Friday, December 23, 2005

Legislatures Take a Holiday From Taxes 

They may not have invented the phrase, but the Rolling Stones made sure everyone knows that "You can't always get what you want." Whether a warning or a simple statement of reality, it is an omnipresent thought. Even when it is holiday time. So try this remake of a holiday classic: "All I want for Christmas is some genuine tax reform." Yes, I know there is no Santa to bring this to me. But did the grinches in the legislatures really need to have said resoundingly, "NO!"? And not once. Or twice. But thrice.

First, the United States Congress whiffs on reform of the alternative minimum tax that would prevent 15 million more taxpayers, mostly from the middle class, coming within its reach for the first time in 2006, even though the tax was designed to prevent the wealthy and ultrawealthy from using deductions to lower their tax liabilities below a specified minimum. According to Senate Majority Leader Bill Frist, as reported by a number of sources, including this Los Angeles Times story, earlier this week asserted that Congress "had run out of time" to finish work on the proposed legislation fixing the problem.

Strike One.

Second, as reported by the Philadelphia Inquirer, the Pennsylvania legislature failed to finish work on local property tax reform. Both the House and the Senate approved separate bills by overwhelming votes, but the two plans are very different. Despite the efforts of the governor, who called House and Senate leaders to a meeting, a problem that the Pennsylvania legislature has been trying to solve for three decades (yes, you read that right, three decades) will continue to vex taxpayers, particularly those on fixed incomes. Yesterday, legislators announced that nothing more would happen this year. The Senate wants to fund property tax reduction with gambling revenue and increases in local income taxes. The House wants to fund property tax reduction with gambling revenue, an expansion of items subject to the state sales tax, and an increase in the state income tax.

Strike Two.

Third, as also reported by the Philadelphia Inquirer, even though Philadelphia City Council voted 9-6 to cut the business-privilege tax from 6.5% to 6.3% over five years, in an attempt to stem the exodus of business from the city, the mayor has promised to veto the legislation. Considering that he has vetoed similar legislation several times in the past, it's safe to conclude that this is one promise by a politician that will be kept. There are insufficient votes in Council to override the veto. An illustration of the insanity that has gripped tax reform in the city is evident from the vote against the tax reduction plan by a member of council allied with the mayor. This member of council then introduced a plan to cut taxes by almost 10 times the plan that the mayor promises to veto.

Strike Three.

They're out. Actually, we're out. Out of luck. Out of patience. Maybe even out of chances.

The Congress claims it ran out of time. The Pennsylvania legislature ran out of time. City Council has run out of time. It's the clock's fault. Or the calendar's fault.

No, it isn't.

Back in March, everyone knew that December 16 would follow December 15. It's not as though December 15 was followed by December 23, and whoa, time disappeared. Good planning, good project management, good time budgeting, and common sense tells everyone that if something is to be finished by December 23, it needs to be started sooner. Much sooner if the issues are complicated, controversial, and time-consuming. These are elected public officials, who owe it to their constituents to do their jobs. It's not enough to issue platitudes about tax reform and then to go home because time ran out. They let time run out. And if someone said they did so deliberately, I would not argue.

Good time management is not some elusive goal such as time travel. As I tell law students who fall into that end-of-semester trap, where they have far more to do before a final examination than they have time to do it (because they wasted time earlier in the semester), time is like money. There are 168 hours in the week. Decide beforehand how they will be used, and allow some cushion for the unexpected emergencies. I see the same lack of time sensitivity when I sit in meetings that are scheduled for two hours, with 10 items on the agenda, and participants devote 80 minutes to the first item. Simple math tells us that instead of 12 minutes per item, the remaining 11 items now must share 40 minutes. That's less than 4 minutes. And, in most instances, the first item was trivial compared to those either tabled or rushed through without appropriate thought.

At the beginning of each semester, I warn my students about the need to budget their time. I explain that through all their years in the profession, the requirement that they account for their efforts in 3 or 5 or 6 minute intervals on billable hour software (or, horrors, "time sheets") will be an unescapable reality that shadows them without respite. Most of us, not just students, lawyers, law professors, and tax practitioners, would like to suspend time, turn back the clock, or even to pull the Congressional stunt of "deeming" it to be one minute before midnight until as long as it takes to finish work on legislation. We can't. We may want it, but we won't get it. But compared to tax reform, sometimes it seems as though there's a better chance we'll learn to suspend time before we learn how to compel legislators to act in the best interest of their constituents.

Can we get what we want? The phrase of warning and reality, at least as sung by the Stones, continued, "You can't always get what you want but if you try sometimes well you just might find you get what you need." We want tax reform. We need tax reform. We have tried. We are still waiting. Like Charlie Brown's baseball team, and like the child who discovers that no one lives or works at the North Pole, we are in danger of becoming so accustomed to legislative tax reform disappointment that we might end up thinking it is impossible.

But so long as there is a chance, I will keep asking. And writing. And proposing ideas. And criticizing. And insisting. I hope you do, too.

Wednesday, December 21, 2005

Using the Tax Law to Impose "Morality" 

Congress finally enacted and sent to the White House for the President's signature the Gulf Opportunity Zone Act of 2005. I suspect it will be known as GOZA.

This legislation creates a Gulf Opportunity Zone not unlike the New York Liberty Zone that was created after the September 11, 2001 terror attacks. Individuals and businesses in the zone are eligible for a variety of tax benefits, including more favorable depreciation, expanded eligibility for tax credits arising from hiring employees, and greater availability of tax-exempt bond financing. GOZA includes an increase in the amount of low-income housing credit available in the zone, a deduction for certain clean-up expenses, and other tax benefits.

A group of legislators, however, were appalled at the thought that tax benefits would be available to certain businesses. "Horror!" they cried. Led by Representative Frank Wolf from Virginia, 65 members of Congress wrote letter to the President, opposing the extension of GOZA benefits to the gaming industry. These legislators argued four points. First, denying special tax breaks to casinos "has been routine." Second, the casinos in Mississippi are planning to rebuild and thus do not require any incentives to rebuild. Third, casinos in Mississippi were excluded from previous state economic development incentive programs. Fourth, high budget deficits demand that tax dollars go "to those who truly need the government's help," namely, "the poor, the needy, and the vulnerable," which does not include the gaming industry.

These legislators prevailed. New section 1400N(p) of the Code will deny GOZA tax benefits to any property that is "used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises," and it also denies the benefits to "any gambling or animal racing property."

It is true that golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, liquor stores, race tracks, and casinos have "routinely" been set apart and treated differently for income tax purposes. These restrictions apply to business deductions, depreciation, empowerment and enterprise zone benefits, and other provisions. This policy reflects an attitude not mentioned in the letter written by the 65 legislators.

Let's look first at that letter. It justifies excluding casinos from GOZA benefits because the casinos plan to rebuild even without tax incentives. I like that as a test. The statute should read, "Any business that plans to rebuild even in the absence of tax benefits is barred from these benefits." Why is that language not acceptable? Theoretically, it simply would encourage businesses to claim they don't plan to rebuild. The casino industry, being honest, admitted that it was planning to rebuild, and was rewarded for that honesty. Practically, it would deny tax benefits to businesses such as Walmart, Exxon-Mobil, and hotel chains, which also would rebuild in the absence of tax benefits. So why not deny the tax benefits to Walmart, Exxon-Mobil, hotel chains, and all the other businesses that would have rebuilt even without tax incentives? So this aspect of the letter is nothing more than a smokescreen.

The letter then takes the position that because the state of Mississippi did not assist casinos with economic development monies in years past, it is acceptable and even essential that the casinos not be assisted this time around. The difference is that this time around, it's a matter of destruction by a hurricane with the force of dozens of megaton nuclear weapons. It's a different ball game. Let's face it. This, too, is a smokescreen.

Then comes the clincher. Casinos don't deserve the tax breaks because they are not "the poor, the needy, and the vulnerable." That's true. Again, though, if other businesses qualify for the tax breaks even if they are in fine financial shape, for example, Walmart and Exxon-Mobil, why not deny tax benefits to businesses with taxable incomes exceeding some dollar amount separating the needy and vulnerable from the wealthy? Again, it's a smokescreen.

The reality is revealed by the list of businesses that are targeted for benefits denial. It's not just casinos and race tracks. It includes other businesses. Liquor stores. Hot tub establishments. Oh, my, massage parlors. And even suntan salons. Wow. I guess the owners of those places were planning to rebuild even without tax incentives. I guess they were omitted from previous state economic redevelopment programs. And I'm sure they're not needy or vulnerable. Their owners are rolling in the cash just like casinos, oil companies, and, of course, Walmart.


This is nothing more than imposition of a particular moral code on America through use of the income tax law. Now, I understand the theological arguments that some make against drinking alcoholic beverages and gambling. But hot tubbing and massages? Oh, perhaps Congress thinks these are fronts for some other activities? Hogwash. I understand that absent careful use, artificial tanning and hot tubs can cause health problems. But that can't be the justification because I don't see denial of GOZA benefits for establishments selling cigarettes. No, it's not about physical health. It's imposition of a particular moral code.

It certainly is acceptable for the voters of a state or county to decide that gambling will be prohibited. Or that it will be permitted. Why should the federal government use its income tax club to punish states and localities that haven't conformed to the moral principles of these 65 legislators? Why should a member of Congress from Virginia get to second-guess the voters of Mississippi? Casinos brought business to Mississippi. They brought tax revenue. They created jobs. There are good arguments for and against legalizing gambling. Ditto for massage parlors, hot tub facilities, and liquor stores. But once the voters of Mississippi spoke, what gives Washington the right to make it more difficult for these enterprises to do business?

