Storms, Public Infrastructure, and Taxes

Though the damage caused by Hurricane Irene along the east coast of the United States was not as severe as expected, and nowhere near what it could have been, and perhaps someday will be from another storm, the damage was bad enough. For example, as reported and shown in this news story, a 900-foot section of North Carolina Route 12 in the Outer Banks was destroyed. In New York, MTA train service on Metro-North lines is suspended indefinitely on account of flooding, power outages, landslides, and track bed erosion, as reported, among other places, in this report. Damage to public infrastructure extends from Maine to North Carolina.

Repairing the damage that the hurricane caused to public infrastructure requires money. To the best of my knowledge, few, if any, of these structures and facilities are insured. Self-insurance might exist in the form of contingency funds, but several years of recession have caused many, if not most, governments and public agencies to dip into those funds. Money can be taken from other portions of the locality’s budget, but what’s left to afflict with a shortage? Should the fire department be eliminated? Should half of the police force be pink-slipped? Should public sewage treatment plants be closed?

Sometimes, no matter what people want, we, and those representing us in government, must do what we prefer not to do. That’s life. That’s also why I shudder in horror at the total inanity and stupidity of the anti-tax pledge. Technically, there are four pledges, one for House members, one for Senators, one for governors, and one for state legislators. All share, however, a promise to oppose and vote against “any and all efforts” to increase taxes. With respect to the type of situation now facing more than a dozen states, the anti-tax pledge advocate explains:

Can the language of the Pledge be altered to allow exceptions?

No. There are no exceptions to the Pledge. Tax-and-spend politicians often use “emergencies” to justify increasing taxes. In the unfortunate event of a real crisis or natural disaster, the legislator should propose spending cuts in other areas to finance the emergency response.

So in the anti-tax world, the county that wants to replace the washed out bridge or the city that wants to restore train service needs to eliminate police departments, lay off fire fighters, close down the sewage treatment plant, or reduce already bare-bone services to the citizenry. I can’t imagine what these ideologues would have argued on December 8, 1941.

Highways, Trucks, Recessions, and Taxes

One of the sights I saw, frequently, on my recent very short journey part-way across the country, was the tractor-trailer. I haven’t seen this many tractor-trailers on a per-mile basis for a long, long time. Because of past experiences, I have convinced myself that when recessions occur, truck traffic decreases. I can remember several recessions during which truck traffic was so reduced that the definition of “open road” almost required rewriting. Past experiences also taught me that truck traffic declined on weekends and almost disappeared on Sundays. That wasn’t the case in August of 2011. Truck traffic was incessant.

One of the questions that popped into my head was a consequence of my curiosity. “What’s in the trucks?” Occasionally, the answer was apparent. Those hauling new cars or cattle pretty much reveal their cargoes. Most of the trucks, however, consist of a tractor and a box trailer or container on a flatbed. “What’s in there?” Food? Is more food being shipped by truck than in the past? Despite recessions, people eat, so I’ve figured that the trucks carrying necessities, such as food, don’t change in number very much. So what’s in these trucks? Not too long into the trip, when I caught sight of this news, a possible answer appeared. Were these trucks filled with $9,010 Chanel sequined tweed coats? Were they carrying $775 Christian Louboutin “Bianca” platform pumps? Even if I had the audacity to find a way to look into the truck trailers (not that I would and not that I’d see much but cartons and crates), I wouldn’t have recognized these things. I’m just copying what I read, because I have no clue as to what these items are and why they are so expensive other than the ever-present desire of the elite to possess something most others cannot afford and to have a name or tag attached so that they are certain the world recognizes them as special and elite. And wealthy.

One of the feelings I encountered during this trip was the rattling, shaking, and banging that is experienced when driving off-road. Yet I did not drive off-road. About the time that I embarked, I had noticed a puzzling statement by Peter King in his MMQB column. He wrote, “Then Lou [the driver of the bus] climbed into the driver's seat and we started buzzing up I-85 toward Redskins camp in Northern Virginia, 490 miles of bumpy bliss while writing this column. Let's just say I would have written longer overnight if the interstate highway system in this country weren't as much of a roller coaster.” Haven’t ventured on interstates during the past two years other than those within a few miles of home, I wondered what he meant. I found out, when I reached I-70 in Illinois. I thought I had crossed the border into a still-developing country. I was reminded of stories from people I know who have driven in some of the countries formerly behind the Iron Curtain. My thought that perhaps it was “last on the list” to be repaired was quickly dispelled as I encountered more and more interstate miles marked with PERMANENT “rough road” signs. On the return leg of the journey, I traversed the Indiana Toll Road, hailed by advocates of privatization of public assets as proof of the superiority of their “shrink government” mentality. Guess what? Parts of that road rivaled the atrocious condition of I-70 in Illinois. There’s no guessing in determining why these roads are a mess. The anti-tax movement is succeeding in wrecking the nation’s infrastructure, banking on an exasperated public giving in to the “private milking of public assets” game that, in the long run, as seen in Indiana, leaves the country no better off and a few special elites wealthier. Perhaps they’re trying to save up to buy a few more dozen pairs of shoes.

My conclusion is that there are two Americas. One, inhabited by the wealthy, is nowhere near a recession, doesn’t worry about highways because helicopters and private jets don’t use them, and detests paying taxes. The other, inhabited by everyone else, is in the economic doldrums, if not ready to fall into another recession or depression, endures deteriorating infrastructure and reduced services, suffers from unemployment or employment at wages falling in real dollar terms, and yet despite holding an overwhelming number of votes, manages to perpetuate the system that keeps them down. Perhaps after paying for more shock absorber and tire replacements, front end alignments, and suspension adjustments, they will decide that it’s cheaper, in the long run, to pay increased tolls.

Two Types of Tax Increases

Apparently there are two types of tax increases in this nation. And apparently one type is very bad and the other is very good. How does one tell the difference? Read on.

A story broke last week, reported by the Associated Press and other sources, that the Republican members of Congress are opposed to extending the social security tax cut that was put into effect for this year. This tax cut applies to a tax imposed on the first $106,800 of wages, and reduced the 6.2% employee portion of the tax to 4.2%. The purpose of the reduction was to put more cash in the hands of ordinary consumers, whose increased purchasing stimulates the economy and creates jobs.

Failing to extend the cut, in other words, permitting the tax rate to return to 6.2%, is viewed by many as a tax increase. As I explained about a month ago in Tax Semantics, allowing a temporary tax cut to remain temporary is not a tax increase, though arguing that point is a distraction from the real issue. But for purposes of this discussion, calling it a tax increase drives home the larger point.

A rational person who pays attention to national politics would not be amiss in concluding that the anti-tax crowd, and that includes almost every Republican member of Congress, would be horrified at the idea of letting the temporary social security tax cut expire. After all, they are livid at the idea of letting the Bush tax cuts benefitting the wealthy terminate. Yet these anti-tax crusaders do not hesitate in their willingness to let the social security tax cut expire. Representative Jeb Hensarling claims that although lower taxes are better than higher taxes, “not all tax relief is created equal.” In other words, for these anti-tax Republicans, tax relief for the wealthy apparently is much more important than tax relief for low and middle income wage earners. Representative David Camp, who chairs the Ways and Means Committee, explained that tax reductions, “no matter how well-intended,” will increase the deficit and make the task of reducing the deficit “that much harder.” Camp gets points for that obvious bit of wisdom. If tax reductions, however, are a problem, then are not the Bush tax cuts even more of a problem, considering that they dwarf the social security tax cut? Where was Camp when those cuts were scheduled to expire and his colleagues went all out, in the face of spiraling deficits, to extend those tax cuts? Do we sense a double standard?

According to anti-tax Republicans, there is consistency in opposing a tax cut extension for ordinary Americans while heaping tax reductions onto the mega-rich. It is better, they say, to reduce corporate taxes and the tax burdens of the wealthy than it is to extend the social security tax cut. A spokesperson for House Majority Leader Eric Cantor claims that Cantor “has never believed that this type of temporary tax relief is the best way to grow the economy.” If he means that temporary tax cuts are not the answer to economic growth, then why the support for the extension of the temporary Bush tax cuts? If he means that temporary tax cuts for low and middle income individuals is not the answer, but that tax reductions for corporations and upper income individuals is the solution to the nation’s economic problems, can he please explain why the Bush tax cuts, rather than helping the economy, contributed to its downturn?

The answer might not be an extension of the social security tax cut. After all, the social security trust fund needs to be maintained and expanded to cover the benefits that are due to retirees in future years. The answer is to let the Bush tax cuts expire, and, ideally, to recoup the tax breaks from those who took them under the pretext of creating jobs that they had no need to create and no intention of creating.

