Wednesday, September 29, 2010

Teaching and Learning Tax When Congress Fails to Act 

On Monday, in the basic federal income tax class, it was time to explore how taxpayers acquire basis. The depth to which the exploration is taken in this course usually is such that the topic turns out not to be one of the mind-numbing experiences that pop up from time to time, such as the section 86 “bubble” to which the class had been introduced on Friday. But this year, the basis discussion became a frustration for both teacher and student. Why?

At the beginning of the decade, when the Congress voted to phase out the estate tax so that it disappeared in 2010, with a revival in 2011 absent any Congressional action, it also voted to replace the basis rules for property acquired through a decedent in section 1014 with a special set of rules in section 1022. Section 1022 would not become effective until 2010. So when it was enacted some years ago, I read it, appreciated the complexity it created, and decided that there was no point in teaching it because it might not even take effect. Many, including myself, supposed – wrongly, it turned out – that Congress would get its act together (sorry, pun indeed intended) and fix the estate tax repeal/section 1022 pseudo-carryover-basis mess before 2010 rolled around. As I told the students on Monday, even when 2010 arrived, I figured that because I teach the course in the latter part of the year, section 1022 would disappear before the semester began. Again, I was wrong.

The failure of Congress to do anything (see, e.g., Can a Zero Congress Exist Forever? and A Zero Tax, A Zero Congress) left me with a decision to make. What should I do with section 1022, itself a complexity that demands an amount of class time that would cut into the many other topics that are essential to acquiring an understanding of the subject? I made the decision to teach section 1014, which isn’t particularly difficult to teach or learn in this setting because we don’t get into the variations on fair-market-value-at-death general rule, and to illustrate how unrealized appreciation existing at death pretty much escapes income taxation. I also decided to mention the existence of section 1022, describe what it does in general terms – carryover basis, with a variety of exceptions that make the practical application difficult – and to explain why I was giving it short shrift. I told the students that they would not be responsible for section 1022 on any of the graded exercises or the exam.

I shared with the students my reasoning for giving section 1022 short shrift. After class, in response to a student question, I refined my reasoning. What follows is a combination of what I shared in class and what I shared with the student. I explained that although we don’t know what will happen, we do know that there are four possibilities with respect to section 1022. First, Congress does nothing and section 1022 expires by the terms of the enacting legislation after being in effect for one year. Second, Congress re-instates the estate tax retroactive to January 1, 2010, making section 1022 either totally ineffective or effective with respect to those receiving property on account of the death of a handful of decedents somehow excepted from the retroactive repeal of the estate tax repeal. Third, Congress re-instates the estate tax as of January 1, 2011, making section 1022 effective for only one year. Fourth, Congress extends the repeal of the estate tax into 2011 and beyond, presumably doing the same for section 1022 and giving it a life of more than one year. The only instance under which section 1022 has more than a year’s worth of effectiveness is the fourth, and the odds of that happening are between slim and none. The other three possibilities, which account, by my estimate, for 99.something percent of the odds, leave section 1022 either as nothing or, at best, a one-year wonder (or one-year insanity, depending on one’s perspective). Thus, it isn’t worth investing valuable class time and out-of-class preparation and assimilation time for what almost certainly will turn out to be a momentary blink in the history of taxation. True, I told the students, one or another of you may end up at a firm that has clients whose decedent died in 2010, or clerking for a judge who ends up with a case involving section 1022, but the odds are very, very high, if not 100 percent, that most of the students in the class will never deal with section 1022, even if they are heading into a tax practice.

The risk in explaining this to students is that the message will get jumbled. There is a danger that some students might emerge from their study of basis thinking that carryover basis at death is the long-time rule. There is a danger that some students might think the $1.3 million exception involves section 1014 rather than the one-year section 1022 deviation. Even those who choose to teach this topic from a tax policy perspective run the risk of students getting confused with current rules, proposed rules, expiring rules, temporary rules, sunset provisions, and all the other politics-trumps-good-policy detritus of the estate tax repeal mess. There also is the risk that the attempt to teach and learn the topic can turn into a wide-open discussion of Congressional ineptitude, and although that is beneficial in its own right, it would push even more essential course topics off the table.

For me, having to allocate even a few minutes, as I did, to explain what would not need any discussion had Congress acted responsibly is frustrating. Though students may not realize it (yes, another bad pun), I am not unaware of the frustration that afflicts them when they encounter what surely is one of the worst experiences to afflict those who are expecting a static set of definite rules. This is worse than the “it depends” situations that need to take into account facts, values, or other variables. This falls into the “we don’t even know what the rules are” torment that afflicts tax practitioners. And thus, I closed discussion of the section 1022 matter by letting students know what life is like, at this very moment, for tax practitioners who, as I put it, do not have the option of hiding in a tower and chatting about the theoretical advantages and disadvantages of estate tax repeal and section 1022. What I didn’t tell the students – and I suppose they have or will have figured it out for themselves – is that when they reach practice, almost surely with section 1022 a thing of the past, they eventually will be the practitioners to whom a tax law professor refers when describing to students of a few years hence yet another transitory tax rule that may or may end up having any applicability. I am more confident what Congress will bring us will be additional instances like the estate tax repeal insanity rather than some semblance of order, stability, clarity, simplicity, and wisdom. And I’m almost as confident that there will additional instances of frustration on account of Congressional failure to act.

In years past, those trying to encourage responsible decision making on the part of Congress have referred to the legacy we are leaving our children. Some of those who were children at the time are now sitting in my classroom, and many others are sitting in the classrooms of other tax law faculty. It is disheartening that we get to teach the legacies that were being prepared not so many years ago. Who enjoys being the bearer of bad news? I don’t. I doubt my tax teaching colleagues do. But, as they say, someone has to do it.

Monday, September 27, 2010

REPOST: ReadyReturn Not a Ready Answer 

[republished from 1 Mar 2006 because blogspot archived page length limitations prevents all posts from appearing]

During the 2005 tax filing season, the California Franchise Tax Board (FTB) administered a pilot program for a project called ReadyReturn. A group of taxpayers was invited to join the pilot program. Under the pilot program, the FTB prepared the taxpayer's return, and then gave the taxpayer the opportunity to verify the information, make any necessary changes, and sign and submit the return. According to the FTB report, approximately 50,000 taxpayers were invited to join the pilot program, of whom nearly 9,400 filed the return prepared by the FTB (5,600 by e-file and 3,800 using traditional paper). The ReadyReturn site provides slightly higher numbers: 11,620 participants (5,610 by e-file and 6,010 by paper).

The FTB prepares the taxpayer's return by "using wage and withholding information that is already reported to the state by employers." Accordingly, the taxpayers invited to participate were those "who file the most simple returns."

FTB surveys of the participants revealed that almost all of them considered ReadyReturn easy to understand, almost all of them concluded they saved time using ReadyReturn, and more than 90% also concluded it was more convenient than how they filed the previous year. Roughly 80% reported that ReadyReturn made them "feel less anxious about filing their tax returns." The survey also discovered that 99% of the participants were “Very Satisfied” or “Satisfied” with ReadyReturn, roughly 97% would use it again, and about 90% thought ReadyReturn was a service that the government should provide. Only 5% indicated they believed their personal information was not secure with ReadyReturn. Many of the taxpayers invited to participate who chose not to do so turned down the opportunity because they had already filed their return, though others expressed doubt about the security of using the Internet, were not comfortable receiving a pre-filled-in return, or preferred a non-government e-filing company. The FTB reported that ReadyReturns were less likely to fall out of processing because of errors, that ReadyReturn users were less likely to receive error notices, and that ReadyReturn introduced "thousands" of paper filers to e-filing, with more than half of the ReadyReturn participants who used e-filing having used paper filing for the previous year.

Based on these results, the FTB requested that the program be fully implemented. However, it would be limited to taxpayers who are single, have no dependents, claim the standard deduction, and have income derived solely from wages.

The project, however, is not without its critics. For example, the National Taxpayers Union (NTU) produced an issue brief, California's ReadyReturn Program: Fool's Gold in the Golden State, in which it pointed out numerous concerns. First, the NTU wondered why the FTB should "get into the tax return preparation business," considering that there are more than adequate numbers of tax return preparers available. Second, the FTB provides a free e-file service, which should mitigate concerns about private industry charging taxpayers for that service. Third, there is no guarantee that the FTB would make fewer computational mistakes than other preparers. Fourth, the FTB is unlikely to "scour the tax code for ways to reduce the filer's prepared tax liability." Fifth, changes in the taxpayer's status could change eligibility, posing the risk that taxpayers would not understand the need to switch to a private preparer. Sixth, there is a cost in generating FTB-prepared returns that end up in the trash because the taxpayer became ineligible to participate or otherwise chose to pass up the chance. Seventh, ReadyReturn makes it less likely that taxpayers will understand how much of their income is being withheld or otherwise paid in taxes because they will not look at the return or have a preparer explain it. Eighth, some taxpayers may see ReadyReturn as a new approach to increasing tax collections. Ninth, the service would not be free because its costs are borne by taxpayers generally. Ninth, ReadyReturn could lead to FTB offering bookkeeping services or estimated tax computation advice, and, at the very least, would justify requests by the FTB for more employees and more funding. Concerns from other critics echo these arguments.

