Monday, August 16, 2004

Oh My (Our) Poor Brain(s) 

In the last post I declined to get hyper-technical, motivated by a desire to refrain from chasing away the few readers that this blog has.

Just to prove the point, let me share a quotation from a tax case that was shared among tax law professors by a colleague who was responding to an inquiry asking us to nominate our "favorite tax quotes." Keep in mind that Tax Analysts annually publishes a growing list of tax quotes that is worth reading if you can find the time.

This one, though, is so wonderfully reflective of life in the tax world:

From PHINNEY V. TUBOSCOPE CO., 268 F.2D 233 (5TH CIR. 1959): "We here deal with problems arising under the Korean Excess Profits Tax Statute, as to which others have said, and we have echoed, that this statute " * * * probably represented the most intricate and baffling enactment ever to receive Congressional approval." Burford-Toothaker Tractor Co. . . . . As we struggle through this intricate web of definitions, exclusions, provisions, exceptions, cross references, limitations, provisos and a general but unavoidable obscurity, it is our conclusion that § 430(e)(2)(B)(i), expressly incorporating § 445(g)(2)(B), impliedly carries with it § 445(g)(3), though not necessarily that portion of § 461 impliedly incorporated by the reference to § 462(g) in § 445(g)(1), so that the attribution rules of § 503(a)(1)(2) (5) makes ownership of the corporate stock by the minor beneficiaries of a trust the ownership of the father, and thus pushes the stock ownership beyond the critical 50 per cent to make thereby a new corporation an old one."

My thanks to Eliot Manning for reminding us of this, especially as it arrived in the world long, long before I knew anything about taxes, and only a few years after I did. No, I've never read, studied, analyzed, or taught the Korean Excess Profits Tax Statute. Wow, I missed out. I feel SO deprived.

Deducting State Sales Taxes 

Last week's Tax Notes carried two articles addressing the current proposals to restore the federal income tax deduction for state sales taxes, which was abolished in 1986 as part of the "deductions and exclusions are removed but rates are lowered" reform that fell to the wayside when rates subsequently were increased. This is a topic on which I previously commented.

After reading these two articles, two more thoughts wandered into my head. The article supporting the deduction restoration argues that the absence of a deduction puts taxpayers living in sales-tax-dependent states that do not have income taxes at a disadvantage. This is true. Both articles address the notion that repeal of the sales tax was an attempt to encourage states to shift from regressive sales taxes to progressive income taxes.

First it's just plain inappropriate and silly for the federal government to try to influence or control how a state raises revenue, other than restrictions intended to prevent states from violating the Constitution. It's inappropriate because if the residents of a state want a regressive tax system, that's their choice and they have a right to make it. It's silly, because, as events show, eliminating the sales tax deduction had no effect on tax decisions made in state legislatures. There's a lesson here for the Congress. If it bothers to read, study, listen, and learn.

Second, resolving the unquestioned disparity in the federal tax treatment between taxpayers living in "income tax states" and those living in "sales tax states" doesn't necessarily require restoration of the sales tax deduction. Resolution also can occur by REPEAL OF THE DEDUCTION FOR STATE INCOME TAXES. Trust me, that one won't sell anywhere, but logic, in contrast to greed, supports such a conclusion.

Here's why. A federal income tax deduction for a state tax shifts a portion of the burden of that tax from the person on whom it is imposed to taxpayers generally. It shifts the burden from taxpayers in one state to taxpayers in another, it shifts the burden among taxpayers in the state, and it can shift the burden from higher income taxpayers to lower income taxpayers (because lower income taxpayers tend to use thed federal standard deduction and forego the state income tax deduction). A taxpayer in the 25% federal income tax bracket who pays a $3,000 state income tax to State A saves $750 in federal income taxes on account of the federal income tax deduction for state income taxes. That means taxpayers across the nation, and not only in State A, pay $750 more in federal income taxes than they would have paid had there been no deduction. But wait! A taxpayer in State B, who pays state income tax, in turn gets a federal income tax reduction, and depending on how much state income tax is paid, comes out a bit ahead, even, or a bit behind as compared to life without a federal income tax deduction for state income taxes. The taxpayer in a state requiring payment of high sales taxes but no income tax loses. But does restoring the state sales tax solve the problem? No, it simply adds to the shifting. With restoration, it means state tax burdens will be shifted from taxpayers in high tax states (whether the tax is income, sales, or as is sadly the case in a few states, BOTH!) to taxpayers in low tax states. Thus, taxpayers who voted to have lower taxes and less government intrustion in life end up paying for the programs operated in states where the taxpayers voted to imitate Sweden. OK, that's a bit simplistic and contrasting the edges, but if I got hypertechnical the reading of this post definitely would stop here.

This debate reminds me of the discussion between two children and a parent that takes place after one child is caught playing with one of dad's power tools. "It's not fair," says the other child, "he gets to play with a power tool and I haven't." Fairness could dictate that both children get to play with power tools. It also dictates that neither child gets to play. It's common sense that helps make the choice between the two avenues to fairness easy to make. Ah, common sense. I haven't seen much of that lately.

Righting a wrong can be done by eliminating the wrong rather than wronging the right.

Independence Has Its Advantages 

I cannot resist a brief comment on a story in today's Philadelphia Inquirer. Penn State University, which "acquired" the formerly independent Dickinson School of Law in Carlisle, Pennsylvania, in a merger several years ago, has been trying to relocate the school in State College. The Law School's Board of Governors, which retained powers with respect to the school's name and location, has voted to recommend that Penn State renovate the school's Carlisle campus rather than build it a new facility in State College.

The relocation plan would have divided the Law School between two locations. The School's clinic programs, which give students practice-world experience while assisting persons in need of legal assistance who most likely would not otherwise get it, would need to remain in Carlisle. That alone is reason to consider the relocation plan detrimental for the students, their present and future clients, and legal education in Pennsylvania. Interestingly, it would cost less money to renovate the Carlisle campus than to build a new facility in State College. Perhaps there is some perceived long-term operating cost savings?

My interest in this story remains high, not only because I am a legal educator who pays attention to these issues, but also because I taught at Dickinson for two and a half years at the beginning of my law teaching career. Though some students might think a so-called "party happy" State College (a/k/a "Happy Valley") has its advantages over an allegedly "boring" Carlisle, I continue to wonder why there would be any advantage to the law school from such a relocation. In an era of digital technology, including video-conferencing and distance learning, the need to concentrate everything in one place flies in the face of the "decentralization" approach that political and other conditions suggest is needed in both the near-term future and the short-term future (if not longer).

Here's hoping that the trustees of Penn State, which "acquired" the law school in order to keep up with the Big Ten universities that have law schools when it gave up independent athletic status and joined that athletic conference (another bad move), have the sense, this time around, to refrain from destroying one of the qualities that has permitted Dickinson to be a quality law school. The other, unfortunately, which is independence, has been lost, though perhaps it may someday, somehow be recovered.