Worse, these legislators don't have the courage to try to enact legislation that imposes fines and penalties on voter-approved casinos. That would be too obvious, too blatant, and too risky. Voters might figure out what these members of Congress are doing, and replace them when they go to the polls. Instead, they put this provision, and for years have been putting provisions like this, into the tax law. It's the equivalent of a fine or penalty, because it economically disadvantages these businesses as contrasted with other businesses. These are stealth fines and stealth penalties. After all, how many people have read section 1400N(p) or its counterparts throughout the Code?

I can understand, and even support, a restriction of GOZA benefits based on taxable income, that excludes the wealthy from participation. I can understand a limitation of GOZA benefits to businesses that otherwise would not rebuild although I am unlikely to support it in such a form because the practical logistics of making that sort of limitation work are almost impossible. I can understand the denial of deductions to illegal businesses even though I think it's sad that the government must use the tax law in its efforts to enforce criminal law. But singling out particular industries, that are legal and acceptable to the citizens of a state or locality, and denying them tax benefits simply because they engage in activities that violate some particular moral code to which those citizens have not subscribed is nothing short of federal tyranny.

Let's take this New Prohibition out of the tax code. Let's leave it to the voters in our states and localities. Their votes on matters of state and local concern should not be diminished in effect by the Congress in Washington. After all, for these 65 legislators, and their philosophical predecessors, it's casinos, suntan salons, and liquor stores. For others, it could be cigarette retailers and video games. For still others, it could be rock 'n roll or rap music vendors. Perhaps stores that sell meat should be denied these benefits, for surely there are folks who consider the eating of meat to be at least as horrific as gambling or the drinking of alcoholic beverages. Or, goodness, getting a suntan or sitting in a hot tub.

Wealth Charts 

One of this blog's readers sent along a link to some wealth inequality charts. When tax reform is debated, these charts should inform the discussion. Of course, the charts tell us what IS, but are truly meaningful only when compared to what SHOULD BE. And what should that SHOULD BE be? Most things in nature are distributed on a natural bell curve. Give a tax exam to 200 students, and no matter what techniques are used in teaching and tutoring the students, there will be a bell curve outcome, or, in some instances, two intersecting bell curves, one for the students who plugged away and one for those who coasted. Is there something different about how wealth accumulates and to whom it accrues? To the extent income contributes to the growth of wealth, the answers to these questions are relevant to the tax reform debate.

Tuesday, December 20, 2005

Have Yourself a Very Merry Tax Time..... 

A day after I express hopes that Little Tax Drummer Boys hired by the IRS don't start showing up in our neighborhoods in an attempt to drum taxes out of our reluctant neighbors, I pick up on another holiday tax delight. This one, too, worries me. A wee bit.

Paul Caron reports in TaxProfBlog that Argentinian tax inspectors are dressing up in Santa Claus outfits as part of a campaign to increase tax compliance. People are being stopped on the street and presented with reasons to pay overdue taxes. They call it "Holidays without Debt."

Don't they know that the end of December is a principal reason so many people are IN debt? Do they understand that in many places dressing up as Santa Claus and stopping a perfect stranger on the street is unwise, dangerous, and perhaps stupid? Now perhaps if they had a reindeer or two in tow..... Perhaps the one named Vixen. Or the one named Cupid? Ha.

What's next? Frosty the Levyman? Rudolph the Pencil-Nosed Taxhound? The Deduction Elf?

Of course, there's nothing new under the sun. Years ago, someone came up with a name to describe what Congress does to tax legislation when it tacks on all sorts of goodies for favored constituents, special interest groups, and heavy-handed lobbyists. It's called a Christmas Tree Bill. Don't believe me? Check out this story.

Monday, December 19, 2005

Snaring Tax Delinquents with Drumbeats 

Somehow in this information age, some news takes its time finding its way to me. This weekend I noticed a story in Parade Magazine, which is bundled with Philadelphia's major newspaper. When I went on-line to find the original story, I discovered that Paul Caron had reported the story on TaxProfBlog last March! For some reason, I hadn't noticed it. Yet, it doesn't seem to have attracted any commentary, but I couldn't let an opportunity, especially the chance to toss in puns once I fell into the right rhythm, go by. Plus, it's the time of the year when we hear some music that nicely fits.

The story is short. According to the MSNBC account, tax authorities in Rajahmundry, a city in India's Andhra Pradesh state, send groups of 20 drummers to play outside the homes of tax delinquents who ignore demands to pay overdue property taxes. They play continuously until the taxpayer drums up the money. The revenue officials resorted to this tactic after it failed to make a dent in the $1.15 million tax backlog by waiving interest and penalties. The incessant drumming has had an effect, clearing 18% of the delinquencies after one week.

I suppose the theory is that if you can't beat the taxes out of them, you beat the message into them. Literally.

But in practice, it has to be uncomfortable for the delinquent's neighbors. Imagine this drum corps showing up next door because the next-door neighbor hasn't paid her taxes. Do they manage to keep the sound from pounding into the eardrums of the innocent residents? HOW? Perhaps what has happened is that the rest of the people living on the block passed a high hat around to raise funds that could be used to pay the delinquent tax bill. Then the collector could stuff that into the pocket.

This is the time of the year when "Little Drummer Boy" gets airplay. If the tax folks in India sent along a chorus, would it sound like this?

Come they told me
Pa rum pum pum pum
A new tax cheat to see
Pa rum pum pum pum

Our finest noise we bring
Pa rum pum pum pum
To pound around the house
Pa rum pum pum pum,
rum pum pum pum,
rum pum pum pum

So to annoy Him
Pa rum pum pum pum
When we come
Little scofflaw
Pa rum pum pum pum

I am a poor boy too
Pa rum pum pum pum
I have no other way
Pa rum pum pum pum

That's fit to get the tax
Pa rum pum pum pum,
rum pum pum pum,
rum pum pum pum

Shall I play for you
Pa rum pum pum pum
On my drum
Neighbors cried no
Pa rum pum pum pum

The government paid us
Pa rum pum pum pum
I beat my drum all day
Pa rum pum pum pum

I played all night as well
Pa rum pum pum pum,
rum pum pum pum,
rum pum pum pum

Then he handed me cash
Pa rum pum pum pum
Me and my drum

This is one of my mother's favorite Christmas carols. She will not be amused. Oh, well. I think it's clever. See what living in a tax world can do?

So, please, my wish for the season is two-fold. One, don't let anyone in the IRS or state revenue departments get any bongo ideas about collecting taxes. Two, please, folks, if you're not going to pay your taxes, don't live next door to those of us who do.

Friday, December 16, 2005

Red Pens, Crossword Puzzles, and Some Tax Exams 

It's grading time again. So if you see fewer posts or shorter posts, don't worry, I will soon be back with the usual frequent and extensive analyses of tax law issues of every sort. And other topics, too. Of course, if the idea of fewer and shorter posts brightens your day, hey, rejoice in it. While it lasts, ha ha.

When I first started teaching I was told that by grading exams, law professors learned not so much whether their students understood, or did not understand, the material, but how much the students had learned that wasn't there to be learned. Principles of black letter law never before articulated on the planet show up as settled doctrine. Facts are invented that conflict with the facts presented. Indecision is evident on examinations where crossed out answers are in turn crossed out and then circled with an arrow pointing to the word "keep." Fortunately, as the years passed, I learned how to identify which students had any bad test taking habits before the examination, and I've had some success persuading some students to break those bad habits. The exams are a much more pleasant experience to read.

Some students, particularly accountants in both the Graduate Tax Program and in the J.D. program insist on setting forth tax law principles without appropriate citations to authority. Most leave out any citation, as though the fact they wrote it should somehow earn credit for creativity. Sometimes, though, students will cite me, or a statement I made in class, as the authority. Thanks, but I'm not the authority on the matters tested by the exam. If I read a portion of a Code section in class to emphasize a particular drafting concern, or a semantic twist, that does not make me the authority. The Code section is the authority. The impression I have is that some students deluded themselves, in college or perhaps high school, into thinking that tossing flattery at the person grading the exam would somehow better their grade. I'm guessing that this approach has worked once or twice for some students, giving them incentive to try it yet again. No, it doesn't work. Not with me.

Many law faculty claim that the least enjoyable part of their academic responsibilities, setting aside administrative and committee tasks, is grading examinations. It can be depressing to read examination answers that tempt responsible faculty into thinking that their teaching somehow caused the problem. Yet in the same batch of examinations one can find brilliant answers, as close to the model answer as students get, and that is, at least for me, a most joyous occasion. It confirms that the course was packaged and delivered well, for in the hands of a diligent, responsible, and interested student, the exam provides the opportunity to generate an answer that is exciting and satisfying to read.

The most difficult part of this process is finished. Creating an examination, or a semester exercise or in-class quiz, is far more challenging than taking the examination. I speak from experience. As difficult as it may be to do a crossword puzzle, it's even more difficult to create one. Again, I speak from experience. Curious? It's what parents and teachers do with a young child who needs to be kept busy so he stops talking and doesn't wander into other trouble. Yes, I speak from experience.

Now let me go find a red pen.

Wednesday, December 14, 2005

How Much Tax Revenue Is Required? 

I mentioned in last Friday's post that Nakul Krishnakumar, one of my former students, and I have been discussion the question of what government should fund. Although that discussion involves governments spending, it implicates the tax policy debate because the level of government spending is a factor, and should be the most significant factor, in determining tax rates.

It appears from our discussion that Nakul and I agree on zero-based budgeting. That is, an annual government budget should not be constructed by allocating increases to the previous year's budget, but should be determined by examining each expenditure and determining its appropriateness. Of course, there may be instances where previous year decisions constrain the decision making with respect to certain items, such as interest on government debt, but that ought not create a blank check for every program in the budget.