The California State Senate Republican caucus has prepared a briefing report on ReadyReturn that devotes far more space to objections than to the advantages touted by its supporters. The Howard Jarvis Taxpayers Association released a commentary in which it called ReadyReturn a "prime example of California's long line of information technology boondoggles," claimed that "[i]n addition to the conflict of interest in having the tax collector also serve as the tax preparer, the program presents a myriad of accountability problems, and suggested "ReadyReturn should be returned to sender with a cancellation notice."

The project also has its supporters. Joe Bankman, a member of the law faculty at Stanford, explains in "Simple Filing for Average Citizens: The California ReadyReturn" that ReadyReturn offers a solution to the trials and tribulations of fling tax returns. He rejects the arguments made by its critics, and rues the effectiveness of those lobbying on behalf of the tax return preparation industry. He concludes with a call for consideration of a similar program at the federal level. A lobbyists for the California Tax Reform Association explained that ReadyReturn was good for taxpayer privacy because taxpayers would "know what kind of information is there. It's simple and straightforward and demystifies the process of filing taxes."

Five months ago, I concluded that ReadyReturn wasn't ready for prime time. In my analysis I weighed the arguments in favor of its use against the arguments that it is not the answer to the problems it purports to ameliorate. Recently, as the FTB's request for full implementation came under attack in the California legislative process, the debate resurfaced. New arguments have been advanced, principally to paint ReadyReturn as a program to save low-income taxpayers from fee-paying and sometimes predatory tax return preparers. After considering these new arguments, my conclusion remains unchanged.

ReadyReturn has been hailed as a "move in the right direction" to deal with increasingly complex provisions that directly affect taxpayers least likely to have the ability to handle them, such as the additional wrinkles added to the earned income tax credit (EITC) by the legislation providing tax incentives for recovery from Hurricanes Katrina, Rita, and Wilma. The concern is that even more low-income taxpayers will be driven to use fee-charging preparers because volunteer preparers cannot compete with the likes of H&R Block. Aside from the fact that California's ReadyReturn cannot do anything for people in the Gulf Coast region filing 2005 federal income tax returns, justifying the implementation of government-prepared tax returns by pointing to government-generated complexity is a bootstrap argument. All that would be accomplished is to make more and more low-income taxpayers wards of the state when it comes to tax compliance. The notion that these taxpayers will review the return "proposed" by a government is impractical. Low-income taxpayers would either accept the government proposal, even if it was incorrect, or go to a fee-charging preparer for help in deciding whether to accept it.

ReadyReturn has been defended because the only "realistic alternative to ReadyReturn is commercial tax return preparation services, which have a vested interest in complexity." Yet ReadyReturn would cement the complexity, because by sheltering taxpayers from its impact, it removes an incentive for taxpayers to press for genuine simplification. What better way to guarantee complexity than to make taxpayers think it doesn't exist because taxpaying has allegedly been "demystified" by letting the government decide what the taxpayer should pay? Simplicity in the form of marching in lockstep to government-dictated tax returns is a dangerously misleading attribute of ReadyReturn, and the theoretical proposition that taxpayers can reject the government's proposed return flies in the face of reality. Low-income taxpayers already are at the mercy of the government, and ought not think they are being befriended by an entity that by law is not set up to be the low-income taxpayer advocate. Consider, for example, the difficulties faced by low-income individuals when dealing with government-controlled child support and custody matters. Incidentally, almost every tax return preparer with whom I communicate abhors the complexity that has turned the tax law into an impenetrable mess. The suggestion, as has been made, that tax return preparers might have been involved in creating the absurd complexities of the hurricane relief EITC, ignores the fact that most complexity arises either from special interests seeking to hide a narrowly focused tax benefit or from theoretical solutions proposed by folks with little or no practical experience in dealing with taxes. Tax return preparers are busy enough and coping with more tax nonsense than they wish than to have encouraged the addition of more mazes into the tax law.

Ready return has been described as a good idea being plowed under by the tax return preparation lobby. That lobby is perceived as inimical to a free market, and as joining forces to conspire against the public. Yet, all things considered, tax return preparers and tax return preparation software don't carry prices that smack of monopolistic or conspiratorial
behavior. Consumer choice when it comes to finding a tax return preparer is orders of magnitude broader than when it comes, for example, to choosing a computer operating system. There is genuine competition among preparers and tax return software developers. The problem with applying market analysis is that it presupposes the government should be a player in the market. How, then, can a government protect the market when it's playing in it? Unless there is a reason for the government to monopolize a market (e.g., national defense), it ought to stay out of it.

ReadyReturn has been characterized as a move toward simplicity on the premise that a government employee has a vested interest in simplicity because it means less work. I disagree. I translate a desire for less work into a temptation to cut corners. And we know whose corner will be cut when that happens. Most government employees have a sense of "protect the revenue" built into their mind set by their training. The folks programming the computer aren't working in algorithms to determine if the taxpayer is claiming the correct number of dependents. Although the FTB request for full implementation would not include taxpayers with dependents, legislators who support the project want to expand it so that it does. All that the FTB could do is to list the dependents claimed on the previous year's return, because it does not have access to information about support, living in the abode, etc. But I wonder if its need for that information would open the door to government collection of even more information about every aspect of the taxpayer's life that affects taxes. Trust me, most things in life affect tax liability.

ReadyReturn has also been characterized as a program that would eliminate the business incentive of tax return preparers to understate tax liability in order to generate refunds, especially if being compensated with a percentage of the refund. Tax return preparer misconduct is not a situation running out of control; in contrast, at least one study has found that a "clear majority" comply with the highest tax return preparation ethical standards. That is not surprising, because there are in place sufficient incentives for tax return preparers to be honest. Penalties, prison, professional disbarment, and similar adverse consequences face the unscrupulous preparer. The problem is that the government has a miserable track record enforcing existing penalties against unethical preparers. Perhaps the FTB could stop trying to play tax return preparer and funnel some resources into helping law enforcement police the tax return preparation industry. Making the government the tax return preparer for low-income, and eventually middle-income taxpayers, on account of the misdeeds of the small number of preparers who act illegally is overkill. One question not asked by the FTB was, "Who do you trust more, the revenue department or your tax return preparer?" Somewhere in here I have visions of people being treated by government doctors, having their tax returns prepared by government employees, having their music censored by government bureaucrats, having their hair length set by government barbers, and so on. The words, "I'm from the government and I'm here to help you, uh, take over your life, because, after all, there are some not very nice people out there doing bad things preparing tax returns,." ought to send chills down the spine of every citizen. ReadyReturn increases dependency on government. That simply is dangerous.

Ready Return has been defended as protection against tax return preparers who advance refunds to low-income taxpayers at a very high rate of interest. Isn't usury illegal? Ought it not be? Ought not our government schools teach people not to borrow money at a high rate of interest and to report such transactions to the appropriate law-enforcement agencies? And if we are to worry about protecting taxpayers as consumers, why should revenue departments be presumed any better at protecting their customers (taxpayers) than are businesses in the private sector subject to all sorts of constraints and requirements designed to ensure consumer protection? It is rather ironic that ReadyReturn would be defended as protection against high-interest loans when governments think nothing of paying zero interest on overwithheld taxes that are refunded months after they've been collected. Casting government tax return preparation as the taxpayer's friend in setting appropriate interest rates makes little sense.

ReadyReturn has been hailed as a remedy for the difficulties faced by taxpayers when the preparer is "long-gone when the IRS asks for more information" or disallows a credit or deduction fraudulently obtained by an unscrupulous tax return preparer, because ReadyReturn provides the low-income taxpayer with more information with which to evaluate the analysis of their returns. Yet aren't these taxpayers perceived as needing the assistance of a ReadyReturn program because they cannot read, cannot deal with numbers, and cannot understand taxes? How are they going to do anything with the information supposedly provided by the FTB? How could the FTB possibly have more information than the taxpayer has? Users of ReadyReturn are put in the position of having a tax return prepared by the government that is presumed to be correct, and the burden of fixing an error is shifted to the taxpayer.

ReadyReturn has been described as a cost-savings rejection of "outsourcing" tax return preparation to the private sector, because it takes overhead and profit out of the cost of return preparation. The notion that there are no overhead costs to government programs makes no sense to me. Surely, ReadyReturn and the staff running it use electricity, water, and health plan benefits.

ReadyReturn removes third-party protection from taxpayer-revenue department relationships. Will one branch of the FTB audit the work of another branch? Isn't there a conflict of interest when the auditor is preparing the return to be audited? Absolutely. Has not a lesson been learned from Enron about the importance of independence? Apparently not.

ReadyReturn masks the problem. As I concluded in my October commentary on ReadyReturn, the solution to complexity is genuine simplification. To achieve that goal, complexity must be revealed for the economic and social drag that it is. The legislative addiction to special interests, of which complexity is a major symptom, requires withdrawal. Withdrawal needs to be discomforting. Enablers of complexity need to be identified, and should not be permitted to cushion the consequences of addiction that lull its victims into a false sense of security. Low-income taxpayers have no incentive to learn why the tax law has become such an agony to taxpayers unless they experience some of that agony. Sheltering low-income taxpayers, and eventually the middle class taxpayers the FTB and ReadyReturn proponents want to bring into the project, dampens criticism of the tax system, weakens the tax reform movement, and trims the number of citizens considering the tax law to be a problem.

