We Don't Need to Make These Up

It is impossible for me to tally how many times I have said to my students, in one or another class, "We law professors don't need to make these up. The best hypotheticals and the best problems are found in life." As 2008 comes to a close, it's worth looking at CNN's Fortune Magazine listing of the year's "21 Dumbest Moments in Business 2008". Why 21 and not the typical 10 or Fortune's benchmark 500? I do not know. Perhaps because a person is required to live 21 years before the law permits the person to drink alcohol, an activity in which both the participants in these 21 stories and the people reading them might be tempted to do.

The tag line for the story deserves a salute. "We don't know whether to laugh or cry. Our annual list of the year's most laughable moves proves that, even in moments of crisis, stupidity lives on." Somehow, evolution theory hasn't yet explained how stupidity continues to thrive and multiply.

Many of the 21 stories provided grist for the MauledAgain mill at one point or another during the year. Sometimes they caught my eye because there were tax implications, sometimes because they reflected the environment and attitude that nurtured the current economic mess, and sometimes because they compelled me to think about the inadequacies of the educational systems that trained the folks whose decisions or words fueled these stories. Were it not for the fact these events happened, no one would believe that they did.

As I read through the 21 stories, I asked myself, "If I had to pick the winner, which would it be?" I narrowed the list down to five. Here they are, in no particular order:

* Paulson's 3-page plea for $700B, featuring the prize-winning proposed statutory language barring legislative or judicial review of the Treasury's decision making with respect to the $700 billion made available for economic recovery purposes.

* Bloating up the bailout, describing how Congress packed hundreds of pages of pork barrel spending and tax give-aways into the bailout legislation, causing a Congress that had rejected the idea of a bailout to embrace it as the next best thing to chocolate.

* Mozilo's 'disgusting' reply-all, describing the email erroneously sent by Countrywide's CEO to everyone in the company, tagging the distressed borrower's request for assistance as "unbelievable' and 'disgusting,' labels that only he would apply to the situation in which he found himself after Bank of America purchsed the company, that is, unemployed.

* Housing rescue comes up short, detailing the fortunes, or should one say, misfortunes, of the Hope for Homeowners legislation, a plan by Congress to guarantee $300 billion in mortgages and to prevent 300,000 foreclosures, a plan so stellar that since its launch three months ago only 321 applications have been filed and none have received final determination.

* Phil Gramm's 'mental recession', recalling former Senator Phil Gramm's comments, made while serving as Senator John McCain's campaign co-chair, that by voters expressing their concerns about the economy were a "nation of whiners" and that the growing economic mess was but a "mental recession."

All five of these stories exemplify the deficiencies in leadership that have brought this nation's economy to a near-standstill. Two involve Congress, and I set them aside because Congress churns out stupidity so often there's nothing spectacular about it. Another involves a member of the current Administration acting as though perfection was so synonymous with his actions that oversight would be useless. That, too, isn't a particularly novel situation. Yet another involved a former member of the Congress, letting the nation see how disconnected he and his circle were from the realities facing most, if not nearly all, of the nation's populace. It's disappointing and foolish, but not so startling that it should take an annual prize. That leaves the hard-hearted, ruthless, insensitive, short-sighted former CEO of Countrywide, an icon for the business culture in which the tough times afflicting so many was brewed and nurtured. So focused on generating money, no matter the social or long-term price, these money dealers lost sight of why their businesses existed.

One of the 21 stories, Microsoft overbids for Yahoo, explaining how Microsoft offered 161% of the amount for which Yahoo stock was then trading, stock that by the end of the year was trading for 40% of that amount, prompts me to ask a question. This story wasn't a finalist, because companies offering too much when seeking to acquire assets is so common an experience it generally would get a yawn. But in this instance, because of the companies involved, I ask this: "Does Microsoft think that spending money to acquire Yahoo so that it can keep up with Google would somehow make its core product more efficient, more secure, more affordable, more user-friendly, more reliable, and more capable?" In the rush to get bigger, and thus more of a risk to the economy, business entrepreneurs forget that one should not move along to fourth grade until one passes third grade. When Microsoft gets its Windows and Vista operating system working the way they ought, then it should think about trying to "out-google" Google. Imitation is not a good form of creativity, and hopefully when the culling triggered by the current economic crisis is finished, genuine creativity will have surpassed the practice of buying, stealing, copying, imitating, and riding on the ideas and efforts of others. Perhaps the smart approaches will displace the stupid ones. Perhaps.

And on that note, a happy 2009 to all.

Tax Holidays?

Last week, in a letter to the editors of the Philadelphia Inquirer, Scott Duman proposed that all employee payroll and federal income taxes be suspended for six months, all corporate income taxes be suspended for three months, and all capital gains taxes and taxes on dividend income be eliminated for all of 2009. At least part of this idea is not Duman's alone. Two economists, one from Stanford and the other from the University of Rochester have proposed cutting the social security payroll tax and making up the shortfall from general revenues. The National Retail Foundation is proposing a sales tax holiday. In contrast, Michael Kinsley has jumped onto one of my favorite ideas, raising the gasoline tax to absorb the difference between last summer's high prices and this winter's much lower prices.

The idea of having the federal government stop collecting all income and employee payroll taxes is downright dangerous. Where would the federal government obtain money to pay its employees, to maintain the Armed Forces, to make social security and medicare payments to retirees and disabled individuals, and to pay interest on its debt, to give but a few examples of how the cutting off of tax revenue would cripple the nation. Speaking of debt, I suppose Duman prefers that the government borrow even more money to offset the tax revenue loss, so that in future years there would be even more need for tax revenues to pay even higher interest charges. Almost two years ago, in another letter to the editors of the Philadelphia Inquirer, Duman gave a clue as to his solution. He would cut government spending, and I suppose with his proposed cut-off of most federal revenue, he would cut all government spending. In making his argument, Duman touted the successes of the current Administration's economic and tax policies. He noted that home mortgage interest rates were low, that unemployment was low, and that tax receipts were at a record high. Funny how that played out. What appeared to be wonderful news two years ago was simply the illusion that smoke-and-mirror politics casts upon a then-unsuspecting populace.

Duman's proposal reeks of the same political viewpoint that abetted the activities leading to the current economic mess. Note carefully that taxes on capital gains and dividend income would be eliminated for twice the period individual income taxes would be suspended. Perhaps Duman thinks that the rich and moderately wealthy, who are the recipients of most taxable capital gains and dividend income, would put the additional cash flow to good use. Perhaps they would seek out investments with Bernard Madoff or with some investment banker intent on making loans to people with no income, no jobs, and no assets?

Duman's proposal intensifies the same economic malaise that has plagued this nation for several decades. Cutting off revenue for the social security system simply accelerates the date on which the trust funds are exhausted. Considering Duman's aversion to taxation, I suppose the solution is the now not-so-hidden goal of eliminating the Social Security system. Or does Duman think the nation ought to borrow even more money to fund Social Security? Duman's defense of his proposal is that taxpayers would spend the amounts not paid in taxes, thus energizing the economy. This "spend now, pay later" mindset is a significant factor in what ripped apart the economy's infrastructure, and to suggest doing more of the same is not much different than suggesting that the cure for a sunburn is to sit on a beach on a cloudless day bereft of sunscreen.

At least the two economists propose a remedy for the suspension of payroll tax collection. To keep money flowing into the trust funds, they suggest taking those amounts out of the general budget. But to accomplish this, the government needs either to raise taxes or borrow money. I suppose it could print money, but the inflationary effects of doing so are on the Federal Reserve's "don't let it happen" list, making it a very unlikely solution. The two economists point out that suspending payroll taxes would make it less costly to hire workers, but if employers have no work for people to do, they're not going to hire someone even if the person offers to work for one dollar a year. They claim that their idea does a better job of stimulating domestic production than does sending out rebate checks or enacting a sales tax holiday, but I disagree. No matter how extra money is directed into the pockets of consumers, some of that money will be set aside and the rest will be spent, without any guarantees that the products being purchases are produced domestically. The one enticing argument made by the two economists is that a payroll tax suspension reaches lower income households, who surely constitute a substantial portion of those who are in tough economic positions.