There's no question that Nakul and I are not the first, and will not be the last, people to sit down and ponder the appropriate role of government. Even where we agree in a general sense, such as the appropriateness of defense spending as part of a federal budget, we haven't focused on the details. After all, we haven't accomplished much merely by accepting the idea of national defense as an appropriate federal function. Questions such as weapons systems procurement, policy decisions such as those concerning the use of troops overseas and in humanitarian efforts can be resolved in ways that would require significantly higher or lower spending levels. In turn, this would affect the tax policy analysis.

Nakul and I also brushed aside the important question of whether an appropriate government function should be conducted by the federal government, a state government, or a local government. We also paid little attention to the question of whether a state or local government function should be funded at the state or local level or wholly or partially through the use of federal revenues. We also left to another day the issue of whether an appropriate government function should be funded through user fees, income taxes, consumption taxes, sales taxes, or some other one or more of the seemingly infinite collection of taxes that exists in the modern public arena.

Our discussion when I replied to Nakul's email that pointed me to the Wall Street Journal op-ed piece that I critiqued on Monday. I commented that the piece presented "regurgitated arguments" and mentioned the possibility of the post that I did in fact write and publish Monday. I noted that one flaw was "that the op-ed argues for a low rate on the deferred stuff, which is not as beneficial to Joe as a low(er) rate on the current (wage) income." Nakul responded, "Personally, I think the answer is a lower marginal tax rate on income for everyone who pays taxes, followed by a lower tax rate on capital gains. This should be financed by massive cuts in needless and/or wasteful government programs. But I doubt that will happen." Interestingly, in his last email, Nakul noted that I had "convinced" him on the capital gains issue. That leaves, however, the proposition that there can be "massive cuts in needless and/or wasteful government programs."

So I challenged Nakul: " I'd be interested in your candidates for spending reductions and the amounts to be cut (so we could then figure out how much of a tax cut could be implemented)." Nakul's response was philosophical:
In terms of "what is that something" that we should limit government spending to, I think that requires a philosophical/political argument as to what is the role of a government in a free society. I submit that the only proper role of government is the protection of individual rights - which means that the government has a monopoly over the use of physical force. Thus a government in a free society should be limited to a police force to protect individuals from criminals, a military to protect us from foreign invaders (or terrorists) and a court system so that we can resolve disputes (and seek damages for torts) and protect our intellectual property. Other than that, I don't really see much of a role for government. As the Declaration of Independence says (I'm paraphrasing): governments are instituted among men to secure these interests. A society where a government doesn't have a monopoly over the use of physical force is anarchy. A society where the government has a monopoly over the use of physical force, but does not recognize individual rights, is a dictatorship. A proper society must have both: (1) Government monopoly over the use of physical force; and (2) a clear and unequivocal recognition of individual rights. America is the first nation to ever attempt this.

Obviously, we don't live in that world right now -- and so applying these principles to our current situation, I would slowly start to phase out lavish entitlement programs such as Social Security (the President's plan is a start), welfare, Medicare and Medicaid. I believe these entitlement programs alone make about 40-50% of our national budget (as compared to national defense which is a little less than 20% - I believe). Phasing these programs out would allow for a significant reforming of our tax code. Obviously, there is a lot of other government waste that can be cut out once we've determined what the proper role of government is. That should be our primary debate.
In turn, I posed this question to Nakul:
Without taking a position on any of these at the moment (for in some instances I'm not sold one way or the other, nor am I focused on a federal v. state differentiation), what of....

Fire protection?

Health and rescue squads?

Protection from hazardous spills, etc?

Disaster prevention and relief?

Control of airspace for airplanes?

Construction and maintenance of highways, bridges, tunnels?

Protection of quality of agricultural products?

Protection of quality of medicines?

Protection of labor?

Protection of public health?

Prevention of negative environmental impacts on people and their

Preservation of natural resources such as national parks?

Education of children?

I'm sure there are more.

Of course, there are some things government currently does that I
wouldn't have government doing ....
Demonstrating that his law school education had been assimilated, Nakul artfully answered some of my questions and sidestepped others:
I suspected that you were going to ask some of these questions! Like my father used to say (He's also a professor), a good professor is always one step ahead of his students.

First, I don't believe in "preventative law" -- thus I would again phase out government organizations such as the SEC, FDA, FTC, etc. Obviously, these things simply can't be disbanded immediately because we've gotten so used to them; however, they can be phased out over time. If I were President (or emperor), I would begin that process.

The building of highways, education, etc should largely, over time, be shifted to private ownership and operation. I think the free market would do a wonderful job in something like education. In fact, there was an interesting article in the WSJ the other day explaining how some municipalities (and soon some states) have begun leasing out their highways to private entities (such as foreign private equity firms — one of which happened to be in Australia). This should be encouraged. To be honest, I haven't completely thought through the fire squads
issue, so I could envision a government role there. However, that may be something that private entities could do as well.

The role of the government is to protect man from man. Certain natural disasters will dictate that the government get involved in emergencies (i.e. Katrina, Tsunamis), but these aren't going to be the normal course of business (hence the term emergency). Nonetheless, it shouldn't be government's role to protect man from nature qua nature. We should of course budget for these potential disasters, but I don't think that will be that expensive.

I know I haven't answered all the questions you asked below, but I hope I've at least conveyed my general belief that the government's primary role should be to protect rights (life, liberty, property, the pursuit of happiness) and not provide services. Services, whatever they may be, should primarily be a private function, with perhaps a few exceptions. Today's mixed economy has government involved in too many things that they shouldn't be involved in. As such, they are spending too much money, and taxing us too much.
I could not resist playing devil's advocate, which is a technique that can reveal the depth of another person's commitment to their argument:
I understand your point. I wonder if you have studied the history of public services? At one time government provided no services (it took land, conscripted peasants for military service, and left the population
to its own fortunes, good or bad, mostly bad). Think of medieval kingdoms. What services were provided came through the church (at least in Western civilization). Eventually, as technology changed and needs evolved, the private enterprises that operated public services had problems. Service was spotty. Canal companies went under. Railroads did a little better until they, too, went under. The societal cost of death and disability from injuries to unprotected workers began to exceed the cost of public regulation of the industries in which these injuries were incurred. So in some respects, the free market and application of economic principles shifted certain services to the public sector because that was more efficient. Then, of course, irrationality set in and policies were formed by those who thought that because some services were more effectively provided by government all services could be more effectively provided by government.

Imagine, for example, private ownership of snow removal from public roads. Wait, they would be private roads, much as Route 30 was once a private turnpike. What happens when the company goes under? Do we litigate for months or years while the road turns to slop? As was the case back then? How do we hold accountable some CEO living in Australia?

How many people must die from bad drugs before the mobs burn down the pharmaceutical company offices and labs? How many people get snookered by bad stock deals before brokers and dealers are gunned down in their offices?

In other words, to the extent government services protect individual rights so that individuals do not seek self-help, then those services which appear to be preventive are actually protective.
Nakul's response:
I have a casual understanding of the history of public service, but I have to admit, I'm certainly no expert. However, I would respectfully disagree with some of your characterizations of private industry.

As a preliminary matter, when I talk about privatizing certain industries and services, I am not under the false illusion that shifting services from the government to the private sector will be a magical elixir whereby all our problems are automatically solved. My argument is simply this: In the long run, private industry will better be able to provide services such as highways (even snow plowing), education, etc and will do so in more cost effective manner - because they have more of an incentive to do so. Of course, companies may still provide spotty
service, but in a free market they will not stay in business that long. In fact, failure is as much a part of capitalism as success. Except in a market economy, failure breeds success. When the government is involved, failure just breeds more failure.

Also, I would slightly disagree with your characterization of history. Yes, railroads went under, and sometimes wholesale industries failed. Howe ever, that period also saw tremendous economic expansion, an increase in people's standard of living, an increase in health and many other things. That is largely attributable to the largely free market system that existed.

Government, properly defined, is a gun, whose chief responsibility is to protect man from man. It should not be involved in endeavors of the mind. If the market can't figure something out, then I doubt government can either. I have a lot more confidence in an intelligent entrepreneur than I do in some government bureaucrat.

In the end, markets are much better suited to solve economic problems than the government is. History bears that out, and I think we would be wise to begin the process of privatizing government services and continue to do so for the foreseeable future. If we do that, we'll reduce spending, cut taxes and simplify the tax code.

P.S. As far as holding the CEO of an Australian company accountable —- I don't know. However, we could fairly easily get jurisdiction over the entity and assets that the CEO controls. If an Australian company owns assets in America, then we have "minimum contacts" and therefore personal jurisdiction over the company itself - which is probably more useful than having jurisdiction over the CEO.
Nakul had taken the discussion back to the philosophical and political question of how government and the private sector should relate, and I jumped on the opportunity, as I've emphasized in text that was NOT bolded in my response to Nakul but which I highlight here:
I agree with some of what you say, perhaps most of it, but when cast against the wider backdrop of experience and the realities of life, the theory of free market snags. Here are some thoughts.

Private industry is no less likely to fail than is government. This is true so long as the bureaucratic malaise and internal office politics which accounts for most of government failure at the boots-on-the-ground level continue to infect the private sector. Academia is responsible for much of this, arguing for theoretical rights and curtailment of worker discipline, and fueling the migration of bad ethics and lack of incentive from government to the private sector. Where's the free market incentive to excel when it's easier to ask the government to use its fake gun to protect some conjured-up right? Where's the free market to excel when the worker in the next cubicle is thinking about appropriating your ideas? That's why I'm no higher on private industry than I am on government. I'm not painting government with a brush of success when it comes to the enumerated services (though it has done well in certain instances, such as highway construction and the weather service). I'm simply discounting the myth of the marvelous private sector. My power went out again today for the umpteenth time because a moron contractor cut something rather than following government regulations (issued by public utility commissioners) to call before digging. Imagine what it would be like without such regulation. True, an isolated incident but so characteristic of post 1980s society.

