It's a Very Simple Game?

The late Baltimore sports commentator Charley Eckman used to say "It's a very simple game." Apparently, that's not necessarily the case.

A recent study, "Scattering of a Baseball by a Bat," concludes:

A ball can be hit faster if it is projected without spin but it can be hit farther if it is projected with backspin. Measurements are presented in this paper of the tradeoff between speed and spin for a baseball impacting a baseball bat. The results are inconsistent with a collision model in which the ball rolls off the bat and instead imply tangential compliance in the ball, the bat, or both. If the results are extrapolated to the higher speeds that are typical of the game of baseball, they suggest that a curveball can be hit with greater backspin than a fastball, but by an amount that is less than would be the case in the absence of tangential compliance.

Theoretically, then, if you can hit a curve ball, it will travel further than a similarly hit fastball. This presumably increases the likelihood of the batter hitting a home run. However, a hit fastball will move with greater speed. One would think that this would thus increase the number of hits "through the hole" in the infield. However, the authors warn:

These results will have implications for the issue of whether an optimally hit curveball will travel farther than an optimally hit fastball. To investigate this in detail requires a calculation of the trajectory of a hit baseball . . . . Such a calculation requires knowledge of the lift and drag forces on a spinning baseball. However, given the current controversy about these forces, further speculation on this issue is beyond the scope of the present work.

Hat Tip: ResourceShelf's DocuTicker.

Tradesport and Taxes

This evening, I noticed that shares of "Republican Party Candidate to Win the 2006 Maryland Governor [sic] Race" are now trading at 39 on Tradesport. I immediately began thinking.

I know a few Republicans whom I can goad into putting down bets on Gov. Ehrlich to win at even money.

If, for every $100 I bet with Republicans on Gov. Ehrlich to lose, I buy $80 in Tradesport contracts for "Republican Party Candidate to Win," I am guaranteed in all events to win $20. That's because if Ehrlich loses, I win $100 from a Republican, but lose my $80 in Tradesport contracts. Conversely, if Ehrlich wins, I lose $100 to a Republican, but I get back roughly $200, or a net of $120, from my Tradesport contracts.

So why haven't I quit my day job?

Well, first there's the obvious difficulty of locating, then investing in, and then enforcing a lot of barroom bets. As a practical matter, this is fairly hard work.

But there's a tax problem.

If Ehrlich loses, I'm ok. While I've lost $80 in Tradesport contracts, I will get back $100 of cash which I will likely not report as income. After all, friendly bettors don't generally turn out 1099's or W-2G's and I'm not that honest.

However, if Ehrlich wins, I get a net of $120 which is going to be reported to the IRS by Tradesport. Assuming that my marginal tax rate, both federal and state, is about 40%, I only net out $52 on the Tradesport side of the transaction. Since I've lost $100 in the barroom, I'm down a net $48. Theoretically, of course, I could attempt to deduct the $100 I lost in the barroom against my Tradesport "winnings," claiming that both were a form of wagering. There are obvious record keeping and proof problems involved in this, however, which are likely to be insurmountable.

Moreover, it's not clear that "investing" in a Tradesport contract is technically gambling. In that case, my $120 in Tradesport "winnings" is simply a short term capital gain that cannot be offset by my $100 gambling loss.

I think that I'll keep my day job.

DeLay Legal Fee Update

Raw Story is reporting that Tom DeLay's legal bills in 2006 now top $400,000.

Not to worry.

According to OpenSecrets.org, as of March 31, 2006, DeLay's campaign committee had cash on hand of $1,450,959. As previously reported here, he can spend all of that on his legal defense. Of course, according to reports filed on February 15, upon which I based my last report, DeLay only had $1.3 million cash on hand. And, according to the Raw Story report, the $400,000 in legal fees paid by DeLay this year also include $110,000 from his campaign fund.

In essence, DeLay's campaign fund has become a $1.56 million legal defense fund.

The Nineteenth Family

Via TaxProf, there are links to a terrific report by Public Citizen and United for a Fair Economy on the 18 incredibly rich families that are providing the financial muscle behind the ongoing efforts to repeal the estate tax. In addition to describing the ways in which these families have mounted their campaign, the report also sets forth a comprehensive listing of and rebuttal to the principal lies of the campaign (Foes Have Misled the Public About the Cost and Reach of the Estate Tax; Foes Have Misled Public About Harm to Family Farms and Small Businesses; Groups Have Lied About the Cost to Collect the Tax; More Fables: The Double Tax; The Estate Tax Is Misleadingly Characterized as a Tax on Hard Work).

However, the report missed one important family that has lead the way in storming the ramparts of the estate tax--The Frists.