The conundrum goes beyond the question of taxes and spending. The conundrum is hidden because the economy is measured with monetary units and monetary equivalents. The trade deficit, the federal budget deficit, tax revenues, per-capita consumption, the amount of foreclosed loans, and many other benchmarks are measured in dollars. Some items, such as barrels of imported oil, natural gas production, and gasoline inventory, are measured in units, but those units generally are not expressed in per-capita terms nor are they expressed as percentages of total resources. Though many economists consider supply-and-demand curves to be at the root of economic analysis, I prefer to think that resource allocation models are more relevant. There is no supply-and-demand curve for triceratops horns, for dodo bird eggs, or for any other item that has been fully consumed by society. We are now at a point where the consumption to date of certain key resources, such as oil, clean water, and certain precious metals, has reduced the planet's inventory to levels that cannot supply anticipated future demand or that can do so only with serious economic displacements. The answer that reductions in supply often reduce demand aren't going to work when the commodity in question is, for example, clean water. That is why economic analysis can be informative only within a larger political framework.

Thus, barring a significant change in consumption patterns, current economic woes may seem trivial compared to the global ramifications of "spend and consume now, pay later" mentalities. The solution is not to try to cajole the economy into resuming past patterns, but to shift into a "spend and consume less, save more, and reduce debt" mode. That shift is going to be painful, not only in an economic sense but in social, political, and even military terms. From this perspective, it makes far more sense to raise taxes, such as gasoline taxes, and to make it even more costly to consume nonrenewable resources. Going on a tax holiday is one of the worst things that this nation could do. That would be the equivalent of spending hours in a tanning booth before going out into the sun without sunscreen. Postponing the inevitable makes no sense if postponement makes the inevitable worse.

Are In Vitro Fertilization Expenses Deductible?

Here's yet another one of those tax questions the answer to which is "It depends." It's the next question that often stumps student and practitioner. "On what?" I like these issues because they rip apart the threads holding together the specious assertion that tax is merely a thing of numbers, a game of computations, and thus, not law. Some folks simply cannot conceive that tax analysis is much more like law than it is accounting, auditing, or arithmetic.

It is notable that two days before Christmas, the Tax Court issued an opinion dealing with the tax consequences of human reproduction accomplished through other than what I will call the "traditional" approach. Two thousand years ago, the Roman Empire imposed taxes of a sort that did not require anyone to deal with the issue of how taxpayers came into being. But in this day and age, advances in medical technology present issues that would not have been faced by those practicing law 20 years ago, let alone by citizens and residents of the Roman Empire.

On Tuesday, in Magdalin v. Comr., no, not Magdalene, the Tax Court held that a man was not allowed to deduct the costs of having an anonymous female donor's eggs fertilized with his sperm and of having two other women carry two of the embryos through the gestation period. These costs included fees charged by the in vitro fertilization clinic, amounts paid to the gestational carriers, legal fees, prescription drugs, and charges imposed by the hospital where one of the births occurred. The taxpayer was not married to the donor or either of the carriers, nor were any of them his dependents. According to the facts, the taxpayer had twin sons with his former wife, and those children were born without the benefit of in vitro fertlization. The facts also note that the taxpayer had no medical problems with his reproductive capacity. The procedures were expensive propositions, amounting to almost $100,000 over a two-year period. Only a bit more than $60,000 was claimed as a deduction because of the 7.5-percent floor on the medical expense deduction.

In order for an expense to be qualify for the medical expense deduction, it must be paid either "for the diagnosis, cure, mitigation, treatment, or prevention of disease" or "for the purpose of affecting any structure or function of the body." So tells us section 213(d)(1)(A) of the Internal Revenue Code. The regulations under section 213, specifically, Regs. section 1.213-1(e)(1)(ii), provide that deductible medical expenses are "confined strictly to expenses incurred primarily for the prevention of alleviation of a physical or mental defect or illness." In Jacobs v. Comr., 62 T.C. 813 (1974), the Tax Court added a "but for" gloss to the requirements, and under that test the taxpayer must show "that the expenditures were an essential element of the treatment" and "that they would not have otherwise been incurred for nonmedical reasons." Onto this labyrinth of qualifying conditions Congress has layered yet another restriction, providing in section 213(d)(9) that the expenses of cosmetic surgery or similar procedures are nondeductible "unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease."

The taxpayer, a physician arguing for himself, took that position that it was his civil right to reproduce, that he should have the freedom to choose the method of reproduction, and that it is sex discrimination to allow women but not men to choose how they will reproduce. Though acknowledging the lack of legal precedent afforded to private letter rulings, he cited PLR 200318017 for the proposition that "expenses for egg donor, medical and legal costs are deductible medical expenses." In turn, the government, represented by counsel, argued that although amounts paid for procedures to mitigate infertility may qualify as deductible medical expenses, the taxpayer "had no physical or mental defect or illness which prohibited him from procreating naturally," noting that he had done so with respect to his twin sons. The government also argued that the expenses were not for the purpose of affecting any structure or function of the taxpayer's "male body" and that "the procedures at issue only affected the structures or functions of the bodies of the unrelated surrogate mothers." Finally, the government made what the Tax Court called an "unexplained assertion," namely, that the government "does not believe that procreation is a covered function of [taxpayer's] male body within the meaning of section 213(d)(1)."

The Tax Court agreed with the government that the taxpayer's expenses were not for medical care because they were not incurred primarily for the prevention or alleviation of a physical or mental illness. It explained that accordingly, there was no need to answer the "lurking questions" as to whether and to what extent the cost of in vitro fertilization procedures and associated costs would be deductible if there were an underlying medical condition. The Court also concluded that the taxpayer's expenses did not affect a structure or function of his body. The Court distinguished PLR 200318017 on two grounds. First, the taxpayer in that ruling was unable to conceive a child using her own eggs after undergoing repeated assisted reproductive technology procedures. Second, the procedures undertaken by the taxpayer in that ruling affected her body because the fertilized donated eggs were implanted into her body.

In explaining its reasoning, the Court indirectly criticized the government's assertion that procreation is not a function of a male's body. Citing the government's own Rev. Rul. 73-201, 1973-1 C.B. 140, the Court noted that the IRS had ruled that the cost of a vasectomy is an eligible non-cosmetic medical expense because it affects the structure of the taxpayer's body, whereas the in vitro fertilization procedures in which the taxpayer had participated did not affect his bodily functions and structures because "they remained the same before and after those processes."

The Tax Court rejected the taxpayer's attempt to cast the deduction issue into a constitutional spotlight. The Court concluded that there were no constitutional dimensions to the case because under the circumstances, "it did not rise to that level." According to the Court, the taxpayer's "gender, marital status, and sexual orientation do not bear on whether he can deduct the expenses at issue." Even with current medical technology, human reproduction affects the female body far more than it does the male body, and thus, at least for the near future, expenses incurred with respect to women participating in medically assisted reproduction are far more likely to be deductible than those incurred by men. Perhaps the cost of surgery to extract male reproductive material that otherwise cannot be made available for the reproductive process in some traditional manner would be deductible, just as surgery to extract eggs is deductible. But in the more distant future, when the technology permitting men to carry children is ready for prime time, the likelihood of expenses incurred with respect to men participting in medically assisted reproduction will be no less likely to be deductible than will be the case for women. Lest one think this is rank speculation or the stuff of fantasy movie plots, Professor Lord Winston, one of in vitro fertilization's pioneers, said as much almost ten years ago.