The tremendous economic expansion to which you refer was carried on the backs of developing nations. Where is the success of the west without the cheap (or free) labor of the rest of the world? And now that the rest of the world is catching up (or at least chunks of it are), the pressure is on. It was private industry that ran the slave trade, though with the government gun at its side for a while ... and look what happened when government changed its position. It is private industry that to this day moves unwilling workers through the pipelines from
eastern Europe to who-knows-where. It is private industry that could participate in a tremendous economic expansion because it externalized costs such as environmental protection, instead dumping toxic materials everywhere from the Love Canal to the waters of southeast Asia.

Unlike you, I have no more confidence in an intelligent entrepreneur than I do in a government bureaucrat. Intelligence does not guarantee, and often stands in the way of, far-sighted judgment and ethical considerations. Worship of the bottom line profit is what has cheapened, in the long run, the effectiveness and efficiency of the economy. This is not a rejection of capitalism. It is an argument that unregulated capitalism, which flourished in the 18th and first half of the 19th century, brings slavery (real and economic), poisoned environments, worker injury, and a whole host of problems that lets the capitalist class, to its long-run detriment, damage the peasant/worker class on which it depends. And some functions are just too important to leave to an unregulated or a modestly regulated free enterprise system. I don't want the current Russia as the role model.
This inspired Nakul, who was having as much fun as I was having, and as I hope readers are having, with this discourse:
Thanks for your reply. Although I disagree with you, I have greatly enjoyed this debate. That being said, I think a great many of the points you made below are based on incorrect premises. I think this argument needs to go back to the basics i.e. fundamental premises and theories. Here is my quick attempt to essentialize this debate:

Capitalism, properly defined, is both a political and economic system. Politically, it requires the full recognition of individual rights. Those being life, liberty, property and the pursuit of happiness (and all derivative rights i.e. freedom of speech, religion, freedom from unwarranted searches and seizures, etc). Fundamentally, capitalism is the only moral political system in the world and is the only system that can accommodate man qua man. Therefore, in a capitalist society, no person can infringe on the rights of another - and if they do so, the government must resolve the dispute (as I stated earlier, government has a monopoly on the use of initiation of physical force. Certain exceptions apply, of course, but those are fairly self-evident. Examples include protecting your self from a burglar, and other necessary methods of self-defense that may have to be done before the "government" can get involved). The protection of individual rights also means the protection (and full recognition) of property rights, including intellectual property (which means no one could exert force and steal or appropriate your ideas, especially if they are patented or trademarked) As such, under capitalism, there can be no such thing as slavery, involuntary servitude, or forced labor. Slavery is the antithesis of a society that respects individual rights and cannot exist (for long) in a capitalistic system. Slavery existed in America, but we fought a war to end it because it was not consistent with our fundamental principles and values as a country. The fundamental tenet of capitalism is individual rights: Countries such as Russia are not capitalistic -- they are at best autocratic bordering on a dictatorship. Note the recent government take-over of certain oil companies without due process. That wouldn't happen in a society that recognizes
individual rights.

Along those lines, under capitalism, there is only one way to deal with other men: VOLUNTARILY. If one wishes to buy or sell a good, that sale must be done voluntarily. Each man will work for his own profit and understand that every other man is doing the same. Some men will be better at others than making money (i.e. Bill Gates versus me), but all trade will be value-for-value and will be done freely and without compulsion A man is not a slave to another man if he voluntarily chooses to work for him, even if that man must work to feed his family, and must work for a low wage. Freedom and capitalism do no guarantee every man a living - it just provides a system in which almost all men - who are willing to work, will be able to do so, and be able to do so voluntarily.

Economically speaking, one has to again, start with fundamental premises. All wealth is created - and those who create it deserve to keep the fruits of their own labor (hence the recognition of property rights). America was not created on the backs of cheap labor in foreign countries (although I fully advocate using cheap labor - so long as those providing it do so voluntarily and those seeking it do so ethically). America was made by entrepreneurs, like Rockefeller, Carnegie, Henry Ford and Bill Gates (and many, many, many others). Were those individuals perfect? No. Nonetheless, their ingenuity helped America burgeon into the great country that we are. Moreover, the outsourcing of cheap labor has done a tremendous amount of good for developing countries - see Singapore (who at one time was poor), India, the Philippines for examples.

Capitalism, like humans will not be perfect. People will commit frauds and try to cheat other no matter what system you are in - and those people should be brought to justice, in a rational legal system, which punishes them accordingly. There will still be bad businesses (i.e. your power may still go out because of some moron contractor). Nonetheless, the simple idea that under Capitalism bad people might take advantage of others does not mean that we should simply do away with the system. That would be like discontinuing the use of the automobile
because X amount of people die each year in car accidents. Overall, a capitalistic society, based on individual rights, will be free, prosperous and most likely, very wealthy.

I could go on forever, but I think I stated the essentials. Politically, capitalism means the recognition of individual rights and a government whose sole aim is to vigorously protect them.
Economically, it means the profit motive, trading values for other values, and by-in-large being able to keep the fruits of your own labor - no matter how big or small those fruits may be. Taxes will still need to be levied to pay for critical government functions, but they should not be levied to redistribute wealth or fund massive entitlement programs.
Resisting the temptation to prove that I, too, could go on forever, I kept my reply as succinct as I could, because we had reached the point where we knew each other's position and understood it:
I think perhaps where you and I differ is that you have much more faith in people than do I. If it were a matter of an occasional fraud, a rare theft, sporadic laziness, and once a decade deviousness, I'd be much more likely to agree with your analysis. However, like Diogenes with his lamp, I continue to seek people who can resist the seemingly easy path to quick profits with a well developed moral code.

Capitalism is the best of what's available, but regulated capitalism is better. Until people recognize individual rights, is there any solace in a government that tries to protect them? Ideally, government's least used function should be protection of rights, for ideally, people would respect each other and not steal, plunder, rape, pillage, and maim. But they do. And after millennia of attempts to create civilization, there is more peace and prosperity when government sets boundaries through democratic processes than when it's a free-for-all free market.

The risk today is that government itself is being corrupted by those who evaded the rules, escaped prosecution, and are taking over the democratic process. They are taking capitalistic control of government. So, no, I would not ditch capitalism but I find it ineffective and inefficient in unregulated form.

If the world had a common religion or ethic, or at least a common set of values shared by all religions, then a spiritual or theological value set could replace the government's role that I am describing. Unfortunately or fortunately, religion does not serve that role well because genuine religious values are irrelevant to large segments of the population. I am not a Catholic Social Thought advocate, but having been exposed to it I recognize that it is sending, in part, a similar message. There is more to social and economic interaction than profit.

You know I wish you were right, and things worked as you describe. But they don't. The answer lies, I think, more in psychology and theology than in economics. But until those disciplines come up with cures, the economic and tax world needs to manufacture better band-aids.
And I let Nakul have the last word and wrap up our fascinating, informative, and pleasant discussion:
I agree with you 100% on the idea that economics is not a primary - philosophy/morals is. A society cannot have the right economic system if it does not have the right moral code.

I'm not suggesting that human interaction is solely for profit (I don't think my wife would like that very much). But at the same time, the profit motive is profoundly moral and should be encouraged - however, it is not the end all, be all of life. You're right that no political party these days really recognizes individual rights. Democrats certainly don't recognize property rights - at least not consistently. The so-called conservatives are much better on property rights, but don't really recognize a right to privacy (which is a common sense derivative of the right to life) and other "unenumerated" rights.

Anyway, capitalism, as I want it, doesn't exist today, and probably won't exist in my lifetime. Despite our different philosophies, I still think we could probably take a look at the budget and come up with some programs that we could cut. I think even the most ardent of government regulation enthusiasts would have to admit that we are spending way too much money. Cutting even a few programs - or at least trimming them down, would be a good start.

As a side note, you've convinced me on the capital gains tax issue. Although I think that cutting the capital gains tax should be done - I can see why doing that would disadvantage middle class and low-income wage earners. I would propose one flat tax - maybe 15% on all income, no matter how it was earned. Those who don't pay taxes now, will still not have to pay taxes under my plan (low-income earners). I would eliminate most deductions - except maybe the exemptions for dependents we have now.
So, ending with his revised tax reform proposal, Nakul never did specifically mention that he and I agreed governments ought not be funding student travel to college Bowl games, as I pointed out in last Friday's post. Of course, dealing with this sort of government expenditure, so clearly inappropriate, would not have given Nakul and I to engage in our typically extended analysis. There's no fun, in this context, with mutual "You're right, that's a totally unwise government spending decision" emails.

Monday, December 12, 2005

The "No Tax on Investment Income" Ruse 

Readers of MauledAgain know that one of the features of the current income tax system that I strongly dislike is the preferential low rates on capital gains and certain dividends. I've commented on this silliness repeatedly, and it is unquestionable that the distinction adds significant complexity to the tax law. Perhaps as much as one-fourth of the substantive provisions of the Internal Revenue Code could be jettisoned if the principle "a dollar of income is a dollar of income" prevailed over the fiction that capital gains and dividend income is more important and deserving of less tax burden.

One of my former students, Nakul Krishnakumar, referred me to a Wall Street Journal op-ed piece from last Thursday. The commentary is a regurgitation of some of the dozens of arguments that have been made over the years to justify continuance and expansion of tax breaks on capital gains and other investor activities. This piece goes further, arguing that the benefits of lowering taxes on investment are so wonderful that it justifies raising taxes on wages. It's nice to see that the advocates of putting the income tax burden on wage earners are beginning to demonstrate some candor about their position.

The op-ed piece begins with the usual "boilerplate" conclusions about the "distortions" of taxing interest, dividends, and capital gains, and how those distortions are bad for the economy. There's no proof as such, but the commentary then attempts to prove the point with an example.

