax is anger, the underlying feeling almost certainly is fear.
Last week, I responded to a request to share my views for a TaxProf Blog post on "Tax Policy Under President Obama." I did so, and my short essay appeared with those contributed by 14 other tax law professors in Tax Policy in the Obama-Biden Administration. Some of the essays attempted to predict what that administration would offer in terms of tax legislation, while others, and some of those that attempted to make predictions, also contained suggestions and discussions of tax theory. In my essay, I emphasized that much of what was promised during the campaign by President-elect Obama would not be enacted or would be significantly modified, that the dire predictions fears made by Senator McCain and his supporters would not come to pass, that the tax law would remain complicated and become even more so, and that changing circumstance would derail some of the campaign proposals. In short, the essay was a preface to my What's Ahead for the Tax Law? post of last Friday. I also noted that the tax law would not change into what I would want it to be, that it would reflect compromise, and that it would continue to generate griping. Though making some rather safe predictions, I also peppered the essay with words such as "perhaps" and "possibly."
Many of the comments that were posted in response to the collection of essays were generally disappointing, though not surprising. It wasn't difficult to pick out the people whose unhappiness at Tuesday's election results and whose apprehensions of impending doom came through loud and clear in their postings. The overused and disproven canard of "socialism" showed its face, as did the assertion that the next administration would steal all the wealth. The essays were described as "a crock" and "embarrassing," threats of tax fraud and voluntary unemploymet were offered, and the fifteen law faculty who contributed were accused of doing nothing more than "discussing their pet peeves and wish lists." One post rested on the assumption that Obama promised to repeal all of the 2001 tax cuts. Another poster advised one of the essay writers to "lay off the meds." The anger is obvious, the fear isn't well hidden, and the ignorance that fertilizes those emotions isn't difficult to find.
The temptation to respond was too strong to resist. I pointed out that someone closely reading my essay would understand that it was not a wish list nor a collection of pet peeves. Though such lists and collections may have surfaced in some of the posts, lumping all of them together as sharing that characteristic is ignorant nonsense. My response also replied to the inquiry, "Does the fact that not one of these experts have any idea of what a President Obama would do, in spite of his innumerable promises, not give a moment's pause?," by explaining that the words "perhaps" and "possibly" were intended to reflect that unpredictability, and by wondering if those words showed up in invisible ink. I closed by sharing the thought that inspired today's post: "Sometimes I wonder whether rational analysis will ever trump emotional reaction."
The fear that taxpayers demonstrate, chiefly through angry comments, is thoroughly disproportionate to the disadvantages that they might face. Joe the Plumber became famous because he expressed his indignation at the very idea that if he managed to generate $250,000 of income -- presumably taxable income -- that his tax bill under Obama's stated plan would be more than that under McCain's stated plan. Had Joe bothered to do his arithmetic, he would have discovered that if his taxable income increased to $260,000, he would pay approximately $400 more under Obama's plan than he would under McCain's plan. Had he thought more, he would have had to admit that in order to make that sort of money he would be taking advantage of employees billed out at rates much higher than their salaries, and that Obama's response was an attempt to instill in Joe the Plumber some sense of obligation to pay back to society a very small portion of the largesse Joe could acquire by conducting business in a nation that protects him, his employees, his contracts, his suppliers, and his business. In other words, Joe, if you do manage to make that sort of money, you can't claim you did it on your own.
Yet somehow, significant numbers of taxpayers, almost none of whom would be disadvantaged by Obama's tax plan, became distressed, angry, and fearful that their wealth would be seized. Almost all of these taxpayers, and perhaps all of them, rallied to the defense of the taxpayers who supposedly would suffer when the tax cut enacted for them eight years ago was revoked or permitted to expire. Why would members of the middle class rush to the defense of the upper class, when the upper class surely won't go bankrupt on account of Obama's tax plan, and when the current economic travails of the middle class are attributable, in no small part, to the stock market and loan-making shenanigans in which those with excess wealth have engaged? Why does it seem so difficult or impossible for the middle class to understand that they are not targets of some wealth confiscation plan? Could it be that clever manipulators have taken the combination of ignorance and fear percolating in the collective subconscious of the middle class and whipped it into a frenzy that makes rational analysis impossible? As many intelligent tax experts, and others, have noted, Joe the Plumber was used.
The appeal to emotion is usually dangerous. It can be effective, but that effectiveness is almost always a short-term phenomenon and a long-term catastrophe. The appeal to emotion underlies most advertising, too much of political campaigning, all hate crimes, and most rumor-mongering. The appeal to emotion is everywhere. It pops up constantly in law school, where students too often begin their arguments or responses to a question from a moot court judge with, "Your Honor, I feel that…" rather than with "Your Honor, careful thought suggests that …" or "Your Honor, sequential analysis of the facts compels a conclusion that …" Though feelings may have a role to play when juries consider punitive damages or the death penalty, it makes little sense to argue that "I feel that section 163(h) allows the deduction." I truly hope that the student, the attorney, the tax practitioner, and the taxpayer would *think* that section 163(h) allows the deduction. Whether section 163(h) allows the deduction is a matter of rational analysis, not of emotional reaction.