So after someone correctly replies, "It depends," to the question of whether in vitro fertilization costs are deductible and is asked, "On what?" the answer should be that it depends on whether the procedure was undertaken on account of a medical illness or disease or, alternatively, affected the function or structure of the taxpayer's body (or the body of the taxpayer's spouse or dependent). And yet, that's only part of it. The answer also needs to include a qualification of the initial question. "Are we talking about HUMAN in vitro fertilization?" is a question that needs to be posed to the initial inquirer. Why? See Truskowsky v. Comr. (cost of in vitro fertilization of cattle treated as business expense).

Tax. It's not just about numbers. It's not just about computation. It's about life. There's just about nothing that it doesn't touch. If I were to say that tax is everywhere, I'd be treading far too close to a theological cliff edge. Not over, because tax is too flawed for me to assert that it is omnipotent. Or that its administration or practitioners are omniscient. And, surely we hope, tax is not eternal, and has no after-life.

What Sort of Tax?

The current tax debate in New York State is a textbook example of the tax policy issues implicated when a state determines that it must increase revenues as part of a plan to deal with a budget deficit. When cutting expenditures won't suffice, because doing so would terminate or significantly curtail critical state government functions, the only other viable alternative is to increase taxes. According to this CNN story, New York's governor has proposed 137 new or increased taxes, along with a variety of expenditure cuts. The proposal has triggered a not-unexpected debate over which taxes should be increased.

Under the proposal, taxes on beer, wine, non-diet soft drinks, certain fruit juices, and cigars would be increased. User fees and taxes on internet connections, taxi rides, massages, cable television, sports tickets, and movie tickets also would increase. The sales tax exemption on clothing sales under $110 would be repealed. The governor notes that by basing a significant portion of its revenues on taxes collected on Wall Street activities, the state took the risk that those receipts would shrink.

Opponents of these tax increases advocate an increase in the state income tax on taxpayers with high incomes. They argue that the governor's proposals will hurt lower and middle income taxpayers, encouraging many residents, for example, to travel to New Jersey to make purchases because the taxes in that state would be lower than they would be under the governor's proposal.

What justification is there for increasing the taxes and user fees that the governor seeks to increase? In some instances, considering the burden that these items or activities put on society, a user fee increase makes sense. The tax on non-diet soda, for example, which some are calling an "obesity tax," reflects a notion that the sugar in non-diet soda contributes to the health problems caused or aggravated by obesity. But as pointed out in this essay on the issue, there are a variety of foodstuffs that contribute to obesity and there is a lack of evidence that non-diet soda is any worse in this regard than other foods. To that reasoning I would add that even some low-calorie foods can contribute to obesity if they are consumed in large quantity. But as a practical matter, what alternatives exist to recoup the cost to society of bad dietary habits other than at the dietary source? Would it not be silly, if not outrageous, to impose taxes on people based on weekly weigh-ins? The fact that professional sports teams often impose fines on players who don't make weight ought not inspire people to use a similar approach in schools and offices. It's a tempting thought, though.

Has there been some sort of increase in the burden placed on society by people who purchase sports and movie tickets? Or by people who ride in taxicabs? It's probably easier to find justification for increasing the cost of cigars. And though the sales tax exemption for clothing under $110 appears to favor low-income individuals, it wouldn't surprise me to discover that taxpayers of all income levels find ways to take advantage of an exemption that perhaps ought not to have existed in the first place.

If increasing the taxes and fees in the manner proposed by the governor in fact shifts consumer transactions to other states, the net revenue gain from the proposed legislation might turn out to be far less than is anticipated. In the same vein, increasing state income taxes on upper income taxpayers might encourage some of them to shift their residences to other states with lower income taxes, similarly decreasing anticipated state revenues. This conundrum exists with respect to almost all state and local taxes and user fees.

Generally, the political process works to create some sort of balance among the various taxes and fees that are available to state and local governments. Ultimately, there's no guarantee that economic or social analysis will trump the emotions of voters and the re-election concerns of legislators. Students in a tax policy course learn that there are good arguments in favor of each particular type of tax, and good arguments opposing each particular type of tax. The ability to understand these arguments, to design the arguments, and to respond to these arguments is an essential ingredient of success in a tax policy course. What would be an interesting research project is an inquiry into the percentage of state and local legislators who have taken a tax policy course. Another interesting research endeavor would be an examination of how many citizens have studied tax policy to a degree that permits rational and careful analysis of tax proposals. Guesses could be made, and they could be very educated guesses, but they would be guesses. Sometimes, it seems, when legislators enact or increase taxes and user fees, they are guessing that it will work. Perhaps that's the best that can be expected.

Great New Book Helps Estate Planning Clients Help Their Attorneys

One of the many practical points I try to get across to my students in Decedents' Estates and Trusts is that they will encounter clients who want them to make decisions that are not the attorney's decision to make. Though a well-educated and diligent attorney knows the law and understands how it works, an attorney cannot begin to frame a plan or to draft documents until the attorney knows what the client wants to do. Clients usually do not know what they want to do or if they think they know what they want to do, they're unaware of the many options open to them.

One way of dealing with this challenge is for the lawyer to become a teacher, and to explain to the client the many options and considerations that the client needs to take into account. In the process, the client will ask questions and seek clarification. This takes time. Attorneys charge for their time. This is one reason many people don't seek professional advice, because they cannot afford the cost or choose to spend their money in other ways. Now there is a solution to this conundrum, one that can make professional advice more readily affordable, reduce the number of people who fail to seek professional advice even though they need it, in other words, increase the number of potential clients, and make it easier for the attorney to ascertain what the client wants to do.

The solution comes in the form of the second edition of Don Silver's "A Parent's Guide to Wills & Trusts," a 250-page explanation of estate planning aimed not at the law student or lawyer, but at the client. It explains why estate planning matters, why wills and trusts are essential, what options are available, the advantages and disadvantages of those options, the traps and pitfalls that beset the careless, and the dangers in making assumptions about property distribution at death based on mis-information. Silver addresses not only basic legal principles but psychological and practical concerns that affect the decision-making process. For example, he explains that legally no one "owes" an inheritance to someone, but then points out how law is just one factor in deciding whether, and how, to limit or eliminate a bequest to a particular person.

The book consists chiefly of questions and answers. The questions are typical of those that a client might ask of an attorney. Silver covers wills, trusts, life insurance, retirement plans, bank accounts, taxes, health care, and every other topic that comes into play when dealing with estate planning. He considers not only the stereotypical situations, such as married couples with young children, and older people with children and grandchildren, but he also deals with domestic partnerships, divorced beneficiaries, second marriages, spouses who are not citizens, nonresident beneficiaries, co-ownership with friends, beneficiaries with special needs, and pets. He points out the events that might occur but of which clients might not be thinking when they try to sort out how they want their assets distributed when they die. He discusses the selection of guardians for minors, the possibilities of 18-year-olds coming into money, the dangers of not telling the attorney about the family member to whom the client wants to leave nothing, and the challenges of selecting executors and trustees.

Some of the points on which Silver focuses are identical to ones that I spotlight in my Decedents' Estates and Trusts course. My students, who at this stage are not all that different from the educated client who has not been to law school, often react with the same eye-opening astonishment as I'm sure Silver has seen with his clients. Surely the point that there is no one rule and no magic formula is a tough one for people, including law students, who think that law and legal practice consists solely of rules mechanically applied to situations facing the attorney or a court. How many people know that a will provision does not change the beneficiary designation in a life insurance contract? How many people understand that probate is a public process? How many people realize that even with a living trust, a person needs a will? How many people understand why funeral instructions should be in writing and why they ought not be stashed away in a safe deposit box? How many people think seriously about what happens to their email and online accounts when they die? As an aside, students who cannot deal appropriately with these issues are not going to earn a worthy grade in the course.