In the example, a person presumed to be in the 35% bracket earns an additional $1,000, and thus pays $350 of income taxes. Of the remaining $650, $500 is spent and $100 is invested in bonds paying interest at 6%, but which the op-ed piece claims is yields 3.9% after tax. That's an application of the 35% tax rate to the interest. Assuming inflation of 2%, the real after-tax return is only 1.9%. Assuming the taxpayer is 40 years of age, and plans to retire 35 years later, the $100 will grow to $193 in current prices.

The example then compares what happens if the interest on the bonds is taxed at 15%. The 6% rate would generated a 5.1% after-tax return, and after inflation is taken into account, a 3.1% real after-tax return. Thus, the $100 would grow to $291 by the time the taxpayer retires.

The commentary claims that this example illustrates two tax distortions. First, it asserts that the tax on interest is also a tax on the reward for doing work that generated the additional $1,000 of wages income. Accordingly, according to the op-ed piece, this taxpayer has an incentive to refrain from doing the extra work. The second alleged distortion appears to be an argument that if the person increases savings to account for the impact of taxes on the savings' earnings, the person's retirement-time consumption would still be reduced.

The name of the game when making arguments is premises. And the premises in the Wall Street Journal's op-ed commentary are questionable. For example, it is assumed that the person in question would forego the additional $1,000 of income because the tax on the earnings accruing from the $100 portion that is saved aren't low enough. But most people who take on additional work do so because they have children to feed, mortgages to service, bills to pay, and other financial needs. Some people work "for the fun of it" and after-tax return is about as important to them as it is to the people who volunteer their time for charitable organizations and get zero economic after-tax return. Perhaps members of some elite leisure class, rolling in money, base their choices about earning additional compensation or playing more tennis on the sort of analysis shared by the Wall Street Journal commentary, but I've yet to meet a person who admits to having done so. Every person I know, personally or through anecdote, who has taken on additional work has done so either to earn money to make ends meet or to satisfy a psychological need to "do something for the fun of it," even if that sometimes borders on being a "workaholic."

But let's look more closely at the example. One problem with the example is that it assumes an equal tax rate on wages and investment income and then tries to justify lowering the rate on investment income. It makes more sense to deal with the situation as it now exists and to analyze the impact of the proposals to reduce even more the tax rates on investment income and to bring interest income within that preference, which is what the op-ed piece is defending.

Let's take the same person, named MC, and again have MC earn an additional $1,000. But put MC in the 15% bracket. MC has $850 after taxes from this additional work. MC pays $750 of bills and invests $100, planning to use it 35 years later. Again, assume that the investment earns 6% after taxes, generating income that qualifies for a lower 15% rate. After 35 years, the $100 grows to $570. In another part of town lives RP, who is in the 35% bracket. RP earns an additional $1,000 for the fun of it. RP has $650 of after-tax income, which RP invests because RP has already paid all of her bills. RP also earns 6% from her investment, and that income also qualifies for a lower 15% rate. After 35 years, the $650 invested by RP grows to $3,705.

Now let's assume that the "low or no income tax on investments" crowd prevails. Let's assume that the special tax rate on investment income is reduced from 15% to zero. But let's also assume that the tax rate on wages must be raised so that the change is revenue-neutral. In other words, reject the notion of deficit funding the additional tax break for investors. Even though Congress, under the influence of the investment crowd, would probably put MC into a 25% bracket and RP into a 40% bracket, let's assume that each bracket is increased by 10 percentage points, MC to 25% and RP to 45%. Keep in mind that the Wall Street Journal op-ed piece advocated an increase in the tax on wages if that was necessary because the decrease in the tax rate on investments is supposedly so important. What happens?

Of the $1,000 additional compensation earned by MC, only $750 remains. MC uses it to pay bills, and has nothing left to invest. So, 35 years later, MC's investment is worth nothing because there is no investment. RP, now with $550 remaining from the $1,000 of additional compensation, invests it at 6%, but with no tax, the after-tax return is 6%. After 35 years, RP's $550 grows to $4,227. It's not too difficult to see who benefits from the proposal, nor is it difficult to see how this plan does absolutely nothing for MC, other than to increase the chances that MC will become or continue to be a serf of MP.*

Suppose instead that MC somehow figures out how to save $100 from the $750 after-tax compensation from doing the additional work, cutting back on food, clothing, and other necessities. The alternative, incurring debt, exacerbates the disadvantages to MC because the interest on the debt would put MC into a negative investment return situation, making it even more likely that MC would reside in the modern-day equivalent of debtor's prison. If MC can somehow stash $100 into an investment, at the end of 35 years it would be worth $768 if it grew at 6% after-tax. So what does the "cut taxes on investment income even more" plan do for MC? At the cost of $100 in present day expenditures for food, clothing, or other necessities for the family, MC now has an additional $198 35 years in the future. Remember that RP has managed to use the zero rate on investment income to increase RP's "nest egg" by $522. Again, it's easy to see why the "no tax on investments" crowd likes the plan.*

Another problem with the Wall Street Journal op-ed approach and its example is that it addresses the concerns of a person saving for retirement, without dealing with the reality that earnings on retirement savings, properly invested, qualify for a ZERO tax rate until those earnings are withdrawn from the retirement account. So the typical wage earner already has the benefit of an ideal retirement plan earnings tax rate. So who would need more? Folks with huge amounts of dollars to invest beyond the limits applicable to retirement plans. In other words, the call for low or zero tax on interest and dividends is nothing more than an attempt by the wealthy to do an end-run around the current limits on how much can be stashed into a tax-free retirement savings plan.

In other words, it is very likely that under current law MC's $100 investment could be put into a qualified retirement savings plan and grow to $768. Reducing the tax rate on investments has little value for MC because MC has the benefit of the zero tax rate on retirement savings. True, when MC withdraws the $768, $668 will be subject to tax, but that will be 35 years in the future, and MC would presumably be in a lower tax bracket after retirement.

On the other hand, under current law RP's $650 investment will grow to $3,705, whereas the "no tax on investment income" plan would increase RP's investment to $4,995 if RP invested the same $650. Additionally, there would be no tax on the $4,995 when it is withdrawn and consumed just as there is no tax on the $3,705 when it is withdrawn and consumed.

Because most Americans do not understand present value, tax deferral, or the other concepts used in making these analyses, it is too easy for the economic elite and their advisors to mask this grab as some sort of wonderful sacrifice on their part for the American economy. It's not unlike the merchandise sales representative who tries to convince the customer that the grudgingly proposed price reduction is putting the seller into near-bankruptcy. Excuse me, does anyone have any tissues to offer the sales reps so that they can wipe away the crocodile tears? I'm hoping that I'm doing some sort of public service by taking apart the mirrors and blowing away the smoke from the piteous pleadings of the apparently nearly bankrupt economic elite.

Of course, as I cannot resist turning attention for a moment to another of my favorite topics, it remains a mystery why we don't mandate the teaching of these basic principles to all citizens, while they are still in mandated education, namely, early high school. Imagine a nation of citizens familiar with present value, tax deferral, and other basic financial concepts. Imagine how much more difficult it would be to pull the wool over their eyes. Imagine... WAIT!!! Perhaps I just answered my own question as to why "they" don't want this taught in the K-12 system. Hmmmm.

No matter how it's sliced, reducing the tax rates on investments outside of qualified retirement plans does NOT benefit the average taxpayer. It's a bad idea. Even the existing system is a bad idea. If Louis XVI and Marie Antoinette had put this sort of tax plan into effect, France would still be a monarchy. The peasants wouldn't have understood that they were being fleeced. By the time anyone explained it, the guillotine would have been falling on the necks of the critics. Turning to yet another of my favorite topics, yes, there's a reason I value the First Amendment. It protects my right to explain the chicanery and protects your right to read it and to share it with others (which I encourage you to do.)
*Note that inflation was ignored, because it presumably affects each taxpayer in the same manner. It very well could be that inflation for food, clothing, and other necessities is higher than inflation on luxury goods, which would cause inflation to disproportionately disadvantage MC. However, that is such a speculative consideration it does nothing to assist in the analysis of the issue.

Friday, December 09, 2005

Tax Dollars at Work: Funding the College Road Trip 

Serendipitous timing is wonderful. Nakul Krishnakumar, one of my former students, and I have been engaged in another one of our tax policy email dialogues, which may or may not eventually end up in some summarized form posted on this blog. One aspect of our discussion is the question of what government should fund, because that relates to the question of how high tax rates can or should be and how they should be distributed. Last evening I challenged Nakul to list items that he thinks the government has a proper role in funding, and when he replied, I tossed back a list of functions he had not mentioned.

At about the same time, I noticed a story, and an editorial column on that story, that described government funding for something that I know Nakul would list on his "ought not be funded" list. I agree, so I didn't toss this one at him. Hey, what's the fun in challenging each other with points on which we agree? Who knows? Maybe most people would disagree with us.

According to this Philadelphia Inquirer story, culled from wire services, the State of New Jersey has "donated" $25,000 to a Rutgers University fund established to fund almost 300 randomly selected Rutgers students who wish to travel to Phoenix to attend the Insight Bowl in which the Rutgers football team is playing Arizona State. Each student will receive a $300 "stipend." The balance of the money comes from alumni donations and some other apparently private gifts. According to Gregory Blimling, Rutgers' vice president for student affairs, "The university encourages students to support the football team at the Insight Bowl. Events like these enrich the college experience."

Who authorized the state "donation"? Acting governor Richard J. Codey. He's not up for re-election, John Corzine already having been elected to fill the next term. So whatever the reason, it's not connected to vote seeking.