So is there a double standard? Indeed there is. Perhaps a better word is hypocrisy. It’s interesting to watch the anti-tax group get painted into a corner as they are compelled to confess that they are not anti-tax across the board, but opposed to taxation of corporations and wealthy individuals. That does make sense from one perspective. Consider who contributes to the cost of acquiring elective office.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part X

This is the tenth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I close the series with a Supreme Court tax case involving a Thomas Maule descendant.

Sarah Prudence (Sally) Ordway (1910-1997), 7-great-granddaughter of Thomas Maule of Salem, Mass., and my 8th cousin: Sarah’s interest in a trust set up by her father, John Gilman Ordway (6-great-grandson of Thomas Maule of Salem, Mass.) was the subject of a gift tax disclaimer case, U.S. v. Irvine, 511 U.S. 224 (1994).

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part IX

This is the ninth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two members of the single tax movement.

Louis Blaul (1854-1909), married to Mary Conard Clendenon, 3-great-granddaughter of Thomas Maule of Salem, Mass., and my 3rd cousin four times removed: According to the Single Tax Review (1910), on googlebooks, “The death of Louis Blaul of West Philadelphia, robs that city of an earnest and devoted Single Taxer.” His funeral, we are told, was conducted “as he had desired, not according to the rites of any church, but by officiating Single Taxers.” One of many explanations of the single tax, and its chief advocate Henry George, can be found in this article.

Earl Harrington Foote (1882 - ?), 6-great-grandson of Thomas Maule of Salem, Mass., and my 7th cousin once removed: In 1920, Earl was a candidate for governor of Ohio on the single tax party ticket. According to Our Campaigns, he received 1407 votes, 0.07% of the total. In the 1930 census of Ohio, his occupation is listed as real estate agent. Earl was a 4th cousin three times removed of Louis Blaul’s wife Mary Conard Clendenon, but it is not known if Louis and Earl knew each other or knew of each other, though both were adherents of the single tax.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VIII

This is the eighth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with a tax return preparer.

Evelyn Newton (1919-2002), 7-great-granddaughter of Thomas Maule of Salem, Mass., and my 8th cousin: Among the many careers juggled by Evelyn was tax return preparer employed by H&R Block. Her interests and skills reached beyond taxation, as she was employed by Utah Power and Light, and the Bureau of Reclamation. She also was an Herbal Life and Vanda Make-up distributor for more than a quarter of a century. (Primary source: her obituary in the 5 July 2002 Salt Lake City Deseret News)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VII

This is the seventh in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with tax accountants.

Willard Clinton Warren (1922-2009), 5-great-grandson of Thomas Maule of Salem, Mass., and my 3rd cousin twice removed: Willard ended his long career as senior tax principal of KPMG Peat Marwick’s Boston office. After serving in the Army Air Corps during World War II, he returned to Bowdoin College to complete his degree, and then joined the family business, Warren Publications. After a few years as manager of Pro-Con, he joined Mount and Carter, a Boston accounting firm, which through a series of mergers, became part of KPMG Peat Marwick. (Primary sources: his obituary in the 16 April 2009 Portland (Maine) Press Herald, in the Bowdoin College Magazine, and in the Conway Daily Sun.

Charles Banks King (1927-2008), 6-great-grandson of Thomas Maule of Salem, Mass., and my 5th cousin once removed: Charles as a CPA, educated at Principia College and the University of Miami Graduate School of Business Administration. He was director of the Estate Planning Council of Greater Miami, was a member of committees of the Florida Institute of CPAs, and served in leadership capacities at many other civic and professional organizations. He was a director and treasurer of the Miami Beach Taxpayers Association. (Primary source: his obituary in the 21 Dec 2008 Miami Herald)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part VI

This is the sixth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with members of local tax boards.

Frederick William Savory (1927-2004), 7-great-grandson of Thomas Maule of Salem, Mass., and my 8th cousin: Frederick was a dairy farmer and crop supply company owner who served for many years on the Town of Greene (N.Y.) Tax Grievance Board. (Primary source: his obituary in the 11 August 2004 Binghamton Press & Sun Bulletin)

Richard Edgar Hewitt (1920 - ?), 5-great-grandson of Thomas Maule of Salem, Mass., and my 5th cousin twice removed: According to a 1982 clipping in an Evansville newspaper archive, Richard, who was president of the Hoover Abstract Corp., served on the Vanderburgh County Tax Adjustment Board as well as on several other civic and governmental boards and commissions.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part V

This is the fifth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two local tax officials.

George Perry Worrell (1863-1942), married to Mary Louisa Ogden, 4-great-granddaughter of Thomas Maule of Salem, Mass., and my 4th cousin 3 times removed (in addition to being a cousin through my Ogden ancestry): In the 1930 census of Pennsylvania, George’s occupation is listed as tax collector. On the three previous census enumerations, he had been listed as a salesman for a grocery store, but it’s not known if the tax collector position followed a career path change or a second job. I haven’t been able to learn anything more about his public service as a tax collector.

Joseph M. J. Flaig (1882-1933), married to May P. Neave, 4-great-granddaughter of Thomas Maule of Salem, Mass., and my 4th cousin 3 times removed: In the 1930 census of Missouri, Joseph’s occupation is listed as tax assessor for the city of St. Louis. According to his death certificate, at the time of his death he was deputy assessor for the city of St. Louis. I know nothing else about him.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part IV

This is the fourth in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two IRS employees.

Juanita Maude Tucker (1922-2006), 4-great-granddaughter of Thomas Maule of Salem, Mass., and my 3rd cousin three times removed: According to her obituary, Juanita “retired in 1988 after an exemplary 20-year career with the IRS.” Before working for the IRS, she was a co-owner and operator of the Powder Puff Beauty Shoppe in Bloomington, Texas, a business she started after raising her children. I do not know in what capacity she worked at the IRS. (Primary source: her obituary.

Rose Marie Randolph Agnes Maule (living), 6-great-granddaughter of Thomas Maule of Salem, Mass., and my aunt: After raising her and uncle Joe’s children, aunt Rose worked for many years as an IRS tax examiner in Philadelphia before retiring some years ago. I’ve never tried to pry into the details of what she did, respecting the confidentiality restrictions to which she was subject. My career with the Chief Counsel to the IRS began before I had learned that Aunt Rose was a tax examiner, though shortly after she had taken the position.

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part III

This is the third in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with two employees of predecessors to the IRS.

Roy Levi Maule (1889-1940), 4-great-grandson of Thomas Maule of Salem, Mass., and my 4th cousin three times removed: In the 1930 census of Oregon, Roy’s occupation is listed as deputy collector for the Bureau of Internal Revenue. Many years ago, his cousin and son described his occupation as a public accountant, making no mention of his career with the BIR. In the 1920 census his occupation is listed as bank teller and in the 1910 census he is listed as a confectionary salesman.

Joshua Clendenon (1813-1892), great-great-grandson of Thomas Maule of Salem, Mass., and my 2nd cousin five times removed: During 1865 and 1866, Joshua was employed as a clerk by the Office of Internal Revenue, Department of the Treasury, in Washington, D.C. According to the 1860 census of Pennsylvania, he was working as a conveyancer before he moved to Washington. He eventually returned to Philadelphia, presumably after he retired. (Primary source: Congressional Serial Set, Issue 1293)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part II

This is the second in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I continue with an IRS and a Treasury official.

James Albert Mackey (1943-1999), 6-great-grandson of Thomas Maule of Salem, Mass., and my 7th cousin once removed: From 1971 through 1980, Jim was an assistant commissioner of the IRS. He had worked at Deloitte and Touche after completing military service, and after his departure from the IRS he founded the accounting firm of Mackey and Kirkner in Newtown Square, Pa., where I grew up. His son Jim was a student of mine at Villanova’s Law School in the 1990s. (Primary source: his obituary in the 23 Nov 1999 Philadelphia Inquirer)

Lorin Blodgett (1823-1901), 3-great-grandson of Thomas Maule of Salem, Mass., and my 4th cousin four times removed: Among Lorin’s many careers were positions as manager of the Treasury Department’s financial and statistical reports, as appraiser-at-large of customs, and as special assistant in the Treasury Department. When not busy with Treasury matters, he made time to found the U.S. Weather Bureau, serve as assistant at the Smithsonian Institution in charge of climatology research, present papers on atmospheric physics, direct the surveying and determination of gradients and altitudes for the Pacific railway, work in the War Office, write at least 150 books, 350 pamphlets, thousands of editorial articles, and countless reports, edit newspapers, serve as secretary of the Philadelphia Board of Trade, and take the industrial census of Philadelphia four times. His “Commercial and Financial Resources of the United States” was reprinted in Germany and was a significant factor in maintaining the nation’s credit in European money markets. (Primary source: Famous Americans)

Taxation and the Descendants of Thomas Maule of Salem, Mass., Part I

This is the first in a series of posts that highlight descendants (and in several instances, spouses of descendants) of Thomas Maule of Salem, Massachusetts, one of my 512 7-great-grandfathers, who have been involved, one way or another, in taxation or tax policy other than in their capacity as taxpayers. Why this 7-great-grandfather and not one of the other 511? In part because I carry his name and his y-DNA, in part because I have not identified all of the other 511, and in part because I have not done similar research for the descendants of the other 511 whom I can identify. The short biographies that I present are, in most instances, just a slice of a much fuller life. The full biographies can be accessed through the index on the Maule Genealogy Homepage by using control-f to search for the person [Warning: the index page is huge and takes a minute to load] or by going to the sources mentioned in the posts.