For a law school, independence has its advantages. Yet few independent law schools remain, just as few independent banks or other businesses remain. When a university founds a law school, the latter is dependent for a few years. But then law schools become "cash cows" for the universities. Even the law schools created by persons or entities other than universities become attractive merger targets.

The alleged advantages of merger to an independent law school don't outweigh the benefits of independence. Having a university handle administrative tasks, ranging from registration and billing to custodial services, is over-rated, and can easily be done by an independent law school for itself. The opportunity for multi-disciplinary and inter-school cooperation is closer to home for the university law school, but independent law schools don't have the "partner with the university's school of whatever" pressure that can preclude partnering with a more reputable school that is not part of the university. In fact, some university law schools have partnered with schools outside their university because the university does not have a school, and it works well.

Some other time I can get into the particulars of these advantages and disadvantages. For the moment, I'll simply hope that this situation works out in a way that counters the past pattern of merger mania and that encourages the development and nurturing of educational independence in graduate programs much as it's beginning to develop in the K-12 world with charter schools and other innovative ideas.

Saturday, August 14, 2004

Angry? Who's Angry? 

One of my readers posted a reaction to yesterday's posting on attempts to expand the phone excise tax. Joe Kristan, of Roth & Company, P.C., quoted a part of my summary of Declan McCullagh's column on the topic. You can see Joe's post here.

Credit goes where credit is due. The analogies to a tax on Henry Ford for horse troughs and on laser printer manufacturers to prop up manual typewriter manufacturers are the product of Declan's imagination. And they're good. That's why I brought them to the attention of more people.

Joe then comments, "And then he gets angry." I'm not sure if that's in reference to my comments, or the rest of the summary of Declan's column. Or perhaps both.

I'm not angry. Anger requires energy, and there's no way I'm wasting precious energy on the Congress. I, and probably many others, share a different perspective: total amazement, bewilderment, and sorrow that legislatures and legislators are so ineffective and inefficient. And a lot of other things. I can't speak for others, but the words for me are disgusted, disappointed, offended, and a few others that I'll leave to your imagination.

In any event, Joe drew an analogy to Lou Ferrigno, a/k/a the Incredible Hulk.

Anyhow, Joe's comment inspired Paul Caron, a member of the law faculty at the University of Cincinnati who runs the TaxProfBlog to start a Tax Profs as Super Heroes? contest. So he has a picture of me next to Ferrigno in green. Man, does that make me look good, ha ha!!

I surely don't identify with the "Incredible" part. I am, I think, quite credible. It's almost a liability.

As for the Hulk stuff, ha! I wish! 'Cept I'd need to get a new wardrobe.

And I do need to get Villanova to change the picture it has of me, which Paul and others use. Ever since Breton Littlehales* photographed me for the Tax Management Millenium calendar, I've found it much more difficult to look favorably on the work product of many other photographers. The ones taking the pictures at Villanova (they seem to get replaced every year, hmmmm) don't seem to have the knack to get the shutter release timed with the best of the pose.

So perhaps next year I'll show up for the photo appointment with my face painted green. And I'll scowl.

As for that contest, I'm going to sit back and watch who shows up as Hercules, Xena, WonderWoman, Austin Powers, MightyMouse, Roadrunner, Wile E. Coyote, and, oh wait, cartoon characters don't count? Drat. Tax professors CAN be amusing. Even to people who aren't tax professors.

*I cannot find a web site for Breton Littlehales. I wish I could because I'd put in a link. It was the best photographic experience (as a subject) that I've ever had.

Friday, August 13, 2004

It Will Not Die 

It will not die. The lure of "the Internet" as a source of tax revenue has been strengthening during the past several years. Despite the ease with which we dismissed the "n cents per email tax threat" rumors that populated our email inboxes during the Internet's infancy, the seriousness with which the tax advocates have pushed their agenda requires us to be more attentive to the doings of Congress and state legislatures.

The current darling of the tax advocates is a tax on what I will call "internet telephone calls." The technical term is Voice Over Internet Protocol telephony, or VOIP for short. Declan McCullagh, a correspondent with a strong understanding of technology and its relationship with the political world, whose POLITECH list is a clearinghouse for political news affecting technology that sometimes seems to be a week or more ahead of the usual media outlets, has written a column for news.com describing the latest developments in the "tax the Internet" craze. It appeared a few weeks ago while I was away, and this is the first chance I've had to share some thoughts on the matter.

First, go take a look at what he wrote on the subject. It makes my commentary more coherent. Also take a look at this news account. Knowing that some folks can't or won't visit, here's a very brief summary of the news:

** The Senate Committe on Commerce approved an amendment brought by Sen. Byron Dorgan, D-N.D., that lets states impose Universal Service taxes (UST) on "providers of a VoIP application." A VOIP application is any software permitting "multidirectional voice communications." The UST is the charge that raises revenue ostensibly to subsidize rural telephone companies. Literally, if enacted, the provision imposes a tax on software developers who offer free software.

** Another bill, this one in the House and sponsored by Rep. Rick Boucher, D-Va., would permit imposition of the UST only on commercial Internet voice services. In other words, the UST would be charged if the provider required payment for the service. This bill, however, authorizes the FCC to subject these providers to the regulations applicable to public telephone companies: 911 regulations, access requirements for the disabled, and UST on chat software. These rules and the tax would apply even if the software does not involve the public telephone network.

** These bills are getting support not only from the tax-friendly legislators, a club to which Dorgan and Boucher belong, but also from Republicans representing rural areas. Apparently some of the UST is diverted to schools, libraries and health care, which makes the UST difficult for some politicians to oppose. Not only are they reluctant to repeal it, they are reluctant to prevent its growth. Declan reports tha the Universal Service Program financed by the UST is rife with fraud and waste. (Well, that's a surprise, isn't it?)

Declan asks some interesting technical questions, most of which demonstrate that Congress is unsurpassed when it comes to tinkering with stuff of which it has so little understanding. Here's my favorite question from Declan:

"How would dialing 911 work on a PlayStation 2 equipped with Sony's forthcoming EyeToy Chat feature, anyway?"

Maybe Sen. Dorgan, or Rep. Boucher, or Sen. Conrad Burns, R-Mont., who persuaded the Senate Committee to add a 911 regulation to the Senate bill, can educate us on the matter. Have they ever USED a PlayStation 2?

Declan also points out some tax issues lurking behind these provisions:

* How do the tax advocates envision collecting taxes from providers that are based overseas? One provider, for example, Skype, is based in Luxembourg.

* There are dozens, if not hundreds, of applications and projects already in use that carry voice over the Internet. Imposition of the tax surely will kill or severely degrade these services.

* The logic underlying these bills would have inspired previous Congresses to have taxed Henry Ford to pay for horse troughs and to have taxed laser printer manufacturers on behalf of the dying manual-typewriter industry.

Declan offers this suggestion:

* Perhaps UST should apply to VoIP companies that make use of the public telephone network. At least it is reasonable and can be defended on the grounds that the public network is being used.

Then he suggests a simple solution:

* "Leave the Internet alone."

And he offers this veiled warning:

* If the UST is not restricted to services using the public telephone networks, what's to prevent imposing the UST on e-mail?