Yesterday, the Inquirer's Monica Yant Kinney ripped into this boondoggle in a way that I just cannot match for elegance, sarcasm, pointed jab, and overall common sense. Read her column. For anyone who cares what happens to tax revenue, it's priceless. But I doubt she'll mind my sharing several of her observations, especially if they spark a visit to the full article. She notes that this $25,000 donation is "[a]ll for the worthy cause of helping college kids get drunk and sunburned and scream themselves silly at the Insight Bowl in Phoenix over the holidays." She's not very supportive of the fact that the state "can scrape up 25 grand to subsidize a bunch of sorority girls doing Jell-O shots in the Arizona desert." She quotes the governor's spokesman, "Rutgers hasn't been to a bowl game since 1978. It's the state school of New Jersey. We see this as an opportunity to show a national TV audience what New Jersey is all about."

Where she drives the point home is with this comment, one with which I full agree, and I am sure Nakul would agree even if he trimmed down her list: "And here I thought the state was too broke to pay for things like road repairs, homeland security, school construction, child-welfare reform and stem-cell research." For those unaware of New Jersey fiscal news, the state has been cutting spending left and right (no pun intended) because of a fiscal crisis.

Of course, the acting governor can't be voted out of office. So it was a low risk proposition for him. But, was it his idea? I doubt it. I wonder who proposed the give-a-way. An aide? Parents of students who want their children to get a full and complete education preparing them for a worthwhile career? Students themselves? I know it wasn't Nakul, and I guarantee it wasn't me!

It's this sort of fiscal nonsense that energizes the "cut all taxes and eliminate government spending" mantra. That's understandable. Of course, and this is the point on which Nakul and I are engaging each other's minds, some good programs may get axed as collateral damage. The problem, though, isn't the program. It's the people. Yes, the politicians who make the decisions. Whether it's the Congress, or an acting governor, or some other official, politicians are doing the citizens a disservice.

But in all of this there is one gleeful question: Do the students who receive the $300 "stipends" have gross income for federal and New Jersey state income tax purposes? Hmmm. Now won't THAT be a surprise!

Thursday, December 08, 2005

In Congress, It's Holiday Tax Gift Time! 

A story in today's Washington Post summarizes the most recent tax legislative action by the House of Representatives. The House has passed three bills and is ready to approve a fourth. What does the legislation do?

* Tax cuts to encourage rebuilding in areas damaged by hurricanes;

* Extension of the low tax rates on capital gains and dividends;

* Fixing up the earned income tax credit snag afflicting members of the Armed Forces serving in Irag;

* Extending the temporary "fix" for the alternative minimum tax (AMT) to prevent it from affecting middle-income taxpayers.

The cost? $94.5 billion in revenue. It's $31.2 billion for the AMT remedy, $7.1 billion for the Gulf Coast reconstruction, $153 million for the Armed Forces tax fix, and, taking the prize, $56.1 billion for the protection of lower rates for capital gains and dividends. Priorities, priorities. Says a lot about a nation, doesn't it?

There had been some speculation during the past few days that because only $50 billion or so in spending cuts had been identified and tentatively approved by the Congress, that the Bush Administration and the Republican Congressional leadership would face a tough choice between extending the low capital gains and dividends rates while letting the AMT jump back up to bite the middle-class, or extending the AMT fix while leaving capital gains and dividends to be taxed at regular rates starting a few years from now.

In the spirit of the holiday season, our "leaders" decided that everyone gets a gift. No matter that they're purchased on credit by a nation way past its credit limits.

How could anyone think this way? Easy. Consider this quote from Representative Deborah Pryce from Ohio: "Our economic policies have done the trick. We are in the middle of one of the strongest economies this country has ever seen."


That must be news to the thousands of people scraping by from day to day, to the folks who are lining up for unemployment benefits, to the workers at U.S. companies such as Ford who are hearing about imminent job cuts, to the workers at enterprises such as airlines who are watching their pensions get flushed down the drain, to the youngsters who go to bed hungry, to the homeless. Perhaps if say, 5 or 10 million families are doing so well that they can afford the second or third home, the investment flyer, and the high-end consumer goods, then the economy is doing so well that it ranks in the top five of all time. No, a rising tide does not raise all boats because those already at the bottom or with holes in them aren't floating.

Consider where the $50 billion used to fund half of these tax cuts comes from: new fees on Medicaid recipients, a reduction in the number of people qualified for food stamps, cuts in education lending, and downsizing federal child support enforcement. It amazes me that our "leaders" can conclude that it is far better for the folks hit by these cut-backs are in a better position to bear the burden of the tax cuts on their backs than investors can handle an increase in their special tax rates by one or two percentage points (which would still leave them significantly undertaxed). Note: pending in my "to be posted" list is commentary on a Wall Street Journal editorial that attempts to defend the taxation of wages and non-taxation of investment income.

The economic data is interesting. According to Maya MacGuineas, president of the Committee for a Responsible Federal Budget (CRFB), tax revenue as a percentage of economic activity "remains below the 2002 level and well below the level of 2001. .... The argument that tax cuts will grow the economy and pay for themselves is very attractive, but it's just not true." Yeah, but it makes for great sound-bites used to gather the votes of unsuspecting citizens, no? Citizens for Tax Justice explains that "the richest 1 percent of taxpayers, of Americans, with an average income of almost $1.3 million in 2009, would enjoy 53 percent of the value of the extension that year, while 78 percent would receive no benefit." The Washington Post article refers to a "recent study by economists at the Federal Reserve[, which] concluded that the dividend tax cut had no real impact on the stock market and prompted 'only muted gain in total corporate payouts.'"

Rest easy, though, as our "leaders" once again have used the tax laws to protect us from ourselves. The legislation providing tax benefits for rebuilding hurricane-damaged area excludes from its provisions casinos, country clubs, hot tub facilities, liquor stores, massage parlors, golf courses, racetracks and tanning salons. I suppose the jobs that those industries create aren't important to the reconstruction of the Gulf Coast economy. Now if the Congress were to exclude crack houses, chop shops, and similar illegal businesses from the tax benefits, I could understand. But singling out certain legal businesses because they offend the sensibilities of "Rep. Frank R. Wolf (R-Va.) and other social conservatives" is downright nonsense. If these folks can't find the votes or the popular support to outlaw enterprises such as tanning salons (perhaps on the ground they cause skin cancer?), then leave them alone. After all, most of us probably have a list of legal businesses we think ought not get tax benefits. Perhaps the rebuilding of re-election campaign headquarters should be denied tax breaks?

And the other $44.5 billion in revenue reduction? That will simply enlarge the already bloated federal budget deficits. No matter, I hear the Chinese are looking for a good investment, and might just gobble up some more Treasury securities. Sarcasm aside, it seems that the concerns I expressed about the nation living beyond its means, and trying to fight a war while pretending that the economy is not and ought not be a war economy are no less serious now than they were when I wrote about them back in September of this year, in "Taxes and Sustaining a Civilized Society." There indeed is something uncivilized in watching the grab-bag tax break free-for-all craze that has swept through the Congress, yet again.

Now before my criticism of this free-for-all grab-bag fest gets painted in partisan flavor, understand that the three bills that have already passed did so almost unanimously, with almost all Democrats joining Republicans. With the Senate having already signed on to these provisions, or close variations, it doesn't take a seer to predict that the Internal Revenue Code will very soon be undergoing its umpteenth official re-write. Despite predictions of a loud and argumentative debate on the fourth bill, the one extending the low tax rates for capital gains and dividends, it appears that the votes for passage exist. And even though this one may be closer, it's the reticence of moderate Republicans (you mean we're not extinct yet?) that makes the matter not as open-and-shut as the other three bills.

I close with a quote from Maya MacGuineas, president of the CRFB, "In a highly partisan atmosphere, tax cutting without regard to the growing federal debt appears to be one area that both parties can agree on. Everybody's losing credibility right now." May I paraphrase? "In a highly frenzied mob action atmosphere, looting without regard to the impact on future generations appears to be one area that the rioters can agree on. Everybody's losing respect right now."

I hope I'm wrong. All I want for Christmas is a legislative defeat of the capital gains/dividend low tax rate. Wait, I lied. What I really want for Christmas is an instant repeal of the capital gains/dividend low tax rate, and I'll even wish for the indexing of adjusted basis for those who want it.

Wednesday, December 07, 2005

Tax Reform Shoved to the Back Burner 

Reports are popping up throughout the news world that tax reform is dead. Technically, it's being described as "postponed" or "delayed" but the reality is simply that there is insufficient support for the sort of changes that the Tax Reform Panel proposed. Or perhaps for any sort of change. That's good news and bad news. It's good news because it sinks the bad ideas floated by the Tax Reform Panel. It's bad news because it seems as though "business as usual" once again has trumped the public interest in genuine tax reform. The cynic in me wonders if the plan all along was to poison the entire tax reform process by dishing up indigestible servings totally unacceptable to most of the nation. After all, there are a lot of politicians, lobbyists, power brokers, and governing elites who have done quite well by the current arrangements and surely don't relish the thought of their tax feeding trough being shut down.

According to bloomberg.com, the delay reflects the Bush Administration's conclusion that the proposed "changes are too tough to sell to the public and lawmakers." Supposedly the President plans to use 2006 for speeches and other efforts to find support for tax reform in 2007 or 2008. Pushing the Tax Reform Panel's proposals almost surely would lead to the same place Social Security reform went, namely, the Congressional back burner.

According to a Boston Globe report, the President has jettisoned his earlier idea to have Treasury study the Tax Reform Panel's report and prepare something for inclusion in January's State of the Union speech. Supposedly there is insufficient time, but worse, the office that would supervise the process remains vacant, a situation on which I have previously commented. Coincidence? A similar report on the denouement of tax reform was issued by CNN and the New York Times, both using the same Reuters lead. A story in Time Magazine pretty much dovetails with the other reports.

Although a few members of Congress continue to talk the tax reform game, it is just that, talk. The chair of the Ways and Means Committee, bound by House rules to step down no matter the outcome of 2006 elections, professes a desire to revamp portions of the Code, but it's a safe bet he won't get the chance. Moving forward with the Tax Reform Panel's suggestions is not something most members of Congress want to do in an election year. Criticism of the report has been so widespread and intense that advocating its ideas is political suicide. Even sensible tax reform proposals are tainted by the way in which the Tax Reform Panel painted the concept of tax reform.