Today I begin with a legislator.

Francis E. Holman (1915-1991), 7-great-grandson of Thomas Maule of Salem, Mass., and my 8th cousin: Fran Holman, judge, state senator, and member of the state house in Washington, built his reputation as an independent legislator who “served the public rather than special interests” and was free from political influence. Former governor Dan Evans remarked, “Mr. Holman couldn’t be budged even by The Boeing Co., taking a stand involving taxation that Boeing opposed.” Reportedly that stand cost him his partnership in one of the state’s largest and most elite law firms. While in the state legislature, he was active in tax reform, “making [the issues] understanable to the public.” (Primary sources: his obituaries in the 11 June 1991 Seattle Post-Intelligencer and the 6 June 1991 Seattle Times)

Tax Complexity: Why?

It is no secret that I find the complexity of the Internal Revenue Code to be unjustified, oppressive, counter-productive economically, and the consequence of politicians creating new provisions rather than expanding existing ones, because the former is more advantageous to incumbents concerned about the source of their next campaign funding dollar. Last week I had the opportunity to gather some facts illustrative of this problem. After I finished writing the analytical portion of the next edition of Tax Management, Inc’s 597 T.M., Tax Incentives for Economically Distressed Areas, I turned to what is called the Portfolio Description Sheet. I counted up the number of issues that are discussed, and then, out of curiosity, I compared the results with their counterparts in the first edition of the Portfolio, written in late 2004 and published in early 2005. The Portfolio analyzes tax provisions that pump money into economically distressed areas, an approach that began in the 1990s as Congress chose to ignore direct grants that constitute spending and decided to use tax breaks that are, in effect, spending, though the beneficiaries of these provisions and their Congressional protégés refuse to treat them as spending and thus consider any reduction or elimination of these tax breaks to be tax increases rather than spending cuts.

The first edition dealt with six types of what I call qualified distressed areas. Early in the “use the tax law rather than spending grants” game, Congress created things such as empowerment zones, enterprise communities, renewal communities, and the District of Columbia Enterprise Zone. By 2011, the six had grown to 14, with the addition of an array of disaster areas, economically distressed production areas, and recovery zones. Though each of the 14 share the characteristic of being an area that has suffered or is suffering from economic set-backs, each one is defined differently.

The first edition of the Portfolio discussed 11 types of qualified assets, including enterprise zone businesses, renewal community businesses, qualified zone property, qualified renewal property, and DC Zone assets. The number of qualified asset types addressed by the second edition grew to 17. Added were things such as qualified equity investment and recovery zone property. Again, though these assets share the characteristic of being used in a qualified distressed area in some manner, the technical details buried in the definitions can make eyeballs spin. For example, try to imagine the differences among these types of property: qualified recovery assistance property, qualified section 179 recovery assistance property, qualified disaster assistance property, and qualified section 179 disaster assistance property.

The first edition analyzed 19 specific tax benefits available to taxpayers who meet the requirements for operating a business or making investments in a qualified distressed area. By 2011, the number had grown to 93. You read that correctly. From 19 to 93. Sounds like the title to the biography of someone’s adult life. The number of exclusions and deductions grew, and to that list were added more than a dozen credits. For example, there is a deduction for qualified disaster expenses and special rules for federally declared disaster area casualty losses.

Finally, the first edition described 12 tax detriments imposed on taxpayers who claimed one or more of the tax benefits. For example, amounts for which a deduction is provided cannot be used to increase basis, and in some instances, if property ceases to be a qualified asset, some sort of recapture applies. In the second edition, there are 51 tax detriments that need attention.

If that doesn’t demonstrate the unchecked growth of the tax law, try this. The manuscript for the first edition consisted of 172 single-spaced pages, with 1,708 footnotes. Using the same margins, font, and other parameters, the manuscript that I completed last week consists of 325 single-spaced pages, with 3,916 footnotes.

Isn’t it time that people get a handle on how much spending has been enacted in the tax law? Ought not economic benefits be treated in the same manner, whether they are direct grants or disguised grants hiding in complex Internal Revenue Code provisions? Is it not possible to create one set of rules for economically distressed areas? Why was it not enough to have empowerment zones? Why add renewal communities? And enterprise zones? Why are some tax benefits available to the Kansas disaster area but not the Hurricane Ike disaster area? Why are the special rules for the Midwestern disaster area different, and in some instances slightly different so as to catch the unwary off-guard, than those applicable to the Rita GOZone? Why are there different rules for the Hurricane Katrina disaster area and the GOZone, considering that the former is pretty much the latter? It’s not as though each time around, Congress refined the provisions and made them better or easier to understand. To the contrary, each of the many dozens of times Congress has added, modified, twisted, or tinkered with the provisions, the language became denser and longer. Why?

The Value of Tax Education

Yes, I’m a fan of education, and I am an advocate for the value of tax education. Tax education is what I do with much of my time, teaching law students, lawyers, and accountants, writing books and articles for tax practitioners and, from time to time, for others, and publishing a blog directed to an audience of tax professionals and those who do not make their livelihood in the tax world. I’ve touched on this in a variety of posts, including Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, and The Consequences of Tax Education Deficiency. Though usually my focus is on the inability of legislators to understand what they are doing, particularly the damage they are causing, and on the disadvantages of an electorate unschooled in tax reality, the problem also touches on individual situations that don’t get very much public attention. Nonetheless, they can be good examples of how tax ignorance adversely affects people apart from matters of national tax policy debate.

A Tax Court decision involving an accountant brings this issue back into the spotlight, if only for a moment. It is unclear from the opinion whether the taxpayer did any tax work. Most accountants take at least one basic tax course, and many enroll in multiple courses, even earning degrees such as the M.T., because of the impact tax rules make on accounting analysis, the “reserve for taxes” being one such example. In Mondello v. Comr., T.C. Summary Opinion 2011-97, the Tax Court held that the taxpayer was not permitted to accrue a deduction for the value of services he rendered to his sole proprietorship operating as an LLC under state law. The taxpayer, in addition to be employed by an unidentified business, owned a web site and spent time maintaining the site. He also performed web site services for unrelated parties, charging them between $45 and $55 an hour. Because he invested 1,000 hours in 2007 developing his own web site, the taxpayer accrued a $50,000 deduction on his Schedule C.

The Tax Court disallowed the accrued deduction for the taxpayer’s own labor performed for himself. The Court relied on three cases. In Rink v. Commissioner, 51 T.C. 746 (1969), the Tax Court explained that just as imputed income from the benefit of taxpayer’s own services is not included in gross income, neither is an imputed expense arising from his own labor for himself deductible. The Court specifically stated, “Labor performed by a taxpayer does not constitute an amount ‘paid or incurred’ by him, and consequently, cannot be deducted by him under section 162.” Later, in Grant v. Commissioner, 84 T.C. 809 (1985), aff’d without pub. op., 800 F.2d 260 (4th Cir. 1986), the Tax Court said repeated the conclusion that a taxpayer’s labor is not payment of a deductible business expense. In Maniscalco v. Commissioner, T.C. Memo. 1978-274, aff’d, 632 F.2d 6 (6th Cir. 1980), the Court reiterated the point, stating, “Whatever may be said in behalf of taking into account the value of one’s own services in lieu of paid labor, such services are not considered an element of the deduction under section 162(a), just as the flow of satisfaction from services arising from one’s own labor is not includible in his gross income.”

This outcome is a basic federal income tax principle. Students in basic tax courses learn it. Compared to much of what they must work through in such a course, this principle is easy as a rule and not particularly challenging in terms of learning its rationale. What’s surprising about the Mondello case is not the outcome, but the fact that the case exists.