While perhaps not providing as much financial muscle as the 18 families listed in the report, Little Brother Doctor Senator Bill has been the point man in the Senate for estate tax repeal. While the Senator's net worth is a measly $15-45 million, Big Brother Tom and his family, according to Forbes, have a net worth of $1.7 Billion. Tom's current holdings in HCA, Inc., alone, (5,563,198 shares) are worth, as of close of business on April 25, 2006, almost $252 Million.

I won't bother to undertake as precise an estimate of the tax savings the Frist family would enjoy if the estate tax were repealed, but it's safe to say that it's well (very, very well) north of $200 Million.

It must be nice to have relatives friends in high places.

Knaves Environmental Style

I don't often comment on environmental issues here. The reason is that I feel that I lack the necessary competence with respect to the basic science issues involved. I can't possibly bring to bear the level of expertise as, say, the contributors to RealClimate.

But financial numbers are another story. After all, over my almost thirty years in practice I've had to review more than my share of financial reports and business tax returns. Thus, I try to delve into financial information in order shed light on the lies dished out by knaves. There is now a case in point dealing with the politics of the environment.

The Republican controlled House Committee on Resources has just put up a website on Earth Day titled "myth-information." It's an outrage. But, rather than rant, I decided to look at some of the alleged "information" offered by the knaves Committee. Specifically, I examined the claim the Committee makes on the website that:

Money is flowing to conservation in unprecedented amounts... But much of it is not actually used to protect the environment. Instead, it is siphoned off to pay for bureaucratic overhead and fund raising, including expensive direct-mail and telemarketing consultants.

The Committee offers as evidence the "fact" that various environmental organizations have "4.9 billion dollars in net assets" yet spend "almost zero dollars for the environment." This charge is allegedly backed up by a chart showing the income and net assets of 29 environmental organizations.

First, let's examine the source of the "4.9 billion dollars in net assets." Of that amount, $3.1 billion is in the coffers of the Nature Conservancy. What the hell are they doing with all that money anyway?

Well, to find out, one has to take a look at the Nature Conservancy's financial reports. Unlike, say, Grover Norquist's Americans for Tax Reform, the Nature Conservancy actually publishes its financials on its website. Of course, some knowledge about how the Conservancy works might be important. In examining its website, we learn that:

In the United States, The Nature Conservancy uses land acquisition as a principal tool of its conservation effort. The Conservancy helps to protect approximately 15 million acres in the United States.

Additionally, the Conservancy acquires conservation easements. It's website explains that:

A conservation easement is a restriction placed on a piece of property to protect its associated resources. The easement is either voluntarily donated or sold by the landowner and constitutes a legally binding agreement that limits certain types of uses or prevents development from taking place on the land in perpetuity while the land remains in private hands. Conservation easements protect land for future generations while allowing owners to retain many private property rights and to live on and use their land, at the same time potentially providing them with tax benefits.

Now, take a look at the Conservancy's 2005 financial statement. You will find that $2.47 billion of the Conservancy's assets are either in "conservation lands" or "conservation easements." Another $1.2 billion are in "endowment investments" or "planned giving investments." There's another $568+ million in "investments held for conservation projects." In other words, the bulk of the Nature Conservancy's assets are held for and used to advance its environmental efforts. In fact, 82% of all funds donated to the Nature Conservancy go directly to conservation programs. See here.

Close examination of the financial statements of the organizations on the Committee's list with next two largest net worths, The Conservation Fund (net worth of $282 million) and the Trust for Public Land (net worth of $225 million) show that their assets are also primarily devoted to their conservation efforts. (For The Conservation Fund's financials, see here. For the financials of the Trust for Public Land, see here.)

Income? The Committee shows that the 29 organizations listed had income of $1.831 billion dollars. Of that amount, $761 million was income of the Nature Conservancy (that is, more than 41.5% of the total) and, as shown above, most of that went to operations, not lobbying or fundraising. Similar analyses of the income and expenses of other organizations that rank high on the Committee's net income list, the Trust for Public Land and the World Wildlife Federation for instance, also show that most of their income goes to their operations. (The WWF's financials are here.)

The Committee's website is nothing more than propaganda. Worse, it's false. Worse yet, it directly slanders organizations that have long demonstrated their devotion to conservation and environmental preservation.

There is some good news, however. Josh Marshall has named Committee Chair Richard Pombo as one of the Congressman who may possibly be indicted in the Abramoff investigation. Can't happen too soon.

Results on the Estate Tax

RESULTS describes itself as "a nonprofit grassroots advocacy organization, committed to creating the political will to end hunger and the worst aspects of poverty." On April 18, it held a press conference concerning the attempts to repeal the estate tax. A transcript of that conference is available here and an mp3 recording is available here.