Declan's column needs to be read by anyone who uses the Internet, whether for VOIP or not. If the citizenry remains asleep while these amendments are slipped onto legislation, when it awakens it will discover that its tax burden has risen, yet again.

It boggles my mind to think that the Congress would enact a provision that would stop the development of VOIP in it tracks. Long-time observers of the Internet know that most major advances come not from copy-cat Microsoft but from free-lance developers and teams of independent collaborators who experiment, not so much in search of the almighty dollar and control of the world, but in satisfaction of their overwhelming intellectual curiosity, desire to see "if it can be done," and sense of doing something useful for other people.

If one or another of these tax-raising bills gets enacted, there is no question that these services will be curtailed. One developer concluded that if the Dorgan amendment becomes law, the audio chat features of the authoring collaboration program now in its infancy will need to be removed. That's amazing. What a blow for progress!

The UST was enacted to subsidize rural telephone customers. The theory was that the much greater distances that these people live from the central switching stations generated a cost that, if passed on to the customers, would make telephone service unaffordable. So Congress did a bit of wealth transfer juggling, imposing a tax on telephone service, most of which is paid by folks living in urban and suburban areas, that is used to pay for the more expensive rural telephone service.

In its day, that made sense. A nation that considers itself advanced would be hypocritical if its rural citizens (many of whom are farmers, ranchers, and foresters providing the nation with its food and timber) were left living in the 18th century.

But it is now 2004. Technology has rendered the public telephone network obsolete. Telephone companies, recognizing this, have brought themselves to offer, for example, DSL, knowing that unless they offered SOMETHING, customers would eventually stop using their product. Already many cell phone users are dropping landline service in favor of the cell phone. This trend will continue now that a person can retain the same telephone number when they move or change carriers.

So what's the point of feeding a dying dinosaur? I could accept the idea of taxing VOIP to make it available to rural customers if in fact it was more expensive to provide it to rural customers. But it's not. The technology of wireless, the proliferation of communications satellites, the ubiquitousness of cell phones, and the surging popularity of hand-held computing devices makes the old landline phone a creature that will soon join white-out, IBM Selectrics, blue flashbulbs, and 45 RPM records as items on a "how old are you really?" quiz list.

It gets worse. As more and more rural customers shift to wireless services, the number of landline telephones (and landline telephone equipment) needing financing will dwindle. What happens to the UST proceeds? Already we have a clue. They'll be siphoned off to other projects. Projects that can be spotlighted by a politician who wants something to offer in exchange for a vote other than a demonstration of vision for the future reflecting understanding of technology and its role in the rapidly changing contours of American life.

Here is another challenge to Sen. Dorgan, Rep. Boucher, Sen. Burns, and their friends. In fact, they can jump to this endeavor even if they get stuck with the Play Station 911 phone call query:

Describe for us the burdens that VOIP impose that justify subjecting it to the UST or any other tax or user fee. Provide a quantitative analysis of the societal costs. Explain why rural customers should be encouraged, through subsidies, to stay aboard the sinking ship of landline wired telephones. Describe how this will nurture America's journey into the 21st century.

Here's the catch: The combination of, to use Declan's words, "state officials ... hungrily eyeing the Internet as a rich additional source of untapped revenue" and members of Congress who are still trying to figure out how to create an image file from a Powerpoint slide condemns us to a nation whose taxation policies are anachronisms. Students of the decline and fall of the great nations and empires of the past know that tax systems afflicted with stagnated response mechanisms contribute to the demise of political culture.

We, the citizenry, must awaken now. We must make it clear to the tax advocates that the extension of the UST to VOIP is inefficient, foolish, detrimental, and short-sighted. Even a die-hard wealth transfer advocate can see that the UST is not the answer. Hanging onto the past can be dangerous, and a warning must be shouted. Declan got it started. He ought not be left alone.

Thursday, August 12, 2004

More on Cricket and Tax 

In response to my comment about the inventor of cricket resurfacing as the inventor of the income tax, a reader in Australia suggested that I had overlooked the following differences:

In cricket, one has a chance to win.

In cricket, there are two independent umpires.

In cricket, you can bowl the other side out (but cannot do that with taxes).

In cricket, even if you can't win, you can drag the game out and play for a draw.

In cricket, you can bowl bouncers at the head of the other guy (something one doesn't want to try with a tax collector).

My response:

"You're right. After inventing cricket, the guy figured he had cut in too much fairness, too much opportunity to knock heads, so he tightened up the game, took out all traces of gentility, and invented the income tax. :-)"

Oh, yeah, I said "guy" as though I'm assuming that it was a male who invented cricket and the income tax. Well, it WAS men (not just one) who were responsible. I don't know what cricket would have been had it been invented by women, as I'm still trying to figure out what it is. As for the income tax, who knows? I think it would have been different, but probably no less complicated.

The Renege Effect 

A discussion on the taxprof listserve has been underway for a few days, giving participants an opportunity to opine on the advantages, disadvantages, likelihood, and wisdom of replacing or supplementing the income tax with a value added tax (VAT). The discussion was triggered by reports that if the President is re-elected the Treasury will seek to abolish the IRS and replace the income tax with a VAT (or some similar sort of consumption or sales tax).

There are people who prefer that the income tax (or perhaps its alternative minimum tax alter ego) be retained with respect to higher income taxpayers (whoever they may be), and that the enactment of a VAT be coupled with elimination of the income tax for lower income individuals. Of course, unless something is changed with respect to employment taxes, lower income wage earners will continue to bear a disproportionate tax burden.

What troubles me about such arrangements is what I call the “renege effect.” Two examples come to mind.

The first was the “deal” reached in 1986 with respect to the federal income tax. Rates were lowered in exchange for surrender of some exclusions and deductions. What happened? The exclusions and deductions having been surrendered, the rates were increased, both directly and through the sneaky phase-out mechanism. And Congress wonders why on trust surveys it ranks so low. Simple. Congress cannot be trusted.

The second is the so-called reform of local taxation in Pennsylvania, enacted in an attempt to deal with public school financing issues. I’ll leave aside the concern that the question addressed revenue sources rather than the tougher issue of why so little is produced relative to how much is funneled to the schools, as evidenced by the fact that some under-funded non-public schools often out-perform the public schools. Some other day perhaps I’ll discuss why money cannot purchase discipline and values.

The situation in Pennsylvania is a classic case of the bamboozle used to such great advantage by Barnum. Yes, folks, it is a circus.

Ostensibly, the reform addresses the major concern that the use of the property tax by school districts imposes a burden on individuals (mostly retirees) whose income does not increase as quickly as the values of their homes and the property tax rate increases. Combined, these phenomena put a lot of pressure on these people.

So the reform was sold as follows: school districts would cut property taxes, and in exchange would be permitted to enact or increase local income taxes. But what was enacted is much more complex and puts taxpayers at risk of another renege effect. And even if what was enacted was what was described, it surely would put the squeeze on people who rent. Most renters fall into two categories: lower-income people unable to afford homes, and retirees who choose to surrender the joys and agonies of maintaining a home. Isn’t there some sort of counter-productivity in this?