The lessons to be learned aren't new. Here are some considerations for anyone interested in genuine tax reform:

1. In the long run, tinkering with the current system isn't genuine reform. People know that, particularly in an information age where back room machinations aren't the secret proceedings they once were.

2. Tax reform requires the input of, and guidance from, people who understand the tax system, who have dealt with it in practical terms, but who aren't beholden to special interests. There don't seem to be very many people with those qualifications.

3. Politics, especially the desire to be re-elected, always trumps tax reform. Serving the public interest takes a backseat to preservation of personal power.

Of course, even though there's not much sense in dissecting the Tax Reform Panel's suggestions any more than they already have been, there surely will continue to be a parade of tax nonsense stepping forth from the halls of Congress to get attention and earn, where appropriate, deserved criticism. After all, the Tax Reform Panel can't be blamed for the "songwriters are too special for their taxes" proposal that I lambasted last week.

Perhaps it's easier now to understand why I simply laugh when people ask me, "So what are you going to do after tax reform makes your specialty irrelevant?" Aside from the fact that I can, and do, teach in other areas of the law, and aside from the fact that there always will be taxation, any concern about the need for wholesale restructuring of courses, rewriting of course materials, revision of tax publications, and modification of computer-assisted tax law instruction exercises barely registers a faint blip on the radar of tax futures. There are far too many other things over which I could fret if I wished to do so. Tax reform is pretty much on the same page of my "things to worry about" list as is the possibility of an asteroid hitting my house. Yes, it's possible. No, I'm glad I haven't held my breath and have no intention to start doing so.

Tuesday, December 06, 2005

Welcome Another VUSL Prof to Blogland 

In yesterday's post on why we blog, I mentioned that several of my colleagues were considering entry into blogland. Well, today one of my colleagues, Prof. Michelle Anderson, flipped the switch to "on" for her No Rape blog. To quote her blog description, "Villanova law professor Michelle J. Anderson analyzes the legal and social issues surrounding rape and sexual assault and devises strategies to bring these practices to an end."

Michelle addresses very serious and important questions. She is focusing on an area of law that does not appear to have had much blog (or technically, blawg) attention. She brings to her blog experience in both teaching and writing about the issues. I am confident her posts will be enlightening, and I encourage you to visit and to pass the URL along to others. As challenging as it is sometimes to write about tax and my other areas of interest, I can usually cut the tension with humor. Michelle's undertaking is daunting, because she's dealing with concerns that are no joking matter.

Needless to say, but I'll say it anyway, I'm delighted that Michelle has joined our colleagues Mark Sargent and Patrick Brennan (Mirror of Justice) and myself in the world of law prof blogging. I'm hoping that this is not the last such welcome announcement.

Monday, December 05, 2005

The Whys of Blawgs 

With things slow on the tax news front, as Congress spins its wheels trying to deliver tax legislation, I get a chance to dig into my "save this for the blog" pile and pay some attention to items that had to take a back seat to other news when they first came to my attention. One is a New York Times Article by Jonathan D. Glater about the recent proliferation of blogs by and about lawyers. They've acquired the name "blawg" .... which I suppose adds a word to the list of words that rhyme with "dog," an observation that might come in handy writing poetry. Poetry about blawgs.

After reading Glater's article, though, I have the impression that blawgs are not simply blogs by and about lawyers. They're blogs about the law, written not only by lawyers, but also law students, law faculty, paralegals, and folks with law degrees no longer actively involved in the legal profession.

How prolific are blawgs? The article cites a Blogads survey that reveals lawyers in fourth place among those maintaining blogs. Almost one-fifth of bloggers identify themselves as educators, the largest such group. Slightly behind them are computer software professionals, and in third place, slightly above one-twentieth, are people working in the media. In fourth place? Legal professionals, just 3/10 of one percent behind the media folks. I didn't participate in the blog. Are law professors who blog a tiny fraction of the group in first place or a slightly larger fraction of the group in fourth place? Who knows? Who cares? I do, because the statistics indicate that a larger percentage of lawyers are blogging than are law faculty. It seems to me that it should be the other way around. After all, there's certainly an audience for blawgs.

Who's reading blogs? Another survey by Blogads puts lawyers and judges in fourth place among blog readers, behind computer professional, students, and retirees. The first two groups aren't a surprise. One would expect computer professionals and students to have the incentives to wander the blogosphere. But retirees? Aren't most retirees among the demographic cohort that is stereotyped as left behind by the computer technology revolution? Apparently retirees have not only the time to explore blogs, but I'm guessing also the interest in the many interesting and important topics that are discussed in blogs.

It's not that difficult to figure out why lawyers enjoy blogging. Lawyers work with words, and blogs offer a place to share them with others. Lawyers find all sorts of things to discuss, and blawgs certainly reflect that phenomenon. Lawyers' blogs touch not only on black letter law, but on just about everything. It has long been said, even before the Internet came into being, that lawyers were frustrated writers and actors. How true. After all, lawyers love to talk, and a blog in many ways is simply another outlet for words. I've been writing for a very long time, and looking back, I realize that those who encouraged me to write were in some ways trying to introduce me to a quieter way of generating words. For their peace and quiet. It worked to some extent, but not entirely!

Even though they constitute less than one percent of the population, lawyers appear to publish a disproportionate number of the influential blogs. Perhaps it is because most lawyers not only like to talk and write, but they speak and write well. According to one source in the article, unlike most people, who are shy about making arguments in public and risking the inevitable attack, lawyers seem to delight in conflict and argument. Lawyers tend to be people with high levels of talent and ambition. Perhaps lawyers caught in mundane practices find blogging to be a nice outlet for their interests with no role in their daily work.

Is it as easy figuring out why people read blawgs? Explaining why lawyers read blawgs is simple enough, but more than 99% of the population aren't lawyers. So what brings the non-lawyers to the world of blawgs? Needless to say, the answer to this question matters to me, because I write in a style not specifically tailored to lawyers as an audience. One answer is that the law fascinates everyone, because it is omnipresent in modern culture. After all, law and lawyers tend to dominate the news, if not in direct ways, such as headline-grabbing trials, in indirect ways relevant to most topics making today's news. Perhaps blawgs are popular among non-lawyers because lawyers have something worthwhile to say about the legal system. To paraphrase Denise Howell of Reed Smith, blawgs demystify the law, spawn discussions about politics, law, and morality, and "break down barriers" between the legal profession and the people it should be serving.

Law faculty blogs are beginning to increase in number. Though it varies from school to school, the percentage of law faculty who blog appears to be catching up to the percentage of other legal professionals who blog. Within the past several weeks, four of my colleagues have sought my advice, and help, in starting blogs. All four will have something to offer that fills a gap in the subject matter of blawgs. If all four bring their plans to fruition, it would triple the number of blogs maintained by Villanova law faculty.

Ultimately, though, the best explanation comes from Ann Althouse, a law professor at the University of Wisconsin. "Compared with spending a year writing a law review article, she said, blogging is fun."

She is so right!

Friday, December 02, 2005

Tax, Marriage, Step-Siblings, and Dependency Exemptions: Sometimes It's Life That Is Complicated 

Once more I can demonstrate why it is true that one can learn much by teaching. The recent changes in the definition of dependent for purposes of the personal and dependency exemption deduction required me not only to provide the new statutory language to the students in the basic federal tax course but also to revise the answers to the problems that we tackle as part of the statutory interpretation process. As we worked our way through several different hypothetical fact situations, I noticed something and pointed it out to the class. Two weeks later, when it was time to administer another in-class graded exercise, I presented the students with four questions (to be answered using their student response pads ("clickers")). Here is one of those questions:
Exer #10(F05) Ques #3. F marries W1, and they have a child C. W1 dies. F marries W2, who has a child S from a prior marriage. Later, when both are over 25, C marries S and they have the same abode. S has gross income of $670, and otherwise is entirely supported by C. If C files a separate return ....

A. C can claim a personal exemption for S.
B. C can claim a dependency exemption for S.
C. C cannot claim a personal or dependency exemption for S.
Go ahead. Try to answer the question. You can evaluate your performance by continuing to read.

Of course, the question drew snickers just as my observation two weeks earlier had raised eyebrows. I'll get back to that in a moment.

Here's the analysis that I expected students to do, that would take them to the correct response. In this sort of question, they would be thinking through this process and selecting an answer rather than writing out a full explanation. And so here's another example of why working with the law is not much different than working through a puzzle, which is why I am startled when some law students tell me they detest doing puzzles, a phenomenon I discussed in a Law School newsletter column several years ago in "Doing Puzzles While Learning & Practicing Law".

First, with respect to any possible personal exemption, a taxpayer cannot claim one for his or her spouse unless three conditions are satisfied. Quoting section 151(b), "a joint return is not made by the taxpayer and his spouse," "the spouse ... has no gross income," and "the spouse ... is not the dependent of another taxpayer." In the hypothetical, the spouse has gross income, and that precludes the taxpayer C from claiming a personal exemption. Choice A must be discarded.

Second, with respect to any possible dependency exemption, the taxpayer cannot claim one for his or her spouse unless the spouse is a "qualified child" or a "qualified relative." Let's look at each in turn.