Yet the advocates of ReadyReturn have a noble purpose. I think they genuinely want to help low-income taxpayers. I think some of them, at least, genuinely think that ReadyReturn is the answer. They mean well, and they have done society a service by bringing much needed attention to the dangers posed to society by tax complexity and to the aggravations afflicting taxpayers when they try to comply with those laws. Yet when reading reports that the taxpayers using ReadyReturn are happy, I wonder how much of that happiness is blissful ignorance? An informed and educated citizenry is essential to a democracy, and so long as the tax law is as it is, keeping citizens insulated from the reality merely guarantees perpetuation of the mess.
The urge to protect low-income taxpayers is not unlike the urge to protect one's child from falling off the bicycle while learning to ride. In the long run, the child must be allowed to fall.

I, too, deplore the increase in the need for paid preparers. The answer, though, is to make independent tax return preparation services available to all taxpayers who cannot afford those services, at least until the true need for tax preparation assistance is removed.

After arguing on a listserve that "The goal of helping low-income taxpayers can be achieved in less risky, more informative, and more effective ways," I was challenged to elaborate, and that if I've "got something better to offer," I should show my hand. Fair enough.

If there is going to be the expenditure of government funds to assist low-income taxpayers comply with the tax law, I'd rather see government pay the bill, thus keeping the third-party intermediary in the picture and thus keeping government honest and unconflicted. My experience with most (not all) state revenue department officials (and some IRS employees) is that they do not have the training or mind-set to prepare tax returns for low-income and middle class taxpayers as an advocate of the taxpayer. Paying the bill for independent preparers to do the job would keep the spotlight on the national disgrace (and threat to economic survival) that the tax law has become over the past three decades.

Therefore, the money and resources being expended by the State of California to program, design, implement, and operate ReadyReturn should be used to finance a "tax return preparation credit" to be claimed by low-income taxpayers (however defined) who pay tax return preparers to prepare their return (and perhaps by those who prepare their own returns though that raises a gross income issue). In this manner, the tax return is prepared by someone or some entity outside of government, which makes it less risky because it puts a second set (or maybe even the only set) of knowledgeable eyes on the return (assuming the low-income taxpayer isn't knowledgeable and assuming, as I do, that the government employees
programming, designing, implementing, and operating the program are insufficiently knowledgeable about the specific tax situation of each taxpayer to know what is best for the taxpayer and in at least some instances are not up to speed on the law). This approach is more informative because it lets low-income taxpayers remain aware of the complexity imposed on them by state legislatures and revenue departments (and if implemented at the federal level, by the Congress and the IRS). This approach is more effective because it would generate fewer situations in which the taxpayer return shows a tax liability higher than (or refundable credit lower than) what an independent tax return preparer would generate. The credit could be disallowed to taxpayers who use a state-funded volunteer tax return preparation service, such as VITA programs that do state returns.

Francine Lipman of Chapman University School of Law considered the tax return preparation credit in her article, "The Working Poor are Paying for Government Benefits: Fixing the Hole in the Anti-Poverty Purse." She rejected the idea because she concluded it "would encourage rather than discourage the use of paid tax preparers with more even benefits being shifted away from working poor families and their communities to paid tax preparers." So stated, that seems true, but from a different perspective the question is whether the FTB should use tax revenue to pay its employees to prepare returns or transfer those dollars to low-income taxpayers so that they can hire independent tax return preparers to prepare their returns. So viewed, the credit removes the conflict of interest, preserves taxpayer choice in selecting a preparer, and decreases the risk that the FTB prepared return would be accepted blindly by taxpayers.

I have as much faith in things working out well for individual taxpayers under any sort of "we'll take over, thank you, sit back and relax" government-run program as I do in things working out for the folks trying to make sense of the Medicare mess. In both instances people theoretically can get third-party assistance, but if they cannot afford it, they don't get it. That's why I prefer the credit. If it means more tax return preparers get more business, that's simply another symptom of the tax complexity mess. The solution is to fix the problem, and not put a leaky band-aid on a symptom.

Can A Zero Congress Persist Forever? 

Late last week, as reported in this Philadelphia Inquirer story and elsewhere, leaders of the Congressional majority decided to defer consideration of the many tax issues confronting the nation until after the election. At a minimum, 2010 will be 90 percent completed before there is any action on these pressing matters, and there still is no guarantee that anything will get accomplished before the end of the year. The stated reason is that the majority party has failed to reach a consensus. The majority whip was more forthcoming, explaining that “many lawmakers would prefer to be home campaigning.” A Senator from the minority party claims that the majority party is “in charge” and hasn’t “done anything” about the problem, but the majority party claims that it cannot do anything with bipartisan support and accuses the minority party of holding extension of middle-income and lower-income tax rate reductions “hostage” in an effort extend tax rate reductions for the wealthy. Yet the majority party seems reluctant to schedule a vote on the issue, perhaps worried that failure to extend tax breaks for the wealthy while providing them for the vast majority of taxpayers will get twisted into political campaign sound bites that make those uneducated in tax law conclude that their taxes have, in fact, been raised. How much easier it would be if politicians simply told the truth instead of trying to spin things from reality into campaign slogans. Yet the minority party has just enough votes to block the majority party from doing anything, because of the bizarre “you need 60, not 51, votes to get something done” rule in the Senate.

There are practical problems to the delay. Treasury and the IRS need lead time to prepare withholding tables for 2011. It’s almost impossible to issue those tables if Congress waits, as it has in the past, until late December before acting. Estate planners trying to write wills for their clients are left in a position requiring them to draft clauses packed with alternative provisions, each geared to one of the many possibilities that exist for the scope of the estate tax in 2011 and beyond. Those managing the estates of individuals who died in 2010 are stuck, trying to hedge against the possibility of retroactive estate tax increases. Individuals and businesses trying to make decisions, such as whether to make purchases or to hire employees in 2010 or 2011, are in limbo waiting to see what the tax rules will be in 2011.

At the beginning of this year, in A Zero Tax, A Zero Congress, I wrote:
What I can offer is my condemnation of the Congress for putting America into yet another economic mess. Several commentators have noted, cynically perhaps, that members of Congress benefit from having the estate tax issue held open because it encourages lobbyists for the various positions to rustle up more cash for the campaign coffers of members of Congress. Far be it for me to criticize a cynical observation. Truth be told, I think these commentators are making a valid point. It's not unlike members of Congress to put personal objectives, including raising re-election funds and grabbing power, ahead of what needs to be done for the national economic good. One look at the bribery involved in crafting a health care bill tells us quite a bit about the value system in play on Capitol Hill.
This perspective is reinforced by the comments made by members of Congress that they prefer to be campaigning, rather than serving the nation’s interest by staying in Washington and handling their legislative responsibilities while the electorate watches and expresses its collective evaluation at the voting booth based on what Congress does rather than what it says on the campaign trail. In the same post, I also noted, in trying to find words to describe the Congressional inaction:
Irresponsible is my favorite. Short-sighted is another good one. Unwise, incompetent, and outrageous also come to mind. There also are some phrases that can be used. Derelict in its duty. A breach of its fiduciary obligation. . . . . There may not be any constitutional requirement that Congress do its job properly and in a timely manner, nor a provision that prohibits the Congress from creating the mess in the first place. Nor is there any statute that can be invoked to compel the Congress to live up to its responsibilities, particularly when the responsibility is one of its own making. But there is more to law than just a constitution and statutes, regulations and cases, rulings and decrees. There is a moral imperative, an overarching array of dedication to the national interest, respect for the citizens, decent treatment of the taxpayers, adherence to diligence, integrity, common sense, and fiduciary duty, and a deep understanding of the difference between the good and the expedient. Whether the Congress ever had or exercised this set of values is debatable, but what's not in dispute is the conclusion that the current Congress fails miserably in this regard. It is morally bankrupt. It earns a zero.
Nothing that has happened during the past week changes my mind. On this question of dealing with the tax law, the Congress earned a zero in January, it has earned zeroes throughout the year, and it earned yet another zero by announcing that it was going to go campaign rather than do its job. The answer to the question raised in the post title, can a zero Congress persist forever, is no. At some point, something or someone will yield. The question is when, and it won’t be soon. That’s too bad for the nation.

Friday, September 24, 2010

A Tax Agency Rises from the Dead 

In May, after more than 70 percent of those voting in a Philadelphia referendum chose to send the reviled Bureau of Revision of Taxes to the scrap heap, I wrote, in R.I.P., BRT, that it would take several months for the mayor to set up the Office of Property Assessment and the Board of Property Assessment Appeals, thus splitting the BRT’s duties between two separate agencies. I also noted reports suggesting at least one member of the BRT would challenge the vote, and if successful, would accomplish not much more than a postponement of the BRT’s death.