No, not if one realizes, as one does after an analysis, that this entire “trade-off in taxes” is nothing more than a disguised tax increase. Some clever people snookered some not so clever people. And, as usual, the citizenry, misled and uninformed, gets the short end of the stick.

Point 1. The law gives local governments and school districts the option to enact an earned income tax OR an all-inclusive income tax that exempts pensions and the first $13,000 of interest and dividends from the tax. Why isn’t the first $13,000 of earned income also exempt? Anyhow, because of prior law restrictions, the existing local income taxes are of the earned income tax variety. That means that wage earners bear the burden and millionaires living off investment income go tax-free. Can we guess who supported and caused this sort of tax policy to infect Pennsylvania? Surely not the labor unions. It will be interesting to see how many localities go for the more equitable almost-all-inclusive income tax. One legislator predicts that the almost-all-inclusive income tax will carry the day because it raises more revenue. He could be right. But he could be underestimating the power of the folks that limited local income taxes to earned income taxes in the first place.

Point 2. Pennsylvania residents who work in Delaware and New York face another squeeze. These people are permitted to claim a credit against Pennsylvania STATE income tax for income taxes paid to Delaware or New York. Because income taxes in those states are higher than the Pennsylvania income tax, the effect is to reduce the Pennsylvania income tax burden of these workers to zero, even though they end up paying more state and local income taxes than had they worked in Pennsylvania. The reason there’s no problem with other states is that the other states, such as New Jersey, Ohio, and West Virginia, have entered into reciprocity agreements with Pennsylvania. Under these agreements, those states agree NOT to tax Pennsylvania residents working there and Pennsylvania agrees NOT to tax residents of those states working in Pennsylvania. My guess is that New York and Delaware have concluded they’re better off in terms of revenue by declining Pennsylvania’s reciprocity offer.

Here’s the problem: these people will NOT be permitted to claim as a credit against the new local income tax the income taxes paid to other states and localities in other states. Why not? Because the school districts lobbied for the omission of a credit. If a credit is provided, the worker pays tax to the other state and not to the school district. School district officials think it is a “good thing” because they reject the idea of Pennsylvania residents working in another state paying for the education of students in that other state rather than Pennsylvania students.

Well, let’s consider this. When the Pennsylvania resident works in another state, he or she imposes a burden on that other state, in terms of highway use, police and fire protection, emergency health care, etc. That other state needs educated people to work in those industries. So it makes sense to impose a tax on the Pennsylvania resident working there.

What about the Pennsylvania side? The Pennsylvania resident also imposes a burden on the locality in which she or he lives. But is it as much of a burden as it would be if the resident worked in Pennsylvania? No. In fact, if the Pennsylvania tax were high enough, the credit would reduce but not eliminate it. So the problem is with the structure of the Pennsylvania tax, not the providing of a credit.

The same situation exists when Pennsylvania residents (such as those working in New York) pay sales tax to other states rather than to Pennsylvania because they are eating lunch and doing shopping while in the other state. (Note that Delaware does not have a sales tax, so the analysis with respect to that particular state is different but doesn’t change the basic point.)

The answer, of course, is a user fee. It can be set at one level for residents who work in other states and at a higher level for residents who work in the state. Residents whose income is not from wages would pay the higher level user fee. This would reflect the burden that is imposed on the Pennsylvania locality by the various categories of residents. Of course, this isn’t going to happen, not when the localities have been admitted to the regressive income tax feeding trough.

Point 3. Within Pennsylvania, a similar problem exists with respect to people who live outside Philadelphia and who work in Philadelphia. Philadelphia’s wage tax is set at two levels, a higher one for Philadelphia residents and a lower one for Philadelphia non-residents, an interesting model for the multi-tier user fee I proposed. The non-resident wage tax is sufficiently high that the credit for it that is allowed against the home locality’s earned income tax totally wipes out income tax liability to the home locality. Under the new legislation, a locality that enacts either type of local income tax will be reimbursed by the state for the revenue it loses on account of the credit.

Where does the state get the money for the reimbursement? From taxpayers, of course, although it isn’t clear in terms of the accounting whether the money comes from specific tax sources or from the general fund. No matter, why can’t this be done for Pennsylvania residents working in New York or Delaware? The answer, of course, is that the Philadelphia politician-lobbyists extracted this deal as part of the legislative process.

Point 4. Guaranteed, within ten years, the new local income taxes will exist. And property taxes will return to, or exceed, what they are now. Oh, I know the enacted law has provisions designed to prevent this outcome, but the Pennsylvania legislature cannot be expected to hold to this arrangement any more than the Congress held to the 1986 income tax legislation arrangement. Legislators dealing with taxes are very much like sugar-addicted folks walking past the bakery or donut shop. They just cannot help themselves.

None of the localities can enact the new income taxes until the proposal goes before a referendum of local voters. The referendum must be held before November 2007. The timing is good. After the 2004 national election, the spinmeisters can turn their attention to writing ads for and against the many proposals that are certain to pop up. Separating truth from fiction will be no easier, and considering the subject will be taxation, probably will be even more difficult.

In a Philadelphia Inquirer article, a person who lives in Pennsylvania and works in Delaware stated, “I think a lot of people will be surprised to find out that the impact will be different from what they expect, and many people will wind up payingmore.” I think MOST people will end up paying more. It ALWAYS works out that way. And the people paying less? Guess.

Monday, August 09, 2004

Youngsters with Money 

While I was away one of the ABA-TAX listserv subscribers posted a question asking if there were any studies on the impact of a child getting a chunk of money from a trust when the child attains age 18 or 21. It’s a good question, though I think it’s just as interesting and necessary to understand the impact when the money is received at age 25, 30, or thereafter.

In my Decedents’ Estates and Trusts class I point out to the students that although the client makes the decisions with respect to how a trust will be structured, the attorney has an important role in helping the client learn the options. There are, of course, all sorts of trust wealth disposition plans, many involving the discretion of a trustee. I’ve noticed that the once-typical “one-third at age 25, one-half the balance at age 30, and the balance at age 35" plan morphs as the trust settlor ages. The 25-30-35 plan that seemed appropriate becomes 30-35-40 and even 35-40-45. I suppose as clients get older, the qualities that they want their children to have, or think that their children should have, to manage money are less likely to exist at age 25.

I’ve seen very few trusts that drop bundles of wealth on 18-year-olds or 21-year-olds. Of course, discretionary education spending by a trustee can be quite a bundle of wealth, but that’s not the sort of thing the subscriber was considering.

The subscriber posted a follow-up that was news to me. Some of the laws providing for Indian gaming also provide that members of the tribe receive money from the proceeds of the gaming enterprises. One law, for example, requires that each member of the tribe receive $9,000 a month. If the recipient is under age 18, the money goes into an account that is turned over to the child when he or she attains age 18. That’s $1,944,000 plus interest. There are all sorts of questions (and the subscriber posted some) that can be asked about the impact of teenagers finding themselves with $2 million or more.

