Sunday, September 25, 2005

Estate Tax Rationale

A good deal of the debate over estate tax repeal has revolved around issues of the amount of the tax burden and the economic class upon which the burden falls. Lost in the rhetorical shuffle is a clear articulation of a philisophical justification for the tax.

Thursday, Linda M. Beale, at her weblog, ataxingmatter, makes several good arguments in support of an estate tax. While the posting is entitled The World Bank on Estate Taxes, her discussion is significantly broader in scope than the World Bank's study (the necessity for estate taxes in developing countries).

One of the points that she makes even goes beyond the estate tax question. She notes:
The [amicus brief submitted by by Columbia, Cornell, Chicago, Harvard, New York University, Pennsylvania and Yale, in the case of Rumsfeld vs Forum for Academic and Institutional Rights, concerning the Solomon amendment that withholds federal research dollars from colleges and universities that prevent military recruitment on campus] articulates the essential role of research universities in the economic and social life of the country. Here are two short paragraphs explaining the importance of federal taxpayer dollars in support of basic research at major research universities.
By any relevant measure, the unencumbered provision of federal funds for university research has been .exceptionally productive.. Nat.l Science and Technology Council, supra, at 331. The results of that partnership are ubiquitous and indispensable; they touch almost every factor of modern life. The computer on which this brief was written is a descendant of the Whirlwind, the world.s first high-speed, general purpose, electronic digital computer, which was developed at MIT with federal funds. MIT, The Federal Government and the Biotechnology Industry: A Successful Partnership (1995), available here.The Internet, now an integral part of society, began as a network of computer science departments funded by the National Science Foundation. National Science Foundation, The Nifty Fifty, available here. (last updated Jan. 27, 2005). The biotechnology revolution, which has spawned most of themedications on which we depend, emerged from pioneering academic research conducted with funds from the National Institutes of Health. Arthur Kornberg, Support for Basic Biomedical Research: How Scientific Breakthroughs Occur, in The Future of Biomedical Research 38 (Claude E. Barfield & Bruce L.R. Smith eds., Washington, DC: American Enterprise Institute & The Brookings Institution 1997). Federally funded academic research on fiber optics paved the foundation for the modern telecommunications era. National Science Foundation, supra. Indeed, the social value of basic research conducted at America.s universities is difficult to overstate: secure credit-card transactions, lasers, doppler weather radar, sign language, even the yellow highway barrels that minimize injuries from car collisions. all of these mainstays of daily life, among many others, likely would not exist without it. See id.

These innovations have contributed enormously to the national economy. Studies estimate that roughly one-third of the total value of the NASDAQ market stems from federally funded university-based research. Margo Carmichael Lester, Federal Funding Spurs Private Innovation, LARTA Vox (Nov. 3, 2003), available here. In the high-technology sector, where federal funding of academic research is most robust, America is the world leader, accounting for about one-third of global production. National Science Board, Science and Engineering Indicators -2004, at 6-8. And because .U.S. high technology industries have been more successful exporting their products than other U.S. industries, [they] play a key role in returning the United States to a more balanced trade position. in a time of growing deficits. Id. at 6-11.
Without the fundamental research mission of our major research universities, we would likely never have discovered various technologies that we use daily to make our lives better, from medicines to the internet. And much of that research would never have been conducted without the support of federal tax dollars. The tax dollars paid by you and me (and, hopefully, by rich people too) turn around and support cutting edge research that in turn ultimately results in new businesses, new medical treatments, and even new forms of art. The cycle of tax dollars from entrepreneur to entrepreneur is the wonderful saga of a democratic society at work. That work is made more possible by mechanisms such as the estate tax.
Her posting also discusses the issue of why it is socially beneficial to tax concentrations of wealth.

Friday, September 23, 2005

It's An Ill Wind Department

Joel Schoenmeyer at Death and Taxes picked up this one from the online edition of Time:
Federal troops aren't the only ones looking for bodies on the Gulf Coast. On Sept. 9, Alabama Senator Jeff Sessions called his old law professor Harold Apolinsky, co-author of Sessions' legislation repealing the federal estate tax, which was encountering sudden resistance on the Hill. Sessions had an idea to revitalize their cause, which he left on Apolinsky's voice mail: "[Arizona Sen.] Jon Kyl and I were talking about the estate tax. If we knew anybody that owned a business that lost life in the storm, that would be something we could push back with."

If legislative ambulance chasing looks like a desperate measure, for the backers of repealing the estate tax, these are desperate times. Just three weeks ago, their long-sought goal of repeal seemed within reach, but Katrina dashed their hopes when Republican leaders put off an expected vote. After hearing from Sessions, Apolinsky, an estate tax lawyer who says his firm includes three multi-billionaires among its clients, mobilized the American Family Business Institute, a Washington-based group devoted to estate tax repeal. They reached out to members along the Gulf Coast to hunt for the dead.

It's been hard. Only a tiny percentage of people are affected by the estate tax—in 2001 only 534 Alabamans were subject to it. And for Hill backers of repeal, that's only part of the problem. Last year, the tax brought in $24.8 billion to the federal government. With Katrina's cost soaring, estate tax opponents need to find a way to make up the potential lost income. For now, getting repeal back on the agenda may depend on Apolinsky and his team of estate-sniffing sleuths, who are searching Internet obituaries among other places. Has he found any victims of both the hurricane and the estate tax? "Not yet," Apolinsky says. "But I'm still looking."
(Emphasis supplied.)

My advice to Sessions and Apolinsky: Don't give up. I understand that Mt. St. Helens has been somewhat active lately. Perhaps, if it perks up a bit more, you can sell the idea of appeasing the volcano gods by sacrificing a billionaire who will be allowed to pass on his or her estate without the imposition of the estate tax.

Tuesday, September 20, 2005

Hello Kelo

In June, I posted some comments about the Supreme Court's opinion in Kelo v. New London. In general, I thought that Kelo was a sensible decision. Of course, while I believe that it is appropriate to use the condemnation power to advance public planning goals, like all public power, I recognize that the condemnation power can be applied corruptly.