For those not familiar with the BRT story, it was no shock that an overwhelming number of voters chose to end its existence. In doing so, they joined with the mayor, City Council, and other civic and political leaders in deciding it was time for the patronage-ridden, inefficient, and cumbersome agency to go. For several years, Philadelphia papers had revealed all sorts of problems with BRT operations. My commentary can be found in a long series of MauledAgain posts, starting in An Unconstitutional Tax Assessment System, and continuing in Property Tax Assessments: Really That Difficult?, Real Property Tax Assessment System: Broken and Begging for Repair, Philadelphia Real Property Taxes: Pay Up or Lose It, How to Fix a Broken Tax System: Speed It Up? , Revising the Board of Revision of Taxes, and How Can Asking Questions Improve Tax and Spending Policies?, This Just Taxes My Brain, Tax Bureaucrats Lose Work, Keep Pay, Testing Tax Bureaucrats Just Part of the Solution, A Citizen Vote on Taxes, Freezing Real Property Tax Reassessments: A Nice Idea, The Tax Price of a Flawed Tax System, Can Bad Tax Administration Doom the Tax?, Taxes and Priorities, and R.I.P., BRT.

But now, as reported by various sources, including this article, the Pennsylvania Supreme Court, hearing the BRT challenge on a fast-track system that bypassed the usual appeals process, has held that the city had no authority to terminate the BRT, but also concluded that the city had the authority to set up an Office of Property Assessment to take over the BRT’s assessment function. If the legislature does not act, this judicial conclusion will leave the BRT very much alive and responsible for handling property tax appeals. The BRT based its objections on two major premises. First, the statutory authority for the city to make changes is limited to the making of assessments but not the hearing of appeals with respect to assessments. Second, the city’s plan to abolish the BRT undercut the authority of state judges to appoint the members of the BRT. The City of Philadelphia presented a competing interpretation of the statute, but in its opinion, the Supreme Court agreed with the BRT.

At the moment, the City of Philadelphia can proceed with its plans to take over, and repair, the assessment process. That process, as described in the MauledAgain posts cited above, is woefully broken. But, for the moment, the BRT retains control of the appeals process, which poses the threat of the BRT undoing or overturning assessments for the same reason that it has been making inappropriate assessments for so many years. Those who were getting low assessments during the assessment process now must turn to the appeals process, and there is no guarantee that the BRT will do anything other than provide for the appealing, favored, taxpayer the low assessment that would have been provided during the assessment process. The statement by the city’s managing director that the Court’s decision to permit the assessment process to be taken away from the BRT takes away the BRT’s “opportunity to do a great deal of mischief” is very optimistic. The mayor intends to work with the judges to find suitable candidates for the BRT as the terms of those currently serving expire, but it remains to be seen how this will work out.

Thus, the partial victory by the City is not a practical victory. The system will not be fixed until the BRT is removed from all aspects of real property assessment, and this must be done by the legislature. Though the legislature has a history of dawdling, even with respect to important and time-constrained issues, it ignores the overwhelming voice of the city’s voters at great risk to itself. Yet even when moving at high speed, the legislature takes months, sometimes years, to get things done.

Unfortunately, a BRT attorney is trying to spin the Court’s decision into something it is not. The Court based its conclusion on statutory language. That language is plain and simple. The Court had no choice but to follow it. Despite this, the BRT attorney characterized the Court’s holding as vindication for the BRT, claiming that “It demonstrates they were doing the public a service.” Sorry, but the Court said nothing of the sort. It did not need to address, did not address, the merits of the quality of the BRT’s activities. For that, perhaps the BRT should be thankful.

Back in May, when I wrote R.I.P., BRT, I predicted that there would be more posts. That wasn’t a difficult prediction to make. Nor is it difficult to predict that there will be yet more posts about the BRT and Philadelphia’s real property tax. Like the BRT, it’s something that does not want to go away.

Wednesday, September 22, 2010

Spreading the Wealth: Not Necessarily Inconsistent with Growing the Economy 

Those who argue on behalf of the wealthy continue to set forth arguments that fall apart under the close scrutiny that is unlikely to qualify for the sound bite worlds of mass media and political campaigns. In an editorial last week, Don’t Raise Taxes on Job Creators, Scott A. Hodge dismisses Treasury Secretary Tim Geithner’s justification for allowing upper-income tax cuts to expire. Geithner was responding to the time-worn argument that when taxes on upper-income taxpayers are reduced, jobs are created, and, inferentially, when tax cuts for upper-income taxpayers are permitted to expire, jobs will disappear. Geither pointed out that only 3 percent of business owners are among those for whom tax cuts will expire under the Administration plan. Hodge asserts that Geithner’s analysis is flawed because, “The vast majority of all private business income is generated by individuals who will be paying substantially higher taxes.”

Hodge supports his argument by citing IRS data for 2008, which shows that taxpayers with positive tax liability reported $864 billion of “pass-through” business income. Of that amount, those for whom the Administration wants to let tax cuts expire reported $588 billion, roughly 68 percent. Hodge also cites data showing that 35 percent of “pass-through” business income showed up on the tax returns of those reporting more than $1 million in income. Taxpayers earning less than $100,000 reported 16 percent of “pass-through” business income. Hodge supports his claim that “The vast majority of all private business income is generated by individuals who will be paying substantially higher taxes” by citing a Tax Foundation study concluding that under the Administration’s tax proposals, $246 billion of tax revenue will be raised from business income, an amount Hodge describes as, “Hardly trivial.”

Hodge proceeds to conclude that an increase in taxes on the upper-income business entrepreneurs to whom he refers will cause “less entrepreneurship and less private business income.” He then drags out the venerable argument, “So if the top income tax rate goes up to 39.6 percent from the current rate of 35 percent, we should expect these business owners to invest less, expand less and hire less.” How reliable of a prediction is this claim?

There are flaws in the reasoning that letting tax cuts for the wealthy expire will somehow reduce investment, economic expansion, and jobs. Alone and together, they demonstrate why nine years of reduced tax rates for upper-income taxpayers ended up doing nothing much for the economy. If anything, those cuts hurt the economy, and in turn, Americans, particularly with respect to job losses.

First, what happens when, using the statistics Hodges provides, $24 billion of upper-income taxpayer business income flows to the Treasury instead of to some other place? To answer that question, we need to know what upper-income taxpayers currently are doing with their after-tax income. Are they using it to create jobs? No, because jobs have disappeared, and at best, in recent months, job numbers are holding steady. Are they investing it? If so, it’s not being invested in job-creating endeavors. Are they spending it? Not according to those who explain that consumer purchasing continues to decline and stagnate. Is it being shipped overseas, stashed into tax shelters, and tucked into the sort of arrangements that compelled Congress to codify the economic substance doctrine? Perhaps. What happens to the $24 billion collected as taxes? It flows back out into the economy, creating jobs, such as what happens when tax dollars are used to repair and improve public infrastructure.

Second, if cutting taxes for upper-income taxpayers was such a wonderful idea, why did the economy tank after the impact of those cuts sank in? Could it be that tax cuts provided more fuel for derivatives-based schemes, monies to pump into toxic mortgage loans, and other arrangements that did not cause the economy to alleviate poverty and better the lives of most Americans? Is it mere coincidence that the number of people living in poverty has risen? Where are the jobs that were promised each time taxes on the upper-income strata of society were reduced? The notion that upper-income business entrepreneurs use tax cut money to create jobs is disproven by a decade of economic malaise ending in near-catastrophe.

Third, missing from Hodge’s analysis is the much larger amount of income escaping taxation in the hands of upper-income taxpayers on account of various deferred compensation and other fringe benefit exclusions. Lower-income taxpayers do not qualify for similarly sized exclusions, and even if they did, they cannot afford them. When these tax breaks are taken into account, the true rate of taxation on upper-income business entrepreneurs is less than what it appears to be. Expiration of the tax cut will not change this outcome, because whether the highest tax rate is 35% or 39.6%, the rate on the tax breaks enjoyed by the wealthy remains at zero percent.

Fourth, we’re not talking about increasing rates to 45, 50, 60 percent. It’s a 4.6 percent increment, from 35 percent to 39.6 percent, the rate that was in effect when the economy was doing quite nicely and jobs were quite abundant, thank you very much. Trying to paint the expiration of the tax cuts for upper-income taxpayers as some huge grab of substantially all their wealth might play well as a sound bite but is misleading. Keep in mind that the increase does not apply to all of a wealthy taxpayer’s income but only to the portion of taxable income that exceeds roughly $375,000. So for a business entrepreneur with $1,000,000 of taxable income, the increase in tax would be roughly $28,750. One question might be whether that sort of decrease in take-home income will break the taxpayer. Another question might be, “Where is the $258,750 saved in federal income taxes by this person during the nine years of reduced taxes?” Yet another: “How many jobs did it create?”

Fifth, the solution for high-income business entrepreneurs who want to reduce taxes is to hire more workers. Surely the businesses who leave customers on hold for 30 minutes because they have an insufficient number of people answering the phone can use some more help. So, too, can those who want their customers to speak with someone whom they can understand and who are not reading from a script. There’s all sorts of work to be done. And why would hiring more workers benefit upper-income taxpayers? The salaries are deductible. By reducing taxable income, the upper-income entrepreneurs reduce their federal income tax liabilities. And the newly-hired workers, removed from the unemployment rolls and taking home paychecks that in turn can be spent and invested, will thereby do much more for the economy. Why? Because studies show that the spending most beneficial to the economy is the spending by lower-income individuals, and it is this element of the economic machine that needs to be repaired. That makes sense. Lower-income workers are much less likely to funnel funds abroad, to invest in tax shelters, or to engage in transactions violating the economic substance doctrine, and are much more likely to purchase and invest in necessities, household appliances, and the sorts of purchases that can energize the small mom-and-pop business ventures held in such high esteem by Hodge and others making arguments similar to the ones he advances.