Though estate planning attorneys would learn nothing new from this book, that's precisely the point. The book is not designed to teach lawyers how to draft estate plans, nor is it designed to teach law students how to read statutes, identify legal issues, or counsel clients. But the book is for lawyers in one important respect. It's something that an estate planning lawyer should give serious consideration as a gift to clients and potential clients. An attorney could give the book to a client with a request that the client read the book and take into account what it says when sitting down to answer the questions that the attorney has presented to the client. Though some clients might not have the ability to do this, most clients are sufficiently educated and literate that they would use the information in the book to prepare themselves for their next meeting with the attorney. In the same way, people who do not think that they need a will, or who think that they can get along quite fine without an attorney, thank you, should benefit from reading this book, particularly the portions that explains why everyone needs a will, and almost everyone needs a trust.

None of this is surprising. After all, Don Silver is an attorney. He has dealt with clients and knows what sorts of obstacles present themselves to people who seek professional assistance in fashioning an estate plan. He knows the sorts of things that haven't even crossed the client's mind, and he knows the misleading information, which he nicely calls myths, which the clients bring with them into their meetings with the attorney. Silver's writing style reflects his experience dealing with people who, for the most part, are not lawyers. He avoids the technical, obtuse, and complex verbiage into which many lawyers sink, often because they erroneously think that lawyering requires writing in an impenetrable style. He writes as though he were transcribing conversations with his family members, friends, and clients, and I think that in certain respects that is what he in fact has done.

This is a book I highly recommend. I recommend it to attorneys to consider as something to give to clients and potential clients. I recommend it to people who are planning to meet with their estate planning attorneys and to people who are thinking about finding an attorney to help them with their estate plans. I recommend it to people who don't think they need a will or any estate planning advice because after reading this book, they will become people who are thinking about finding an attorney to help them with their estate plans.

To order, contact Adams-Hall Publishing or call 1-800-888-4452. A significant discount is in place through December 31, and a discount exists for quantity purchases, which should appeal to lawyers thinking about distributing copies to their clients. The book also makes a good, last-minute holiday gift for that person who has everything. What better way to get them started on their plans for doing something with that everything when the time comes. And more good news: even a single copy (aside from shipping and handling) falls into that "under $10" gift category.

Cutting Up the Economic Distress Remediation Pie

Thanks to Paul Caron's TaxProf blog post, Did Double Tax on Corporate Income Contribute to Economic Meltdown?, I found myself exploring another side of the inevitable process by which people try to turn the current economic mess, or more specifically, proposed remedies, to their advantage. According to the posting, at a December 5 Brookings Institution Conference, called Memo to the President: Tax Reform's Challenges and Opportunities, former Assistant Secretary of the Treasury for Tax Policy, Pam Olson, characterized the double taxation of corporate income as having contributed to the current economic mess. Beginning at page 130 of the transcript of the Conference, Pam Olson explains how the double taxation of corporate income and the deductibility of interest on corporate debt encouraged corporations to borrow money, thus in some way causing distress in the credit markets. Though this theoretical proposition is attractive, the reality is that most of the explosion in corporate debt took place after the tax rate on dividends was reduced to the same special low rate applicable to capital gains, and after that rate was itself significantly reduced. Though one other expert agrees, others point out that many other factors encouraged the run-up in corporate debt. What makes no sense is how corporate double taxation has anything to do with the huge increases in the bad mortgage and other consumer loans that poisoned the credit markets.

What I think is happening is a reverse rerun of an argument that permeates almost every plea for special tax relief. When it comes time to make changes to the tax law, advocates of corporate income tax relief will argue that elimination of the corporate income tax is essential to restoring the health of the national economy, just as a long line of lobbyists have been moving through Treasury and Congressional offices making their case for a piece of the TARP or other pie, whether or not their clients fall within the scope of the industry for which TARP or some other program is designed to rescue.

When I teach the basic federal income tax course, I try to help students cope with the confusion that besets them when they discover that depreciation deductions are permitted for real property even if the property has not declined in value. I point out to them that this isn't the only tax provision favorable to the real estate industry. Students, so terribly insulated from the realities of political life as they move through 16 or more years of pre-law-school education, think I am joking when I tell them how lobbying works. It is not uncommon to insist that failure to grant a particular tax break will cause economic collapse. Usually, because the provisions are enacted and the economy hums along, there is no way of proving the negative, that is, that the economy would have collapsed without the provision in place. Now that the economy in fact has collapsed, it's time for the advocates of provisions not successfully advanced during previous lobbying efforts to return with claims that the absence of their pet provision was a factor in the current economic mess.

Don't get me wrong. I happen to favor corporate tax integration, but of the sort that most advocates would reject. Rather than allowing corporations to deduct dividends, I would prefer to see corporate income taxed to shareholders in the same manner S corporation income is taxed to S corporation shareholders. There are many strong arguments in favor of corporate tax integration, and even stronger ones in favor of the pass-through approach, but it hurts the cause, rather than helping it, to claim that the absence of corporate tax integration was or is a culprit in an economic fiasco fueled by fraud, greed, stupidity, miscalculation, and of course, the refusal to increase taxes and the absurd reduction in taxes at a time when trillions of dollars were expended or committed to fighting a war.

So we need to prepare ourselves for the onslaught of special case pleading. Here are some of the candidates, in predicted quotation format:

"The economic collapse is due in part to the lack of corporate tax integration, so to fix it Congress must enact corporate tax integration."

"The economic fiasco is due in part to the refusal of Congress to permit developers to claim immediate and full deductions for building even more shopping centers, so to clean up the mess Congress must enact an immediate deduction for amounts invested in shopping centers."

"The economic fiasco is due in part to the refusal of Congress to permit more favorable depreciation deductions for NASCAR facilities, so to, oh wait, sorry, Congress already enacted more favorable depreciation deductions for NASCAR facilities because it bought the argument that doing so would prevent economic collapse and, oh, gotta run, have a call coming in."

"The economic mess is due in part to the refusal of Congress to eliminate taxes on interest income, dividend income, capital gains income, and any other sort of income other than wages, so to fix the mess Congress should tax all wages at 80 percent so that the maximum amount of investment income can be steered into those excellent growth funds, you know, like the ones run by that Madoff guy."

"The economic collapse is due in part to the refusal of Congress to provide a tax credit for building sports stadia in cities and towns across America so that they can invite the Arena Football League to put new franchises in those locations, so to restore the economy and create jobs Congress should enact a tax credit for the construction of Arena Football League facilities."

But here's my favorite:

"The economic debacle is due in part to the refusal of Congress to provide a refundable tax credit of $50 billion per year to all law professors who write tax blogs the names of which begin with the letter M, have an upper-case A in the middle of the name, and end with the letter n, and that first appeared in 2004 because the law professors who so qualify know how to use refundable credits in a manner that is beneficial to the economy, and so to revive the national economy Congress should enact such a credit, making it retroactive to 2004."

Yeah, ok. Hurry and get in line before it gets too long.

Is Tax the Best Way to Deal with Greed and Financial Foolishness?

Three months ago, in Risk Premiums with a Greed Tax?, I suggested that perhaps there should be a tax on greed. I proposed that "The tax would apply when a person's or entity's attempt to accumulate wealth, rather than 'trickling down' benefits to society generally, harms society." Recent news compels me to think about how such a tax would have affected the most recent fraudulent scheme presented by Wall Street.

In news that broke last week, an investment broker was arrested for defrauding customers with a $50 billion Ponzi scheme. Bernard Madoff was charged with securities fraud, for allegedly providing the guaranteed returns he promised his customers by obtaining money from other investors to pay off the earlier entrants into the arrangement. Even a 1 percent fee would have generated $500 million for Madoff. According to the complaint filed by the SEC, Madoff told his employees that his advising business was a fraud, that nothing was left, that it was "one big lie," and that it was a "giant Ponzi scheme." Yet Madoff did have about $200 million remaining which he tried to distributed to employees, family members, and friends of his choosing. Madoff served as president of NASDAQ during the early 1990s. Now he faces up to 20 years in jail and a $5 million fine. According to a CNN story, several European banks were victims of Madoff's machinations.