Former IRS Commissioner Sheldon Cohen offered some of the most pointed remarks:

[A] lot of the confusion in proposed repeal is setting up straw men and then knocking them down. Much of the argument says, well, this is double-taxation; you get taxed on the income, and then you get taxed on it again. Ninety percent – over 90 percent of the value of estates has never been taxed. That is, it’s generally appreciation that's occurred.

Also I think most of us forget that the so-called death tax, which is really an estate tax, occurs at the end of life. So it's been deferred for 50, 60, 70 years of work. So if you discounted it by the fact that it's paid at the end of life, instead of installments during the period of time which accumulated – the wealth is accumulated, you'd get a much lower number.

Progressive taxation – that is, the higher your income, the higher the rate of tax – has been with us since the very beginning. Teddy Roosevelt was in favor of this kind of taxation. This is not particular party or group. We each have our own points of view, depending on where we sit. But progressive tax has been with us right from the beginning. The question is always, "How much progression?" And that's a legitimate argument.

The real impact on small business is almost nil. As Mr. Carlson indicated, the impact on small family farms is virtually nil. The impact on small family businesses is virtually nil because the tax law now has exemptions for family farms and for family business that are slightly larger than the general exemption. And they also allow for longer payout, so that – in my practice – I’ve been practicing law for a little over 50 years – I have never seen a family business that was sold because of the estate tax. They are sold, because the kids don’t want to manage the business, the kids are off just being doctors or lawyers and don't want to go back into the farm, or don't want to go back into the family manufacturing business. That occurs all the time. But it isn't because of the estate tax that the business is sold.

Nobody's talked about – and the (charity, or very charity) of mentioning this – what an important element here – is that the estate tax, as well as the income tax, are an encouragement for charity. That is, since we have deductions in beneficial gifts to charity, we're (all) encouraged to give to worthy causes. Nobody knows for sure how much is going to be lost when, as and if these – either the income tax were to be pushed down in rates, or the – or the estate tax were to disappear. But if that were to be the case, there are estimates that go to 13-plus billion up to 20 billion. I’m not an economist; I don't want to project those numbers.

I do know that it does affect people's behavior. People give a little more to charity because there is tax benefit. We saw that the President and the Vice President both took advantage of large charitable deductions at the end of last year. That was just announced this last week, when they filed their returns.

So it’s an important element. And I think it's been missing from the discussion. And it will be missing, because the charities can't say it out loud. They can't say it because their donors might get offended.

(Emphasis supplied in all cases.)

Another participant in the press conference, Robert Carlson, made this point:

The present estate tax only affects about 300 farm estates per year. That's less than one percent of all farm estates. And those are Department of Agriculture numbers.

What is most dangerous about the proposal to end the estate tax, however, is that with its ending – which would only affect, again, less than one percent of farm estates – we would have imposed the capital gains on gains in farm estates, and that would affect many more people. So there would be a net – there would be a net loss; there would be many more losers than gainers among the farm community and family farms and ranchers, if the estate tax were to be eliminated.

(Emphasis added.)

In other words, as I have pointed out before, the repeal will actually impose additional tax burdens on most small estates, including smaller family businesses and farms.

Finally, Adam Hughes, of OMBWatch, noted that Senator Kyl's suggested "compromise" was no compromise at all:

That proposal would cost between 81 and 84 percent of full repeal. And what we're talking about there is around 770 billion added to the debt over the first 10 years.

Dick Cheney Speaks Out In Favor of the Estate Tax

Ok, the title is simply untrue. But Dick Cheney's recently released income tax return does present a strong argument for the retention of the estate tax.

Ordinarily, the ability of an individual to reduce his or her income taxes through charitable deductions is limited to a certain percentage of the individual's income. In reaction to Hurricane Katrina, those rules were suspended with respect to charitable contributions made between September 27, 2005, and the end of that year. As a consequence, in 2005, Cheney was able to satisfy various pledges that he had made to charitable organizations that would otherwise had taken years to fulfill. Citizens for Tax Justice discusses Cheney's strategy here.

The CTJ report also claims that Cheney reduced his 2005 taxes by almost $1.1 Million due to the Bush tax cuts. CTJ does not explain how it made that determination. If it used the post-Katrina suspension of charitable deduction limitations in their calculation, its conclusion is simply not justified. The reason that Cheney had such high charitable deductions is that the tax law provided him with a strong incentive to cash in his Halliburton stock options and contribute them to charity in 2005. Absent the temporary suspension of the limitations on deducting charitable contributions, the contributions would inevitably have been made, but at a much later date. While taken as a whole, the charities to which Cheney directed his contributions received a Katrina-related benefit by getting their money now, not later, the Cheneys' total income tax bill, over time, would likely have been about the same.