Hodge concludes by affirming Joe the Plumber, claiming that "'spreading the wealth around' appears to be more important to [the Obama] administration than growing the economy." An economy that grows but that has unbalanced wealth distribution is doomed in the long run. We may have already seen the beginning of this economic fracturing because of a decade of unbalance that has widened the have-and-have-not split and increased poverty. There are other ways of growing an economy, and spreading the wealth offers no less, and in most ways much more, a chance of success than did the wealth concentration experiment. The “grow the economy by making the rich richer and then trickle something down” crowd had their decade. If they created jobs, they created jobs overseas. They had their chance. They failed. It’s time to try something that pays attention to all Americans and not to a handful of millionaires and billionaires that continue to claim, through their advocates, that they should continue to dominate the economy. The nation does not need more of the same. It’s time to realize that spreading the wealth is not inconsistent with growing the economy.

Monday, September 20, 2010

The Viral Nature of Tax Disinformation 

The email arrived with my name and email address in the cc: field. It was being sent by someone I know – let’s call the person N -- to a list of names unrecognizable to me. N knows that I am a tax law professor. The email, referring to something “below” the message N sent, began with the statement, “I don’t think that is an accurate description of the proposal,” followed by a cite to, and link to, a Paul Caron TaxProf blog post. N is not a tax practitioner, so it must be gratifying to Paul that his blog is read and referenced beyond the world of tax.

Scrolling down a bit more, I discovered what had triggered the email on which I had been copied. It had been sent in response to an earlier email sent to a large group of persons, including N. The response was shared with everyone to whom the email had been sent, and not just the sender. That’s a technique I often use when I receive an email that needs a response to negate misinformation, lies, and other untruths. The email to which the response had been sent now follows, shared with some reticence because of the risk it will be quoted out of context, erroneously attributed to me, or re-circulated in a manner that brings it to the ears of those who don’t understand it for what it is:
Every person in the country who owns property should see this before Nov. 2nd!! Keep Sending It

This will apply to you whether you are a Liberal or a Conservative

Subject: REAL ESTATE SALES TAX TO GO INTO EFFECT 2013 (Part of Obama HealthCare Bill)

Those liberals are sooooo sneaky

So, this is "change you can believe in"? How's that working for you?

Under the new health care bill - did you know that all real estate transactions will be subject to an additional 3.8% Sales Tax?
The bulk of these new taxes don't kick in until 2013 (presumably after obama’s re-election).
You can thank Pelosi, Reed and Obama and your local Democrat Congressman for this one.

If you sell your $400,000 home, there will be a $15,200 tax.
This bill is set to screw the retiring generation who often downsize their homes.

Is this Hope & Change great or what? Does this stuff makes your November and 2012 votes more important?

Oh, you weren't aware this was in the obamacare bill? Guess what, you aren't alone.
There are more than a few members of Congress that aren't aware of it either (result of clandestine midnight voting
for huge bills they've never read).

AND, there are a few other surprises lurking.

*Why am I sending you this? The same reason I hope you forward this to every single person in your address book.

People have the right to know the truth because an election is coming in November!*
After reading this, my first thought was, “Did I not just blog about tax ignorance?” Of course I had. As recently as last Wednesday, I had shared some thoughts in The Consequences of Tax Education Deficiency. My next thought was, "There really is a flood of totally erroneous tax information being circulated, clearly designed to inject fear into the minds of those who, in fact, have nothing to fear, and clearly designed to stir up votes based on fear grounded in misinformation rather than on rational analysis of the issues."

Of course, I responded to the person who shared the email with me. Here’s what I wrote, edited for typos:
Thanks for the blog topic! I’ve just written several things about tax ignorance, and the need to educate Americans so they’re not led astray by the misinformation artists. You are correct, the only instances where a house sale would be taxed are gains on vacation homes by high-income taxpayers, gain exceeding $500,000 on principal residences by high-income taxpayers, and gains on investment properties by high-income taxpayers. And if they were clever enough to engage in a like-kind exchange, no tax.

I wonder how many of the people who started or forwarded this email bothered to read the actual words of the statute? It’s like the “half of all Americans now pay no taxes” screed being used to fight off restoration of pre-economic crash tax rates on the wealthy. I wonder who is trying to make it appear as though the poor and middle class pay no taxes.

The only valid point in the email is the despicable practice of Congress (and other legislatures) not bothering to read what they’re voting on. That’s been a problem for a long time.
I should have added that the 3.8% tax is NOT a “sales tax.” But who’s being technical when dealing with idiocy?

Let’s face it. The overwhelming majority, and by that I mean at least 95% or more, of Americans, are totally and completely unaffected by the 3.8% tax. Even some of those subject to the tax, the proceeds of which are slated to fund Medicare, will not pay tax on home sale gains. Yet someone wants Americans to oppose something that affects a portion of the nation’s wealthy by making Americans think that THEY are the ones being taxed. If Americans understood how the tax works, almost all of the 95% would react by thinking, “Well, that’s not going to affect me.” At that point, whether or not they oppose the tax would rest on rational analysis, such as the effectiveness and efficiency of Medicare and taxes imposed to fund it, preferences with respect to tax policy, and the like, rather than limbic system fear response. But those who oppose the tax know that under rational analysis a majority of Americans would decide that they can live with or even prefer the tax, so for those opposing the tax, they need to “trick” Americans by spreading misinformation. So who’s being sneaky?

I doubt the person who sent the email to N wrote the email on a blank screen. That person received it from someone else, who in turn received it from someone else. But SOMEBODY wrote the original email. Who? Did it originate here? I doubt it. I think it originated with one of those “operatives” whose “job” it is to make certain that the political goals of those for whom he or she works are accomplished. If that means whispering “there’s a 3.8% sales tax on all home sales starting next year” in someone’s ear, the “operative” won’t hesitate to do so. Surely, notions of integrity, honesty, fact checking, and other sensible approaches must be set aside for the “must win at all costs” mentality that has made acquisition of political power so much more important to the politics industry than use of political power for the benefit of ALL Americans.

Preventing this tax misinformation campaign from warping electoral outcomes is difficult. Propaganda, like rumors and other nefarious utterances, once started, take on a life of their own. Only a small percentage of people receiving this alarmist email will go to Snopes, which gets it right. Not many people who receive this manifestly manipulative email will bother to check with Paul Caron’s web site, communicate with a tax expert, or do some research into the matter before getting caught up in the mob mentality being nurtured by those who spawn this nonsense. Even though some sites, such as this one, have published a retraction, how many readers will return to discover that they have been hoodwinked?

If it had been one email and one issue, carelessness might have been the culprit. But it has been tax issue after tax issue, to say nothing of other issue after other issue, with misleading and even dishonest email after misleading and dishonest email. It’s not carelessness. It’s not an accident. It’s deliberate, and it threatens the “informed electorate” on which genuine democracy rests. To counter the trend, send the URL for this post in an email. Let’s get this information circulating. Let’s see if good information can drive out the bad. If so, then perhaps good public servants can drive out bad politicians, their operatives, and their truth-twisting tales of tax terror.

Friday, September 17, 2010

Making Progress with Mileage-Based Road Fees 

Not too long ago, in Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, I noted:
“What I support is the mileage-based road fee, a 21st century concept that seems to elude legislatures and politicians still living in the 19th and 20th centuries. It is time for them to sit down and read Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, and Change, Tax, Mileage-Based Road Fees, and Secrecy, and the articles and studies cited therein.
Though it’s doubtful that my suggestion caused any rush by legislators to read the posts and studies to which I referred, it appears that progress is being made. There are more experiments, demonstration projects, pending legislative bills, and research studies underway than I had realized. I attribute most, if not all, of the attention given to the concept by the legislators that have considered it to the efforts of others.

Recently, I received an email from an associate transportation researcher at the Texas Transportation Institute at Texas A&M University. He “stumbled upon” MauledAgain while looking for information about Pennsylvania’s oil company franchise tax, and discovered my posts on the mileage-based road fee. He directed me to the web site of the Institute’s University Transportation Center for Mobility, where I found a growing collection of information and research on the topic. It turns out that the Center held a symposium on the issue in Austin, Texas, during April 2009, and then presented a second annual symposium, Moving Forward, in Minneapolis, in April of this year. These symposia brought together professionals from various fields who offer insights, information, and expertise with respect to the issues, and focused on the process of shifting highway funding to a mechanism that more closely matches use to revenue.

The Center’s web site has a nice collection of news stories and links to other sites dealing with mileage-based user fees. It has accumulated a variety of reports and studies. It is about to spawn a listserve, called MBUF. I think we are witnessing another of those “there almost at the beginning” web sites that will be generate nostalgic stories when researchers in the 2020s start writing the history of the mileage-based road fee.

Rest assured I will be watching and reading developments in this area. It is essential that transportation funding be reformed before transportation infrastructure makes transportation as difficult and dangerous as it was during the nineteenth and earlier centuries. Progress means moving forward, not standing still in the deadlocks of partisan bickering and national ignorance.