Kelo has been the subject of fairly broad criticism from both sides of the political spectrum. However, the damage caused by Katrina will trigger the application of the principles of Kelo on a scale not contemplated in June. No doubt, there will be situations where those principles are used to enrich those with political connections rather than to advance the public interest. (There have already been blog comments on this issue, generally expressing fears that Kelo will be used to dispossess African-Americans and the poor. See here, here, and here.) However, the reconstruction of New Orleans in any rational way is unthinkable without the power of condemnation. And Kelo.

Monday, September 19, 2005

Comments on Circular 230

In August, I posted excerpts from and links to letters from Leslie Samuels and Diana Wollman to Cono R. Namorato, Director,Office of Professional Responsibility, of the IRS and Stephen A. Whitlock, Deputy Director, Office of Professional Responsibility, IRS, confirming that the Service agreed with their interpretation of Circular 230 as applied to certain types of agreements, term sheets and educational materials. Today, Tax Analysts is reporting that:
The government recognizes that the final Circular 230 rules are not perfectly targeted to the transactions they are intended to address, acknowledged Michael J. Desmond, Treasury’s acting deputy tax legislative counsel, appearing on various panels September 16 at the American Bar Association Section of Taxation’s meeting in San Francisco. But there is a view that the problems should be addressed on a more deliberate basis, he said, so as to avoid having to revise them every three months. While fixing the rules is a high priority, there is also some desire to “let the dust settle,” Desmond said.

The government is looking at focusing and simplifying the rules, according to Desmond. Adding exceptions and definitions is “not the way to go,” he said.

Among the ideas being considered for providing interim guidance is setting up a Frequently Asked Questions page on the Web site for the IRS Office of Professional Responsibility (OPR), he said. The government could use more suggestions, Desmond added.

Unanswered letters to the IRS are not guidance, Desmond said in response to questions about recently published letters from New York lawyers who refer to agreements reached with OPR officials during private meetings. From a policy perspective, the best approach is to fix the rules, he said.
(Emphasis supplied.)

I will edit the August posting to provide a link forward to this posting.

Sunday, September 18, 2005

Rehearsal for Retirement

Via the TaxProf, we have the CRS Report Pension Sponsorship and Participation: Summary of Recent Trends. The report makes for fairly easy reading even for those not well-acquainted with retirement plans. Several points are worth noting:
  • There are essentially two types of retirement plans, defined benefit plans and defined contribution plans. "In a defined benefit plan, it is the employer who bears the investment risk of the plan, while in a defined contribution plan it is the employee who bears the investment risk." Although the report does not point this out, Social Security is, in essence, a defined benefit plan, while Bush's plan to gut reform Social Security was (is?), to a large extent, a defined contribution plan.

  • The number of defined benefit plans is declining. "Between 1985 and 2004, the number of defined benefit pension plans with fewer than 100 participants fell from 90,911 to 18,835, a decline of 79.3%. The number of large DB plans fell from 23,485 to 12,403, a decline of 47.2%."

  • Overall, participation in an employer sponsored plan has been declining. "In 2004, 52.9% of men who were employed year-round, full-time participated in a company-sponsored retirement plan, compared to 54.1% of women. Both of these participation rates were lower than the peak participation rates of 1998-1999. The participation rate for men was 6.3 percentage points lower in 2004 than in 1999. The participation rate for women was 2.1 percentage points lower in 2004 than in 1999."

  • A lower percentage of Black and Hispanic workers than White, Non-Hispanic workers participated in employer sponsored plans, but the gap between Black and White, Non-Hispanic participation has narrowed somewhat.

  • There is a dramatic gap in participation between low wage (lower quartile) and high wage (upper quartile) employees, with low wage employees having a participation rate of less than one-half of upper wage employees. Although not mentioned in the study, this accentuates the tax burden on these two groups, since contributions to retirement plans are tax deferred. As a practical matter, this means that the tax burden on income earned by lower income workers is higher than that borne by upper income workers.
Also last week, the CBO published a paper on The Risk Exposure of the Pension Benefit Guaranty Corporation. The PBGC is the insurer of last resort in the event that a defined benefit plan sponsor becomes insolvent and the plan has insufficient assets to cover the liabilities.

The PBGC does not pledge the full faith and credit of the Federal government. Theoretically, that means that in the event its assets are insufficient to meet its obligations, the tough nuggies rule kicks in and participants in failed plans would just have to face up to losing their pensions. Because this would cause a political furor, the CBO assumed that the Federal government would, in fact, shoulder any shortfall notwithstanding the fact that it currently has no legal obligation to do so.

The CBO report is unsettling. "Over 10 years, the prospective market-value cost of the program is $63.4 billion. Adding PBGC's accumulated deficit of $23.3 billion results in a total cost of $86.7 billion. Extending the horizon increases total net costs to $119 billion for the next 15 years and $141.9 billion for 20 years." These amounts, however, are smaller than estimates from other quarters. For instance, the report notes that "CBO's estimate is only two-thirds of the $96 billion in reasonably possible losses reported by PBGC." And, comparing CBO's "estimates with numbers reported in PBGC's financial statements, the 10-year forwardlooking market value of the insurance is only about 15 percent of the more than $450 billion in reported aggregate pension underfunding." In other words, while things are bad, they might end up being a whole lot worse.

Traditional economic theory tells us that employees effectively bargain for the services they render to their employers. To the extent that, for instance, they have bargained for a defined benefit retirement plan, they are at risk of losing the benefit of their bargain. In any event, there is a decided downward trend in the ability of employees to fund their retirement. Current trends in retirement plans are increasing the risk that employees will have sufficient assets to fund their retirement. Fewer employees are covered by retirement plans, the retirement plans increasingly tend to place the downside investment risk on the employees, and the insurer of last resort for existing defined benefit plans faces a dramatically increasing loss profile.

Knave Calls Fool a Fool

President Bush claims that the Federal government can pay for the approximately $200 Million that it will spend on Katrina-related relief by cutting costs in other, presumably domestic, programs. To anyone even remotely knowledgeable about the Federal budget, this claim is laughable. Typically, however, the Republicans have, regardless of how preposterous White House claims were, toed the party line and said something along the lines of "Well, that sound's ok to me."