The taxpayer tried to distinguish the three cases on which the IRS relied and that the Tax Court cited in support of its decision. The taxpayer noted that the taxpayers in those three cases were cash method taxpayers and that he was an accrual method taxpayer. The Court’s reply is the sort of opinion language that no litigant wants to read or have the world see: “Perhaps petitioner did not read Rink or he failed to read it carefully. The Court pointed out in that case that the taxpayer took the position, as petitioner does, that ‘he should be permitted to accrue currently, as a liability, amounts owed by him to himself on account of his labors, but include the value of such labor in income only when and if such labor gives rise’ to income in the future. The Court found the argument to be without any merit; ‘For one thing, we have found that the petitioner incurred no liability, in favor of himself or anyone else, to pay for the value of his services.”

Whatever may have inspired the taxpayer to claim the deduction, that gaffe was multiplied when the taxpayer did not look closely at the cases cited by the IRS. The cost of the litigation, the additional interest and penalties, and the aggravation of the entire situation could have been reduced. It is not beyond the realm of possibility that the taxpayer did read the cases, and did look closely at them, but did not understand them. Though many people think tax is all about numbers, it’s actually almost all about words. Perhaps therein is the answer. Perhaps the taxpayer, like some accountants learning tax, was looking for numbers rather than absorbing the meaning of the words.

Tax education. Priceless.

User Fee Accountability

A few days ago, in States Eye Fee Increases as Alternative to Taxes, two associated press writers shared a sampling of fees that had been added or increased by state and local governments governed by politicians reluctant to support tax increases. The list, which surely is but a fraction of the fees in question, is long, and includes parking fees, vehicle registration fees, driving exam fees, park use fees, day care license fees, fireworks permit fees, traveling circus fees, medical marijuana fees, over-the-counter drug fees, sightseeing tour fees, smartphone applications fees, traffic fines, birth certificate fees, and many more described in the article.

In Texas, a state representative has introduced legislation requiring that fee increases be labeled as tax increases. His proposal is a reaction to complaints that by increasing fees, legislators simply are finding ways to increase government revenue without voting for tax hikes. The Texas legislator claims that a user fee should be called “what it is: a tax.”

As readers know, I like user fees, and think they should be used wherever possible. Seven years ago, in Turnpike Tolls: User Fees in Context, I wrote, “As readers of this blog know, I am a fan of user fees.” Several years ago, in User Fees and Costs, I explained why roads should be funded through tolls or other dedicated fees and not general tax revenues. My support for the mileage-based road fee has been the subject of at least a dozen posts, the latest being Toll One Road, Overburden Others? In Tax? User Fee? Does the Name Make a Difference, I explained that “User fees that make the justification for government revenue easier to see, and thus easier to understand, deserve more attention and present valuable opportunities.” I elaborated on the reasons for my preference in Yet More Reasons to Prefer User Fees . In Funding the Bailout, I proposed, to no avail, a user fee on financial transactions to shift the cost of cleaning up the mess made by the financial industry from taxpayers generally to the people responsible for the financial disruptions.

Here’s the problem with the Texas propsal. The Texas state representative is correct, but only to a point. To the extent that the fee reimburses government, that is, the body politic, for the costs imposed by a person making use of a public good, the fee is not a tax. As I stated in User Fees, UK Style, “The ‘reduce tax’ crowd, of course, is opposed, even though a user fee is no more a tax than is the charge for admission to the theater. Use it, pay for it.”

On the other hand, to the extent that the fee exceeds the costs imposed by that person, and generates revenue directed to other purposes, the fee is a tax. I touched on this issue in When User Fees Exceed Costs: What to Do?. The Federal Highway Administration acted consistently with my arguments, as I noted in User Fee Philosophy Vindicated, when it decided that proposed tolls for use of a certain highway should not be diverted to other uses.

Perhaps the solution is to require legislatures to publish in any legislation that increases fees, the cost accounting analysis that explains how it decided that the cost to the public of a person making use of a parking space is $20, or that the cost of processing a birth certificate is $8. People who pay fees to governments are entitled to know how the fee was calculated and to what purposes it is being spent. Transparency in this respect fortifies democracy. Those who oppose transparency make it too easy for the rest of us to wonder what they are trying to hide.

Tax Semantics

First comes news that Grover Norquist described expiration of the Bush tax cuts as not a violation of his no-tax-hike pledge. He said, “Not continuing a tax cut is not technically a tax increase.” Speaker of the House John Boehner countered that allowing the tax cuts to expire would be the equivalent of a tax hike.

Then Norquist’s Americans for Tax Reform issued a statement explaining that failing to extend or make permanent the Bush tax cuts “would clearly increase taxes on the American people” and that “[i]t is a violation of the Taxpayer Protection Pledge to trade temporary tax reductions for permanent tax hikes.”

Suppose an employer hires someone to work for $60,000 a year. During the person’s second year of employment, for whatever reason, the employer pays the employee a $1,000 bonus. During the person’s third year of employment, because of economic conditions, the employer does not pay a bonus, but the employee receives the $60,000. Though one might understand someone saying that the employee had a pay cut, the fact is that the employee did NOT have a pay cut. The employee simply did not have a repeat of a windfall. Similarly, if the government decides not to continue paying a bonus to the wealthy, for the simple reason that, like the employer in the example, economic conditions don’t permit it to do so, the government isn’t doing anything to the underlying after-tax condition of the taxpayer as it existed before the windfall was paid. The only difference between the examples is that the employer paid the bonus after deciding that the employee’s work merited a special supplement, whereas the windfall bonus paid to the would-be job creators did not bring the promised returns.

The scuffling and arguments over the difference between a tax cut expiration and a tax hike are the sort of word games that obscure the analysis. Rather than debating the merits of the tax rates that existed before the Bush cuts and the tax rates that would be restored when those cuts expire, rather than looking carefully at the economy’s condition before the Bush tax cuts and the economy’s condition as a consequence of the Bush tax cuts, rather than focusing on the impact of cutting taxes, twice, simultaneously with increasing federal spending and the federal deficit on account of waging war, those charged with the sacred fiduciary trust of caring for the nation have put on brain blinders that narrow their chatter to a debate over the phrase to apply to tax cut expiration.

It’s easy to play the game. Here’s another word to describe what happens when the Bush tax cuts are permitted to expire. Correction. Correction of a foolish, dangerous, unjustified action. The folks who brought us that debacle are now trying to convince us that it ought to be perpetuated, into perpetuity. Well, not quite, because next on the agenda are additional tax cuts. Just as increasing bonuses for employees when economic conditions are prohibitive will bankrupt the employer, continued unwarranted tax bonuses when economic conditions are prohibitive, especially when those economic conditions were caused by or at least exacerbated by those tax bonuses, will bankrupt the nation. Perhaps to people who care more about party and philosophy than national interest, this doesn’t matter much, if at all. I wonder what interesting word will be invented to mask that bankruptcy. Privatization?

No Tax Increases, No Fee Increases, No Roads, No Bridges?

The Transportation Advisory Commission appointed by the governor of Pennsylvania returned with recommendations earlier this week dealing with the gap between how much money the state has to repair and maintain transportation infrastructure and how much money is required to keep bridges from falling down, roads from crumbling into rutted stone piles, and tunnels from collapsing. The gap is $3.5 billion. Considering that Pennsylvania has more structurally deficient bridges than any other state, in addition to at least 7,000 miles of bad roads, the $3.5 billion amount, hefty as it is, ought not be surprising.
The Commission, which has the power to make suggestions but not to implement any of them, offered a variety of suggestions. As summarized in this Philadelphia Inquirer story among the Commission’s recommendations are increases in vehicle titling fees, vehicle inspection fees, driver license fees, and fees for similar documents. It suggested a new “local registration fee.” Another new fee would be a $100 surcharge imposed on motorists who rack up more than one moving violation in a year. And, yes, it recommended an increase in the wholesale gasoline tax, which translates into a 22 cents per gallon jump in pump prices. The Commission also advocated a cost-cutting plan, to permit biennial rather than annual vehicle registrations and to extend the life of a driver’s license from four years to eight years.

Aside from the safety concerns of letting people go eight years without checking in for a vision or other test to obtain a license renewal, the most noteworthy aspect of the Commission’s ideas is that they conflict with the philosophy of the governor who appointed its members. Pennsylvania’s governor is among those who oppose tax increases, period, and though he has given hints that he is open to new user fees and increases in existing ones, nothing of the sort has materialized. The governor, of course, is free to disregard the Commission’s ideas, because it is simply an advisory commission. But what alternatives are there? One is to let transportation infrastructure spending drop to what can be supported by current revenue, causing an increase in the number of deficient bridges and miles of sub-standard highways. That, of course, will lead to more accidents, deaths, and injuries. Nice choice. Another option is to downsize, by closing down the highways and bridges that are deficient and for which there is no revenue to make repairs. That, of course, will lead to traffic congestion, more wear and tear on highways that remain open, until those are closed from the increased damage, and breakdowns in the transportation system that brings supplies to, and provides means for shipping products from, the state’s farms and businesses. This choice is pretty much an economic death spiral.