Wednesday, September 15, 2010

The Consequences of Tax Education Deficiency 

A few days ago I had a conversation with someone who is not a tax expert, nor a lawyer, but who can fill out simple individual federal income tax returns. The person commented that this was a weird year, because people who die in 2010 leave estates that are not subject to the estate tax. I pointed out that although this was true, one can’t guarantee that the Congress would not come up with some sort of retroactive imposition of the estate tax. The person then noted that someone who died in 2011 would be subject to a 55% estate tax. My response? “That’s not so.” The rejoinder? “Oh, yes it is, that’s what they’re saying.” I had to ask, “That is what WHO is saying?” I really didn’t need to ask. I know where this sort of nonsense originates. It originates with people who have a vested interest in stirring up opposition to the estate tax, but who are so lacking in confidence that they can be persuasive with truthful arguments that they need to resort to deliberate disinformation, to put it kindly. So, I explained that the 55% rate will be the top rate in 2011 barring any legislation, that because of a $1 million exemption, a zero rate will apply to many estates, and that the top rate does not apply until the value of the net estate exceeds $1 million by $3 million. “Oh, but that’s not what they said. They said the 55% rate applies to the all of the estate and it applies to everyone.” I wasn’t about to stop the conversation and read section 2001 of the Internal Revenue Code and its amendatory notes to the person, or to dig up David Joufaian’s The Federal Estate Tax: History, Law, and Economics and recite the tables, particularly Tables 3.1 and 3.2. That’s tough to do during a phone call. But I do suggest that everyone take a look at that article.

What’s “out there” is troubling. The misinformation leads to examples such as those at this site, which applies a flat 55% to the taxable estate after explaining that “the federal estate tax is scheduled to come back in 2011 with only a $1,000,000 and a 55% estate tax rate.” No mention is made of the lower rates that apply to the computation of estate tax liability for taxable estates less than $10 million. This is far from the only web site, news report, radio show, or television commentary to put the issue in terms that strike fear into the hearts and minds of people whose estates won’t be affected by the estate tax and people whose estates, if subject to the estate tax, will be subject to taxes computed at rates less than 55%.

About the same time as I had the conversation, another person sent me an email with a link to Fox Calls for Repeal of the 20th Century — 13 Achievements Conservatives Would Roll Back. Zooming in on the opposition to progressive taxation, what caught my eye was the reference to Sean Hannity’s repeated (for example, here, here, here, and here) claim that “50 percent of American households no longer pay taxes.” As any adequately educated person knows, tax expert or not, far more than 50% of American households pay taxes, including social security taxes, sales taxes, gasoline taxes, and so on. Even if Hannity, and his ideological colleagues, were to refine their wild claim by inserting the adjective “federal” before the word taxes, they still would be wrong. More than three-fourths of households pay income, social security, and other federal taxes. The folks who trumpet these sound-bite flavored nuggets of ignorance do so deliberately and hope to get away with it by getting folks suffering from tax education deficiency to dismiss those of us who are careful and honest as unworthy of attention.

It is easy to figure out why the purveyors of tax nonsense do so. Political gain means more than does truth, honesty, or integrity. It’s not stupidity or laziness on their part. They know the facts, and they consciously twist the information because the twisted material has positive value for their agenda whereas accurate information will wipe out any realistic chance for political success. It also is easy, for me, to determine why the dissemination of tax nonsense works. As I pointed out in Tax Education Is Not Just for Tax Professionals:
It’s obvious that too few Americans understand enough about tax law or finances. It’s also obvious that one of the reasons is that insufficient funds are provided to educate the nation’s children about these things as they move through its school systems. . . . . If the nation continues to resist paying for quality education of its children, it will soon become a nation of the ignorant.
Who benefits when the country is a nation of the ignorant? The answer to that question explains much more than what fits in a four-paragraph blog post.

Monday, September 13, 2010

What If They Gave a Tax Party and No One . . . . 

Sorry, that headline won’t quite work. That’s because when Philadelphia hosted the tax party that I discussed in Taxes and Parties, it wasn’t a case of no one showing up. A few people did. Fifteen, according to this Philadelphia Inquirer article. Among the 15 who attended to discuss the city’s imposition of a business privilege license tax on bloggers with any revenue from their blogging activities were “bloggers, freelancers, and small-business owners.” The business privilege license tax, and its application to bloggers, was the subject of A Tax on Blog Writing or on Blog Business? several weeks ago, though the city imposes it not only on bloggers who receive revenue but on all other sorts of activities generating revenue.

The low attendance surprised me. Considering the brouhaha over the city’s imposition of the tax on bloggers with minimal, almost accidental, revenue, I would have expected hundreds to have joined in the festivities. The city officials hosting the gathering tried to “dispel lingering notions that Philadelphia has a ‘blogger’s tax.’” That is something easily accomplished, because the business privilege license tax also applies to babysitters, children’s lemonade stands, and youngsters who mow lawns.

City officials did disclose, however, that they have started to analyze the business privilege license. Should there be a fee? If so, how much? Should the current fee be changed? The bad news is that any change must be enacted by City Council, which at present is caught up in a variety of other priorities, including real property tax reform. These dim prospects for change, coupled with other complexities facing businesses, including non-tax issues, prompted one attendee to comment that he doesn’t need to operate his business in the city, and that his decision to remain in the city was made “with [his] heart, not [his] brain.” One might suppose once he thinks things through, he could be packing up and heading over the bridge to New Jersey where he lives.

Oh, one last bit of information. According to the article, not only did roughly 15 people attend the party, “at least that many city representatives were on hand.” Wow. The taxpayers were outnumbered. At least they had the chance for some one-on-one conversation about taxes. Now that is a party. Not.

Friday, September 10, 2010

If At First It Doesn’t Work, Try, Try, Try Again 

Not much is worse than a failed attempt at a resolving a problem being offered as a solution to the very problem it failed to resolve. True, one ought not give up after one unsuccessful try, but is there not some limit to the pursuit of futility? Professional baseball tends not to give up on a prospect who goes zero for four in his first minor league game, but how likely is a franchise to keep in its system a player who is zero for eighty?

Such is the life of one of the business world’s favorite tax breaks. Entrepreneurs salivate at the idea of getting a deduction for making an investment. The idea of getting a tax break for swapping cash for equipment of equal value is the sort of thing that makes lower-income taxpayers roil, because they don’t have the opportunity to get, in effect, cash flow from the government in the form of lower taxes by swapping cash for equipment of equal value.

In a speech on Wednesday, the President proposed that “all American businesses should be allowed to write off all the investment they do in 2011,” and explained that “This will help small businesses upgrade their plants and equipment, and will encourage large corporations to get off the sidelines and start putting their profits to work. . .” More specifically, the Administration is proposing that taxpayers be permitted to take a deduction for 100 percent of the cost of “qualified investments” acquired in between September 8, 2010 and December 31, 2011. Technically, section 168(k), which provided for a deduction equal to 50 percent of the cost of “qualified investments” made during 2008 and 2009, and which expired of its own terms at the end of 2009, would be revived, though with 100 substituted for 50 and the effective dates altered as described.

The Administration fact sheet asserts that this proposal “would provide tax incentives for business to invest in the United States when our economy needs it most, which should both help create jobs now and expand the capital stock to support future growth.” Is this in fact the case?

The previous incarnation of section 168(k) “bonus depreciation” as well as continual expansion of section 179 expensing have been consistently hailed as solutions to the nation’s economic woes of the moment. Yet no evidence exists that these tax giveaways have had the claimed effect. Why is it, for example, that during 2008 and 2009, while businesses basked in the benefit of 50-percent bonus depreciation, the economy got worse, not better? Where are all the jobs whose creation was promised when the proposal for the 2008 and 2009 tax break was being trumpeted as the answer? Where is the economic recovery that supposedly was an inescapable consequence of enacting those tax breaks? Similar questions can be asked about the long parade of tax breaks for business investments during the past 50 years. Though the economy doesn’t benefit, though economic fundamentals do not improve, though joblessness doesn’t abate, something fuels the repetitive re-enactment of this bundle of tax breaks. Could it be that it’s good for business? Could it be that what’s good for business isn’t necessarily good for those in need, especially if the funds generated by the tax break go the same way as the excess cash that businesses have been accumulating during the past year and a half, namely, somewhere other than the economy?

In early 2009, when the House Ways and Means Committee included expansion and extension of, among other things, bonus depreciation and first-year expensing, I wrote, in Just Because It Didn’t Work the First 50 Times Doesn’t Mean It Will Work Next Time:
Does it make sense to increase deductions for acquisitions of equipment? How does that restore confidence in the economy, which is essential to putting the nation back on track? How does a tax provision that encourages businesses to use their limited funds to buy machinery put people in this country back to work? Nothing in the provision requires that the property be built in the United States, and it's almost certain that such a requirement would violate at least a few trade agreements and treaties. What's the point of enacting tax breaks that create jobs in other nations? Dollar-for-dollar, a tax break for creating jobs directly is worth much more than a tax break for purchasing equipment.

With the nation's economy in rampant turmoil, does it make sense to turn to the same shop-worn provisions that came with promises of outstanding national economic performance that failed to materialize behind the façade of debt-driven unaffordable consumption? Advocates of these provisions argue that they give businesses an incentive to create jobs, but if that were the case, why hasn't unemployment dropped while previous increases and expansions of bonus depreciation and first-year expensing were being increased?