Apparently not this time.

Via Centerfield, we learn that even the exterminator doesn't buy this baloney:
House Majority Leader Tom DeLay said yesterday that Republicans have done so well in cutting spending that he declared an "ongoing victory," and said there is simply no fat left to cut in the federal budget.

Mr. DeLay was defending Republicans' choice to borrow money and add to this year's expected $331 billion deficit to pay for Hurricane Katrina relief. Some Republicans have said Congress should make cuts in other areas, but Mr. DeLay said that doesn't seem possible

"My answer to those that want to offset the spending is sure, bring me the offsets, I'll be glad to do it. But nobody has been able to come up with any yet," the Texas Republican told reporters at his weekly briefing.
The full reportage can be found here.

Katrina has confronted us with a real and concrete problem: There's simply too much spending and not enough tax income in the Federal budget. Even true believers such as DeLay can do the simple arithmatic. More astute (and intellectually honest) observers, such as Daniel Schaviro are getting shrill:
I would say that a calamitous Weimar Germany-style crisis involving hyper-inflation and the collapse of US government credit has become both significantly more likely to happen, and likely to happen sooner. Barring a dramatic change in the rate of healthcare expenditure growth, which would have to happen on its own since no one in Washington is addressing it, we have known for quite a while that the US is going to face fiscal collapse UNLESS Congress and the President address it responsibly in time, and in the interim retain credibility with financial markets as planning to address it responsibly.
This means that, at the least, that there will likely be a serious effort to rollback the Bush tax cuts for the rich. As a practical matter, I think that the estate tax repeal and the income tax cut that was making its way to the Senate via the reconciliation bill are both dead or, perhaps in the case of the reconciliation bill, on life support.

Above all, it means that knaves and fools will find it increasingly difficult to keep on putting out happy talk that is so obviously nothing more than happy horseshit, since even they don't believe their own lies any longer.

Thursday, September 15, 2005

Love, War, and Contribution

I came across the case of Field v. Bryant (In Re: Shelton), from the United States Bankruptcy Court for the District of Maryland. The case deals with some interesting issues in the area of the right of a joint owner for contribution. Looking at the facts, however, the case also gives a slightly different perspective on wealth than we've been exposed to when dealing with question of estate tax repeal.

Bryant and Shelton lived together, without getting married, for several years. After 9/11, Bryant was called up for service in Afghanistan. At about the same time, Shelton's economic situation declined.

The parties decided that Bryant would continue to pay the mortgage on the residence that they had purchased together and shared. (Shelton had paid the down payment from her funds.) This arrangement continued for several years.

Upon his return from service, Mr. Bryant found that his relationship with Ms. Shelton had changed. As noted by the Court "he came home to a hostile environment, found most of the house closed off to him and was forced to sleep on the floor."

Byant claimed that, upon sale of the house by the bankruptcy trustee, he was entitled to contribution from the proceeds for one-half of the morgtgage payments that he made. In other words, that he was entitled to one-half of the proceeds from the sale, plus a payment from the one-half of the proceeds that would otherwise go to the trustee in an amount equal to one-half of the mortgage payments he made while he was in Afghanistan. Of course, the trustee made similar claims for contribution (contribution for one-half of the down payment that had been made by Ms. Shelton, for instance).

The trustee opposed Bryant's request, in toto, on a number of grounds, e.g., waiver, estoppel, and that the "excess payments" were a gift from Bryant to Shelton.

The Court generally sided with Bryant and rejected the trustee's defenses. The Court did, however, allow offsets for contributions made by Shelton. At the end of the day, Bryant was granted a net amount of $11,565.26 due as contribution from the sale proceeds.

From October, 2001, through May, 2004, with only a four month hiatus in the middle, Mr. Bryant served his country in Afghanistan. I suspect that the service was hardly pleasurable.

He came home to find a relationship of twenty years in tatters and was relegated to sleeping on the floor of his own house. He had to institute litigation in order to obtain $11,565.26 from contributions that he made to support the mortgage on the house.

Now, can someone explain to me why it is necessary to raise the lifetime estate tax credit equivalency to $5 Million?

Tuesday, September 13, 2005

Do I Really Need a Caption for This?

Thanks to Peter Ward.

Now I Understand

The following question was posed several weeks ago on the MSBA's Section of Business Law listserve:
Is anyone familiar with a company called Advantage Corporation Services? They are encouraging business formation in Nevada because of the favorable statutes and regs for business. I have a potential client that has allowed this company to start on formation paperwork for him however now they want him to be his own resident agent in Maryland which will be his primary place of business . . . .[A]ny information would be helpful.
My response at the time was:
There are a host of companies that "push" Nevada as the state of domestication for corporations and LLCs based upon alleged benefits that are, so far as I can determine, illusory. By way of example, I've heard of an individual who formed an LLC in Nevada because he was assured that Nevada would only turn over the ownership info concerning the LLC if it received a subpoena. I then informed him that Maryland went one step further, since it didn't have any ownership info to begin with and even if it received a subpoena would therefore not turn over any ownership info.
There were other, similar, responses.

Yesterday, the LAT had an article, Tax-Averse Firms Cross a State Line, (registration required) where it reported that a large number of California businesses were incorporating in Nevada to avoid California state taxes.
No need for savvy accountants or high-priced lawyers. Seminars, webcasts and radio advertisements bray that it's easy to slash a California tax bill — or eliminate it altogether — by creating a corporation in Nevada, where there is no income tax on businesses or individuals. Set one up online with a few keystrokes and a $395 credit card payment! For a little extra, a Nevada mailing address, telephone number and bank account can be added.

Promoters peddling the packages call it good tax planning. California officials call it something else: tax fraud. They say the cash-strapped state's coffers are being drained as even some of the smallest California businesses shift their profits into hastily created corporate shells in the Silver State.

"We want to catch this scam before it gets out of hand," said state Controller Steve Westly. "We think it will cost the state tens of millions of dollars if this continues."