Now before jumping to instinctive conclusions and gasping at the thought of a spouse being a qualifying child, consider the definition. Under section 152(c)(1), "a qualifying child ... with respect to any taxpayer ... [is] an individual (A) who bears a relationship to the taxpayer described in paragraph (2), (B) who has the same principal place of abode as the taxpayer for more than one-half of [the] taxable year, (C) who meets the age requirements of paragraph (3), and (D) who has not provided over one-half of [the] individual's own support for the ... year." As to the first condition, the individual qualifies under section 152(c)(2) if the individual is "(A) a child of the taxpayer or a descendant of such a child, or (B) a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of any such relative." The spouse is taxpayer C's stepsister, so the first condition is met. We'll come back to this a little later. As to the second condition, the facts state that C and the spouse share the same abode, so it is met. As to the third condition, the individual does NOT qualify under section 152(c)(3) because the individual has attained the age of 24; to satisfy this condition, the individual must either have "not attained the age of 19 as of the close of the ... year ... or be "a student who has not attained the age of 24 as of the close of [the] year." So the spouse in this case is not a qualifying child. Can it happen? A momentary tangent. Suppose the spouse were 18, or a full-time student not yet 24. The third condition would be satisfied, leaving us with the fourth condition to analyze. The facts tell us that C provides all of the spouse's support, which means the spouse does not provide half of his or her own support, and thus the fourth condition would be satisfied. Yes, had I set the age of S at 18, or made S a full-time student with an age under 25, the outcome would be different. But, giving a peek into the design of questions, I didn't want S to be a qualifying child because I wanted students to go further in their analysis.

So we turn to the question of whether the spouse can be a "qualifying relative." Under section 152(d)(1), a "qualifying relative ... with respect to any taxpayer ... [is] an individual (a) who bears a relationship to the taxpayer described in paragraph (2), (B) whose gross income for the ... year ... is less than the exemption amount ... (C) with respect to whom the taxpayer provides over one-half of the individual's support for the .. year ..., and (D) who is not a qualifying child of [the] taxpayer or of any other taxpayer for [the year]." Having already determined that S is not a qualifying child of C, and knowing that C provides all of S's support, we know that the third and fourth conditions are satisfied. What about the first? The individual qualifies under section 152(d)(2) if the individual is "any of the following with respect to the taxpayer: (A) A child, or a descendant of a child, (B) A brother, sister, stepbrother, or stepsister, (C) The father or mother, or an ancestor of either, (D) A stepfather or stepmother, (E) A son or daughter of a brother or sister of the taxpayer, (F) A brother or sister of the father or mother of the taxpayer, (G) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law, (H) An individual (other than an individual who at any time during the taxable year was the spouse ... of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer's household." Because S is C's stepsister, S satisfies the third condition. Note that the prohibition against spouse only applies to persons trying to qualify under subparagraph (H) and not those, like S, who qualify under any of subparagraphs (A) through (G). What about the second condition? S satisfies it because S has gross income of $670, which is less than the exemption amount.

Wow! S is a qualifying relative. So the correct response is choice B.

How did you do? Good guess? Good reasoning? No clue? Or, as is the case for many, no way this is possible?

It does seem strange, doesn't it? Interestingly, the possibility existed under the statute as it existed before last year's changes, but I didn't notice it. What caused me to pay close attention was the change in the definition of child, for the idea that a child could include a sibling or step-sibling for dependency exemption purposes was counter-intuitive. Last year, I shared a detailed explanation in the post, "Redefining Children (at least in the Tax World)". There is a good reason for the change. To accomplish the legislative goal of creating one definition of child for purposes not only of the dependency exemption but also the child credit, the earned income tax credit, and other provisions, the language needs to reach beyond child and include those other close relatives who are eligible for purposes of those credit and other provisions.

But wait. Isn't the hypothetical a bit bizarre? People don't marry their step-siblings. Two anecdotes not only are helpful but probably will end up being retold. Some years ago I happened upon a television movie starring, among others, Dermot Mulroney, whose father is one of my colleagues and who is director of the Graduate Tax Program. Knowing almost nothing about Dermot, I figured I'd watch the movie just to see who he was, whether he looks like his father (yes, the resemblance is apparent), and whether he was good at acting. This was long before he became the well-known star he is today. Well, the movie, "Sin of Innocence" (1986) turned out to be about a step-brother and step-sister who fall in love with each other. The next morning I'm in Michael's office. "Hey, I saw your son in a tv movie last night and he played the part of a guy who fell in love with his step-sister." Michael replied something to the effect that this was the sort of part Dermot had been getting. "Young Guns" and "My Best Friend's Wedding" were yet to come. Suddenly, as Michael and I were discussing the "tawdriness" of the film's plot, a light bulb went on. I looked at Michael and quietly said, "Wait a minute. My great-great-great-great-great grandfather Daniel Maule married his step-sister Hannah Brown. Whoa!" Michael just stared at me, as he sometimes does when I blurt out some startling fact. "Yep, and it's no big deal. We're talking four different grandparents for each of them. It's not a problem. It's not illegal. It's not morally unacceptable. It's not theologically prohibited." After I administered the graded in-class exercise, I explained the answer but still noticed some very suspicious looks. So I described another scenario, a bit different from the facts of the problem, but raising the same possible issue and based on a true life story. Two people, let's call them H and W, who are unrelated (at least in the sense they are not closely related) meet, fall in love, and decide to marry. The families meet. H and W get married. In the meantime, H's mother, whose marriage isn't so wonderful, and W's father, whose marriage is likewise falling apart, end up falling for each other, divorce their respective spouses, and marry. Does this not make H and W step-siblings? It also makes for a bunch of other things, such as really interesting Thanksgiving dinner seating arrangements, but I'm not going there.

But one more nagging hesitation exists. When C married S, did that terminate their step-sibling relationship? Yes, I researched this. No, there is no direct authority. What I did find, though, is some regulatory guidance with respect to other relationships. Working from another problem we do in the class, what happens under the following circumstances? H marries W. W has a brother B, who is supported by H and W. B has no gross income. So H and W, on their joint return, properly claim a dependency exemption for B. But then, sadly, W dies. H, a nice fellow, continues to support B. Does B meet the relationship condition for being a qualifying relative? Is B the brother-in-law of H? Well, yes, surely before W died. Does W's death end that relationship?

Regulations section 1.152-2(d) provides that "the relationship of affinity once existing will not terminate by divorce or the death of a spouse." I call this the "once an in-law, forever an in-law" rule, and it's yet another instance in which teaching tax can be fun, notwithstanding what some may think. Surely, this sort of rule makes this part of tax fun to teach. "You can divorce your spouse but apparently the tax law doesn't let you divorce the in-laws." The looks on their faces are priceless. But then I explain that in order for the tax question to exist, the person must be supporting their ex-spouse's sibling, suggesting that an amicable relationship between the taxpayer and the sibling-in-law exists. It could be, as one student pointed out, a case of a taxpayer who married a friend's sibling, perhaps against the friend's advice, and when things fell apart between the taxpayer and the spouse, the taxpayer and the friend maintained their friendship, along with a tax-eternal designation of siblings-in-law.

Anyhow, next question is whether a similar rule exists or should be inferred for step relationships, namely, "once a step-sibling always a step-sibling." It seems to me that just as a brother-in-law relationship is a relationship of affinity, so to a step-sibling relationship is one of affinity, caused by a marriage, in this instance, the marriage of a parent. After making inquiries, I learned from the lawyer who drafted what he calls the "rule that a relationship once acquired stays on forever" that it was raised by his boss, who knew of someone who supported a step-grandchild. So I'm even more confident that "once a step-sibling always a step-sibling" is the rule for tax purposes.

One last point. If Congress wanted to preclude spouses from being qualifying relatives under all circumstances, it would have put the "(other than an individual who ... was the spouse)" language in the introductory phrase of section 151(d)(2). Instead, it is in subparagraph (H), leaving subparagraphs (A) through (G) free of that limitation.

Whew! And people wonder why tax law is complicated. There are all sorts of reasons, and sometimes the complexity of life will be reflected in the complexity, not of the law, but of the application of the law to the facts. Sections 151 and 152 aren't all that complex. In fact, they're fairly easy to handle, as demonstrated by the adeptness with which students who have been in the basic tax course for all of 12 weeks deal with these issues. Life itself is complex.

A few may have noticed how, once again, I managed to bring together tax law, legal education, theology, and genealogy. All that's missing are the model trains, the music, and the chocolate chip cookies. Don't tempt me!

Thursday, December 01, 2005

MauledAgain Featured in Blawgworld 2006 

This blog has been selected as one of 51 blawgs (law-related blogs) featured in TechnoLawyer's new e-book, "Blawgworld 2006: Capital of Big Ideas."

I'm delighted. In an internet world where 80,000 new blogs appear every day, any spotlight is valuable. I'm hoping that at least a few members of Technoworld stop by for a visit and decide to return or to add MauledAgain to their RSS feeds.

I've browsed Blawgworld 2006 and have discovered that most of the blawgs featured in the e-book are ones I had not previously seen. I must confess that as much as I am immersed in law blogging, I was unaware of how pervasive law blogging has become. Perhaps I was concentrating a bit much on law faculty blogs and ignoring what the practitioners have been sharing?There are blogs on a wide variety of legal subjects, many acting as news providers with respect to cases and developments that otherwise would not come to the attention of lawyers and law professors because they end up in a disposition other than an appellate opinion. There are blogs topics dealing with patent law, medical malpractice, securities law, trial practice, electronic evidence, intellectual property, contracts, family law, the Fair Trading Act, environmental law, law office practice management, employment law, legal research, corporate law, First Amendment law, and other areas of law.

Knowing that tax practitioners have, and must have, a keen interest in other areas of the law, for those are the places where our tax issues germinate, I recommend that you visit TechnoLawyer, sign up (it's free), and get your copy of "Blawgworld 2006: Capital of Big Ideas." You'll also receive free newsletters from Technolawyer. Tell them I sent you. Tell them thanks for featuring a law blog that you read. And rather than tell you which of my postings was featured, I'll let you find out when you browse through your copy of the e-book.

Newer Posts Older Posts

This page is powered by Blogger. Isn't yours?