Nevertheless, this brings us to the estate tax. As presently formulated, the estate tax generally falls on the estates of the wealthy and, most heavily, on the estates of the very wealthy. Within the estate tax are provisions that strongly encourage charitable giving. Some of these allow wealthy contributors to "double dip." Thus, in Cheney's case, he received a charitable contribution that wiped out any tax on the income on his stock options. (As reported by the Washington Post, "[t]he options largely were from Halliburton Co. . . . [with] [s]maller amounts came from companies for which [Cheney and his wife] had been board members, including Electronic Data Systems, Procter & Gamble, Lockheed Martin and Anadarko Petroleum Corp.") Furthermore, the net proceeds that Cheney would have realized had he exercised the options and taken those proceeds into income are also effectively taken out of his estate for estate tax purposes. Assuming that these proceeds would have been taxed in his estate at a fairly high marginal rate, one can reasonably conclude that the economic cost to him and his wife of each dollar of these charitable contributions was significantly less than fifty cents because of the tax savings provisions they were able to utilize.

As a practical matter, the Cheneys' contributions illustrate that tax incentives do work to "create" charitable contributions that would ordinarily not be made. After all, absent the provisions that increased the charitable deductions that the Cheneys would have been allowed to take in 2005, the charities would have had to wait for their money. There is no reason to expect that a similar dynamic is not at work in the estate tax area.

BTW, the WaPo story completely misses the post-Katrina change in the tax law as the reason that the Cheneys' contributions in 2005 were so high. Instead, it buys into the Cheney cock and bull story that the contributions were made in late 2005 because the "options were at a good value for the benefit of charity." Right. And the estate tax overly burdens family farms and small businesses and there are alligators living in the sewers in New York.

What Did the Trustee Know and When Did He Know It?

A memorandum recently issued by IRS Area Counsel, PLR 200614006, promises to be a major headache for trustees of various types of trusts. Specifically, the memorandum asserts the following:

1. The IRS can levy upon payments from any trust to a beneficiary in order to enforce its rights under a tax lien even if the trust contains spendthrift provisions.
   


2. Perhaps more significantly, in the event that the delinquent taxpayer/beneficiary has a fixed right to trust income, the levy attaches not only to each payment, but also to the taxpayer/beneficiary's "fixed right to obtain a future distribution from the trust." This means that the Service can seize and sell the actuarial right to the payment stream. It does not mean that it can demand immediate payment from the trustee. However, this is potentially devastating to the taxpayer/beneficiary since the payment stream, sold at auction, is likely to be sold at a deep discount. Thus, the seizure and sale will likely make only a small dent in the taxpayer's liability to the IRS, while possibly stripping the taxpayer of his or her patrimony.


3. Most troubling from the standpoint of a trustee, the memorandum concludes that when a trustee distributes funds that he knows are encumbered by a federal tax lien and the funds "enter the stream of commerce and cannot be traced" (which presumably occurs virtually any time cash is paid to the beneficiary and it can't be recovered), the trustee is liable for tortious conversion for intentionally impairing the lienor's security. This would seem to pose significant problems for institutional trustees such as banks. In many cases, one department of a bank (e.g., the mortgage service department) may have knowledge of a tax lien against a beneficiary. That knowledge is likely not regularly transmitted to the trust department and, in many cases, the mortgage service department may not even be aware that its customer is a beneficiary of a trust with respect to which the bank is the trustee.

PLR 200614006 is part of an emerging trend where the Service aggressively pursues various sorts of rights to satisfy tax liens, even in cases where the rights had traditionally been considered protected from creditor attack. These methods of asset protection, most of which are effective against non-governmental creditors, such as disclaimers, tenancies by the entireties, and spendthrift provisions in trusts, simply will no longer ward off attacks from the Service.

The Shorter Seder

For those of you who think that the Passover Seder is too long, you might try going here.

Hat Tip: Cheshyre.

How Grover Norquist Can Pay His Legal Defense Costs With Tax Deductible Charitable Contributions

Yesterday, I pointed out how Tom DeLay can pay his legal defense costs from his campaign war chest if he is indicted for criminal acts allegedly taken in conjunction with his duties in Congress. Grover Norquist has a potentially better way to go--getting his defense costs paid via tax deductible contributions to his 501(c)(3) organization, the Americans for Tax Reform Foundation. Here's how.

