November 30, 2012
Schrag Reviews Tamanaha's Failing Law Schools
Philip G. Schrag (Georgetown), Failing Law Schools -- Brian Tamanaha's Misguided Missile, 26 Geo. J. Legal Ethics ___ (2013) (reviewing Brian Tamanaha (Washington U.), Failing Law Schools (University of Chicago Press, 2012)):
Professor Brian Tamanaha’s book, Failing Law Schools, usefully collects in one place the recent critiques of law schools for reacting excessively to U.S. News rankings, manipulating admissions data, spending excessive amounts of money to hire “star” professors and to circulate glossy brochures and magazines, and in some cases, falsifying graduates’ employment statistics. But Tamanaha’s main argument is that law school has become unaffordable for most applicants, because it will saddle them with debt that they cannot afford to repay on the incomes that they can reasonably expect. His thesis is based on a misunderstanding of student loan repayment methods. In particular, he erroneously assumes that the only proper way to repay student loans is through so-called “standard” repayment (over a ten year period). Actually, many law graduates will find typically law school debt manageable if they repay federal student loans through income-based repayment plans, particularly the new Pay As You Earn (PAYE) plan. Tamanaha disparages income-based repayment, however, because he incorrectly believes that total debt, rather than the ratio of current repayment obligations to current income, primarily determines a borrower’s credit-worthiness for mortgages and other large loans.
Based on his belief that law school is no longer affordable for most students, Tamanaha offers several radical proposals, such as amending accreditation standards to permit a two-tier system, in which only a few expensive law schools would continue as research institutions offering three-year degrees, while most would offer law degrees after two years of classroom study and a year of some sort of lightly-supervised apprenticeship. He would also do away with the standard that requires schools to put most faculty members on tenure tracks and to support faculty research. This review essay questions the need for those far-reaching changes in legal education and concludes with the suggestion that Tamanaha focus his considerable critical skills on the problems not of law students, but of lower-income clients who are unable to obtain the legal services that they need.
Other reviews of Failing Law Schools:
- Jennifer Bard (Texas Tech)
- Jim Chen (Former Dean, Louisville)
- Chronicle of Higher Education
- Ronald Den Otter (California Polytechnic State)
- Stanley Fish (Florida International)
- Scott Greenfield (here and here)
- Bill Henderson (Indiana)
- Paul Horwitz (Alabama)
- Orin Kerr (George Washington)
- Brian Leiter (Chicago)
- Andy Morriss (Alabama)
- National Law Journal
- Robert Steinbuch (Arkansas-Little Rock)
- Washington Post
Update #1: Brian Tamanaha (Washington U.), What's Wrong With Income Based Repayment In Legal Academia: A Response to Schrag:
Phil Schrag has written a strong critique of my analysis, which I encourage everyone interested in these issues to read. He criticizes me for directing a "nuclear weapon" at the structure of legal education, when "small arms fire, to curb a few evident abuses, would have been a more appropriate response." The Income Based Repayment program (IBR) solves the economic problems I identify, he argues. IBR allows graduates to make monthly loan payments based upon their income (10% of income above 150% of the poverty rate), and forgives the remaining balance after 20 years. In a section called "Sarah gets rich," Schrag shows that law graduates on IBR end up doing very well. He also argues that, contrary to concerns I expressed, their credit scores (FICO) will not be adversely affected by the fact that their loan balances will remain very large (and in many instances grow), because creditors will care only about their fixed and manageable low monthly payments. ...
Schrag makes a convincing case. The recently implemented version of IBR is far more generous than the formula in place when I wrote the book (15% of income above 150% of the poverty line, forgiveness after 25%). Under the previous program, a student on IBR would end up paying more each month and a much higher amount of interest on the loan before forgiveness. ...
That said, in my view IBR does not solve the basic underlying problem of the warped economics of legal education, but actually has the potential to make it worse. I will identify just two reasons to doubt Schrag's assertion that no big changes are necessary.