* * * * *
Nevada corporate secrecy laws can make it impossible to unearth how exactly money is being used once it is shifted there. Unlike most other states, Nevada doesn't work cooperatively with the IRS to root out tax cheats — something the office of the Nevada secretary of state highlights in a pamphlet titled "Why Incorporate in Nevada?"
Part of the scam, sorry, legitimate planning strategem, frequently involves:
[S]etting up a Nevada corporation to own all of a company's equipment — ovens for a bakery, for example, or maybe computers and fax machines for a travel agency. But no baking or travel planning is being done in Nevada. No one involved in the business is even located there. Everything is still happening in California.

The owners simply use the Nevada company to lease the equipment back to the store in California. The cost of the lease cancels out California profits, possibly eliminating taxes owed there. The profit gets shifted to Nevada, which has no corporate or personal state income tax.
The use of the scam strategy appears to work, in part, because of the apparent difficulties faced by California audit personnel in attempting to obtain information via administrative subpoena in Nevada. The problem has been exacerbated by the Supreme Court's ruling in Franchise Tax Bd. of Cal. v. Hyatt, 538 U.S. ___ (2003), which held that the doctrine of comity did not compel the Nevada courts to honor the California taxing authority's claim that sovereign immunity provided a shield against claims for intentional torts.
"It makes it a little more scary to audit someone in Nevada," said Frank Katz, general counsel for the Multistate Tax Commission, an organization of state governments working to make tax collections more efficient. "The person can now just sue you there."
Given the possibility that this gambit threatens to rip a wide hole in California's tax collection mechanism, I suspect that the state's tax administrators and its courts will rise to the occasion and devise appropriate plugs. Tax avoidance should be more than a $395 credit card charge and a wink and a nod.

Sunday, September 11, 2005

A Depressing Opinion

This from Naked Cartwheels:
"I'm not sure the city can come back," says Louisiana native and novelist James Lee Burke, who believes the flood merely exacerbated the city's decades-long spiral of descent and social deterioration from illegal drugs, crime and government neglect.
Somehow, I always thought that the creator of Dave Robicheaux would have been more optimistic. In the Robicheaux novels, New Orleans, the underdog city, always seems to prevail.

Does David Brooks Read the New York Times?

In his column today, David Brooks offers this apologia for the total incompetence of FEMA in response to Katrina:
This preparedness plan is government as it really is. It reminds us that canning Michael Brown or appointing some tough response czar will not change the endemic failures at the heart of this institutional collapse.

So of course we need limited but energetic government. But liberals who think this disaster is going to set off a progressive revival need to explain how a comprehensive governmental failure is going to restore America's faith in big government.
If he had bothered to read the lead story on the front page, he would have discovered the following:
Under the Bush administration, FEMA redefined its role, offering assistance but remaining subordinate to state and local governments. "Our typical role is to work with the state in support of local and state agencies," said David Passey, a FEMA spokesman.
In other words, FEMA failed not because of some inherent inability of government, but because this administration has attempted to get out of the business of government. The reason that FEMA failed (in addition to the fact that Bush had filled the upper ranks with political hacks with no experience or competence in disaster relief) is that, following the Bush party line, it intentionally abdicated its role as the principal source of disaster relief.

National governments have the ability to do things that state and local governments and the private sector cannot do. These smaller entities typically face more immediate financial pressures. By way of example, if New Orleans or Louisiana had attempted to undertake the cost of building a levee system or a massive relief organization-in-waiting, they would have been bankrupt in no time, since businesses would have fled to lower tax jurisdictions. The federal government can undertake these tasks because the American citizenry is not likely to flee to some other country.

Government can provide essential goods and services for its populace that cannot be provided in any other way. When you place the reins of government in the hands of ideologues who do not understand or appreciate the central animating principle of government, you end up with failures like the one that we have seen for the last two weeks. The response to Katrina was not an illustration of some natural limitation on the ability of government to act. Rather, it was a demonstration of the fundamental failure of the ideology of the Republican right which refuses to recognize the necessity of government.

Saturday, September 10, 2005


On the right, you will notice that there are now two possible ways to get postings via email. Both have their strengths and weaknesses.

Bloglet does not carry the captions and if I post more than once in a single day the email comes across as a single posting.

FeedBlitz cures these problems and, in addition, allows postings to come in via HTML. Its primary weakness is that, if you subscribe to more than one blog via FeedBlitz, you receive all of the postings on any day from all of them in a single email. However, the postings from each blog are grouped together.

If you want to follow a number of blogs, the best way is via Bloglines. At the top of the column on the right you will find an icon that will allow an easy way to subscribe via Bloglines.

Friday, September 09, 2005

Better Late Than Never?

Katrina has, if not killed estate tax repeal efforts, dealt them a serious body blow. Now that estate tax repeal is off the immediate news radar, Floyd Norris chief economic reporter for the NYT finally, FINALLY, had a column on the subject, How to Assure the Very Rich Stay That Way.

The column contains no information that is new to those who have followed the issue via the blogosphere for the last several months. Why did it take the Times chief economic reporter so long to examine the topic? Had it not been for Katrina, after all, the Senate would already have taken the key votes on the question.

To an increasing extent, there is a stratified gradient of the amount and quality of news and information Americans receive.

At the lowest level, there are those who get no information other than via television or commercial radio. It is this mass market that is most susceptible to the baloney dished out by the Faux News and the Rush Limbaughs and Bill O'Reillys

At the next level are the local newspapers. Due to market forces, these institutions have been greatly diminished over the last generation. (Don't tell that to the New Orleans Times-Picayune, however. The work of the paper and its reporters in response to Katrina have been nothing less than inspirational.) In any event, fewer people now receive their information via their local papers than was the case say 25 years ago.

On the next rung on the ladder are the national newspapers, the NYT, WaPo, the WJS, the LAT and, to a somewhat different degree, NPR.

Finally, we have the constant stream of information via the blogs.