Any criminal charge against Norquist would likely be tied in some fashion to his activities with either the Americans for Tax Reform Foundation or the related 501(c)(4) organization, Americans for Tax Reform. Both appear to be incorporated as non-profit organizations under the laws of the District of Columbia.

Section § 29-301.05 (14) of the D.C. Code provides that a non-profit corporation has the power:

To indemnify any director, or officer, or former director or officer of the corporation, or any person who may have served at its request as a director or officer of another corporation, whether for profit or not for profit, against expenses actually and necessarily incurred by him in connection with the defense of any action, suit, or proceeding in which he is made a party by reason of being or having been such director or officer, except in relation to matters as to which he shall be adjudged in such action, suit, or proceeding to be liable for negligence or misconduct in the performance of a duty. Such indemnification shall not be deemed exclusive of any other rights to which such director or officer may be entitled, under any bylaw, agreement, vote of board of directors or members, or otherwise[.]

(Emphasis supplied.)

Typically, when corporations are formed, the organizational documents (e.g., the bylaws) provide the broadest possible indemnification provisions allowed by law. Since the D.C. statute is open-ended, the bylaws of ATRF and ATR more than likely have provisions that allow indemnification even of costs incurred in defending against criminal charges. The provisions may or may not provide for reimbursement of the costs in the event of a conviction, but, as a practical matter, if Norquist were charged and convicted after a full-blown trial, it is unlikely that he would be able to repay the attorneys' fees advanced by either ATRF or ATR.

Now here's the genius part: as of the end of 2004, ATRF, the 501(c)(3) foundation that can accept tax deductible charitable contributions, owed ATRF, the 501(c)(4) organization, almost $6.5 Million. (Take a look at Statement 7 the 2004 tax return of ATR, which is on page 18 of the exhibits to the complaint filed with the IRS by Citizens for Responsibility and Ethics In Washington.) Thus, ATRF can take in up to $6.5 Million of tax deductible dollars, repay the loan to ATR, and ATR can use all of that amount to pay Norquist's legal fees.

Aside

I've been puzzled as to why ATR has been subsidizing ATRF. After all, contributions to ATR are not tax deductible while contributions to ATRF are. The subsidy has actually been growing. Line 65 of the 2001 tax return of ATRF, set forth on page 78 of the exhibit to CREW's complaint, shows that at the beginning of 2001 the amount owed by ATRF to ATR was $4,257,206 and the debt increased to $4,909,208 by the end of that year. As noted above, it increased to $6.5 Million over the next two years.

I can only think of two reasons, neither of which are intellectually satisfying:

• In appropriate circumstances, contributors to ATR can deduct their contributions as business expenses. This does not seem to account for the disparity since ATR seems to have a wide array of contributors who are not taking their contributions as business deductions.
  


• Much of what ATRF is doing is not truly tax deductible, but because so much of its operations are funded via loans, it made an unattractive audit target when the expenses were being incurred. At some later date, however, after the statute of limitations period had run with respect to any improper deductions, the loan to ATR is repaid via funds obtain through charitable contributions. In other words, the timing mismatch between the date of expense and the receipt of (tax deductible contribution) income is designed to camouflage the improper activities from scrutiny. Quite frankly, I have to believe that this is too clever and devious even for Norquist.

If anybody with more experience in 501(c)(3)'s and 501(c)(4)'s has any idea as to why the relationship between ATRF and ATR has been structured in this way, I would be glad to hear from you.

Why DeLay Didn't Delay

One of the factors that may have motivated Tom DeLay's withdraw from his Congressional race is that he can now use all of the money in his campaign fund for his legal defense.

According to Federal Election Commission Advisory Opinion 2000-40, campaign funds can be used for legal defense where, as is likely the case with DeLay, the defense fund relates to allegations that arise out of his official duties. As of February 15, DeLay's campaign fund had cash of almost $1.3 Million.

Doing 501(3) The Right Way

My blogging has been rather light (i.e., non-existent) lately. I should be back more regularly by the weekend. One of the topics that I will post on is the information contained in the limited disclosure of some of the tax returns of the two main Grover Norquist connected entities, Americans for Tax Reform and the Americans for Tax Reform Foundation, contained as exhibits to the complaint filed with the IRS by the Citizens for Responsibility and Ethics in Washington.

I don't know how CREW obtained the returns. However, I doubt whether they were put on to public display by the Norquist crowd.

There are, of course, non-profit organizations that are have ideological viewpoints that run counter to those of Norquist. One of them is OMB Watch. A quick trip to their website offers a strong contrast to the Norquist sites with respect to transparency.

On the OMB Watch site, one can:

• Examine the organization's Form 990 tax returns for the last 8 years


• Find out where OMB Watch obtains its funding


• Obtain a list of groups affiliated with OMB Watch, something that Norquist's groups attempt to hide.