First, I find it alarming, not reassuring, to be told that IBR should be viewed as the "standard payment" for contemporary law grads. ... The second reason for concern is that the operation of IBR exacerbates the situation in several ways. ... Because monthly loan payments under the program are tied to salary, not to the amount owed, IBR renders the size of the debt irrelevant. ... Besides encouraging inefficient economic decisions by students, IBR will artificially keep alive law schools that should not exist. ... Finally, the fact that IBR makes the size of the debt irrelevant means that law schools can increase tuition without worrying about adverse consequences for our students. ... Law schools benefit from and are happy about these aspects of IBR. But legal educators should also consider whether they are good for our students and for society.
Update #2: Paul Campos (Colorado), Sarah's Problem:
There are a whole lot of problems with Schrag's claim that IBR is a good thing for law students (let alone for the public as a whole, which of course is picking up this particular bill), but I'll leave those for another day. Here I'll stick to a much simpler and more fundamental point:
Sarah's real problem is that she's not getting a job, or if she does get a job it's not paying $60,000, or if it does pay $60,000 she's not going to be able to keep it.
Law professors tend to live in a bubble where they imagine that Sarah's hypothetical career path is a typical outcome for people who don't make the big bucks in Big Law. That's why arguments about "affordability" end up assuming a series of can openers, consisting of solid salaries, career stability, and other features that have very little to do with what the large majority of current law graduates can realistically expect to obtain in return for taking out ever-more enormous piles of taxpayer-funded debt that will never be repaid.
Gergen Presents Harnessing Conflict and Distrust as Drivers for Tax Compliance at Today Washington U.
Tax enforcement strategies that target third parties (e.g., reporting requirements, third party penalties, and whistle blower awards) create what is from the perspective of the taxpayer and the third party an agency problem for there will be a positive joint net payoff from misreporting a transaction. Distrust can make it difficult to solve this problem and so can make efficacious enforcement strategies that target third parties. However, such enforcement strategies can also breed distrust, imposing private losses by reducing the value of a transaction. This paper presents a simple model for analyzing the problem. The model uses a contract for home improvements in which a contractor can induce a homeowner not to report the transaction by revealing he is a tax cheat but at the cost of diminishing the homeowner's trust the contractor will perform as promised.
Keen Presents Presents Revenue Mobilization in Developing Countries Today at Columbia
Michael Keen (Deputy Director, Fiscal Affairs Department, International Monetary Fund) presents Revenue Mobilization in Developing Countries at Columbia today as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer and Wojciech Kopczuk:
The Fund has long played a lead role in supporting developing countries’ efforts to improve their revenue mobilization. This paper draws on that experience to review issues and good practice, and to assess prospects in this key area.
Kleinbard: Bridging the Fiscal Cliff With a Three-Year Ramp
America's fiscal policy faces an apparent Hobson's choice.
On the one hand, we need to tame federal deficit spending by imposing new across-the-board spending cuts and higher taxes. We are told that if we do not act on this soon, the debt markets will choke on the overabundance of government debt issued to fund those deficits, causing interest rates to climb. As a result, businesses and homeowners will be unable to borrow on reasonable terms, which will lead to a slowdown of the economy.
On the other hand, we also are told that allowing this deficit reduction program actually to take effect in 2013 would precipitate a new recession.
Faced with two genuinely unpalatable courses of action, it's no wonder that Washington struggles to find a consensus. But, the dilemma is more apparent than real, because it confounds the dimension of time.
What we need to do is to commit today to a transition -- a ramp -- from our current taxing and spending policies to a more sustainable mix. A firm congressional commitment, for example, to a three-year ramp, by means of which we move to a sensible combination of higher taxes and lower spending, should enable the economy to heal while reassuring markets that the long-term fiscal health of the country will be restored.
Of course, advocating a three-year transition from where we are to where we need to be is the easy part. The real challenge is to identify the new policies.A bona fide "grand bargain" might need to encompass as much as $8 trillion in lower spending and higher taxes over 10 years to address fully the underlying fiscal trends, not the much smaller numbers currently bandied about.