Madoff's attorney was quoted as saying, "Bernie Madoff is a longstanding leader in the financial services industry. He intends to fight to get through this unfortunate set of events." One question that crosses my mind is this. If Madoff succeeds in getting through these events, at what place does he arrive? Surely his career as an investment broker, as a financial advisor, as a Wall Street executive, is over. So, too, are the lives of those whose investments he squandered. A related question is whether he will find the opportunity to earn enough money to pay a $5 million fine. Yet another related question is whether anyone seriously thinks Madoff ever will find the means to reimburse his victims.

As a practical matter, it's too late for Madoff to find ways to restore the financial status of his customers as things were before he embarked on this money grab. The time to build a protective fund, or some sort of insurance, is during the period someone is engaging in risky financial behavior. All financial behavior is risky, but that risk varies from near-zero to astronomical, depending on the activity and the persons involved in the undertaking. Actuaries know how to evaluate risk, and surely they can tag different financial deals with appropriate risk characteristics. If a risk premium is charged on every financial transaction, then a fund exists that can be used to provide relief to those who, like the couple I saw interviewed on the television at the gym on Monday morning, have "lost everything."

The tougher question is whether a risk premium should be augmented with a tax on greed. In Risk Premiums with a Greed Tax?, I had this to say about greed:

Greed is not the desire to increase one's economic status, particularly because most people on the planet who have that desire pursue their dreams because they are trying to accumulate enough economic assets in order to survive. Greed is the desire to hold far more economic wealth than is necessary for survival, comfort, and even luxurious lifestyles. It is the desire to hold so much wealth that the wealth becomes an instrument of power more effective than the decisions of elected officials, and thus becomes a threat to democracy. Greed is exacerbated when it is coupled with impatience, much like the demand, "I want it all, and I want it now."

How does one know whether greed is tainting a financial transaction? Was Madoff greedy? Or was Madoff someone who feared failure, and having put himself into a corner by making outlandish promises that he could not keep, proceed to act in desperation? Should those who deal with large amounts of money be subject to a different, more exacting, set of standards and treated as more likely to be caught up in greed? Should motive matter? Should the tax be expanded from one imposed on greed to one imposed on greed, carelessness, stupidity, and over-reaching? Or should the risk premium, whether or not in the form of a tax, be determined by actuaries who take greed, carelessness, stupidity, and other factors into account? Are actuaries capable of doing that? Simply because the broker or investment banker can point to degrees earned from prestigious educational institutions does not mean that he or she is free of carelessness or even greed? Is there a track record that can be considered? What sort of risk factor would an actuary have pegged on Bernie Madoff before this news broke?

If industry and government, and society in general, cannot develop workable answers to these questions, the continuing parade of news stories of this sort will do nothing to restore the trust that needs to exist in order for the economy to resume some semblance of productive operation. In a time when people don't know each other the way they did when they grew up together in the same small town, something is required that creates the assurances once more easily obtained in a less inter-connected world. I doubt that a tax or user fee can renew that trust, but it can build a financial cushion, a financial cushion that might help people scale back their fear of dealing in a crumbling economy.

Timing Estimated State Income Tax Payments

Last week someone brought to my attention advice being given by Charles Schwab to the effect that one should "prepay" state estimated income taxes due in January by sending the check in December 2008 rather than in January 2009. The same advice has poppped up on many web sites, including Renaissance Tax and Business Service, Joe Kristan's Tax Update Blog, and MDManagement Planners. Joe's site includes a chart that taxpayers can use to help themselves decide if this advice makes sense in their case. Take a look.

Unless the AMT causes this to backfire, or unless the taxpayer is in a very low tax bracket in 2008 and expects to be in a very high tax bracket in 2009, this advice makes sense because it accelerates into 2008 the reduction in federal income tax liability caused by the state income tax payment. Technically, one is not pre-paying the state income tax, because the payment is with respect to 2008, and there is nothing in any state's income tax law requiring that the payment be made after December 31, 2008. The practical challenge is the increased difficulty of estimating state income tax liability in December, when the taxpayer does not necessarily have all the information one needs to make that determination. Yet this concern is deceptive, because it is unlikely that when the January 2009 due date for the state estimated income tax payment arrives the taxpayer will have the necessary information. For example, consider the Schedules K-1 due from partnerships, LLCs, and S corporations, which often bring those amazing April (or later) surprises.

Someone asked if the same outcome would be reached if the taxpayer made payments in December 2008 of his or her 2009 estimated state income tax liability. I think that is very risky, and suggested that the taxpayer simply increase the amount of the final estimated state income tax liability payment for 2008 being made in December 2008. My argument is as follows. The December 2008 payment is an estimate, and it is difficult to know with any degree of precision what will end up being the actual 2008 liability. Any state overpayment will end up being available as a credit for the 2009 liability, so the taxpayer will end up in the same place as if a December 2008 payment were tagged as a payment towards 2009 state income taxes. I then got myself into a bit of trouble with an additional bit of reasoning. I noted that the IRS enjoys dealing with people who over-estimate federal income tax liability because those overpayments are interest-free loans to the government. Do people do that? Yes, there are people that do so, particularly folks who have what I will call a hyper-cautious personality. Thus, I asked, would it not be inconsistent for the IRS to object when the same taxpayer is as cautious with state income tax liabilities?

Well, apparently the IRS is a bit touchy about taxpayers who make state estimated income tax payments that are too high. Someone kindly pointed me in the direction of a revenue ruling and a case. In Rev. Rul. 82-208, 1982-2 C.B. 58, the IRS concluded that no deduction would be permitted in year 1 for estimated tax payments for year 1 that were unreasonably too high for year 1. The ruling involved a taxpayer whose income was salary and for which state income tax withholding was sufficient. Clearly the taxpayer was paying a high estimated state income tax in year 1 in order to benefit from the deduction, even though the payments would either be refunded or credited by the state towards the taxpayer's year 2 state income tax liability. On the other hand, in Estate of Cohen v. Comr., T.C. Memo 1970-272, the court rejected the IRS attempt to deny a deduction for high estimated state income tax payments made in year 1 towards year 1 state income tax liabilities because the taxpayer understood that some or many of the income tax deductions taken on the return might be challenged, and if the challenges were successful, state income tax liability would be increased. The taxpayer made high state estimated income tax payment to cover this possibility. Another reason that a taxpayer would take this approach is the one I've already mentioned, namely, the arrival in April of year 2, or later, of Schedules K-1 reporting far more income for year 1 than was expected, often far more income than the partnership's or other entity's tax advisor estimated when contacted by the taxpayer. Absent precautionary payments of state income tax in year 1, the taxpayer ends up having to pay year 1 state income taxes in year 2, incurring interest and perhaps penalties, and obtaining the federal income tax benefit of the deduction for those payments not in year 1 but in year 2. It's the worst of all possible tax worlds. Well, maybe not the worst, but quite unpleasant.

The most important point is that sometime between now and the end of the year, taxpayers and their advisors need to be thinking about these, and other, issues. No matter what the taxpayer decides to do, the worst thing is to ignore the issue only to discover next year that there was something that should have been done before December 31 of this year. This is one reason why, when people claim that early April is the busy time for tax advisors, I disagree, explaining that December often offers the final chance to get some tax things timed correctly. Only 16 tax planning days left in 2008. Use them well.