Furthermore, when OMB Watch runs an essay such as White House Continues False Rhetoric on Impact of Tax Cuts, it supports its position by linking to source material and analysis by such groups as the Congressional Budget Office, the Economic Report of the President and the Center on Budget and Policy Priorities. Compare this to the diet of tendentious baloney offered up by ATR.

To the extent that groups such as ATR and the ATR Foundation obtain indirect public subsidy via the tax code, they should be required to disclose their sources of funding and the ways in which they spend their money. Of course, don't hold your breath waiting for Norquist to make voluntary disclosure.

Chawla Update

Today, the Fourth Circuit handed down the opinion in Chawla v. Tranasamerica Occidental Life Insurance Co. (I commented previously on Chawla here, here, and here.)

The Court affirmed the district court's decision on the basis that material misrepresentations made by the decedent on the life insurance applications entitled Transamerica to rescind the policy. However, the Court vacated that portion of the lower court's ruling that held that because a trustee under an insurance trust lacks an insurable interest in the life of the trust's settlor, the trust cannot hold a life insurance on the life of the settlor. The Court reasoned:

Because the district court correctly awarded summary judgment to Transamerica on the misrepresentation issue, its alternative ruling appears to have unnecessarily addressed an important and novel question of Maryland law. And, as a general proposition, courts should avoid deciding more than is necessary to resolve a specific case. This important aspect of the doctrine of judicial restraint has particular application when a federal court is seemingly faced with a state-law issue of first impression. Cf. Kaiser Steel Corp. v. W.S. Ranch Co., 391 U.S. 593, 594 (1968) (observing that, in certain circumstances, federal courts should abstain from ruling on "novel" state-law issue of "vital concern"). In these circumstances, we vacate as unnecessary the district court’s alternative ruling that the Trust lacked any insurable interest in [the settlor's] life.

The opinion in no way obviates the need for a legislative fix in this area. So long as the statute is unclear, there will continue to exist an open invitation for insurance companies to challenge a claim for life insurance benefits where a trust holds the policy.

Hat Tip to Daryl Sidle.

Happy Birthday Testudo

Today is the 150th birthday of my alma mater, the University of Maryland at College Park.

Some things are timeless. For instance, the University Chapel today:


Is not much different than it was when I was an undergraduate:

CBO Saves Bush From His Own Folly

Generally, you will hear the following about the CBO's analysis of President Bush's budget submissions:

Federal revenues would plummet $1.7 trillion over 10 years compared to baseline projections, and deficits would top $2 trillion through 2016 if President Bush's fiscal 2007 budget proposals are implemented, according to new estimates by the Congressional Budget Office.

(From Tax Analysts.)

Yes, the numbers are bad. So bad, in fact, that they won't happen. The tax cuts, as proposed, will not be passed. Of course, the budget cuts, as proposed, will not pass either.

However, tucked away in the CBO report is the following:

The mandatory spending proposal that would have the largest effect on the budget is the creation of individual Social Security accounts. That policy would increase outlays by an estimated $312 billion between 2007 and 2016, CBO estimates. (The Administration projects much higher outlays—$712 billion over the 10-year period—chiefly because it assumes that two-thirds of eligible people would sign up for individual accounts, whereas CBO estimates that about one-thirdwould participate.)

In other words, the CBO report assumes that the number of people who would elect to participate in the proposed Bush Social Security reform would only be half of the number the Administration estimated.

The really good news for the President is that his Social Security reform will not pass, so the additional $1.7 trillion in budget deficit predicted by the CBO will only be $1.4 trillion.

WSJ Mumbo Jumbo

I previously commented on a CBO letter to Senator Charles E. Grassley that explained why the increase in capital gain revenue could not be attributed to the cuts in the tax rates on capital gains. At the conclusion of the posting, I said, "I'm waiting for the WSJ to spin [the CBO letter]." On March 2, the spin began with an editorial entitled "Non-Dynamic Duo." (Subscription required.)

Not surprisingly, the WSJ had to resort to name-calling, dubbing the detailed analysis offered by the CBO as "economic mumbo jumbo." Apparently, "economic mumbo jumbo" is a WSJ term for "technically difficult analyses that contradict the WSJ's ideological biases." At the core of the dispute is whether the CBO's and the JCT's methods of estimation are reasonably accurate. They are.

Late last week, the CBO issued another study, The Uncertainty of Budget Projections: A Discussion of Data and Methods. That study showed that, over the long haul, CBO estimates have generally been on the mark. Thus we have this graph which shows that, generally, the CBO estimates of budgetary surpluses or deficits have been within their 90% confidence range:

(Click for larger image.)