None of the steps in the ladder completely displace the steps preceeding it. In particular, weblogs are still too hit or miss to replace the national papers and, in smaller cities, don't even touch the issues addressed by the local papers. Also, weblogs actually rely on the papers for much of their source material, digesting that material and aggregating it in interesting and novel ways.

However, there is a growing knowlege gap between those who get their information solely from the first or the second rungs of the ladder and those who obtain informaton from the third and fourth rungs. And, as the Norris column reveals, there is a growing information gap between those who come to rest on the third rung and those who move up to the fourth.

Thursday, September 08, 2005

Daniel Shaviro's Tax Crystal Ball

Daniel Shaviro has a post on Katrina and Pending Tax Issues. He is rather pessimistic on the possibility that Katrina could bring some sanity back into Congressional tax policy. His conclusion: "[T]he only bipartisanship on view for several years has involved making looting and giveaways a bipartisan process."

The Estate Tax: A Constructive Discussion

I first want to thank Jim Maule for carrying the laboring oar in posting our correspondence. I think he fairly summarized both sides of the dialogue.

Rather than continue in the same dialogue format, I will simply outline points that I think, in their totality, strongly argue against a tax upon death of all untaxed capital gains (which, for purposes of brevity, I will refer to as the "CGUD Tax.")

The first of these is a sort of Burkean principle. That is, it is truly revolutionary to throw out a tax regime with a system of rules and decisional interpretations that has been built up over many years in favor of a wholly new design. For better or worse, I would err on the side of conservatism here (mark this date--it may be many years before you see this again). I believe that the current system, while in need of some tweaking perhaps, offers a fairly good design for taxing the transmission of wealth since the basic rules of the road are reasonably well established. The type of tweaks that I would suggest are, perhaps, indicative of my normative choices:
  • One aspect of the current tax regime that contributed to the force of the political drive to abolish the estate tax in its entirety was the failure to automatically adjust the unified credit to take account of inflation. Thus, the initial credit amount, which was quite generous when it was first enacted, began to be seen as being too miserly when even those who considered themselves middle class began to cross the $600,000 threshhold. Though the lifetime credit has been raised, now to $1.5 million and soon, in increments, to $3.5 million, the earlier low credit amount has scarred the psyche of middle class taxpayers. I would like to see the credit set at some specific amount, say $2.5 million, that would automatically adjust based upon some sort of inflation index. (For reasons I won't go into here, I am not certain that the index should be the CPI.)

  • I think that many of the abuses in the present system can be easily abolished, if by "easily abolished" one means that the technical means of abolition are simple. I have in mind here insurance trusts in particular. I suspect that if one means "easily abolished" in the political sense, insurance trusts would certainly not fall into this category, since the insurance industry is certain to lead an energetic charge in defense of its cash cow. However, other methods that are used to game the system, such as family limited partnerships designed to obtain lower estate tax valuations, could also either be repealed or be subjected to clear and unambiguous rules.

  • Finally, the manner in which qualified plans are taxed has to be changed, since they are frequently subject to both income tax and estate tax at roughly the same time. I know that in subjecting them to tax in this way we are not really taxing them twice (after all, both the contributions and the subsequent earnings and asset value appreciation have not yet been subject to income tax), but that is not the perception of the public. I would subject to income tax an amount equal to the previously untaxed contributions and subject to the estate tax both that amount (net of income taxes) and all appreciation, allowing a step-up in basis of the assets.
Let me now address what I perceive to be some negative aspects of the CGUD Tax.

At the outset, let me note that I firmly believe that Jim is overly optimistic about making a CGUD Tax comparable in progressivity to the estate tax. As I noted in April, in a research paper published in 2000, The Distributional Burden of Taxing Estates and Unrealized Capital Gains at the Time of Death, James M. Poterba and Scott Weisbenner (using figures from 1998) concluded that:
[A]mong those with small estates ($1 million or less), taxing capital gains at death would collect more revenue than the current estate tax from roughly half of the decedents. For those with larger estates, replacing the estate tax with a tax on unrealized gains at death would result in a substantial reduction in total tax payments.
In order to engraft onto the CGUD Tax concept a degree of progressivity that we find in the current estate tax, Jim would really have to enact a wholly-new set of tax rules and tax rates. (E.g., The first $X million dollars in gains would be exempt and there would have to be a progressively increasing rate of tax imposed which, at some point, perhaps its upper end, would be significantly greater than current capital gains rates.) I suspect that, just as is the case with the income tax now, there would be numerous rules, exceptions, and exemptions built into the law by various interest groups.

This, together with Jim's proposed merger of the CGUD Tax with the gift tax, would leave us with a system that would be both extraordinarily complex and subject to a whole new set of rules. Because the new rules would not carry with them the years of judicial and administrative interpretation that go with the current estate tax, years of controversy and litigation would likely result. If this were the case, both Jim and I could probably extend our careers for the remainder of our natural lives (and perhaps longer if either of us wrote the definitive treatise on the CGUD tax), however, I somehow doubt whether this would endear either us or the CGUD Tax to the taxpaying public.

Furthermore, the current estate tax carries with it a strong incentive to make charitable contributions. Again, while it is evidence of a maverick streak of conservatism on my part, I think that encouraging the growth of charities is a good thing because it establishes a decentralization of power and influence. While some reforms may be necessary in this area (do we really want to continue a system where the inventor of Vicks VapoRub continues to exert political influence long after his death), it is reforms that are necessary, not a radical restructuring of the system.

Also, it just may be that the tax rate is too low at the upper end of the wealth scale. The Mars family, for instance, is reputed to be worth about $30 Billion. Can it reasonably be argued that if we reduce their family wealth to a mere $10 Billion we are inflicting upon them a grievous wound?

In concluding, let me suggest that, despite our differences, Jim and I share a good deal of common ground. Both of us, I think, believe that upon death there should be a progressive tax imposed, although we likely differ on the degree of progressivity that we would favor. Additionally, we both welcome true tax simplification, although we might differ on the paths to that goal.

Finally, although I don't want to commit Jim with respect to the politics of the current estate tax debate, I think that both of these concepts set us apart from the true radicals who want to abolish the estate tax.

Back to you, Jim.