All of Us Knew Tax is Just About Hot Air

Thanks to Paul Caron's TaxProf blog post, I have learned of a proposed user fee for animal-caused air pollution. According to Proposed fee on smelly cows, hogs angers farmers, the EPA has issued proposed rules that would require farmers to pay a fee for the gases emitted by farm animals through belching and flatulence. The so-called "cow tax" would not be limited to cows, but in a gesture of equality, would apply to hogs, and according to some, to chickens and other livestock. I suppose sheep and goats would be in the mix.

Most of the reports alerting people to this proposal state something along the lines of what was written here: "This proposal comes hot on the heels of a U.S. Supreme Court decision declaring that 'greenhouse gasses emitted by belching and flatulence amounts to air pollution.'" With that quotation from the Supreme Court at hand, I ran some searches but could not find it in the text of Supreme Court opinions. What I did find was a 2007 Supreme Court decision, Massachusetts v. EPA, 549 U.S. 497 (2007), in which the court rejected a statutory interpretation that would treat "everything airborne, from Frisbees to flatulence" as an "air pollutant." The Court then noted that such a conclusion would be one that "defies common sense."

Though numerous other stories and articles are reporting the same news, just as I cannot trace the Supreme Court quotation to a Supreme Court decision, I also cannot find an EPA issuance that sets forth the proposal. According to a CBS News report, the EPA denies having made a proposal to tax livestock. It seems that last Friday the EPA issued a technical report on the causes of pollution, and someone who read it concluded that it included the so-called cow tax. The American Farm Bureau Federation claimed that the tax would affect farms with "more than 25 dairy cows, 50 beef cattle or 200 hogs to pay an annual fee of about $175 for each dairy cow, $87.50 per head of beef cattle and $20 for each hog." Though I've looked for the report on the EPA's web site, the American Farm Bureau Federation's web site, and other sources, I've come up empty. I wonder why none of the stories reporting the proposed tax includes a link to the report. Another version of the proposal is a fee on farming operations that generate more than 100 tons of carbon emissions annually, though carbon can be emitted from all sorts of farm activities, such tractors, furnaces, brush burning, and a variety of other air polluting processes.

Assuming that there is such a proposal from the EPA, it isn't difficult to imagine the nonsense that would turn it into something that makes the income tax law seem simple. Would there be credits for expenditures undertaken to reduce the emission of hot air by livestock? Would this tax law spark investment in a "Bovine Beano" production facility for which a credit or deduction would be allowable? Surely there would be rules determining whether farms would be combined for purposes of counting the number of each animal, else the savvy farmer would divide the animals into mini-farms of 20 dairy cows, 48 beef cattle, or 198 hogs. Why those numbers? Well, what happens when the cows and hogs produce the next generation? And when it comes to counting, would the tax be apportioned in some convoluted way if the number of animals on the farm fluctuated during the year from a number below the minimum to a number above the minimum? Would the tax be considered a property tax, raising uniformity clause issues? Or would it be a transaction tax, measured by some presumed number of annual hot air emissions by each type of animal?

Whether or not there is such a proposal from the EPA, it surely has generated some fun commentary. I've tried to be elegant, using phrases such as "hot air" and "emissions." But my attempt to be polite doesn’t deter me from sending my readers to the comment sections at TaxProf Blog's report, or from suggesting they check out this news item from EcoGeek. Next time someone calls you a windbag, try not to remember what you saw here.

When analyzing an idea, it helps to ascertain if anyone else has previously explored the concept. So, has such a proposal ever been made elsewhere? Yes, according to this report, in New Zealand. About five years ago. And perhaps that tax encouraged the research results reported in this article a few months ago. As I tell my students, tax is everywhere, tax affects everything, tax invades every aspect of life, tax is cosmic. But don't get carried away. Tax is not divine.

So, eventually, the entire discussion may or may not end up as nothing more than hot air. But the commentary flooding the web demonstrates that it doesn't take much to get people to raise a stink about an issue. Especially one that has the word "tax" connected to it.

A MauledAgain Millesimal Event

Well, folks, here it is. Post number 1,000. Who would have thought, almost five years ago, that MauledAgain would be around for 1,000 posts? Not me. When I started MauledAgain, I had no idea what would happen. I guessed that I would enjoy blogging. I guessed that people would read what I wrote. But I would never have predicted, in February of 2004, that near the end of 2008 MauledAgain would still be around.

A quick analysis of the posts indicates that the average word count per post is roughly 1,000. That means I've penned, no, I've keyboarded one million words, give or take a thousand or so. And the same analysis suggests that my words average five characters each. I must use "to," "and," "the," and similar words quite a lot, to make up for all of those lengthy tax-related words. Five million pressings of a key? No, far more, because I have backspaced more than once, I've written and deleted thousands of sentences and tens of thousands of words. Too bad the blogosphere doesn't pay by the word or character. Seriously, I'd rather be "paid" by the citations of, and links to, MauledAgain.

What I haven't done is to analyze all 1,000 posts in order to classify them by subject. I think it is a good guess to conclude that at least two-thirds involve tax, in one way or another. Legal education surely comes in a distant second. Somehow chocolate didn't get quite the same amount of attention. At least not on the blog. I think chocolate prefers a different sort of attention.

Before I end this relatively short post, thanks to Mark Sargent, the Dean of the Villanova University School of Law, whose immortal words, "What? You don't have a blog? Of all people …." set things in motion. How could I not have a blog? Thanks to those who have encouraged me to continue writing, and thos who have been gracious in naming or nominating MauledAgain for an award. Thanks, also, to all of those who have taken time to read the blog, to those who have sent comments, offered suggestions, and provided material, and special thanks to all of those who, having read the blog, came back for more.

And more there should be. That's in my plans.

Do Tax Credits Deserve Credit?

The chief executive of a major home builder, Toll Brothers, Inc., has suggested that the government's proposal to guarantee mortgage-backed securities not only should be pursued but should be accompanied by a $20,000 federal income tax credit for persons who purchase a home. According to this Philadelphia Inquirer story, Robert I. Toll explained that the guarantee would reduce mortgage rates to 4.5%, a rate that would make homes more affordable. Presumably, if homes are more affordable, more will be sold, and the housing market would regain some of its vitality. Justification for the proposed tax credit rests on Toll's theory that it is better to "overprime" rather than "underprime" the economic pump.

It makes sense to question whether a tax credit solves the problem, and to question what happens when such a credit, if enacted, expires, as it is highly unlikely that even if enacted, a homebuyer credit would be permanent and eternal. Toll did mention, in his comments, that there exists a "pervading lack of confidence" in the market. The question is whether a tax credit would restore that confidence. My suggestion is that it would not.

Toll is correct that lack of confidence is a significant factor in the troubles afflicting the economy. It's no wonder people lack confidence. Once upon a time, a town's banker could be trusted. Now one deals with an unidentified person in some remote institution, hiding behind an automated telephone system and an unresponsive web page. Once upon a time, a person could trust investment brokers, financiers, and regulators. Now the financial markets are flooded with toxic financial instruments, in which bad assets are hidden inside good ones, products of manipulation by schemers who have made their money, stashed it offshore, and purchased tickets to some hideaway. Once upon a time, business entrepreneurs either did their job well and prospered, or demonstrated incompetence and went under. Now people are being asked to bear the burden of others' mismanagement. Finally, the wrappings have fallen off the postmodern financial culture, and what one sees isn't going to instill confidence. The charade is over, people are frightened, and the economy is spinning out of control. People who stop and think for a moment understand that it's not possible to bail out every failure, every product of incompetence, and every consequence of fraud.