Details of President Obama's $1.6 Trillion Tax Increase Plan
2d Circuit Reverses Tax Shelter Convictions of Two Former Ernst & Young Partners
United States v. Coplan, No. 10-583 (2d Cir. Nov. 29, 2012):
We consider here the fate of four partners and employees of Ernst & Young, LLP (“E&Y”), one of the largest accounting firms in the world, who appeal their convictions in connection with the development and defense of five “tax shelters” that were sold or implemented by E&Y between 1999 and 2001. At issue, among other things, is the scope of criminal liability in a conspiracy to defraud the United States under 18 U.S.C. § 371 and the sufficiency of the evidence with respect to the criminal intent of certain defendants.
The defendants in these consolidated actions are three tax attorneys, Robert Coplan, Martin Nissenbaum, and Richard Shapiro, and one accountant, Brian Vaughn, formerly employed by E&Y. A fifth defendant, Charles Bolton, was an investment advisor who owned and operated various asset-management companies. Coplan, Nissenbaum, Shapiro, and Vaughn (jointly, the “trial defendants”) appeal from separate judgments of conviction entered by the United States District Court for the Southern District of New York (Sidney H. Stein, Judge) on February 17, 2010, following a 10-week jury trial on charges of conspiracy to defraud the Government, tax evasion, obstruction of the Internal Revenue Service (“IRS”), and false statements to the IRS. Bolton appeals from a judgment of conviction entered by the District Court on April 14, 2010, following his plea of guilty to a single conspiracy charge.
For the reasons that follow, we reverse the convictions of Shapiro and Nissenbaum on Counts One, Two, and Three, and the conviction of Nissenbaum on Count Four, and we affirm the convictions of Coplan and Vaughn in their entirety. We affirm the District Court’s order sentencing Bolton principally to 15 months of imprisonment, but we vacate and remand the portion of the judgment that imposed a fine of $3 million. ....
Dissent: I respectfully dissent from so much of the Majority Opinion as finds the evidence insufficient to support (1) the convictions of defendants Richard Shapiro and Martin Nissenbaum of conspiracy, in violation of 18 U.S.C. § 371, to (a) defraud the United States by impairing the lawful functions of an agency of the United States government, to wit, the Internal Revenue Service ("IRS"), (b) commit tax evasion, see 26 U.S.C. § 7201, and (c) make false statements to the IRS, see 18 U.S.C. § 1001 (Count One); and (2) those two defendants' convictions of attempted tax evasion in violation of 26 U.S.C. § 7201 (Counts Two and Three).
- ABA Journal, 2nd Circuit Reverses Tax-Shelter Convictions of 2 Former Ernst & Young Lawyers
- Bloomberg, Ex-Ernst & Young Lawyers Get Tax Convictions Reversed
- Federal Tax Crimes Blog, Major CA2 Decision on E&Y Tax Shelter Convictions
- Reuters, Two Ex-Ernst Partners' Convictions Reversed in Tax Case
- New York Law Journal, Circuit Reverses 2 Lawyer Convictions in Tax Shelter Cases
- Wall Street Journal, Two Convictions Tossed Out in Ernst Tax-Shelter Case
Tax Policy Center Releases Fiscal Cliff Tax Calculator
The Tax Policy Center has created a new Tax Calculator that lets users examine the effects of four potential outcomes of negotiations over the upcoming fiscal cliff:
- 2012 tax law (with an AMT patch). This is what you’re paying this year, assuming Congress gets around to patching the alternative minimum tax for 2012.
- 2013 tax law. This is what you’ll pay if Congress doesn’t act and we go over the fiscal cliff for all of next year.
- The Senate Democratic plan, which would extend the expiring Bush-era income tax cuts for a year for all except the top 2 percent of taxpayers and extend the credits originally enacted by President Obama in 2009, but allow the temporary payroll tax cut to expire.
