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Wednesday, August 30, 2006

Shlaes on Murphy

Interesting article in today's Bloomberg:  Court Redefines Murphy's Law -- And Gets It Wrong, by Amity Shlaes:

Most of us have heard of Murphy's Law, which says that if something can go wrong, it will. Now, the U.S. Court of Appeals in Washington has given the axiom a literal meaning with a wrong decision called -- what else? -- Murphy....

Defining Income.  Tax protesters on the far right will love this one. If you have ever listened to their radio tax talk, you know they are constantly trying to narrow or annihilate the 16th Amendment. On the legal side, too, there is a basis for this opinion -- maybe. The 16th Amendment, ratified in 1913, says Congress may ``lay and collect taxes on incomes, from whatever source derived.'' Ever since then, economists have been fighting about the definition of the concept of income. In Murphy's case, the judges decided that the award was given to her ``to make Murphy emotionally and reputationally `whole.''' The judges are saying that all Murphy got back was what she had had before she tangled with her employers.

Right, Left Attacks. This reasoning will appeal to legal experts across the political spectrum. We can speculate that Judge Douglas Ginsburg, the conservative who wrote the opinion, may have wanted to attack the income tax from the right, and found his vehicle in Murphy. Judge Judith Rogers, who signed off on the opinion, is an appointee of President Bill Clinton's. She may approve of the redistributive aspect of the opinion -- Democrats tend to believe redistribution is highly constitutional.

When you try applying Murphy to other areas, as the tax bloggers have been doing nonstop in the week or so since the Murphy finding, you run into trouble. Take the argument to its humorous extreme: Both windfall wealth and gambling proceeds are currently taxable. The Murphy principle suggests that they shouldn't be. Plaintiffs could argue that their casino winnings were only restoring to them the luck they were born with. There are also potential consequences for financial markets. As Paul Caron of the University of Cincinnati College of Law points out, "The buyer of a zero-coupon bond that does not pay interest currently is nevertheless taxed each year on the increased value of the bond as it nears maturity. Yet because such imputed interest was not considered income back in 1913, the Murphy court's approach could impose a constitutional barrier to taxing such items."

"Almost anything is up for grabs here,'' concludes Caron.

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Excellent article by Amity Shlaes in Bloomberg.com on the implications of the Federal Circuit's recent Murphy decision (Hat tip: TaxProf... [Read More]

Tracked on Aug 30, 2006 10:32:26 AM

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