Wednesday, September 07, 2005


The President's Advisory Panel on Federal Tax Reform has postponed its meetings on September 8th And 15th:
"There is mutual agreement among the Chair, Vice-Chair, Panel members, Treasury Department and the White House to postpone our two upcoming meetings," said Jeffrey Kupfer, the Executive Director of the President's Advisory Panel on Federal Tax Reform. "In addition, we are having ongoing discussions to determine when the Panel's final report will be delivered to the Treasury Secretary."
The panel is reportedly attempting to determine whether the lines in Subterranean Homesick Blues:
You don't need a weather man
To know which way the wind blows
have any applicability to their deliberations and, if so, what that is.

London Calling

Even though the estate tax repeal is (at least temporarily) shelved, I can get at least one more blog posting out of it.

TaxProf has collected a wealth of material from different perspectives concerning the intersection between Paris Hilton and tax policy. The best of the lot is the television ad by United for a Fair Economy that can be viewed here. Perhaps not as much fun as the original Paris Hilton Carl's Jr. ad, but worth a look.

Tuesday, September 06, 2005

Yes, Americans Actually Have Some Sense of Decency

Via Mauled Again, we learn that the scheduled vote on the estate tax repeal debate has been postponed indefinitely. My sense of this is that while Frist and Friends will try to spin this as a slight tactical delay and there will probably be some residual skirmishing, the effort to repeal the estate tax is dead.

Even David Brooks, dapper NYT apologist for the Bush Administration ("The Bursting Point"), acknowledges that Katrina and its aftermath, coming after a host of other "institutional failures" have "cumulatively changed the nation's psyche." Brooks contends that "it is beginning to feel a bit like the 1970's, another decade in which people lost faith in their institutions and lost a sense of confidence about the future." That's wrong.

It's really more like a less intense version of the 1960's (if that's not an oxymoron). There's a sense that the greed and self-indulgence which really took off in the '70's and stoked by Bush and Co. to a fever pitch, have gone too far and have to be replaced with a greater focus on the common good.

For instance, the problems with the environment are real. As two scientists recently put it:
The real question we are faced with is not whether humans are changing climate. The science on this is clear, and decades of research have culminated in a scientific consensus on this point. The real question now is what we need to do about it.
It is true that governmental intervention alone will not solve these environmental problems. But it is not acceptable for the govenment to abdicate its role under the guise of "we don't know enough yet."

Similarly, it is obvious to anyone who wants to look that there are widening disparities in wealth in this country. Trickle down economic and tax policies have not narrowed these disparities, they have expanded the distance between classes. The high water mark of this lunacy (I use that phrase with only a hint of a smirk in light of Katrina) was reached this week in Grover Norquist's appeal to help the victims of Katrina by repealing the estate tax. Americans will only tolerate fools such as this for so long.

The symbolic end of the McCarthy era came when Joseph Welch, counsel for the Army, stood up against McCarthy and said "Have you no sense of decency, sir? At long last, have you left no sense of decency?". But Welch really didn't expose McCarthy. McCarthy exposed McCarthy. And this week, Frist, Norquist, and, last but certainly not least, Bush, exposed themselves as enemies of the commonweal. As a result, they have been forced to abandon the most grotesque of their excesses. This, I suspect, is the start of a more general retreat.

Monday, September 05, 2005

Lying Knave Watch

TaxProf reports that, an "American Shareholders Association study released Friday claims that Death Tax Repeal Will Have No Impact on Budget Deficit:
'ASA has uncovered new information from the Congressional Budget Office (CBO) which demonstrates that Death Tax repeal will be revenue neutral over the next ten years without taking into consideration any effect of higher levels of economic growth stemming from the tax cut.'"
Well, not really.

The ASA argument, breathlessly reported in two pages here, is as follows:
  1. The CBO report on the cost of the repeal of the estate tax underestimates the growth in the economy over the next ten years ("CBO assumes over the next 10 years, real GDP growth will average 2.98 percent. The CBO forecast encompasses a 3.7 percent estimate for 2006 and then averages 2.9 percent from 2007-2015. This 2.98 percent forecast is an underestimation of historical averages and a 1 percent increase of GDP over tenyears is more than plausible.")

  2. Because the total tax intake (using the ASA's assumptions, of course) will approximately equal the tax loss due to the repeal of the estate tax, the estimate of the cost of the tax loss from the repeal of the estate is too high ("Matching up the CBO Death Tax repeal score with the underestimation of GDP growth reveals a small revenue loss of $9 billion over 10 years.")
The people who drafted this nonsense are either (a) disingenuous, (b) hopelessly stupid, (c) mendacious liars, or (d) all of the above.

Just because total tax revenues are underestimated due to a low assumption as to economic growth does not mean that the revenue loss due to the repeal of the estate tax is understated. All that it means is that the revenue loss due to the repeal of the estate tax will, if ASA's assumptions hold, be made up by other sorts of taxes. Since the estate tax falls on the very wealthy and, in fact, primarily on the very, very, very wealthy, and other taxes are either only mildly progressive or actually regressive, the ASA's argument is really as follows:
The CBO is wrong in its estimates, because the revenue loss due to the repeal of a tax on people of great wealth will be made up by an increase in taxes on everyone else.
Which, of course, brings us to the question of who is the ASA? On its face, it would seem to be sort of a grassroots organization of individuals who own publicly traded stocks. It's not. The ASA is s apparently a front for Grover Norquist. See here.

Norquist's principal front organization is "Americans for Tax Reform Foundation" which is primarily supported by the Scaifes (through the Sarah Scaife Foundation and the Carthage Foundation), the Olin's (through the John Olin Foundation), the Waltons (through the Walton Family Foundation), and the Randolph Foundation (funded by a trust established by the guy who invented Vicks Vaporub). See here. ASA is simply another front organization that is part of the ATR family.

In other words, the ASA "study" is yet another hack job from the usual knaves.

Sunday, September 04, 2005

Does Everyone in Bush Administration Have Their Pants On Fire?