The governor is in a tough spot. I have no sympathy for him, because it’s a tough spot of his own making, with much help from those who financed his acquisition of the office. If he raises taxes and user fees, he will be seen by his supporters as a hypocrite, as someone who sold out, and as unreliable. His appeal among the anti-tax crowd would diminish, and barring a transformative experience taking him to the other side of the political spectrum, would essentially end his political career. If he stands firm and rejects tax and fee increases, he becomes an historical figure forever associated with the transportation infrastructure disasters and ensuing economic catastrophes triggered by unwise underfunding. Might he try some legerdemain that comes up with a new name for taxes the way Ronald Reagan’s advisors used the phrase “revenue enhancements” to describe the remedy they designed when they figured out their tax cuts had been too much, too soon, and too dangerous for the nation’s survival? Is that a trick, once played, that can be used again? My prediction is that he tries to turn public transportation assets, including not only roads and bridges but also vehicle registration and driver license issuances and renewals, over to his friends in the private sector, letting them jack up what are called “prices” as they extract from the public profits that governments don’t need to generate. At that point people might begin to wonder whether there is a difference between a “tax” charged by a government for provision and maintenance of public goods and a “price” charged by an unregulated, unelected private enterprise for public goods co-opted by the private sector. Spend enough time wondering, and by the time the reality is obvious, it will be too late.

The answer to the question isn’t necessarily “if there are no taxes and no user fees there are no roads and no bridges.” The answer to the question very well may be something much worse.

Please Let Tax Intelligence Trump Vote Pandering

Please. Isn’t it time that people who step forward and offer themselves as public “servants” bring to the discussion a greater emphasis on responsibility and less concern about trolling for votes? If the message is good enough, the votes will follow. Remember the high school class president candidates who promised to repeal all examinations and grades? Plays well, especially with those ignorant of education’s value, but for the most part, fortunately, didn’t work. Unfortunately, that sort of nonsense seems to resonate among Americans who don’t quite understand life’s realities.

Early this month, a TaxProf Blog headline caught my eye, and I tucked it away for future discussion. Whose eye would not be caught by Michele Bachmann Backs One-Year Income Tax Holiday. Is she serious? Who knows? The headline linked to a Forbes article by Taxgirl Kelly Phillips Erb, carrying a similar headline, “Michelle Bachmann On Board With Tax Holiday.” Kelly’s article in turn linked to a Boston.Com story that explained Bachmann had replied positively to a question from Dan Gorman, a former New Hampshire Libertarian Party state representative, who proposed the one-year income tax moratorium. Bachmann replied, “Put a moratorium on the entire income tax for one year for every citizen in this country and watch this country take off.” Really?

Here’s what happens if the federal government stops collecting income taxes for a year, and this does not take into account the consequences of one or more states going along for this wild and irresponsible joyride. First, the federal government would be unable to pay interest on its outstanding debts. Regardless of what happens to the debt ceiling, the government would be unable to borrow additional money, because creditors will back off when borrowers lose their revenue sources, whether it’s a job or a tax revenue stream. Second, the government will be unable to pay salaries to members of the Armed Forces, including the Coast Guard, and people who staff the Center for Disease Control, FEMA, or any other agency, including the folks who do air traffic control. Third, federal courts will close. Fourth, payments to Social Security recipients, including the retired and the disabled, and to beneficiaries of Medicare and Medicaid will stop. What does this do to the economy? It destroys it. Imagine flights cancelled because there are no air traffic controllers, and no Congress – remember, there is no money to pay the legislators or to keep the Capitol open – to enact laws permitting the “private sector” to “take over” that and many other aspects of government. Imagine tens of millions of retirees with no income source, unable to pay bills and with no money to spend. Whatever increase in spending occurs from workers awash in higher take-home pay is offset by the decrease in spending by retirees. It is quite possible that health systems would go under. State and local services dependent on federal revenue shut down. A “private sector” person on his yacht off the coast of Long Island who finds himself in trouble has no Coast Guard to call. Interest rates soar. If failure to deal with the debt ceiling portends catastrophe, as many claim, the one-year tax moratorium supported by Bachmann surely will bring whatever it is that exceeds catastrophe.

Kelly Phillips Erb makes the same overall point, though not so alarmingly. She also notes that Bachmann has an LL.M. in Taxation and worked at the IRS. Bachmann is proof that working as a tax professional and earning an advanced law degree in taxation does not increase a person’s ability to reason sensibly. Kelly also suggests that Bachmann simply is playing to the masses, using rhetoric to drum up support. That would explain Bachmann’s proposal to repeal the Internal Revenue Code, along with just about everything else that the anti-authority segment of society detests, and replace it with, well, it isn’t known what Bachmann would use to raise revenue. Perhaps nothing. Perhaps Bachmann would put all government functions in the hands of the private sector individuals wealthy enough to buy the power necessary to compel everyone else what to do.

Maybe Bachmann simply is pandering for votes. But the people who listen to her Pied Piper promised land nonsense don’t know that and don’t understand that. Those who wish to be public servants have a responsibility to the nation that exceeds the attempt to be elected or re-elected and that exceeds their devotion to their political party. History tells us what happens when the interests of political parties and their financial supporters trump the national interest. It never, ever ends well.

It’s Not the IRS, It’s the Congress

Friday morning, listening to a sports-news radio station on my way home from the gym, I hear one of the commentators share a thought concerning the tax issues facing the fellow who caught Derek Jeter’s 3,000th hit. He asked, “Why does the IRS inject itself into this. Why does the IRS make these things taxable? You win a prize and the IRS takes part of it.” This comment adds more weight to my sad conclusion that the Congress, and those supporting Congress in its efforts, are succeeding in making Americans think that the IRS is responsible for the current condition of the tax law. Though I thought, as explained in Is Public Truly Getting IRS-Congress Distinction? that increasing numbers of Americans were figuring out who enacts tax law, I hesitate to continue thinking along those lines. Hundreds of thousands of listeners, having heard someone spew misinformation on the radio but considering it gospel truth because it comes from somebody who must be brilliant because he’s on the radio, have been led astray.

The Congress decided that a variety of receipts must be included in gross income, and absent deductions that totally offset those items, are subject to tax. It is the Congress that decided salaries, wages, and other compensation is subject to the income tax. It is the Congress that decided prizes and awards, but for two exceptions, are subject to the income tax. Yet people throughout America think that the IRS made those decisions. It didn’t. One of the first things students in my basic tax course learn is that the Internal Revenue Code is a creature of the Congress. I almost always test that point in some way, and the fact that more than a few of my students, intelligent people all of them, get it wrong demonstrates the extent to which this pernicious myth has been beaten into the heads of the nation’s citizens. One wonders why high school students aren’t told who enacts tax and other laws. Who benefits from ignorance on this point?

Consider an example from another situation commonly experienced by most people. A bridge is closed because it is unsafe. A police officer directs traffic to the detour. Aside from the occasional irrational driver who yells at the officer, most people understand that the police officer is not the person who decided to close the bridge. The police officer is simply enforcing the decision. Why do people understand this? Because there is no concerted effort by the officials who closed the bridge to pass the buck to the police department. On the other hand, the Congress itself constantly criticizes the IRS for doing what the Congress told it to do, in ways that make it appear to Americans that the IRS is out of line. Consequently, the IRS acquires a terrible reputation among the citizens of this country, though for other reasons the Congress doesn’t do much better.

Just last month, in If Congress Says So, Don’t Blame the IRS, I repeated my oft-raised warning that Americans need to understand who writes the tax law. As I noted more than a year ago, in Taxes and Anger, “The Congress has done a very good job making Americans think that all their tax woes, all their tax complaints, all their tax unhappiness, all the pitfalls in the tax system, and all the aggravation that federal taxation causes them is the work of the IRS.”

It’s worth repeating what I said in If Congress Says So, Don’t Blame the IRS, although I doubt the sports and news commentators read it last month or will read it this time:

So long as people view the IRS as the source of all that is wrong with taxation and the tax system, or the cause of anything they dislike about tax law and tax enforcement, and overlook the responsibility of the Congress for the tax law, tax policy, and tax administration deficiencies afflicting the nation, the problems will not be solved. Once people understand what Congress has done and is doing, there may be increasing numbers of incumbents who fail to be re-elected. But until Congress understands what Congress should be doing, replacement of incumbents by newcomers who continue the bad habits of Congress will continue unabated.