I could respond in kind to the WSJ's editorial by claiming that it's written by a bunch of knaves appealing to the baser instincts of a bunch of fools. But that would be name calling and I shouldn't stoop that low. Oh, what the hell.

Opinions of Precedential Caliber

On Monday, Judge Ellen Segal Huvelle of the U.S. District Court for the District of Columbia issued a decision in the case of Tax Analysts v. Internal Revenue Service. The Court ordered the IRS to release written advice rendered to regional employees by attorneys in the IRS Office of Chief Counsel's national office in less than two hours. The case has been well covered in the tax regions of the blawgosphere, but somewhat ignored elsewhere. It should not be.

There was a time where limitations that were placed on the access to interpretive material, whether administrative or judicial, were justified on the basis of their cost. Thus, opinions of the Court of Appeals of Maryland, Maryland's highest court, have always been published. Opinions of the intermediate appellate court, the Court of Special Appeals, are only published when the Court find's them significant enough to be precedential.

Although somewhat different, the U.S. Tax Court used to draw a distinction between decisions that were reviewed by the entire court and memoranda decisions. The latter were not "officially" published, although they were available through commercial services. Now there is a third, lower tier, category, that of summary opinions. However, all of the opinions of the Tax Court are "published" on the Court's website. That is not the case, for instance, with the non-published opinions of the Maryland Court of Special Appeals, for instance, which are only available, for a fee, either from the Court or from a commercial service. I suspect that this is true with respect to a large number of other intermediate appellate courts in the country.

At the federal level, I suppose that it could be argued that all opinions are published since one can obtain an opinion, for a fee, via the Administrative Office of the Courts' PACER service. However, that is not the same as open web access to all issued opinions. At the appellate level, some circuits offer reasonably decent access. The Fourth Circuit, for intance, "publishes" all opinions, even those that will not be accorded precedential value. Not all of the courts of appeals are so open. The Tenth Circuit's website currently has this wonderful statement: "Opinions of general interest to the public are posted here. There are currently no opinions of general interest." To obtain copies of opinions of the Tenth Circuit that may not be of "general interest" one has to go either to PACER or to websites maintained by Washburn University School of Law or Emory Law School.

At the district court level, things are even more hit or miss. Thus, the U.S. District Court for the District of Maryland maintains a website for its opinions, but only certain judges (Motz, Chasanow, Bennett, Blake, Davis) seem to regularly post their opinions. Most of the judges rarely or sporadically post their opinions. My limited experience with searching for opinions in other district courts or bankruptcy courts suggests that judges in other districts have even a lower rate of publication.

Today, there is no reason not to allow wide publication of judicial decisions. As a matter of philosophy, it has always seemed to me that the "default" rule with respect to judicial proceedings is that they are open to the public. By way of example, the files of all cases are open for review by all and sundry. Cases are sealed only in specific and limited circumstances.

This principle should be extended to the written opinions of all courts. The excuse that the expense of making them available simply will not fly because the cost of widely disseminating and searching them is almost trivial. The public has an interest not only in having judicial proceedings being "narrowly" transparent (i.e., having to go to the court to pull a file to look at an opinion), but "widely" transparent as well.

Things Are Worse Than Previously Reported

The 2005 Financial Report of the U.S. Government has just been released. The picture it paints is not pretty. According to Kleinrock (subscription required):

According to the report, under GAAP [Generally Accepted Accounting Principles] the federal deficit for last year would have been $760 billion. The Treasury reported a deficit of $319 billion for that year. Differences were due to accruals (such as pensions and health care owed to veterans and government employees) not being accounted for under the Treasury method. Because of full disclosure rules placed on companies, especially those that are publicly traded, accruals must be accounted for to help ensure investor trust.

In other words, if we apply the accounting rules that businesses use, the deficit is far worse than previously reported. As noted in This Is My Blog Test, the report contains significant disclaimers concerning its reliability:

* Material deficiencies in financial reporting (which also represent material weaknesses and other limitations on the scope of our work resulted in conditions that, for the ninth consecutive year, prevented us from expressing an opinion on the federal government’s consolidated financial statements.

* The federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2005.

Three major impediments to our ability to render an opinion on the consolidated financial statements continued to be

(1) serious financial management problems at the Department of Defense,

(2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and

(3) the federal government's ineffective process for preparing the consolidated financial statements.

Moreover, as a result of the material deficiencies we found, readers are cautioned that amounts reported in the consolidated financial statements and related notes, certain information contained in the accompanying Management's Discussion and Analysis, and other financial management information that is taken from the same data sources as the consolidated financial statements, may not be reliable. Until the problems discussed in our audit report are adequately addressed, they will continue to have adverse implications for the federal government and the taxpayers, which are outlined in our report.