From Mark Schleifstein of the New Orleans Times-Picayune:
Dr. Max Mayfield, director of the National Hurricane Center, said Sunday that officials with the Federal Emergency Management Agency and the Department of Homeland Security, including FEMA Director Mike Brown and Homeland Security Secretary Michael Chertoff, listened in on electronic briefings given by his staff in advance of Hurricane Katrina slamming Louisiana and Mississippi and were advised of the storm’s potential deadly effects.

Mayfield said the strength of the storm and the potential disaster it could bring were made clear during both the briefings and in formal advisories, which warned of a storm surge capable of overtopping levees in New Orleans and winds strong enough to blow out windows of high-rise buildings. He said the briefings included information on expected wind speed, storm surge, rainfall and the potential for tornados to accompany the storm as it came ashore.

"We were briefing them way before landfall," Mayfield said. "It's not like this was a surprise. We had in the advisories that the levee could be topped.

"I keep looking back to see if there was anything else we could have done, and I just don't know what it would be," he said.
So much for the question of whether Chertkof and Brown had no idea that the levees could be breached.

And, via Mark Kleiman, we learn that the WaPo story that quoted a "senior Administration official" the Governor of Louisiana had failed to declare a state of emergency was false.

Can't we just give every member of the Bush Administration some sort of medal so that they will just go home?

Saturday, September 03, 2005

Overwhelming Generosity

At its pressroom, Morgan Stanley proudly reports that it "will allocate more than $1 million in support for the victims of the disaster." Of that amount, $500,000 is in the form of a match to employee contributions.

This from the same firm that paid Stephen Crawford $32 million after he resigned after 3 1/2 months as co-president. Not that Mr. Crawford was ungrateful. He did note that it was "a great privilege" working for the firm.

Just to put this in perspective, if Mr. Crawford made a contribution of just 1.5625% of his termination award, it would totally absorb the amount set aside by the company for employee matches.

Of course, I suppose Morgan Stanley would refuse to match the contribution since Mr. Crawford is no longer an employee.

Friday, September 02, 2005

A Civilized Commentator

I often disagree with Jim Maule. He is somewhat conservative and, as close readers of this blog may have observed, I'm . . .not. His most recent posting, Taxes and Sustaining a Civilized Society, is, however, a must read regardless of one's location on the political spectrum.

In a sense, it ought not be necessary for any educated adult to read Maule's essay, since the lesson he teaches is one that we should all have learned by now--taxes are necessary to pay for that community which we call civilization.

At times, I think that Maule is being too charitable. For instance, he says:
During the past several decades, the anti-tax movement gathered steam and rolled through the political landscape. The impetus for this movement is understandable. Aside from corruption and other commonly held unacceptable activities, the most significant object was the use of tax proceeds to fund government programs that did more to enrich bureaucrats than the intended beneficiaries, and to nourish government programs that were inconsistent with the goals of those who flocked to the anti-tax movement. Cries for tax reduction reflected a frustration with a political process that was not responsive.

Unfortunately, the cries for tax reduction drowned out the rest of the argument. Full and open debate on how tax proceeds ought to be spent took a back seat to the rush to find ways of "cutting taxes." Trickle-down or not, even with the occasional tax increase (including one that doomed the re-election of one president), taxes were cut. Tax revenues increased at times as the economy grew, with tax cut supporters claiming that tax cuts were the cause of the economic upswings. Does that mean cutting taxes to almost zero would generate almost infinite tax revenues? No. The economy bounces up and down for many reasons, tax being just one, and not necessarily the most important one.
My views here are well-known. I do not view the rabid tax cutters with nearly Maule's degree of equanimity. Thus, I frequently refer to them as fools and knaves. I firmly believe that the radicals of the tax cutting movement possess the same true-believer psyche as our homegrown Communists of an earlier era. Greg Mankiw was right to brand them "charlatans and cranks." (If you're still not convinced that these people are of a piece with, say, the Jim Jones Kool-Aid drinkers, take a look at Grover Norquist's latest (via the Daily Kos) where he argues that abolishing the estate tax will assist the victims of Katrina. Of course, even Norquist didn't have the balls to articulate it as "A rising tide raises all ships.")

However, I agree with the core of Maule's argument:
The nation allegedly is at war. We are allegedly at war with terrorism, or terrorists, or terrorist-sponsoring states, or insurgents, or well, bad people, I suppose. Whether or not one supports none, one, or all of the various military actions undertaken in connection with this war, it is inconceivable to me how one can disagree with the notion that if there is a war the war must be funded because wars cost money. Would opposition to specific military campaigns been stronger, or developed sooner, had taxes been increased to fund the campaign, as good fiscal management demands? Maybe. My guess is that those who supported a campaign, or at least most of them, would have acquiesced, reluctantly or otherwise, to a tax increase. . . . . I've been told, and I've read, that when the nation went to war in 1941, and even as it was preparing to do so in 1939 and 1940, taxes were increased. I don't know if there was much griping, or how extensive it was, but people knew that war means war. It requires sacrifice. My parents have described what life was like under a rationing program for a long list of items. The nation allegedly is at war. A few individuals and their families, constituting a very tiny percentage of the population, have made and are making sacrifices. The rest of us, it seems, are living lives that somehow don't seem consistent with what life is like during war. Perhaps I am wrong, but for me, war is like pregnancy. Either a woman is pregnant or she isn't. Women cannot be partially pregnant or have limited pregnancies. Concepts of limited war or partial war get used not only to create the sorts of conditions that preclude victory, as happened in Vietnam and Korea and as is beginning to happen in Iraq, but also to deflect the effects of war-waging decisions so that war seems, somehow, more palatable. War, at times, unfortunately, is necessary. War, though, should never be palatable.

Now the nation faces another, more serious catastrophe. Hurricane Katrina has all but destroyed a city. It has closed the nation's largest port. It has shut down a significant portion of gasoline refinery capacity. It has closed and damaged much of the Gulf of Mexico oil and natural gas production, the latter getting very little attention, but wait until October's chills set in for that to flare up as a mainstream media and politician soundbite. A quarter of the nation's coffee supply is rotting in New Orleans warehouses. Steel, zinc, rubber, and bananas must find their way in through some other port, if that is possible. Most of the grain harvest, and other domestic agricultural product, has no way out. If 9/11 disrupted the economy, Hurricane Katrina has the potential to devastate it.