Another subscriber made the point that a similar set of issues can arise when a person wins a lottery. He noted that lives are changed, “but not always for the better.” How true. His anecdotal account fuels the stereotype that most people, when finding themselves with more money than what they’ve been accustomed to receiving, go on spending sprees, splurge, and have little or nothing after a short period of time.

Yet another subscriber provided a link to the Gallo Institute, which offers seminars and workshops dealing with the psychology of money and issues surrounding family wealth. A lawyer-psychotherapist team established the Institute, and it seems they are providing a service that surely would be of value not only to the folks making the decisions about family wealth, but the lawyers and other professionals advising them.

For those who are advising the trust settlors, it is important to remember that in most cases that person knows more about their intended beneficiaries than do the advisors. Sometimes, though, there is more to the situation than meets the eye or is apparent from an interview with the trust settlor. With the settlor’s permission, it makes sense to get a better picture by talking with others or having someone with credentials or programs such as those of the Gallo Institute to become involved. After all, the notion of team advising, with lawyers, accountants, financial planners, and appraisers working together to help the client, suggests that adding a financial psychologist makes a lot of sense.

Let’s face it. Some people at age 18 are very ready to handle money responsibly. I know one college student whose nickname is the “old man” and for a reason. And all of us know people in their 20s, 30s, and 40s who cannot handle money. I’m not talking about checkbook balancing. I’m talking about responsible decision-making, budgeting, saving, and establishing financial priorities.

Most 18-year-olds have some roads to travel before they are at the point where the trust settlor is willing to drop 1/3 of the trust principal into their laps. Once upon a time it probably happened by age 25 for most people, because life demanded that people grow up. In the post-modern world (or whatever it’s called), there are many children who are pampered and coddled, protected and sheltered, to the point where they don’t acquire financial maturity by age 25. That’s probably why I see more and more “30-35-40" and “35-40-45" plans (as well as a few 30-35-40-45 plans).

Sometimes the principal disbursements can be put into the hands of the trustee with the use of discretionary clauses. That, however, invites litigation, and if not done properly, can generate tax problems. And surely, considering all the talents that a trustee needs to have, judging the character of a beneficiary is at least as important as the ability to juggle investments. Trustees who can make the judgments to distribute income under a discretionary clause can make the judgments to distribute principal under discretionary clauses.

None of that, of course, deals with the listserv subscriber’s question. The law providing for full distribution at age 18 trumps any planning that the 18-year-olds parents or legal guardians might wish to put into place. Unfortunately, it will take a few years of financial catastrophes before the legislature that enacted the law even begins to think about amending it. After all, if a legislature can conclude that 18-year-olds cannot purchase or use alcohol (even though some 18-year-olds might demonstrate moderation when it comes to alcohol), it surely can make a similar decision with respect to the acquisition of significant amounts of money. Then again, if an 18-year-old can purchase a lottery ticket and win millions, why should 18-year-olds receiving money from gaming enterprises be subjected to greater constraints? Is it simply a matter of numbers, that there are only a few 18-year-old lottery winners but significant numbers of 18-year-olds receiving gaming enterprise money?

Well, now I’m simply posing even more questions so I’ll leave it at that. I don’t profess to have “the answer.” I’m not sure if there is “the” answer. But there’s a lot to think about, and I’m not so sure that the legislatures did much thinking on this one. I’m not sure that they do much thinking on much else, either.

Not Really a User Fee Research Trip, But..... 

First, a brief note as to the absence of a posting since Wednesday. I went to New Hampshire, invited by a fifth cousin twice removed with whom I’ve corresponded for the past two decades but whom I had not met. She and her husband had moved there, from California, a while ago, and decided to have a reunion of their branch of the family, most of whom are in California.

It was a wonderful gathering and I had a great time. I’m amazed at how much this group of Maules resemble my more immediate family and cousins. And, of course, personality and other traits were so similar that when someone asked me if I was having a good time I honestly replied that I felt as though I were at a gathering of my cousins.

So sometimes the blog takes second seat. Or even third.

I will note, though, that the roads I used for the trip varied in quality in direct proportion to the funding systems used to maintain them. My vote for highway most in need of redesign (even though it is in fairly decent shape) is I-84 as it goes through Hartford. It is impossible to stay in one lane if traveling through. A bypass or ring road is in order.

And a suggestion to the Pennsylvania Turnpike Commission and the folks running the toll booth on I-78 at the Pennsylvania-New Jersey border: Take a page from the folks who set up the E-Z Pass bypass lanes at the Tappan Zee Bridge. Sitting in backed up traffic trying to get to the E-Z Pass lanes makes no sense when most of that traffic consists of vehicles not using E-Z Pass. Once I “broke through” the 3/8-mile jams, the E-Z Pass booths were almost empty. My guess is that for every vehicle with E-Z Pass there were 100 or 150 without it. C’mon, folks, get E-Z Pass: it’s in use in more and more places, there’s a wee bit of discount on the tolls, there’s no need to fumble for cash tolls, and once the Tappan Zee plan is in place there’s no need to waste time (and gasoline) cooling one’s heels in the backup. In fact, there would be no backup.

Oh, by the way, Turnpike Commission: put up signs indicating where the E-Z Pass lanes are so that the vehicles with E-Z Pass can get into position long before they get into the thickest jams in front of the cash toll booths. Easily done and worth the effort.

Wednesday, August 04, 2004

That Microsoft Dividend 

Though the news about the huge Microsoft dividend appeared several weeks ago while I was away, there’s still time, I hope, to share some observations that I haven’t seen in any of the material that passed through my email, listservs, and news subscriptions. Microsoft’s announcement of a $32 billion dividend, the largest ever, got attention.

Some folks focused on the inevitability of a huge dividend from a corporation that had accumulated huge amounts of cash. Others pointed out that the dividend creates an incentive for foreign owners of Microsoft stock to sell their stock, to avoid a 30% withholding tax on dividends paid to residents of countries other than those that have tax treaties with the U.S. providing for a lower rate (usually 15%).

The announcement also brought speculation about the impact of the presidential campaign. If John Kerry is elected and manages to abolish the special low tax rate for dividend income (something that is far from certain even if he does win), corporate officers and directors that waited until 2005 to cause increased dividend payouts to be made will face adverse shareholder reaction.

No one has said much about the accumulated earnings tax. Generally treated as meaningless by most commentators because almost every corporation can get into the “accumulated to meet the reasonable needs of the business” exception, it surely must come into play under these circumstances. Though it is possible that Microsoft has figured out ways to make its taxable income less than its cash flow, it surely has not reduced it to the point where there are no or little accumulated earnings in the company. Now, the declaration of this dividend is PROOF that the accumulation were not for the reasonable needs of the business because Microsoft is saying, in effect, that the business didn’t need the earnings. It will be interesting to see if the IRS picks up on this (especially if no one there reads this blog). Perhaps it will be more successful than was the Department of Justice.