The longer the “blame the IRS for the deeds of Congress” game is played, the higher the risk that the tax system, and thus the nation, will suffer. What member of Congress has the courage to stand up and admit that it is the Congress that decided people earning salaries and winning prizes are subject to income tax on their wages and awards?

The Flat Tax Myth Won’t Die

It is disturbing that the “flat tax makes tax simple” myth continues to be circulated, even among those who should know better. This isn’t my first attempt to explain why the flat tax simplifies little, and takes confusion out of pretty much nothing. For example, in Flat is Not Simple, At Least Not with Taxes, I explained why a flat tax does not remove the features of the income tax that contribute to tax law complexity. That short essay came three years after a much longer, detailed analysis of the Forbes tax plan, in The Revived Forbes Flat Tax Plan. Two years ago, in Fighting Tax Ignorance, I took apart, among other things, Paul Ryan’s claim that reducing the tax rate schedule to one or even two rates would simplify the tax law.

This time, it’s William F. Shugart II, a senior fellow with the Independent Institute and the J. Fish Smith Professor in Public Choice at Utah State University. In Flat Tax is a Good Idea, But Spending Is the Real Problem, Shugart writes, “I strongly favor junking the mazelike federal income-tax code, nine million words long and shot full of arcane provisions supplying tax breaks to special-interest groups whose Gucci-shod lobbyists patrol the halls of Congress whenever taxes are on the agenda.” At this point, he and I are in total agreement. He continues, “Replacing those nine million words with a single tax bracket of, say, 17 percent - applying to all income, however earned, with few deductions or exemptions and no loopholes - would produce huge economic benefits.” Whether the economic benefits would be huge or merely substantial can be debated, but the adjective “few” is the doorway through which the special interests that Shugart and I think have no place in tax law would enter.

Reducing the tax rates to one rate, which is the precise definition of a flat tax, does nothing to simplify the issues that clutter tax law analysis. Taxing “all income, however earned,” is a good start, but I’ll put to Shugart the question that confronts basic tax law students early in the semester. “What is income?” Here’s a clue. There’s no definition in the Internal Revenue Code.

The prospect of eliminating all deductions invites challenges with respect to cost of goods sold. A tax on gross receipts is not a tax on income. If people think that the computation of cost of goods sold is a simple thing, they’re in for a surprise. It’s an easy concept but tough in practical application. Cost of goods sold requires determination of inventory. Books have been written on that question. Hundreds of tax cases have been litigated on inventory issues.

Playing with the section 1 tax rates does absolutely nothing to address the question of timing. It does not simplify, for example, installment sale rules, or the dozens of nonrecognition provisions that pepper the Code. And to the extent Shugart thinks a flat tax would fuel the economy, let him explain how that would happen if nonrecognition provisions were repealed. If every time a business traded in equipment for a newer version it had to pay tax, which would happen in most instances, the cash flow burden would stifle the economy. If Shugart’s response is to retain nonrecognition provisions, he’s advocating retention of tax complexity that take multiple volumes to explain. Ask anyone who has studied like-kind exchanges and involuntary conversions. Nor can I imagine what repeal of section 1041 would do to the economy.

A flat tax does not resolve the continuing debate with respect to international taxation. The question of how nonresident aliens and foreign corporations should be taxed, and the question of how American taxpayers should be taxed with respect to overseas operations, is not one that goes away if section 1 is reduced to one tax rate.

The Internal Revenue Code can be simplified. A much more practical tax law can be drafted. But it won’t rest on a flat tax. Too many of the flat tax proposals turn out to be nothing more than a flat tax on wages and a free ride for all other income. Shugart, to his credit, doesn’t advocate this, but I wonder if he realizes that many of the flat tax proposals are precisely this sort of deception. Tax ignorance is a dangerous thing. Beware.

Julian Block: On the Road Again

Like every traveler filled with wanderlust, Julian Block the tax author cannot sit still. He took a look at one of his books and decided it was time for revamping it. Four years ago, he gave us "Travel and Moving Expenses: How To Take Maximum Advantage Of Every Tax Break The Law Allow." Now he’s back with a new edition, "Tax Deductible Travel and Moving Expenses: How To Take Advantage Of Every Tax Break The Law Allows!" Four years is a long time in tax law. Things change. Julian chauffeurs us through all sorts of tax issues involving travel and moving.

Readers of MauledAgain know that Julian is a veteran at this. In previous posts, I have taken a look at several of his books. "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal" was reviewed in Tax and Relationships: A Book to Read and Give (Feb. 2006), "THE HOME SELLER’S GUIDE TO TAX SAVINGS: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum," in A New Book on Taxation of Residence Sales: Don't Leave Home Without It (Aug. 2006), "TAX TIPS FOR SMALL BUSINESSES: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum," in A Tax Advice Book for People Who Write and Illustrate Books (Dec. 2006), "Year Round Tax Savings" in Another Tax Book for Tax and Non-Tax People to Read (Feb. 2007), "Travel and Moving Expenses: How To Take Maximum Advantage Of Every Tax Break The Law Allow" in Tax Travels and Tax Moves: Book It with Block (Sept 2007), "Ultimate Tax-Saving Resource '08" in Helping Tax Clients Understand Taxes (June 2008) and "Julian Block’s Tax Tips for Marriage and Divorce" in
Julian Block Talks Tax with Married, Divorced, and Other Couples (Jan. 2011). His latest journey through the tax law is no less concise, readable, and helpful.

The tour begins with a general overview, in which Julian lays the groundwork for what he is doing by explaining “The Basic Rules” and mapping out why he needs to do this in “Most Americans Don’t Understand Basic Tax Terms.” How unfortunately true. When he suggests that too many Americans don’t understand AGI, AMT, standard deduction amounts, and tax credits, he’s right. As with many things on life’s highways, once understood it seems simple but until the light bulb goes on, the challenge appears insurmountable. Julian’s explanation is much like the light switch. It’s there, but it takes an effort to turn it.

After mapping out the rest of the book, Julian turns to strategies that affect all of the deductions he addresses. He shares information about filing status, timing, and “red flags for audit.” His tips for dealing with automobile and travel expense audits will smooth the ride for taxpayers who didn’t quite pay attention earlier when filing returns or even earlier when engaging in transactions. Thus, his tips for “Correcting Past Mistakes” come in handy for those who made a wrong turn during tax return preparation time.

The next stop is the commuting issue. The classic “commuting expenses are not deductible” axiom meets the case of the “Commuting Cops” and one of my favorite cases that I have my students read, Margaret Green v. Comr., involving the professional blood seller, which gave the world the classic explanation, “Unique to this situation, the taxpayer was the container in which her product was transported to market.” Travel between job sites and the hauling of tools and equipment get their proper due.

Automobile expenses may be one of the more confusing, erroneously applied, and audit attracting deductions in the tax world. Both the actual expense method and the standard mileage rate method are examined, along with the impact of home office use. Julian brings not only tax law, in the form of casualty and disaster losses, but also insurance premium computations and liability exposure, into the picture when he discusses the best way to handle the title for a child’s first car.

Another bumpy road on the travel expense circuit is the question of whether the expenses of a spouse who accompanies the taxpayer on a business trip are deductible. One might expect a simple answer, but the analysis of this part of tax law resembles more a detour with missing signs than the wide open road of a lightly-traveled interstate highway. Julian shepherds the reader through this aspect spousal teamwork before turning to the similarly thorny issue arising when spouses work in different cities.

What about travel to and from locations where business-related education takes place? Or travel that in and of itself is educational? Or travel undertaken to find employment? Or travel on behalf of a charity? Or travel in order to obtain medical care? Or travel to attend investment seminars and shareholders’ meetings. What’s deductible? What’s not? Julian explains these rules in ways that are easily understood by someone who is not a tax professional and hasn’t had the benefit of sitting through a tax course. To those of us who have been in tax courses, as students or teachers, or who have prepared tax returns, those questions are familiar ones. Julian then tosses in one to which I’ve not previously given any thought. Are gamblers permitted to deduct the cost of traveling to the places where they are trying to make money? Curious? The answer is in the book.

Julian shifts gears at this point, turning to the moving expense deduction. He explains the distance test, the time test, the definition of tax home, and the classification of the various expenses paid when moving from one house to another. His list of what is not a moving expense is a valuable checklist.

The next chapter, dealing with amended returns, reaches far beyond travel and moving expense deductions. Mistakes can be made not only in reporting those but in all other sorts of transactions. Advice on how to file refund claims and amended returns is helpful but mostly beyond the scope of the book’s topic. Errors with respect to asset basis, casualty losses, medical expenses, and the standard deduction seem to lie outside the travel and moving expense itinerary. The same can be said of the chapter on getting “free” advice from the IRS. Perhaps these chapters can be considered the “surprise bonus,” the unscheduled and previously unannounced stop on the group tour that causes the folks on the bus to conclude that they’ve experienced an even better deal than what they thought they had.