And thus I turn back to taxes. Money is being spent, and more money will be spent, by governments on rescue, relief, and recovery. Government surely will spend money on rebuilding, as will the private sector. Where does government get that money? Does it borrow, thus increasing the deficit and thus fueling the "foreign ownership of dollars" problem? Does it raise taxes, thus taking money out of the private sector? Doesn't the private sector have a better chance of spending the money more efficiently than does the government? Perhaps taxes need to be raised. Certainly, they should not be lowered.
Maule goes on to argue (I think) for a fairly high degree of progressivity in any new tax enactments:
It is time to consider raising taxes on those whose taxes are not as high as they ought to be. Those folks happen to be the ones enjoying low tax rates on dividends and capital gains. I've yet to see the evidence that lowering taxes on dividends and capital gains, but not on wages is better for the economy. Many of the displaced people in the Gulf Coast region have been paying taxes at higher rates than those imposed on dividends and capital gains.
He then goes on to discuss an end to dividend tax rate preference and the current effort to repeal the estate tax. (However, he is willing to consider a full estate tax repeal in exchange for taxing capital gains at death subject to what he terms a "sensible" exemption. Here, we part company.)

Finally, he directs an appeal to the tax reform commission that will soon be issuing a report on ways to restructure the federal tax system. Maule is pessimistic that the nation can "reset its course." In an sense, I am both more pessimistic and more optimistic than he is.

On the side of pessimism, I have no faith in the tax reform commission. I think that too many of the people who will populate its warrens will be ticket-punchers, seeking to get one more star on their report cards.

However, I am optimistic that there are sufficient numbers of political leaders (today, the Mayor of Houston comes readily to mind) who recognize that, ultimately, Benjamin Franklin was correct: We must hang together, or assuredly we shall all hang separately.

Katrina Made Me Do It

From the LAT, we read this:
The disaster in the Gulf Coast changes the political dynamic on other big issues before Congress. For example, images of stranded hurricane victims in squalid shelters give Democrats ammunition against GOP plans to hold a vote next week on repealing the estate tax, a measure critics say benefits only the wealthiest taxpayers.

That vote had been scheduled before Congress began its monthlong August recess. In a letter Thursday, Reid urged GOP leaders to postpone the issue.

"Given the tragic and devastating events along the Gulf Coast, members of the Senate would have great difficulty explaining why we were debating the estate tax during our first days back," Reid said in his missive to Senate Majority Leader Bill Frist (R-Tenn.).

A nonpartisan budget analyst said it would be politically inopportune to cut taxes on the wealthy while the government was grappling with a humanitarian disaster that will add billions to the federal deficit.

"People would wonder what the heck the Senate is up to with all that is going on in Iraq and New Orleans," said Robert Bixby, executive director of the Concord Coalition, a watchdog group.

Bob Stevenson, Frist's spokesman, said there was no plan to pull the tax bill from the schedule but that Frist was prepared to do so if necessary to make progress on relief.
(Emphasis supplied.)

WTF? Frist gets it bass ackwards. The estate tax repeal bill is not blocking the bill to provide Katrina relief. What really is occurring is this: The Katrina disaster points up what happens when we starve or attempt to strangle domestic programs (e.g., Army Corps of Engineers efforts to bolster flood control in New Orleans, the funding of FEMA, constructive efforts to address global warming). The estate tax repeal is dead because suddenly Americans have suddenly awoken to the reality that government and taxes are necessary and that there's no free lunch.

I will offer more comments on this topic later this evening.

Thursday, September 01, 2005

Unnatural Disaster

Editor and Publisher asks: "Did New Orleans Catastrophe Have to Happen? 'Times-Picayune' Had Repeatedly Raised Federal Spending Issues."

The story, well worth reading in its entirety, states that:
New Orleans had long known it was highly vulnerable to flooding and a direct hit from a hurricane. In fact, the federal government has been working with state and local officials in the region since the late 1960s on major hurricane and flood relief efforts. When flooding from a massive rainstorm in May 1995 killed six people, Congress authorized the Southeast Louisiana Urban Flood Control Project, or SELA.

Over the next 10 years, the Army Corps of Engineers, tasked with carrying out SELA, spent $430 million on shoring up levees and building pumping stations, with $50 million in local aid. But at least $250 million in crucial projects remained, even as hurricane activity in the Atlantic Basin increased dramatically and the levees surrounding New Orleans continued to subside.

Yet after 2003, the flow of federal dollars toward SELA dropped to a trickle. The Corps never tried to hide the fact that the spending pressures of the war in Iraq, as well as homeland security -- coming at the same time as federal tax cuts -- was the reason for the strain. At least nine articles in the Times-Picayune from 2004 and 2005 specifically cite the cost of Iraq as a reason for the lack of hurricane- and flood-control dollars.

Newhouse News Service, in an article posted late Tuesday night at The Times-Picayune Web site, reported: "No one can say they didn't see it coming. ... Now in the wake of one of the worst storms ever, serious questions are being asked about the lack of preparation."

In early 2004, as the cost of the conflict in Iraq soared, President Bush proposed spending less than 20 percent of what the Corps said was needed for Lake Pontchartrain, according to a Feb. 16, 2004, article, in New Orleans CityBusiness.
Emphasis added.

Not to put too fine a point on it, there is a direct correlation between Bush/Cheney policies and the devastation resulting from Katrina.

Thanks to the Wonkette for the tip.

Katrina and Estate Tax Repeal

This country's response to Katrina will rely primarily on two sources of funding: govenmental programs and programs run by charitable organizations. It is estimated that full estate tax repeal would reduce federal revenues by $1 Trillion over a 10 year period. It would also dramatically reduce contributions to charities. Perhaps this explains the report today in Kleinrock that:
With lawmakers on August 31 nearly ready to return to work and the debate over repealing the estate tax heating up, conspicuously missing from that conversation is President Bush.