What Congress is proposing to do is more of the same. It didn't work last time around. Why would it work now? Sometimes persistence is a virtue. Other times it is foolishness.

The answer is simple. The things that need to be done are neither palatable nor easy to explain. Dishing out more tax breaks that are easy to explain and promise relief with no sacrifice sell better when election day rolls around. The depreciation provisions, including bonus depreciation and first-year expensing, have contributed to the current economic mess by allowing taxpayers to compute taxable income as though their economic position declined when in fact it remained the same or improved. Packaged into tax shelters, LILO deals, tax-exempt leasing arrangements, and other devices that contribute to the tax gap, these provisions ought not be considered remedies for the very economic diseases that they have caused and aggravated.
If Congress were running professional baseball, we’d probably see a fair number of zero-for-eighty ball players being brought up to the major leagues. One cannot fault the Congress for having tried bonus depreciation and expanded first-year expensing. One can fault the Congress for continuing to trot out the same failures after it has become clear that these ploys aren’t making the economy better and aren’t providing benefits to the general public.

Back in 2009, I concluded Just Because It Didn’t Work the First 50 Times Doesn’t Mean It Will Work Next Time with this prediction:
If, indeed, it is time for change, Congress should be given that message and understand it. Change does not mean doing something over and over when it hasn't worked and shows no signs of working. Just as consumers need to abandon the bad habit of spending beyond one's means and borrowing beyond one's ability to repay, Congress needs to break its bad habit of using the tax code as a vote generator. The likelihood of Congress embracing genuine change and doing more than giving lip service to the concept remains, unfortunately, very low. Its recalcitrance may prove to be one of the most difficult obstacles to the incoming Administration's success in solving the mess in which we find ourselves.
That the Administration has joined up with the pro-fake-writeoff crowd in Congress is not only disappointing but alarming. Except, perhaps, to the companies and people in other nations that make money selling equipment to American businesses.

Wednesday, September 08, 2010

When User Fee Diversion Smacks of Private Inurement 

More than two years ago, in Soccer Franchise Socks It to Bridge Users, I criticized the decision of the Delaware River Port Authority (DRPA) to contribute $10 million of bridge toll revenues to the developers of the professional soccer stadium in Chester, Pennsylvania. I rejected the DRPA claim that the contribution was for development of the area surrounding the stadium, and thus in some mysterious way an investment that would increase use of the bridges that the DRPA is charged with maintaining. It would take a huge increase in traffic to generate tolls sufficient to make up for the $10 million give-away.

A week later, in a follow-up post, Bridge Motorists Easy Mark for Inflated User Fees, I questioned the wisdom of the DRPA having racked up debt in order to finance monetary gifts to places such as “Lincoln Financial Field, the Kimmel Center, the New Jersey Aquarium, and dozens of other projects that surely are not bridges.” I expressed disappointment that the then-governor of New Jersey, who had announced a readiness to veto further giveaways, backed down, with every indication being that he did so in expectation of his state continuing to get a piece of the DRPA pie. And it did. For example, the New Jersey town of Pennsauken, according to this Philadelphia Inquirer article, picked up $700,000 in bridge toll revenue to fund a football complex for the town.

The DRPA saga is a long story. Recently, in DRPA Reform Bandwagon: Finally Gathering Momentum, I reviewed my commentaries on the subject and provided a list of links to stories that had emerged in the several months since I had last visited the topic. It’s not a pretty picture.

Over the weekend, news reports, such as this Philadelphia Inquirer story, appeared that highlighted the egregiousness of the DRPA’s actions. Recall that the DRPA’s excuse for diverting bridge toll revenues from bridge repair and maintenance to unrelated projects was that by helping fund those projects it would be fostering a better economic climate, one that would increase bridge traffic and thus bring more revenue. It was not surprising, of course, when the DRPA announced it needed to raise bridge tolls, as apparently tossing toll revenue at stadiums and concert halls did not have the traffic increase consequence that the DRPA had hyped. The most recent news discloses that the projects and groups getting their hands on bridge toll revenues were not necessarily those whose future success would jack up bridge traffic, and thus toll revenue, but organizations and enterprises with close ties to DRPA board members and executives. It seems that the car allowances, free E-ZPass transponders, nepotism, and pension deals discussed in the articles to which I referred in DRPA Reform Bandwagon: Finally Gathering Momentum weren’t enough. What fun it must be to use someone else’s money to bolster one’s favorite enterprises.

The list of toll revenue recipients is long, and a selected subset of the list has been published at the end of the Philadelphia Inquirer story. Can someone explain why the Philadelphia Eagles and the University of Pennsylvania need “contributions” from the DRPA? Who’s getting what for what? On the other hand, it’s easy to figure out why almost $60,000 was shoveled into the Philadelphia Tribune, a paper whose publisher happens to sit on the DRPA board. Isn’t there something very wrong about a person holding a public trust shifting public money into his personal business enterprise? Aren’t there laws in place prohibiting that sort of behavior? If not, why not? If so, why no prosecutions? Though the DRPA and some of the board members whose affiliated interests received money claim that the board members were isolated from the selection process, anyone who has any inkling of how boards work knows that isolation simply isn’t possible.

Though many of the recipients are in and of themselves good causes, such as the Red Cross, United Way, Seamen’s Church Institute, and the Boy Scouts, and though it’s possible that these organizations weren’t actively soliciting funds from the DRPA, it’s still wrong for the DRPA to take money paid for the repair and maintenance of bridges and ship it off to some other undertaking. So it would be bad enough if the recipients consisted entirely of charitable enterprises. Though I and many others are fans of the Philadelphia Eagles, not everyone paying a toll holds that characterization. And what does one do with this information, as the the Philadelphia Inquirer story puts it: “And when DRPA board member E. Frank DiAntonio retired as president of Laborers Local 172, the DRPA contributed $2,000 to the E. Frank DiAntonio Retirement Gala Committee.” Wow.

The DRPA claims that the give-aways have ended, and that it is “engaged in an effort to regain the public’s trust.” Good luck with that. As much as I am an advocate of charging user fees and collecting taxes to the extent required to give governments the opportunity to do what they need to do, I’m no fan of diverting user fees from the stated purpose to some other activity over which the payor of the fee has no control and as to which the payor has not consented. Though I do not think that there is sufficient fraud and misuse of funds in government budgets to permit the near-elimination of taxes that the anti-tax crowd advocates, I’m surely dead-set against the sort of corruption and mismanagement that has plagued not only the DRPA but surely other government agencies and boards throughout the nation.

Do the DRPA board members and their counterparts throughout governments understand how their actions undermine public support for government? Do they understand that when government loses public support, it withers? Does the public understand that a withered government is in no position to protect the freedoms, rights, and liberties that cannot be sustained without strong government? The way to restore public trust in government is to bring the hammer down on public servants who forget the meaning of the phrase “serve the public” and who betray their government and the people whom government serves. There’s a word for the sort of betrayal that contributes to a growing threat to the survival of the government and the nation. I’ll let the politicians look it up.

Monday, September 06, 2010

Legislative Tax Procedure: Confusion Runs Rampant 

Somehow, they just don’t get it. Considering how law students struggle with procedure and process – one of the most critical aspects of lawyering and law-making – it’s not surprising that journalists also don’t get it. On Friday, in More Democrats Balk at Raising Taxes for Rich, David Lightman of McClatchey Newspapers writes, “Tax cuts enacted in 2001 and 2003 expire at the end of this year. . . However, a small but growing number of moderate Democrats are balking at boosting taxes on the rich. . . Without their support, the push to raise rates on the rich will probably fail.”

He, and many others, have it backwards. If Congress does nothing, tax rates on the all taxpayers, including the wealthy, will go back to what they were in 2000. In other words, tax rates on the rich will increase unless Congress acts affirmatively to prevent that from happening. So the folks who need to gather votes are the folks who want to extend the tax cut bestowed on the wealthy nine years ago. Let’s look at the numbers shared in the article.

According to the article, it’s in the Senate where things matter, because in the House, the Republicans who presumably would vote to extend tax breaks for the wealthy are so outnumbered that even if a few moderate Democrats join them, it won’t happen. But the Senate, with its quirky rules that make simple majorities into minorities and give controlling power to 40 Senators, poses a strange phenomenon. If 41 Senators can block legislation, even with the defection of some moderate Democrats, a sufficient number of Senators who oppose extending tax breaks for the wealthy can block legislation that would do so.

Where it gets confusing is when alternative legislation is tossed into the mix. The Administration proposes extending tax breaks for those with adjusted gross incomes under $200,000 ($250,000 for joint returns) but not extending tax breaks for the wealthy. To get this legislation through the Congress, the Administration needs to find 61 Senators to support it. It probably would pass the House. But 41 Senators could block it.

In other words, Congress will come to loggerheads. This sort of stalemate is familiar, so it’s not surprising. It’s simply frustrating, because taxpayers and their advisors need to know what the 2011 federal income tax landscape will resemble. Note that similar planning concerns afflict estate planners and their clients. Thank you, Congress.