The Senate Republican plan,
which would extend the Bush-era income tax cuts for everyone, but would
allow the 2009 credits and the temporary payroll tax cut to expire.
(More details on these scenarios, including their treatment of the AMT and estate taxes, are available here.)
The calculator does not include options to cap or eliminate itemized deductions but you can see the effects of such options simply by reducing or zeroing out the input values for some or all deductions. And, as in earlier versions of the calculator, you can look at ready-made examples or create your own case.
Shaviro Posts Two Papers on SSRN
Surely just about everyone in the U.S. federal income tax field has heard of Henry Simons, if only for his famous definition of “personal income.” Few realize, however, that this proponent of “drastic progression” in a broad-based income tax was also a self-described libertarian who generally denounced government economic regulation and was arguably the chief architect of the pro-free market law and economics movement at the University of Chicago. This article provides a brief intellectual history of Simons’ work, aiming in particular to explain how and why he combined these seemingly disparate sets of beliefs, and what we may learn from them today.
Contemporary political debate about Social Security and Medicare often conflates the issue of the programs’ long-term fiscal sustainability with that of whether their design should be made more market-based, such as by transforming Social Security into a private accounts program and Medicare into a voucher-based program. In fact, the sustainability and design issues are fundamentally separate.
This article assesses the case for making the programs more market-based by using two main conceptual vehicles: (1) the model for understanding the programs’ substantive features and rationales that I offered in my books, Making Sense of Social Security Reform and Who Should Pay for Medicare?, and (2) Paul Samuelson’s classic description of Social Security as providing what we would now call an implicit financial instrument that reflects an intergenerational compact. In the end, it reaches largely skeptical conclusions about altering the programs to use either private accounts or vouchers.
Gov. Nikki Haley Blames IRS for Massive Data Breach Affecting 6.4 Million South Carolina Taxpayers
South Carolina's governor faulted an outdated IRS standard as a contributing factor to a massive data breach that exposed Social Security numbers of 3.8 million taxpayers plus credit card and bank account data. Gov. Nikki Haley's remarks on Tuesday came after a report into the breach revealed that 74.7 GB was stolen from computers belonging to South Carolina's Department of Revenue after an employee fell victim to a phishing email. People who filed tax returns electronically from 1998 on were affected, although most of the data appears to be after 2002, Haley said during a news conference.
South Carolina is compliant with IRS rules, but the IRS does not require SSNs to be encrypted, she said. The state will now encrypt SSNs and is in the process of revamping its tax systems with stronger security controls. She said she has sent a letter to IRS to encourage the agency to update its standards to mandate encryption of SSNs.
The lack of encryption and strong user access controls plus dated 1970s-era equipment made DOR systems ripe for an attack, she said. ... The report, written by the security company Mandiant, found that an employee's computer became infected with malware after the user opened a phishing email. The hacker captured the person's username and password, which allowed access to the agency's Citrix remote access service. ...
The data included SSNs for 3.8 million tax filers and information on 1.9 million dependants, Haley said. Information belonging to 699,900 businesses was compromised, along with 3.3 million bank accounts and 5,000 credit card numbers, she said.
South Carolina has identified all of the victims, who will be notified by letter. The state is also working with Experian, which is monitoring credit information for victims.
As a result of the breach, DOR Director Jim Etter will resign effective Dec. 31. He will be replaced by Bill Blume, who is currently executive director of South Carolina's Public Employee Benefit Authority, Haley said.
The State: The Hacking of South Carolina:
A $25,000 dual password system likely would have prevented hackers from stealing state tax data belonging to 6.4 million consumers and businesses from the S.C. Department of Revenue, a special state Senate subcommittee investigating the data breach was told Wednesday.
“I almost fell out of my chair,” Sen. Kevin Bryant, R-Anderson, co-chairman of the cyber-security breach subcommittee, said after the hearing. “For $25,000, we wouldn’t be here.”