Accumulated earnings taxes aside, the Microsoft dividend, and its taxation at low rates, highlights some of the failings of present-day corporate business culture. Let’s try this scenario:

A company invents an operating system unlike anything ever seen. It is almost perfect. It rarely crashes. It is secure against hacking, worms, and other intrusions. It is fast. It is easy to use. The company advertises this operating system, users speak of it highly, sales skyrocket, and the industry begins to suggest that the company branch into applications software. The company brings its expertise to bear on word processing, databases, spreadsheets, email, networking, and a long list of other applications. The programs are a hit. Competitors simply cannot deliver similar quality. Company revenues soar. The applications and the operating system are sold for a fair amount representing value. The company eventually pays out a huge dividend to its shareholders, who are taxed at low rates. After all, the company’s products energized the economy.

If that were the story, perhaps there would be some sympathy for the temporary stashing of cash in the company as it pondered other areas of technology in which it could make a similar high quality contribution, making talk of an accumulated earnings tax a bit silly. And if that were the story, perhaps there would be an array of arguments advanced to support the idea of taxing dividends at rates lower than other income.

Of course, that is not the story. Even if it were, we know that no one, back in the 80s, would have banked on dividends being taxed at absurdly low rates in the 2000s. Not only could no one have counted on such a thing, it would have been risky even to predict it other than as something in the “anything can happen” category of items ignored as silly.

No, the story goes as follows. A company takes an existing operating system and rushes it to market in order to get an advantage over another enterprise also fashioning a new operating system from the existing operating system. The company’s operating system is a kludge. It crashes incessantly. It is insecure. Later versions, spawned almost yearly if one counts service pack upgrades as new versions, add all sorts of needless complexity while opening up even more security holes. The systems are slow, and users complain. Attempts by users or other businesses to bring other operating systems to market are met with obstructions, some legal and some on or past the borderline. Manufacturers are arm-twisted into accepting the operating system because the company knows most end users lack the ability to replace it. Free copies are given to schools in the same manner as the soft drink sugar merchants put discounted vending machines in the school, both having learned lessons from the guy down the street from the school just past the “Drug-Free Zone Starts Here” sign. The company, bored with fixing the operating system, jumps into developing applications to compete with any other venture that manages to bring out something useful. The perfect word processing program is pushed aside with a lesser-quality pale imitation that is filled with security holes, a mind-boggling concept. Someone invents a great web browser and a campaign to drive it into oblivion succeeds even though the replacement is buggy and needs upgrade and revision almost every month. Someone else develops instant messaging and the company is on their backs the minute it seems there is money to be made. Others develop web search engine technology that works marvelously and the company announces it’s going into that area as well. In the meantime, its latest operating system, rid of some of the earlier flaws, generously advances new defects that defy explanation and that are passed off by the company as the fault of the users or others. As the money flows in from what clearly is a compelled monopoly, the efforts of the federal government and most of the state governments to bring the company into compliance with antitrust laws is thwarted.

Now, awash in cash from having shoved its less than adequate products into most of the nation’s homes and businesses, and a good portion of those elsewhere in the world, the company decides to funnel a huge amount of the cash to its shareholders. Yes, that’s us, if we own Microsoft stock (I don’t) or are in retirement plans that own the stock. But is that what we really want?

There are two things that Microsoft SHOULD do with its cash. Both rest on the principle that until a job is finished, and finished correctly, the anticipated profits ought not be spent.

First, all users of Microsoft products should be compensated for the time, distress, and lost profits caused by the numerous crashes, virus and other invasions, sluggish performance, and other damage generated by the flaws in Microsoft products over the years. I’m picking on Microsoft because it is awash in cash that reflects the burdens and costs it surreptitiously shifted to the consumer. Other companies do the same thing but they’re not awash in cash because if they didn’t shift costs to the consumers in terms of bad products, poor service, incompetent help line employees and other failings, they’d be out of business. Microsoft, it will claim, simply learned the lesson taught by the developers who made and make money building projects that leave infrastructure burdens in the form of traffic, congestion, demand for fire and police services and other costs on the taxpayers of the region. With all the economists in this country, you’d think somehow they’d get the point across that hidden and shifted costs ought to be taken into account. More, in a moment, on how.

Second, Microsoft should take this cash, for which it appears to have no use, and plow it into a total and complete redesign of its operating system. Microsoft claims it doesn’t do that because it would cost too much. Well, guess what? Microsoft has the wherewithal to pay those costs.

Before getting to the how, one more facet of this prism needs examination. Bill Gates announced that his $3 billion dividend (subject to $600 million less tax than it would have been in the absence of the “dividends are really special” low tax rate) will be contributed to the Bill and Melinda Gates Foundation, which already is the largest charitable foundation in the world. Sounds nice? Well, let’s face it. When foundations give money, they can attach conditions. Foundations CONTROL the use of their money. So while we hear about elections and voting, we don’t hear much about how corporations and their foundations are shaping policy and decisions while the Congress wanders aimlessly searching for ways to deal with the EU tax crisis, homeland security, intelligence oversight and many other serious issues.

The tax law, of course, exempts the foundations from tax if they jump through certain hoops. A tax-free institution, therefore, has even more economic muscle when it’s not Alex’s Lemonade Stand trying to eke by on the generosity of individuals, but is simply an extension of someone who has a lot of wealth acquired not through the free marketplace rewarding high quality products but gathered through intimidation, questionable business practices, and corporate behavior still being investigated by some brave state attorneys general.

The tax law has failed us. Not only has it prompted Microsoft to move its profits into charitable foundations and to shareholders taxed at rates more appropriate for the working poor, it has also failed to penalize Microsoft for having accumulated these profits in the manner in which it did. It also lacks any mechanism to reward quality and tax that which hurts society. If there can be taxes on environmental polluters, why not taxes on technological destroyers? Why not a system that records every Microsoft operating system crash, every security hole opportunity used by a hacker, and every productivity slow-down caused by bad programming, followed by a user fee imposed on Microsoft for the outrage of high priced products that deliver far less reliability than the $29 genealogy program or $19 html editor (which, by the way, is far superior to the junk churned out converting a Word document to html)?

Here’s why not. The typical person does not understand computers and think crashes are as normal as are automobile accidents (even though both are preventable and need not be accepted as unavoidable). Most people know little or nothing about programming, and thus are in no position to judge the defenses raised by those whose programming falls short because the dollar is considered more important than any other value. Most people know little or nothing about the tax law, how it affects dividend payment decisions, or how it is used to regulate (or not regulate) charitable foundations. So they don't know what to demand of their elected representatives (who themselves struggle to understand what's really going on), and thus suffer because "that's the way it is" and "what are you going to do?"

I have a nephew who is a certified Microsoft network engineer. He defends Microsoft with the same vigor with which I criticize it. He argues that Microsoft is doing a better job than anyone else. I respond that no one else is given much of a chance to do the job, and when they do find a niche and make it successful, Microsoft moves in quickly and rapaciously. Our debates could be endless, except that we’ve given up trying to change each others’ minds. I am resigned to the notion that someday Microsoft will pay yet another huge dividend, say, $50 billion, because it has accumulated yet another hoard of cash, from selling and monopolizing the sale not only of operating systems, word processing applications, networking software, email clients, and internet searches, but also robotics software, music downloads, cable television services, cell phone services, computer hardware, homeland security software, defense department databases, RFIDs, highway toll collection systems, GPS navigation services, and just about every other digital product or service on the market. Considering the extent to which technology has penetrated and will dictate even more decisions in education, health care, safety, entertainment, transportation, and manufacturing, it may be time to start collecting corporate logos for the collectors’ items they are bound to become.