Why do I think that a $20,000 tax credit won't make much of a difference? First, consider the impact of the recently enacted $7,500 homebuyer credit, which I described and criticized in Yet Another Questionable New Tax Provision. Ill-advised for many reasons, it isn't working, and more than doubling the amount and removing the recapture provision amounts to something akin to banging one's head against the wall even more forcefully. Second, an income tax credit won't change the minds of people who can afford to purchase a home but are refraining from doing so because of the uncertain future they, and the rest of us, face. Third, an income tax credit won't make a home affordable for those who cannot afford a home even if the required cash outlay is reduced by $20,000 because people who cannot afford monthly payments, including the increasing number of people without jobs, are less likely to walk into a home they cannot afford than they were two or three years ago, because they've learned some lessons about living beyond one's means. The number of people for whom $20,000 makes the difference between affordable and unaffordable are too few to make a difference, and even many of them would refrain from making a purchase, even if it became affordable, for the same reason people who can afford to purchase a home without the credit are holding back. Fourth, offering a tax credit to encourage home purchases doesn't address the problem, but at best alleviates some portion of a symptom. The problem with the economy isn't the lack of home sales.

What would make a difference is something that deals with the underlying problem, and that means crafting a solution that addresses the underlying cause of the economic turmoil. Assuming that the tax law is the appropriate vehicle with which to tackle the problem is itself a dubious proposition. As I noted three years ago in More on Skyrocketing Housing Prices, "Considering the government's track record using the tax code to "step in" the ideal of using the tax code to tinker with the housing market is alarming." But even if the tax law is to be used to deal with the crisis, ought it not be used to get to the root of the problem? The problem isn't unemployment, reduced housing sales, failing automakers, or credit squeezes. The problem is confidence. The problem is lack of trust on the part of the typical citizen in the machinery of the marketplace and the absence or ineffectiveness of regulatory mechanisms. People now understand that the free market isn't free, except to the extent some people thought it meant they were free to abuse, manipulate, distort, and undermine the market. Perhaps tax credits should be offered to those who produce evidence of how the markets were damaged, information on who did things that contributed to the deceit and mismanagement, and leads to finding the money that has been squirreled away in places hidden from the eyes of tax authorities, supervisory agencies, and victims of the games that people played with other people's money and lives. I'm not convinced that such credits would necessarily or alone restore confidence, but I'm convinced that such credits stand a better chance of doing so that simply throwing more money into the bottomless pit of citizen anxiety. I'm not ready to put faith into tax credits the way others do, and I'm not yet ready to give credit to tax credits.

Leaders as Teachers: Fixing the Financial Fiasco

Speaking from experience, it truly is difficult to resist saying, "I told you so." Yet somehow, according to this report, Paul O'Neill refuses to speak those words. Who's Paul O'Neill? He's the guy who was Secretary of the Treasury when George W. Bush decided that it made sense to reduce tax rates while incurring huge expenditures to fight the war in Iraq. He opposed the notion of huge increases in federal expenditures not only unmatched by tax increases but accompanied by tax cuts. He wasn't Secretary of the Treasury much longer. He was shown the door, and out he went.

I made that same point on several occasions. Though my earliest comments weren't recorded on MauledAgain, as it did not yet exist, eventually my thoughts presented themselves in the world of blogs. More than three years ago, in Does It Matter Who or What is to Blame?, I opined:

Whether or not one supports none, one, or all of the various military actions undertaken in connection with this war, it is inconceivable to me how one can disagree with the notion that if there is a war the war must be funded because wars cost money. Would opposition to specific military campaigns been stronger, or developed sooner, had taxes been increased to fund the campaign, as good fiscal management demands? Maybe. My guess is that those who supported a campaign, or at least most of them, would have acquiesced, reluctantly or otherwise, to a tax increase. The failure to seek a tax increase, or at least to put the brakes on the tax cutting, probably reflected a policy of trying to make everyone happy even though the long-term cost is far higher than would be the cost of an immediate, and thus smaller, tax increase. I've been told, and I've read, that when the nation went to war in 1941, and even as it was preparing to do so in 1939 and 1940, taxes were increased. I don't know if there was much griping, or how extensive it was, but people knew that war means war. It requires sacrifice.

Later, in my May 2006 Memorial Day Essay on War and TaxationI expounded on this analysis, with this prediction:

Politicians have chosen to fight without increasing revenue, imposing rationing, or deferring projects and activities. In their defense, they argue that none of these things are necessary, that a nation can have its guns without giving up its butter. I disagree, and I happen to think that politicians are reluctant to do what needs to be done because they are more concerned about maintaining their position in office than in making the tough decisions that war requires. So our national leaders have chosen to put the cost of the current war on our children and grandchildren. Those who decry the huge deficits, triggered in part by war and in part by the almost insane concept of decreasing tax revenues (mostly for the wealthy) during wartime, pretty much focus on the economic impact. They ask if, or suggest that, our grandchildren will be facing income tax rates of 80 percent in order to reduce an unmanageable deficit. I think it will be worse. I think our children and their children and grandchildren will become subservient to our nation's creditors. The sovereignty of the United States of America is far from guaranteed, and is at risk. Were these considerations discussed when those in power decided that war can be done on the cheap?

War cannot be done on the cheap. War is not free. War ought not be purchased on a credit card. War is a national commitment. Hiding the true cost of war in order to influence a nation's willingness to engage in war is wrong. Ultimately, the price to be paid will be dangerously high.

Just a few weeks ago, in What's Ahead for the Tax Law?, I observed: "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."

As the media continues to bring news of job losses, failing industries, companies lining up for federal bailouts and handouts, mortgage foreclosures, and stock market tribulations, I wonder why someone doesn't figure out that Paul O'Neill should be given a chance to put his mind to work solving the problem. No, it's no fun cleaning up the mess that wouldn't be there if one's advice had been taken. Again I speak from experience. But it would be a fine vindication to let Paul O'Neill, not merely for himself but for all of those who share his opposition to reckless federal tax and budgetary policy, to demonstrate that it indeed is possible to exercise public fiduciary fiscal responsibilities in an appropriate manner.

O'Neill acknowledges that returning to a balanced federal budget cannot happen in the short term. It takes time to fix a fiscal mess of this magnitude, and it will take time to get the machinery of the nation's economy humming along in a beneficial way. O'Neill has enough sense to realize that throwing hundreds of billions of dollars at programs that might create a few million jobs is extremely inefficient. His suggestions demonstrate that he understands why it is important to have federal financial assistance flow directly to the people who need help and not to banks, financial institutions, or, worse, the people and companies that caused the problems. Even more impressive is his acknowledgement that the current crisis pales in comparison to what will confront the nation in a decade if nothing is done to deal with the Social Security, Medicare, and health care funding conundrum.

O'Neill summed up his approach in a sentence almost short enough to qualify as a great soundbite, and we know how oxymoronic a concept is "great soundbite." Said O'Neill, "The leaders of this country need to educate people and deal with it, or we'll all pay the price." I'll go along with that idea, provided the leaders of this country are in a position to educate people. In other words, the leaders of this country have an obligation to get smart about federal budgets, taxes, monetary policy, and markets. Just because someone is among the leaders of a country doesn't mean that he or she is qualified to educate, or should be educating, the people. But perhaps that soundbite works better if we define leaders not as those who manage to get elected, but as those who step forward with positive ideas for rehabilitation of a broken nation. It's not difficult to think of elected officials who demonstrated little, if anything, that would make people want to be educated by them. Woven into the definition of leader is the ability to lead a nation out of messes rather than into them. Sometimes leading people out of messes requires the leader to persuade people to walk where they don't want to go, by getting them to understand why they simply don't realize that they, in fact, do want to go there. Thus, there is hope in President-elect Obama's statement to the governors convened in Philadelphia earlier this week: "We are not, as a nation, going to be able to just keep on printing money. So at some point, we're also going to have to make some long-term decisions in terms of fiscal responsibility. And not all of those choices are going to be popular."

The key will be getting people to admit that though a measure is not popular, it is necessary and needs to be undertaken. Goodness, that's not unlike what teachers do when they educate students. Again, I speak from experience. It's time for the nation to go to school.