The key to muting the anger about tax proposals that has become so rampant in recent weeks is to defuse the fear that fuels it. Fear is broken by knowledge and understanding. Knowledge and understanding are transmitted and acquired through education. The education need not be formal. It is the moral obligation of every educator, whether holding a formal position on a school's faculty or writing a blog, whether teaching a regularly scheduled class or dispensing information on a talk show or news network, to disseminate truth, to refrain from exaggerations and half-truths, to encourage rational discourse and discourage emotion-laden soundbites, and to realize that until fear is dispelled, knowledge cultivated, and understanding acquired, the nation's ability to restore itself, an effort that will involve the tax law in no small part, will be impeded.
Friday, November 07, 2008
None of that, however, is getting in the way of web site after web site, columnist after columnist, pundit after pundit from venturing into the risky world of making predictions. Although there is some information to be gleaned from party platforms and campaign speeches, there really isn't enough information to make the predictions anything more or less than educated guesses. Many prognosticators simply are presenting what they would like to see happen, even though some of the proposals have very little chance of finding a home in the Code. Others are zeroing in on one or two narrow provisions or proposals, leaving the overall crystal ball analysis to others. I've read enough of these commentaries to conclude that if a tax proposal exists, someone somewhere has come forth with an assurance that it will find life in the Obama Adminstration and the next Congress.
So I'm going to play it safe. Though some have said that other issues will occupy the Administration and keep it from focusing on tax law changes until 2010, I disagree. With one exception, no matter what major issue facing the nation is tackled, the tax law will be amended. In no particular order, because I have no clue as to what the priorities for solving these these problems will be:
Health care? Even the simplest of tweaks will involve changes to at least a handful of Code provisions dealing with medical expenses, health savings accounts, and the like. In Obama's plan is a health care tax credit.
The impending crises in social security and medicare and the shaky status of retirement plans? Much attention has been given to Obama's suggestion that a tax be levied on high level incomes to fund the social security and medicare trusts, and there also are proposals to change the rules currently applicable to private retirement plans, such as eliminating required minimum distributions from plans for taxpayers 70.5 years of age and older.
Energy independence? I guarantee that any program designed to encourage development of alternative energy sources, energy conservation, and similar initiatives will be done principally through the tax law. The precedent is entrenched.
Environmental issues? As is the case with energy independence, proposals being floated will increase the size of the Internal Revenue Code, just as the ideas already enacted have done. Increased credits for clean-fuel vehicles can be found in Obama's tax plan.
Economic downturn? There will be some sort of stimulus payment or, in lieu thereof, some sort of incentive to increase investment, perhaps in the form of an income tax credit for businesses and indivduals making certain types of acquisitions. There will be changes to the taxation of American business activities abroad and to the tax treatment of asset transfers to foreign tax havens.
Fixing problems in the education systems? Obama's plan includes, among other things, an American Opportunity Tax Credit.
The war in Iraq? This is the one major issue that I don't see generating tax law changes. That's ironic, because it's the failure to raise taxes to pay for the war that contributed significantly to the credit crunch.
And whether anyone likes it or not, there are all sorts of tax provisions expiring in 2009 and 2010, some of which, if left alone, would create all sorts of havoc for taxpayers, including the surreal decision facing terminally ill taxpayers facing an estate tax if they survive from December 31, 2010, into 2011. In other words, there will be no choice but for the Obama Administration and the Congress to do something with the tax law.
What won't happen is simplification. There's very little, if any, attempt to remove or consolidate existing provisions. There will be more credits. The actual tax liability computations will become more complicated. The AMT will continue to star in its own horror movie as the once sensible but no longer viable abuse remedy that will not die.
People will continue to complain about the existence of taxes, the amount of taxes that they pay, and the complexity of taxation. Bickering on Capitol Hill will continue, as members of the House and one-third of the Senate begin to focus on the 2010 elections, with tax policy again finding a spot in the center of the stage.
TurboTax will not go out of business. Tax return preparation and tax advising will continue to be growth industries, though whether that will increase employment here or abroad depends on what changes are made to the tax law.
For me, the basic tax course will not become any easier to teach or to take. The same can be said, to a lesser extent, of my other tax courses. There will be even more tax portfolios and book chapters for me to modify and create. There will be no slowdown in the flow of questions posted to the ABA-TAX and similar listservs.
And I will not run out of material for MauledAgain.
Wednesday, November 05, 2008
The supposed tax increase on income exceeding $42,000 was part of a budget bill, and therefore would not become part of the tax law. What's more important is that the budget plan would have increased taxes on unmarried taxpayers earning more than $42,000, but would not have affected married couples or people filing as head of household. An ad that tries to make married couples earning more than $42,000 think that Obama voted to raise their taxes is deceptive and manipulative. It takes unfair advantage of the overwhelming percentage of Americans who, for one reason or another, do not understand the tax laws, the Congressional budget process, or the nuances of legislative drafting.