And I will always wonder what the world would have been like had Microsoft waited to market its products until the products were essentially as fault-free as intensive cardiac care software systems. I wonder what would have been the impact on society, politics, and life had the increased productivity, the hack-free databases, the increased speed in delivery of goods and services, and the other benefits that should come from paying top dollar for software, been delivered. At least a $32 billion dividend would have been seen in the same light as a similar payout to the folks who cured cancer or developed an earthquake preclusion system.

Monday, August 02, 2004

Forgive the tardiness of this update, but I've been digging through some emails and other items that "accumulated" while I was away. In early July I had shared my thoughts about the IRS proposal to extend the telephone tax to VOIP (Voice Over Internet Phone) calls, and the subsequent introduction of legislation on the topic .

Late in July I received a copy of a letter sent to the President by Rep. Christopher Cox, urging him to direct the IRS "immediately to affirm that this 100-year-old tax does not apply to the Internet, but only to traditional voice analog services." Rep. Cox argues that if restricting the tax in this manner causes revenue to drop (I suppose, because over time fewer calls will be made via analog devices), then a 100-year overdue ending of the tax in question would be "very good news."

Rep. Cox makes some very good arguments against the telephone tax in question. It is regressive, it imposes a higher tax burden on phone calls than on any other activity except alcohol and tobacco, and it compounds state and local telephone taxes.

All user fees tend to be regressive. The cost of most products and services, such as food and automobiles also are regressive. That's one extreme of the tax spectrum. The other is "from each according to his or her means, to each according to his or her needs." The latter, which also is found in some theologies and in other ideologies, works well if the folks involved are honest, industrious, and caring. In other words, it doesn't work very well in the real world. What works best is a system of user fees coupled with an income transfer program (such as an income, estate, or wealth transfer tax) that provides for those who are unable to cope with the cost of life (including user fees, food, medical care, housing, etc.)

The problem I have with Rep. Cox' position (at least as he sets it forth in the letter to the President) is that he saves his best efforts for finding an "Internet is special" approach rather than a tackling of the issue on two more basic points. First, as I pointed out in one of the earlier posts, SHOULD there be a tax (or user fee) on communications? Second, if so, on what aspect of communication? Clearly, taxing words raises First Amendment concerns (and would bankrupt me, ha ha). To the extent society (through government) is providing something of value to communication, then a tax or user fee is in order. If that something of value can be demonstrated, then the tax or user fee ought to be applied to all that receives value, whether it is on the Internet or not, whether it is voice or data, whether it is in color or black and white. There probably is some government benefit to communication, whether it is defense of facilities against attack, regulation of the bandwidth to prevent confusion and communication chaos, the launching of communications satellites, etc. My point is that singling out analog phone calls is just as bad as singling out analog and VOIP calls.

While in England I was reminded that the U.K. imposes a fee for the privilege of owning a television (and learned that it is waived for persons who reach retirement age). That fee rests on the long-eroded practice of government providing television content (and so when we are tempted to think that it's bad, yes, it could be worse, except that the BBC did, and does, produce some programs of exceptional quality that ought to make the "we know all about who should be President" folks in Hollywood re-think the reasons that their brains churn out so much low-grade junk for the networks (which, of course, watch their ratings plummet)). So perhaps there could be a fee imposed on the original purchase of a communication device of any sort, with the proceeds invested in repaying government (i.e., we taxpayers) for the costs of communications facilities, protection of those facilities, etc.

My proposal goes beyond the simplistic (though artful) attempt to render the telephone tax obsolete by letting its subject go extinct while protecting its successors from the reach of the tax. (It is, after all, artful, to denounce a regressive telephone tax while the Congress continues to make the income tax more regressive!) My proposal involves a down-to-the-ground examination of the relationship between communication and society (government) and the crafting of a user fee system that does not disfavor any sort of telephone usage to the benefit of other communications devices.

I mute my criticism of Rep. Cox (much of whose efforts in support of the development of the Internet and the fending off of government interference I respect) because all I have, of course, is his letter to the President. It might be a bit much to ask Rep. Cox to get too technical, precise, or detailed when writing to the White House (no matter who resides there). Perhaps all Rep. Cox was doing was trying to buy some time by holding off the IRS until Congress can do something. If that's the plan, he needs to ask for a HUGE amount of time, considering the molasses into which the Congress has sunk on its recent tax legislation efforts.

Friday, July 30, 2004

Turnpike Tolls: User Fees in Context 

Well, users of the Pennsylvania Turnpike, according to this article, tolls are going to increase by as much as 43% on Sunday.

This news came as a shock and more than an annoyance to some users. Business travellers aren't necessarily reimbursed by their employers, especially if they are on a monthly allowance. One person was quoted as figuring a typical increase was 5%, "like everything else in life."

The turnpike has not raised tolls since 1991. That's 13 years ago. At 5% per year, compounded annually, we're looking at 70%. So 43% isn't that bad of a deal. It's roughly 3% annually.

What happens to the projected $1.1 billion increase in toll revenue? All of it will be spent on a $3.4 billion construction plan. The list of projects can make a driver smile (and will benefit the environment and the economy by easing fuel-consuming and air-polluting traffic tie-ups, bring traffic trying to get to I-95 off the local roads, and save lives by improving road safety): widening the turnpike between Valley Forge and Norristown, widening the Northeast Extension between the East-West turnpike and Lansdale (something that I proposed doing in the mid 80s to the usual responses of "never" and laughter), and then widening it from Valley Forge to Downingtown. The much needed interchange between the turnpike and I-95 will be constructed. Toll plazas will be rebuilt and slip ramps will be added in several places.

The best responses came from those who are willing to pay for better roads. That makes sense. Better roads are desired, and necessary. They cost money. The users are the logical sources of that money.

As readers of this blog know, I am a fan of user fees. User fees come as shocks to folks who grow up thinking money grows on trees, that there is such a thing as a free lunch, and that resources are infinite. I would like to see more user fees that cause people to think, "Well, if doing this (whatever it might be) costs $x then perhaps I will re-think my intention to do this." In other words, let's unhide the hidden costs.

Happy motoring.

More on Legal Services Outsourcing 

Beau Baez, a member of the law faculty at Liberty University, shared with me some thoughts about the outsourcing of legal research services to India. Specifically, though agreeing with my points and expressing concern about outsourcing in general, he wrote:
...lawyers in India are trained in the common law tradition and they speak English. While I don't see Big Law turning to outsourcing I can imagine many solo practitioners and small firms doing so. At aminimum I can envision a competent attorney using this kind of servicefor getting a first draft- is that really any different from what a partner does when he asks a first year associate to prepare a draft? Over time these Indian lawyers - where there is a huge glut of attorneys - will become experts in American law. I suppose that a person could be trained in India via theInternet. For four years I worked for Concord Law School, the nation's first Internet based law school. At $8,000 a year an Indian could be fully trained in U.S. law without ever leaving India (there are a numberof foreign nationals in the school right now from countries all over the world who don't have to deal with U.S. travel restrictions) and theywould have the basic skills to conduct legal research from India forAmerican law firms.