The confusion also manifests itself in this sentence: “The bigger problem for Democrats is in the Senate, where Reid’s immediate problem is getting the 60 votes needed to cut off debate on the [Administration] measure. Democrats control 59 seats, and at least three – Bayh, Ben Nelson of Nebraska, and Kent Conrad of North Dakota – have signaled they won’t back a permanent repeal of the tax cuts for the wealthy.” The catch is that there is no permanent repeal to back. It is going to happen, unless supporters of extending the tax rate reductions can pull together 60 votes to get an extension through the Senate. So if these moderate Democrats sit back and refuse to support a measure, the outcome will be precisely what they say they oppose. But if they step up and affirmative vote for tax breaks for the wealthy, they put themselves at risk when elections roll around.

Is it any wonder that getting sensible, rationale debate on these issues is so difficult? If the rules of the Congressional game aren’t understood, what are the chances that the outcome will be what people want it to be, even setting aside the wisdom of any of the particular positions being put forth? Congress has painted itself into a corner. It would be tempting to leave it there, except that when Congress paints itself into a corner, it puts the public in a bind. The first step in getting this mess straightened out is inspiring journalists to educate the public with the correct information. I seriously doubt that will happen. I’ve tried, but MauledAgain doesn’t have the circulation of McClatchey Newspapers or any of the other huge media outlets that can’t seem to figure out how to explain something that, all tax things considered, isn’t all that complicated.

Friday, September 03, 2010

Taxes and Parties 

No, this is not about taxes and the Tea Party, or taxes and the Democratic Party, or taxes and the Republican Party. It’s about taxes and a cocktail party.

No, this is not about the deductibility of cocktail parties, or the possible exclusion, as a fringe benefit, of an employer’s cocktail party for employees. It’s about a cocktail party for taxpayers.

Indeed, according to this Philadelphia Inquirer story, Philadelphia’s Office of Arts, Culture and the Creative Economy and Philadelphia’s Department of Revenue are staging a cocktail party for “bloggers, entrepreneurs, freelancers, artists, and creatives.” This is the city’s response to the outcry over its determination to impose a $300 business privilege license tax on bloggers, even if their gross receipts are minimal, as I discussed last Friday in A Tax on Blog Writing or on Blog Business?.

The city’s goal is to “answer any questions about the business-privilege license and tax that have riled Philadelphia bloggers.” So the solution from the bureaucrats is to ply the taxpayers with liquor?

Wait, perhaps Philadelphia city officials are onto something. Consider the increase in IRS audit efficiency if taxpayers and their representatives were hosted at a cocktail party before being conducted to a revenue agent’s office. Consider the increase in tax revenue if tax return preparation was restricted to taverns, pubs, and night clubs. Imagine the IRS throwing a cocktail party for taxpayers, and holding it across the street from, say, a Tea Party meeting.

In all seriousness, all of this could backfire. Inebriated tax return preparers are no more likely to make errors in the IRS favor than they are to make them in favor of the taxpayer. Perhaps the release of inhibited subconscious desires would increase the chances of errors favoring taxpayers. Audits involving plastered taxpayers and their representatives could get ugly, fast. And imagine what happens if the bloggers and others who show up at Philadelphia’s “soften them up with alcohol” event get feisty, as drunk people often do. What might strike someone as a good idea when planning an event sometimes can backfire. Just ask the folks who came up with Disco Demolition Night and Ten Cent Beer Night.

If the bloggers and others attending Philadelphia’s “free booze makes taxes more palatable” bash get so feisty that they drive the planners to tears, will we hear strains of "It’s My Party and I’ll cry if I want to"? Speaking of parties and taxes, if the Bush tax cuts are not renewed, will they be singing, "party like it’s 1999"?

And if all else fails, you can always throw your own tax party, following this advice from the folks at C-NET. Be sure to click on all five numbered tabs.

Wednesday, September 01, 2010

An Exercise in Futility? 

The other day, a distant cousin – distant both geographically and in terms of degree of relationship, something on the order of fifth cousin – sent me The Best of All Possible Americas, a posting on The Smirking Chimp, a blog with which I was not familiar. The posting, by Marty Kaplan, explored the dysfunctions in our system of government, and pointed out that the answer rests with voters, who aren’t quite as smart as one would wish that they would be or that they need to be in order to bring the present political polarization to an end. This caught my eye, because on more than a few occasions, I’ve suggested that the solution to one or another problem is for voters to step up and make their dissatisfaction evident.

Kaplan focuses on how the polarized debates pushing centrists out of the public arena is fueled by all sorts of misinformation. He presents a variety of examples of lies, distortions, and unverified rumors being dished out to tens of millions of Americans. The speed with which information goes viral makes it difficult to rectify these sorts of errors and intentional dishonesty. Kaplan notes that having “smarter voters, who in principle would elect better legislators” is a “strategy [that] puts a premium on better information, delivered to rational people through quality education or a free press.” Kaplan then explains why this hasn’t happened and perhaps won’t.

Pointing to studies done by University of Michigan political scientist Brendan Nyhan, published in When Corrections Fail: The Persistence of Political Misperceptions, and moved into the mainstream media by Joe Keohane’s Boston Globe’s article, How Facts Backfire: Researchers Discover a Surprising Threat to Democracy: Our Brains, Kaplan,borrowing from Keohane, sums up the problem as follows:
Our brains are designed to create shortcuts like inference and intuition in order to avoid the cognitive discomfort required to process and assimilate dissonant information. It hurts our heads to change our minds.
Kaplan summarizes some of the Nyhan research. For example,
People who believed WMDs were found in Iraq believed that fiction even more strongly when they were shown a news story correcting that mistake. The same was true of people who believed that the Bush tax cuts increased government revenue; a correction -- revenues actually fell -- also backfired, further entrenching people in their error. This finding transcends ideology: People who believed that Bush banned all stem cell research continued to believe that even when they were shown that only certain federal funding of stem cell work was stopped.
According to Kaplan, “This . . . puts a ceiling on what we can expect from education.”

Kaplan presents the approach that has long characterized my outlook on education, one that has motivated my decision to teach:
It’s not that they don’t have the facts, goes this view; it’s that they lack a good education, which cultivates critical thinking. Reason, the scientific method, media literacy: it’s widely believed that these tools can overcome not only propaganda and superstition, but also the inherent limitations of how we’re wired. We may possess lizard brains, but we also possess several centuries’ worth of methods for transcending our species’ propensity for paranoia, intransigence and irrationality. Education trumps ignorance.
Perhaps part of the explanation for my struggle to understand how someone can sit in one of my courses for 14 weeks and yet end up “not getting it” can be attributed to the difficulty, or even impossibility, of emptying their brains of nonsense to make room for careful analytical processes.

An example might help. Early in my teaching career, when I reached the subject of moving expense deductions, I turned to a problem in the book that presented a solo practitioner in City A deciding to combine his practice with a law firm in City B, some miles away. The solo practitioner decided to move to City B. The question was determining how far away City B needed to be in order for the mileage requirement of the moving expense deduction to be satisfied. A student raised his hand. He claimed that the hypothetical could not exist. After three or four exchanges, I finally figured out what he was trying to say. The solo practitioner, he claimed, could not become a partner in the City B firm until he had worked there for seven years. No one, claimed the student, becomes a partner in a firm without working at the firm as an associate for seven years. When I explained that a solo practitioner with a book of business, namely, a stable of paying clients, combined efforts with an existing firm, it was not uncommon for the firm’s partners to welcome, with open arms, the rain-making solo practitioner. Sensing that the rest of the class, who pretty much understood this point, was getting restless, I let it go. Whether the student in question ever got it is something I don’t know, but now I understand that some sort of misinformation or consequence of faulty reasoning got wired into his head, namely, the notion that no one can become a partner in a law firm without working at least seven years as an associate at that firm, and it just wasn’t going to be unhooked.

For me, the question is whether some people are genetically or otherwise constituted so that their brains are more easily hard wired or more resistant to re-wiring through education. If the answer is yes, then I wonder whether it is a futile exercise to try to help such people get it right. Someone sufficiently convinced that one plus one equals seven might not ever understand that one plus one equals two no matter what a teacher does, no matter how many classes the person takes, no matter how much reading the person undertakes. Scary. Very scary. Especially when the outcome of a collective effort by an aggregation of such individuals bestows on the nation or the world a gift of truly ignorant leadership.

Kaplan believes that “Even the brightest among us are run by the same limbic system that ran us when we roamed the savannahs. Even the best-educated citizens sometimes can’t help being bedazzled by illusion, seduced by spectacle and misled by morons. Our public education system may be failing us, but even in the most splendid of educational circumstances, schooling can’t prevent smart people from occasionally being totally wrong about the facts.” It would be wonderful if I, or anyone, could prove Kaplan wrong. Or rebut Keohane’s report. Or refute Nyhan’s studies. Perhaps that will happen. But until it does, we must give serious credence to the possibility that the limbic system gets in the way of the sapiens part of sapiens sapiens, and that it might make sense to invest more time and money figuring out better ways to re-wire badly hard-wired brains. Why? Because if that doesn’t happen, we’re in for a long stretch of political polarization and the even worse consequences that it can and will bring. It will make most tax policy debate a luxury that will slide to a very deep back burner. But in the meantime, I intend to continue teaching, and will continue trying to shake students who have a hard-wired adherence to passive learning out of that mindset, to persuade students beholden to a disdain for class preparation that their approach has been disproven, and to encourage the sort of intellectual curiosity that has constrained unbridled limbic system behavior. But in the back of my mind will be that wee bit of doubt, something about exercise and futility.

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