On Saturday, a McCain canvasser knocked on my door. We had a nice conversation. It was apparent he was disappointed in John McCain but very worried about the economic policies of Barack Obama. Yet his pitch focused chiefly on the well-worn allegations about Obama's past associations. When, however, he tossed the "voted to raise taxes on everyone earning more than $42,000" claim, I stopped him and told him what I do for a living. His crestfallen expression said it all. I saw him again this morning [edit: by the time this posted showed up it was yesterday morning] when I voted. He asked me if I had changed my views. I responded that after hearing the $42,000 question turned into a radio ad, the door had closed.
Let's face it. Even if Obama wanted to raise taxes on everyone earning more than $42,000, and he doesn't want to do that, there's no way that the Congress would go along. Two years from now, all of the House and one-third of the Senate will be up for election. As critical as I am of the Congress, I'll give them credit for not being so callous as to think that their constituencies would be accepting of a tax increase of such a scope. Yes, there will be some folks facing tax increases, or to be precise, revocation of previous tax cuts. Though there has been talk of revoking tax cuts for those with incomes exceeding $250,000 in 2009, it would not surprise me to see them remain in place until they expire in 2010. What does not exist is a consensus to extend those tax cuts past 2010, though it also would not surprise me to see the tax cuts for those earning less than $200,000 renewed so that they do not expire in 2010.
This much is certain. Though there are going to be quite a few amendments to the tax code in 2009, Congress is not going to increase taxes for all taxpayers earning more than $42,000. It's unfortunate that some people cast votes thinking that Congress would do that if Barack Obama were elected. It's even more unfortunate that supposedly responsible candidates permitted those people to be misled.
Monday, November 03, 2008
The notion that believing in taking from the haves and giving to the have nots makes a person a socialist means that almost every President elected since 1913, and almost every member of Congress elected since that time, is or was a socialist. How do I develop that reading of the GetLiberty assertion? The federal income tax usually takes something from the haves and redistributes it to the have nots, though in recent years it also has taken from the have less and provided more to the already haves. Since 1913, the executive and legislative branch of the federal government has enacted, amended, and administered a progressive federal income tax. Seen in this light, the notion that Obama, or anyone else supporting the progressive federal income tax, is a socialist, is a total canard, a misleading sound-bite designed to mislead those who are emotionally predisposed to dislike taxation.From what one hears from those trying to equate wealth redistribution through a progressive income tax with socialism, it might appear that wealth distribution through progressive income taxation is some un-American plot by a small group intent on accomplishing something to which most Americans are opposed.
Perhaps to the surprise of some, but surely not to the shock of many others, a recent Gallup poll tells us that 58% of respondents concluded that the current distribution of money and wealth in the United States is not fair and that money and wealth should be more evenly distributed among a larger percentage of the people. Gallup has been asking this question for two decades, though surely its appearance as a hot button topic in the current election prompted Gallup to ask it again. Whenever it has been asked, a majority of those asked the question reached the same conclusion as did the majority of respondents during the most recent questioning. Gallup also asked if wealth should be redistributed through "heavy taxes on the rich," but only 46% of those responding to the poll agreed. Precisely one-half disagreed. These numbers do not differ significantly from the results when Gallup has asked the question in the past, though earlier this year 51 percent agreed.
Unfortunately, at a time when the country needs to be unified, Gallup's follow-up questions demonstrate the depth of the chasm that divides the populace. Among Republicans, roughly two-thirds think that the current distribution of wealth and money is fair, whereas only one-third of independents and 13 percent of Democrats agree with that conclusion. Among Republicans, only 17 percent agree with the proposition that wealth should be redistributed through heavy taxes on the rich, whereas 47 percent of independents and 75 percent of Democrats agree.
Gallup managed to combine the answers to these questions to determine that 41 percent of Americans are what it calls "strong redistributionists," namely, "those who say money and wealth should be more evenly distributed and that the government should do so with heavy taxes on the rich." Another 15 pecent are "non-government redistributionists," namely, "those who say money and wealth should be more evenly distributed but that the government should not attempt to do so with heavy taxes on the rich." That leaves 32 percent who are "anti-distributionists," namely, "those who say the current distribution of money and wealth is fair and who oppose heavy taxes on the rich." Four percent replied that current distribution is fair but that the government should heavily tax the rich. The others replied "don't know" to one or more of the questions.
What this poll tells me is that if opposition to the current distribution of wealth, agreement with the proposition that the tax cuts for the wealthy should be repealed, or both, makes a person a socialist, the majority of Americans are socialists and have been so for many decades. It ought not be surprising that a majority of Americans look at what tax cuts for the wealthy have accomplished and conclude that it isn't something beneficial for the nation. This issue may not be the sole factor in tomorrow's vote, but it certainly appears to be the principal issue. We'll know late tomorrow evening the extent to which saving the wealthy from the proposed repeal of their tax cut mattered to the electorate.