The book concludes with several questions and answers about travel and moving expense deductions, and a postlude offering “Some Presidential Words on Income Taxes.” I’d opt for even more of the former, and if it meant chopping out the latter, so be it. All in all, though, Julian has maintained his usual folksy and effective style, and has delivered another book useful, as I noted in Tax Travels and Tax Moves: Book It with Block , not only to “students who are trying to go further into tax law than time permits their course instructors to take them,” but also “taxpayers and tax return preparers who need to learn or refresh their understanding of these two very specific areas of tax law.”

Inflation, Indices, and Tax Visibility

Friday brought some news about possible budget and debt ceiling solutions that demonstrates part of what is wrong with the tax policy process and the extent to which most Americans are unaware of what really transpires in that process. According to various sources, one of the solutions under consideration is a change in the inflation index used to measure Social Security and veterans’ benefits and to make adjustments to a variety of numbers in the tax law, including the bracket boundaries for the income tax rate schedules.

One sentence in the story highlights the problem. Read this carefully. “Adopting a new inflation measure would allow policymakers to gradually cut benefits and increase taxes in a way that might not be readily apparent to most Americans.” Can someone explain why tax policy should be approached in ways that “might not be readily apparent”?

It’s not a question of whether the inflation index currently used, the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the proposed index, the Chained Consumer Price Index, is the appropriate measure. It’s a question of whether and how those who advocate this change are willing and able to educate Americans about the significance of the change. Too few Americans understand the interplay between taxes and inflation, and even fewer understand the impact of inflation adjustments in the tax law.

The rhetoric will fly, of course, if the issue gathers more public attention. Should a decrease in the future pace of fixed-dollar taxes be considered a tax increase? So long as taxes are reduced in fixed dollar terms though holding steady in inflation-adjusted dollars, is it appropriate to argue that taxes are being increased? If the Chained Consumer Price Index is the better inflation measure – and I’m not addressing whether it is – then might not one frame the argument that ending what had been a windfall tax decrease using the Consumer Price Index for Urban Wage Earners and Clerical Workers is not a tax increase but the closing of a tax loophole?

Much of the attention in the coming debate will be focused on the impact of an inflation measure change on Social Security and other benefits. Perhaps that is another reason why the tax impact “might not be readily apparent to most Americans.” If enough people read this and pass it along, perhaps it will become apparent, even if not readily, to most Americans.

Surprise! Congress Puzzled By Tax Code Complexity

Last week, as reported in a United States Senate Finance Committee press release, the committee chair, Senator Max Baucus, convened a hearing “to address the relationship between the complexity of the tax code and the $345 billion annual ‘tax gap.’” According to the press release, Baucus “asked whether the complexity of the tax code discourages compliance and to what extent it contributes to the tax gap by making it hard for taxpayers to calculate their tax bill accurately.” Duh. Do we really need to invest the time and energy of Congressional staff to conduct a hearing to ask questions that have been answered many times in the past? What’s next, a hearing to determine if the sun rises in the east? For example, four years ago, in Closing the Tax Gap Requires Congressional Introspection, I discussed the GAO Report, "TAX COMPLIANCE Multiple Approaches Are Needed to Reduce the Tax Gap," explained that the report concluded “that billions of dollars of the tax gap could be avoided if the tax law were simplified or fundamentally reformed,” and after suggesting, “consider the provisions that add complexity to the tax law and thus feed the tax gap,” asked, “Is it the Congress that judges this array of complex provisions in the Code to serve important purposes? Does the Congress even know they exist?” Two months later, as described in Congress Invites My Ideas for Improving Tax Compliance and Of Course I Respond, responding to a public request by Senators Baucus and Grassley, for “suggestions on ways to improve compliance with our tax laws, including specific recommendations to reduce the tax gap," I wrote a letter to both Senators (reproduced in Congress Invites My Ideas for Improving Tax Compliance and Of Course I Respond), in which, among other things, I explained, “Tax simplification is essential if rates of noncompliance are to be reduced. There is a direct correlation between noncompliance and complexity.”

Apparently Baucus has not read the aforementioned GAO report, or my letter, or if he read them, he soon forgot what they said, because he then asked “whether the complexity of the tax code discourages compliance and to what extent it contributes to the tax gap by making it hard for taxpayers to calculate their bill accurately.” As I explained in Closing the Tax Gap Requires Congressional Introspection, the IRS has concluded that tens of billions of dollars of tax revenue go uncollected because the complexity of the Internal Revenue Code causes taxpayers to make mistakes.

The irony is that Baucus then preached, “The tax code has grown far too complex, and it’s becoming much too difficult for honest Americans to calculate and pay their tax bill. We should make determining a taxpayer’s responsibility as easy as possible so we are able to collect more of the $345 billion in taxes that are owed but unpaid each year Especially in these tough economic times, $345 billion is far too much to waste. A simpler tax code will ease the burden of compliance on honest Americans and help them meet their responsibilities.” No kidding. Guess what? The sun rises in the east.

Congress is responsible for what’s in the Internal Revenue Code, and one example of its many contributions to unnecessary tax complexity is recounted in Objections Raised to Elimination of Legislative Tax Deceit. For whatever political points are scored by standing up and criticizing one’s own handiwork, the members of Congress should shut down the yapping and grandstanding and crank up the doing. Fix the Code. It’s a technically easy thing to do, and the obstacles, chiefly political, can be overcome with courage. Courage. If they need to have a hearing on the definition of courage, that might be a useful expenditure of Congressional staff time. It won’t take long. Courage is doing what is right for the nation while disregarding the benefits, political and otherwise, of catering to the small groups that want the tax law tailored to their preferences.

But I think the Congress will continue as it has, complaining about complexity and doing nothing to fix it while piling on more complexity. Does it not remind us of the five-year-old who trashes his or her room and then complains that the room needs to be tidied up, all the while continuing to pull more toys onto the floor without putting any away? Here’s a challenge for Senator Baucus. The next time someone proposes a tax law change that adds complexity contributing to the tax gap, stand up, explain why it is wrong, and vote against it.

Are Three Years of College Enough for Law Students?

Thanks to a posting by my colleague Lou Sirico on the Legal Skills Prof Blog, I found my way to an Austin-American Statesman article describing plans at the University of Texas to cut the total number of years required to complete college and medical school from eight to seven. Designers of the plan, which has been implemented in similar ways at other schools, want to make medical school education more efficient, increase the number of physicians in Texas, reduce the time and costs required to earn the M.D. degree, eliminate redundancy, and make medical education more suitable to practicing medicine in the twenty-first century. Advocates of the plan point out that students who major in health-related disciplines in college end up taking the same science courses a second time when they enter medical or nursing school. One idea is to test students in particular subjects and if they earn a “proficient” grade, they are released from the obligation to take that course again.

So it’s not surprising that in his Legal Skills Prof Blog post, Lou suggested, “The plan: admit top undergraduate students at your college to your law school after three years of college and thus shave off a year of college expenses.” Is this possible? Would it work?

Admitting students to law school after three years of college is feasible if certain conditions are met. Testing for proficiency would make it more likely to succeed, but for the fact that unlike medical school faculties, law school faculties adhere to the questionable practice of not requiring any specific courses as a prerequisite to admission. It’s difficult to imagine law faculties agreeing on a list of courses in which proficiency should be tested.

What matters is not the number of years invested in college, but the amount of learning that takes place. Simply chopping off the last year of college makes no sense, because in many instances there are important courses that are left for the student’s last year, and unless the student has the foresight to take these courses during the first three years, something that might not be permissible in some universities, the student will enter law school with even less sufficiency of undergraduate education. I phrase the issue in that manner because I do not think that undergraduate education, in general, prepares students for law school as well as it could and should. These are deeper questions I’ve addressed in posts such as Bringing Practical Awareness Into Law School Education and Undergraduate Majors and LSAT Scores: Chickens and Eggs.