(My emphasis.)

That is, things are worse than previously reported, but things may even be worse than that.

Kleinrock reports that:

Earlier today members a part of the Blue Dog Coalition spoke out against Treasury's actions. Blue Dogs are comprised of fiscally conservative Democrats who in the past have broken ranks with fellow liberals and supported tax cuts. They, like many on Capitol Hill, are growing extremely tired of catching the administration hiding vital information that could help Congress better determine what bills should be passed and which ones shouldn't.

"Once again we find the administration grossly misrepresenting the truth and intentionally misleading the American public," said Congressman Mike Ross (D-AR), the Blue Dog Whip. "The Treasury's annual but little known report, complete with the signature of Secretary Snow, uses real accounting practices that all American companies follow, and states that the deficit in 2005 was $760 billion, more than double the claim of the administration. The time to restore honesty, accountability, and transparency in our nation's fiscal house is long past due."

I await with bated breath the WSJ's spin.

And Your Point Is?

Both The Tax Foundation and Linda Beale offer comments on a CBS/NYT poll reported on in the NYT on February 28. The headline of the NYT article was "Americans Are Cautiously Open to Gas Tax Rise, Poll Shows." The conclusion drawn by the NYT was:

Americans are overwhelmingly opposed to a higher federal gasoline tax, but a significant number would go along with an increase if it reduced global warming or made the United States less dependent on foreign oil. . . .

The Tax Foundation responded to the comments with a bit of pedantic nit-picking. I can't figure out whether Gerald Prante, the author of the post, truly does not grasp either the essential point revealed by the poll or the policy goal that the proposal to dramatically increase the tax on gasoline hopes to achieve, or whether he is just being disingenuous:

Given that the original question of favorability toward a general gas tax hike was asked, the second question is based on a false premise, making it misleading to the respondent. Here’s why:

Regardless of the definition of "dependence on foreign oil," there is nothing substantive in asking a second question about whether respondents would support a gas tax if it reduced our "dependence on foreign oil." If you define “dependence on foreign oil” as the percentage of oil that comes from other countries (compared to domestic production), then a higher gas tax at the pump is not going to reduce that number at all. That tax would apply to all oil, whether it comes from Texas or Iran, meaning the percentage “dependency” will not change.

On the other hand, if you measure “dependency on foreign oil” by the actual amount of oil coming in from other countries, then of course you will be reducing your dependence on foreign oil. But that would also be reducing our “dependence” on Alaskan oil or Texas oil. You would merely get lower oil consumption period, regardless of the location from which it comes. And you would get that same result from the general gas tax posed in the original question, where respondents overwhelmingly (85 percent) said no.

It is true that articulating the goal as "reducing dependence on foreign oil" is somewhat misleading. But I think that most Americans understand that what is meant is not really an effort to reduce the relative percentage that foreign oil bears to our total oil consumption, but rather a reduction in the total amount of cash we send abroad to buy the stuff. The relevant operative theory is that by dramatically raising the tax on gasoline we will (i) put a good portion of the cash we spend on gasoline in our (collective) pockets, rather than the pockets of foreign nations, (ii) not be in thrall to feudal despots, and (iii) reduce the total consumption of oil. Beale gets it right:

[E]nergy researchers think there is a real correlation between gas taxes and gas consumption: Severin Borenswtien at the University of California, Berkeley's energy institute suggests a 10% increase in cost could reduce consumption by 6-8% over the long term. . . So Americans are willing, after all, to think long term and to pay taxes to protect the things they value.

Robert Frank, an economist at the Johnson School of Management at Cornell, suggests that a $2-a-gallon gas tax, rebated against payroll taxes, could "produce hundreds of billions of dollars in savings for American consumers, significant reductions in traffic congestion, major improvements in urban air quality, large reductions in greenhouse gas emissions, and substantially reduced dependence on Middle East oil."

I assume that there are good arguments against a dramatically increased gasoline tax, but the silly word-play offered by The Tax Foundation and Prante is not among them.

Calling Collect

Via Joel Schoenmeyer's Death and Taxes, we find a post discussing a WSJ article (by subscription only) on the thinning ranks of "collectors." Joel does a fine job of summarizing the estate planning issues raised by the article, but he missed the money quote:

A collectibles researcher in Vera Cruz, Pa., Mr. [Harry] Rinker, 64, himself collects everything from jigsaw puzzles to antique toilet paper.

(Emphasis added.)

Since this is a family-oriented blog, we will let this pass without comment.