I share my reply:
You make several good points. . . . . The key consideration is "Over time these Indian lawyers -- will become experts in American law." If it's at the expense of beginner's workproduct, the issue is whether the solo practitioner or small firm can do the mentoring that the traditional first year associate gets. There's something about having the associate in a position for a face to face meeting. And if the solo is going to do that via teleconferencing, the time investment makes the outsourcing far less attractive economically. I do think, though, that the idea of training lawyers via the Internet may have an impact on what I'd call "globalized international law"....eventually, just as the existence of 50 different state laws led to the Uniform Laws movement (with varying degrees of success), so, too, a similar phenomenon could occur internationally. But I'm not so certain that it will be driven by outsourcing or outsourcing alone. I suppose the researcher in India isn't practicing law? Else there'd be all sorts of practice of law issues. Yet the first year associate must pass at least one bar exam. That provides a screening level in addition to that provided by the law school. (Nothing against Concord or any other school, but the existence of bar exams does tend to set a standard for curricular design and for weeding out students who got through on"mercy"....)

Beau then replied:

I certainly am not promoting the use of overseas outsourcing but I recognize that it may occur. In part, our state unauthorized practice of law ("UPL") rules are to blame. The UPL rules use a
physical presence standard thus a person overseas would not run afoul of them. As long as we insist on 50 distinct state bars the physical presence rules will remain because the standard is very easy to administer, and attorneys do not want to be subject to another state's disciplinary system when they provide multistate advice. A unified national bar would solve our internal problems and possibly the outsourcing possibility. However, I am not an advocate of a unified
national bar.

There are indeed some serious issues here. It is unlikely that the Indian researchers are practicing law. If the lawyer meets his or her professional responsibility requirements in the matter, he or she will be doing far more than what would be done if an associate down the hall were doing the research. Will the outsourcing tempt the lawyer to perform the same sort of review as if the work were being done in the same office? Who's at risk? Ultimately, the client. Though I dislike regulation, state disciplinary boards may find it prudent to address this question before it becomes (as have so many other practices nurtured by the Internet and its technology) a fait accompli. Perhaps bar associations can take the lead and thus steer the debate? Would it be more efficient to have a national bar rather than 50 state bars? Maybe. But addressing that issue is not an absolute prerequisite to dealing with the problems generated by the outsourcing of legal research and analysis tasks.

Thursday, July 29, 2004

Would You Pay for This? 

While I was away a friend and colleague forwarded an email that he had received from an outsourcing company in India, offering to do legal research and information. The company claims to produce high quality, low cost work, with excellent delivery schedules. On the side, I think they do atomic fusion, too.

Sorry about the sarcasm, but despite the company's guarantee of highest quality and accuracy available anywher, I just don't follow the logic. I'll skip over the claim of highest quality because I don't have time to pit my research skills, the research skills of people I know, and the research skills of the best lawyer-librarians with the employees of this company.

But I do want to share why I have more than just a few doubts. Doing research, in terms of gathering information, isn't very difficult. Of course, compiling legal information (not unlike what uninitiated law students think law school teachers) doesn't do much most of the time for most clients.

What matters is analysis. And it is in the analysis that a researcher finds the clues to develop the second and third layer of research. It's the reason that those teaching "legal research" in law schools end up teaching a fair bit of legal analysis.

Now, to do American law research and legal analysis, one needs to be educated in American law. Oh, a few Einsteins might teach it to themselves, but they won't be hiring themselves out to a company that is going to make the money from their efforts.

So who has that education? People who have graduated from American law schools. Now, will those graduates ship themselves off to India to work for "low cost" wages so that the owners of the company can gather profits on their efforts? NO!! They will ship themselves off to law firms that will pay them commensurate with their education and accomplishments (though perhaps not as much as the graduates would like to receive), and though their employer law firm will gather profits on their efforts, those law firms will provide guidance, mentoring, and client experience (even if not as intensely as in years past) that will refine the research and analytical skills of these newly hired attorneys.

Could it be that this company is sending its Indian employees to American law schools to learn American legal research and analysis to bring back to the company? I doubt it. The company would need to shell out at least $120,000 per employee (which makes "low cost" a bit more difficult to achieve). And once someone comes to America, as much as it is held in disdain by so many of the world's people, they tend to want to stay. Why? BECAUSE INCOME IS HIGHER, the quality of life is better, and opportunity abounds far beyond the confines of a partitioned cubicle grinding through the compilation of legal information.

I was tempted to waste a few dollars and send along an "interesting" American income tax question. But once I re-read the advertisement email, and noticed that legal research and information is one of "a number of services" that are provided, I decided to use the few dollars for something more fun than playing tax research and analysis games. After all, that happens every semester in the normal course of teaching.

All of that aside, I can't imagine a legal professional putting the fate of a client in the hands of an unknown, unseen, and unmet researcher thousands of miles away, who lacks American legal education, who lacks access to the state and local materials that are the more difficult even for domestic researchers to find, and who surely have a minimal command of the necessary language. Oh, I know that professionals in other fields are doing this, but will it make sense for the lawyer who is representing the patient, client, customer, or associate who is harmed by the use of off-shore resources to be exposed as doing the very thing of which the plaintiff is critical?

No, it would not.

Nor does it make sense to pay someone else to do one's thinking. That's what gets politicians in trouble. And we know that lawyers don't want to come across in the same light as do politicians. Ha.

I'm Back 

Though I tried to keep the blog current while I sailed across the Atlantic, toured Europe and sailed home, it wasn't the easiest thing to do. Even though it is 2004, Internet access isn't easy in the small towns of Europe (other than through expensive and slow old-style dial-up modem). And on the ocean, even with newer satellites covering most of the world, the ship charged as much as $30 per hour for access.

I kept a list of the topics on which I want to discourse. I'll start with one very soon and allocate the others across the next week or two.

Oh, while I was away the Philadelphia area was drenched, literally, with rain. On one day 12 inches fell on parts of New Jersey. Dams broke. A lot of people lost a lot. And then a tornado hit. And in Europe? It rained far more than usual, and has been raining. It has been colder. Several pictures comparing 2003 (remember the heat wave) and 2004 were striking, especially one of the beaches in southern England. Jammed in 2003, they were populated by a few brave souls bundled up in December clothing. It had warmed up a bit by mid-July. So where was the sun and fair weather? In the middle of the ocean. On a sea that was like a pond for much of the time. I suppose a few folks will cry, "Oh that is so different from last year, the world is ending, the glaciers are melting, the sky is falling" but the experts tell us that some decades ago there were summers just like this one. Weather: what goes around comes around. Literally.

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