Uniformly Rejecting Tax Non-Uniformity

Eighteen months ago, in An Unconstitutional Tax Assessment System, I commented on the decision in Clifton v. Allegheny Co., holding that Allegheny County's decision to determine the value of all real property as of 2002 for real property tax purposes violated the uniformity clause of the Pennsylvania Constitution and ordering the county to do full reassessments in 2008 and 2009. The decision was appealed and the state Supreme Court is expected to render a decision sometime in 2009. Now comes news that last week a judge in nearby Washington County has ordered that county to "initiate and pursue a program of countywide reassessment and to proceed diligently" before the current terms of the county's commissioners expire in January 2012. The last reassessment in the county took place in 1979.

Unless the state legislature deals with the issue, a suggestion I made in An Unconstitutional Tax Assessment System, or unless the Supreme Court reverses the Allegheny county case, Washington County will incur millions of dollars in expenses bringing its assessment rolls up to date. Would it have been cheaper to comply with the state Constitution through annual maintenance of those rolls? I don't know. Apparently the county would need to borrow money in order to perform the reassessment, but the current constriction in the municipal bond market makes that prospect not very promising.

The chair of the county commissioners claims that the reassessment was sought because the plaintiff, a school district, wants to increase taxes. However, there is a law that caps increases on account of reassessment, and consequently, the effect of a reassessment is that some property owners will see increases, some will see decreases, and others will be unaffected. In other words, the total tax imposed on county property will be re-allocated so that taxpayers with properties assessed proportionately higher than other properties will benefit from a tax reduction, whereas those whose properties are under-assessed will incur a tax increase. Is that fair? The answer is in the response to a more telling question. Is it fair that without reassessment property owners are taxed at different rates in violation of the state Constitution?

One wonders how long before similar decisions in other counties are added to the list. Will there be, throughout the Commonwealth, a uniform rejection of these non-uniform real property tax assessment practices?

Some Tax Odds and Ends

Several news stories during the past few days have caught my attention. Tax is involved in some indirect way.

According to a KYW News Radio report, Atlantic City Electric Company is giving people the opportunity to give a gift that consists of paying some or all of a person's electric bill. Under the "Gift of Energy"program, a person visits one of the company's courtesy centers, provides the name and address of the donee, and pays a selected amount to be credited toward the donee's utility bill. The company requires that a specific recipient be selected. It will not accept gifts simply for "someone in need." Here's the tax angle. A gift to a specific person, even if that person is economically distressed and in need, does not qualify for a charitable contribution deduction. In contrast, a cash gift for the relief of poverty, that does not name a specific person, and that is made through a qualified charitable organization, does qualify for a charitable contribution deduction, provided appropriate record keeping requirements are satisfied. To take the latter approach, Atlantic City Electric Company directs people to New Jersey Shares, "the only statewide, nonprofit 501(c)(3) organization which provides grants to pay the utility bills of households in need through a statewide network of more than 173 community-based social service agencies operating out of 225 sites." PECO Energy, which is my supplier, uses a similar program called the Matching Energy Assistance Fund.

According to a number of reports, including this one, security guards aboard a tanker seized by pirates in the Indian Ocean do not carry weapons. Though they are former Royal Marines and are aboard ship specifically to deal with the piracy risk, having been provided by a company called Anti-Piracy Maritime Security Solutions, for some reason they are unarmed. Hello? Are they to use spitballs? Talk the pirates into somnabulence? Make scary faces at them? Is the company waiting for a chance to make a pitch that the cost of weapons is such that only a tax credit for ocean-going security guard weaponry will make it possible to give the guards some reasonable chance of success? The three guards in question jumped overboard when the pirates boarded the ship.

Speaking of security, there surely was none present when an unruly crowd of undisciplined shoppers crashed through a Wal-Mart door, trampling a worker to death. According to many reports, including this New York Times story, the crowd surged over and around the body of the worker who died from his injuries. They even ran over the EMT folks who were trying to save the man. Even when asked to leave the store on account of the tragedy, most refused to do so. It is only a matter of time before someone proposes a tax credit or tax deduction as a solution to the problem. I can imagine someone arguing that tax incentives to acquire an education that helps a person's common sense overcome the greed instinct would be helpful in this context, and in others. I also imagine stores arguing that a tax incentive to hire security guards for the Black Friday madness that grips America's materialistic society would eliminate the chances of this catastrophe happening again. Would the guards be armed? If not, what would they do when the crowd begins to chant, as happened in this instance, "Push in the doors"? Perhaps retail executives need to re-think the entire notion of a day when one or two items are sold at a deep discount in order to bring tens of thousands of people into their stores. Maybe some sort of tax credit will get their brains to function in a manner that they currently do not demonstrate.

Finally, recall that in A Truly Frightening Halloween Candy Bar and in Happy Halloween: Chocolate Math and Tax Arithmetic, I lamented my inability to find the 4-pack version of Reese's Peanut Butter Cups to distribute at Halloween. Over the weekend an email arrived from my sister in Massachusetts, with the subject "4-pack." She has found a place to purchase those 4-packs online. She offered to send some. NO! Please, I'm drowning in 2-packs. There was a reduction in the turnout of trick-or-treating youngsters this year, perhaps because the Phillies Championship Parade was held that same afternoon. The last thing I need, oh, ok, one of the last things I need, is another bundle of Reese's Peanut Butter Cups. I continue to give them away. Perhaps they will make nice holiday gifts. I would give them to a charity but the paperwork now required by the tax law is a bit much, and the appraiser's fee is prohibitive.

Taxes and Benefits: Cliffs and Steps

It's easier to go up steps than to go up cliffs, and it's easier to go down steps than to go down a cliff. This is true in both the literal and figurative senses. The tax law provides many examples of why steps are both more equitable than cliffs but also more complicated than cliffs.

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.

Giving MauledAgain a Personality

Thanks to a link that the Wandering Tax Pro included in What's the Buzz? Tell Me What's a Happennin', I found my way to Typealyzer, a web site that analyzes a person's personality characteristics by doing some sort of review of the person's blog. I typed in the URL for MauledAgain and within a fraction of a second the following result popped up:

INTP - The Thinkers

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.

Though 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.

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:
Kincaid: 9.6
ARI: 10.7
Coleman-Liau: 11.3
Flesch Index: 63.6
Fog Index: 12.6
Lix: 43.5 = school year 7
SMOG-Grading: 11.1
sentence info:
37605 characters
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
word usage:
verb types:
to be (261) auxiliary (141)
types as % of total: conjunctions 5(419) pronouns 7(590) prepositions 11(906)nominalizations 2(167)
sentence beginnings:
pronoun (77) interrogative pronoun (18) article (57)
subordinating conjunction (19) conjunction (12) preposition (36)

Now, a year later, here is how MauledAgain is measured:

readability grades:
Kincaid: 11.8
ARI: 13.4
Coleman-Liau: 12.1
Flesch Index: 55.3
Fog Index: 15.3
Lix: 49.1 = school year 9
SMOG-Grading: 12.9
sentence info:
80744 characters
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
word usage:
verb types:
to be (556) auxiliary (274)
types as % of total:
conjunctions 5(936) pronouns 8(1286) prepositions 12(2063)
nominalizations 3(469)
sentence beginnings:
pronoun (153) interrogative pronoun (30) article (101)
subordinating conjunction (36) conjunction (35) preposition (58)

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.

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.

A Tax Conundrum

Last week, the Philadelphia City Council approved Mayor Nutter's proposed legislation to deal with impending budget deficits caused by the worsening international economy. The debate was quite sharp, as reported in this story, but the plan consists of two major elements. One is a suspension of tax cuts scheduled to go into effect in 2009 and thereafter. The other is a cut in spending for city services. Of all the cuts, the ones that would shut down several fire houses, as described in Fire Department Plan Causes Worry, and close eleven branches of the Philadelphia Free Library, the full impact of which is examined in this story, have generated the sharpest criticism and concern.

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.