An example demonstrates what I mean when I claim that what matters most is the amount of learning, not the number of years. When I was enrolled as an undergraduate at the University of Pennsylvania’s Wharton School, I was required to complete 120 credit hours, or 40 courses, to earn the degree. My friends in the College of Liberal Arts were required to complete 96 credit hours, or 32 courses. This meant that each semester, Wharton students were taking five courses while their colleagues in the College were taking four. Were those four courses equivalent to Wharton’s five courses? No. Wharton students were enrolled not only in Wharton courses, but were required to complete two semesters of Physics, two semesters of Calculus, two semesters of Statistics, and a variety of courses in other colleges, for the purpose of obtaining a well-rounded education, but not at the expense of cutting into the core Wharton courses. Students in the College were permitted to take courses in other schools but did so as replacements for, and not in addition to, whatever their core course load happened to be. Someone I knew at the university’s radio station, where I worked, decided to take five courses each semester while enrolled in the college, and with two summer school courses, completed college in three years, saving not only a year but knocking down tuition by 25 percent. She did not, however, give up on the amount of learning she experienced. There is no reason today’s students cannot increase their semester course loads and thus cut down on their college tuition while retaining their education experience. I’m all in favor of that approach. I’m not in favor of reducing tuition by reducing the education experience. Students arrive in law school sufficiently deficient in education and in need of remedial experiences that exacerbating this condition would not bode well for their professional success.

Yes, three years of college might be enough. Or perhaps two, for the very energetic and talented student. Law schools can make this tuition reduction dream come true by designating education that students need before entering law school and providing proficiency examinations to identify the students who are ready to take advantage of the time-saving, tuition-lowering approach. Whether law schools and their faculties can let go of the “we can teach you to be lawyers (or legal philosophers) in three years no matter what you studied in college” delusion remains to be seen. Law schools that truly care about making the legal profession more accessible to students who are stretched in terms of financial resources will find ways to do what is right even if it is bold, risky, and innovative.

Freedom, Independence, Taxation, and Service

Today is Independence Day, though most people refer to it as “the Fourth of July holiday.” Late last week, while reading a news report about the rather inept manner in which the State of New York has tried to apply its mandatory e-filing requirement to Amish sects that don’t use electricity, let alone computers and the internet, I noticed that one of the individuals remarked that “it’s a free country.” That phrase, and ones like it, have been tossed about so cavalierly that too many people fail to realize that it’s not true. The United States is not a free country.

When I claim that it’s not a free country, I don’t mean that the United States is not an independent country. There is a huge difference between free and independent. Free means to be without cost. The United States was not created, nor has it been maintained, without cost. Many people have paid, in blood, in service, and in sacrifice, in order for this country to exist and to continue existing. It is misleading to use the phrase “it’s a free country” as some sort of blank check for unbridled behavior and willful refusal to contribute to the nation’s health and well-being. There are those who claim that because we live in a “free country,” they should be “free” to do what they want and “free” to refuse to pay taxes. Some go so far as to claim that the War of Independence was fought to eliminate taxation. One of the causes, and certainly not the only cause, of the War of Independence was the refusal to submit to taxation without representation. There is taxation, there is representation, but it’s not clear that the representatives are doing what the represented want. One need only read Americans Support Higher Taxes. Really. to get a sense of how twisted representative taxation has become in a nation that is not free, and has not been free for quite a long time, from self-centered partisanship.

Somewhere along the line the notion that the freedoms enjoyed in our independent nation need to be protected through the participatory service of citizenship was corrupted. Though a brave few continue to put their lives on the line, the proportion of Americans willing to pitch in has diminished, while the chorus of cries for self-centeredness has grown larger and louder. Once upon a time, when it was necessary to defend the nation’s freedoms, everyone pitched in, one way or another. Some served in the military, almost everyone was subjected to rationing, almost everyone paid taxes, many stepped up to perform volunteer services, and almost everyone bore the burden of lifestyle restrictions. Today, claims that letting the poor get poorer, the sick sicker, the unemployed more desperate, and the rich richer will strengthen the freedoms on which this independent, and expensive, nation has been built resonate among those whose ability to see beyond the horizon and into the future is weak or missing. Too many seek ways to avoid paying taxes, very few volunteer for military service, and too many turn their attention to how assets can be hidden off-shore.

Perhaps Independence Day should be a time not only to celebrate what was done several hundred years ago by people willing to pay the price, but also an occasion to examine the extent to which some people take freedom for granted, and others misunderstand what freedom means and what it requires. Freedom is not free. Independence is not free. Trend lines suggest that there may come a day, perhaps sooner than later, when not enough people will be willing to pay what needs to be paid for freedom. The cost in that event will be loss, not only of freedom, but of independence.

Taxing Stupidity?

Last week, Paul Caron shared Dilbert: Let's Tax Stupidity So We Have Less Of It, to which I commented, “Five years ago, I discussed this possibility in Tax Stupidity? No, Tax Stupid Acts and Stupid Decisions. Tax is not a new idea, stupidity is not a new idea, and taxing stupidity is not a new idea.

Today is July 1, 2011, so it is fitting that I succumb to the temptation to share my standard response to an email that has been circulating relentlessly since the beginning of the year. The email claims, in these or in slightly modified words, “This year of 2011, July has 5 Fridays, 5 Saturdays and 5 Sundays. This happens once every 823 years. It is called 'money bags' so forward this to your friends and money supposedly will arrive within 4 days.” The first sentence is true. The second is total nonsense. The third consists of a sentence that might be true and an admonition that is silly.

Every time I receive this email I send a “reply all” in my feeble and apparently doomed-to-fail attempt to educate the world and take a bite out of the stupidity that is overwhelming our inboxes. Here is what I write:

It amazes me that this July thing keeps circulating. So I keep debunking it.

There are 5 Fridays, Saturdays, and Sundays in a July if July 1 is a Friday (So that the Friday-Saturday-Sunday combination is July 1-2-3, 8-9-10, 15-16-17, 22-23-24, and 29-30-31). It doesn’t work if July 1 is any other day.

July 1 will be on a Friday roughly every 7 years, with skips on account of leap years. July 1 is a Friday on 2011. July 1 was a Friday in 2005, 1994, 1988, 1983. July 1 will be a Friday in 2016, 2022, 2033, 2039, 2044, 2050, 2061, . . .

Folks, that’s NOT “once every 823 years.” Not even close.

The “Money Bags” email also includes this claim to authoritative justification, coupled with another admonition: “Based on Chinese Feng Shui: ‘The one who does not forward.....will be without money.’” Perhaps it should explain, “The one who does not forward…..will provide a helpful step in the education of the world.” Perhaps the tax on stupidity should be a tax on each person who forwards the “Money Bags” email, computed by multiplying one cent by the number of people to whom the email is sent. The tax form could state, “Make many forwards…..give U.S. Treasury positive balance.”

A Real-World Tax-and-Spend Challenge

Here’s a real-world public finance and administration, tax-related problem. The problem is easy to describe, and difficult to solve.

Last week, as reported in this Philadelphia Inquirer story, a series of shootings rocked the small borough of Darby, just outside Philadelphia. Giving the story an added attention-getting twist is the fact that on the day of the first shooting, a former mayor was robbed. Toss in a car chase, a “midday gunfight,” and a shooting near an elementary school. The last event prompted borough officials to declare a state of emergency. That permitted the borough to request, and receive, law enforcement assistance from other municipalities, in addition to giving the “police expanded powers to pull people off the streets.”

About 11,000 people live in the borough. The borough has eight full-time and several part-time police officers. The former mayor has demanded the hiring of an additional 15 full-time officers to bring the ration between population and police staffing “back up to the national standard formula.” The difficulty is that the borough lacks the money to make those hires. The former mayor admits that the borough’s residents, who are on the low end of income measurements and who have already been hit with school tax and county tax increases, would find it impossible to pay even more taxes. Yet the former mayor also stated, “We should have raised taxes – that’s what we should have done, but we didn’t do it because Darby Borough as it hard enough as it is.” Contributing to the borough’s financial woes are multiple heavy flooding incidents during the past several decades and a cut-off of federal and state funding. And it’s unclear how the borough will pay for the outside assistance received during the state of emergency.

Those are the facts. Here is the question. What should the officials of Darby Borough do, or at least try to do? I could leave this as an essay question, but perhaps multiple choice appeals to some. There are a variety of choices. Raise taxes and perhaps see the population decrease as people flee. Raise taxes and end up collecting very little. Leave things as they are and watch the criminal element continue its ascendancy. Ask the state and federal government, namely, taxpayers from other jurisdictions, to provide financial assistance. Persuade an adjacent municipality to absorb the borough and take on its financial and social and crime problems. Declare the borough extinct, shut down the local government, and let the state figure out what to do with the resulting wild, wild West.

The process of trying to find an answer to the question is significant for more than the people of Darby Borough. There are municipalities throughout the country in the same conundrum, and there are even more on the verge of slipping into similar situations. The gated communities may feel safe, but as things around them crumble, the adverse effects will spill over political boundaries. Local communities throughout the nation are far more interlocked with each other than standard political maps show.

So what would you do if you were a Darby Borough official? Resignation is not an option other than as part of the declaration of extinct borough choice.