A computer security firm hired by the state told senators that hackers would have been thwarted by requiring Revenue Department employees to log-in twice – once with a password that changes every minute.
Dual passwords are required by the Internal Revenue Service for agencies, such as state tax departments, that access federal tax records remotely, but the S.C. Revenue Department did not install the system until after the breach. The password system is costing $25,000, agency director James Etter told senators.
The Negative Tax Consequences in Employment Dispute Recoveries
Michael K. Hulley, Jr. (J.D. 2012, Michigan State), Comment, Taking Your Lump Sum or Just Taking Your Lumps? The Negative Tax Consequences in Employment Dispute Recoveries and Congress's Role in Fashioning a Remedy, 2012 Mich. St. L. Rev. 171:
This Note considers whether a prevailing plaintiff in an employment discrimination or wrongful termination suit should receive an augmented award to balance out the extra taxes a lump sum creates. It also proposes a solution and urges Congress to respond accordingly. Part I defines pertinent terms, lays the groundwork for understanding how tax issues intersect with employment law, and describes the negative tax consequences that may impact plaintiffs. Part II presents a thorough analysis of the Eshelman decision and compares the Third Circuit's findings to the handful of other rulings on point. Part III argues that, in the spirit of anti-discrimination statutes, plaintiffs should be able to request payments that will offset increased tax liabilities. Moreover, Part III asserts that courts do have the authority to provide gross ups. Part IV details the uncertainty that pervades employment suits with regard to how taxes should be treated, as well as the great reluctance of many courts to resolve the matter adequately. Finally, this Note recommends that Congress breathe life back into the Civil Rights Tax Relief Act and, ultimately, pass Part IV's version of it. As courts struggle to reach a satisfactory approach to an employee's right to tax relief, Congress should guarantee that America's “national policy of encouraging the pursuit of meritorious civil rights claims” does not become diluted.
November 29, 2012
Case Western Dean: Law School Is Worth the Money
I’m a law dean, and I’m proud. And I think it’s time to stop the nonsense. After two years of almost relentless attacks on law schools, a bit of perspective would be nice.
For at least two years, the popular press, bloggers and a few sensationalist law professors have turned American law schools into the new investment banks. We entice bright young students into our academic clutches. Succubus-like, when we’ve taken what we want from them, we return them to the mean and barren streets to fend for themselves.
The hysteria has masked some important realities and created an environment in which some of the brightest potential lawyers are, largely irrationally, forgoing the possibility of a rich, rewarding and, yes, profitable, career.
The starting point is the job market. It’s bad. It’s bad in many industries. “Bad,” in law, means that most students will have trouble finding a first job, especially at law firms. But a little historical perspective will reveal that the law job market has been bad — very bad — before. ... What else will these thousands of students who have been discouraged from attending law school do? ...
It’s true, and a problem, that tuition has increased. ... Debt, too, is a problem. The average student at a private law school graduates with $125,000 in debt. But the average lawyer’s annual salary exceeds that number. You’d consider a home mortgage at that ratio to be pretty sweet. Investment in tuition is for a lifelong career, not a first job. There are many ways to realize a satisfactory return on this investment. Even practicing law appears to have paid off over the long term.
The graying of baby-boom lawyers creates opportunities. As more senior lawyers retire, jobs will open, even in the unlikely case that the law business doesn’t expand with an improving economy. More opportunity will open to women and minorities, too. As with any industry in transition, changes in the delivery of legal services create opportunities as well as challenges. Creative, innovative and entrepreneurial lawyers will find ways to capitalize on this.
The overwrought atmosphere has created irrationalities that prevent talented students from realizing their ambitions. ... We could do things better, and every law school with which I’m familiar is looking to address its problems. In the meantime, the one-sided analysis is inflicting significant damage, not only on law schools but also on a society that may well soon find itself bereft of its best and brightest lawyers
- ABA Journal, Law Dean Criticizes ‘Overwrought Atmosphere’ Discouraging Prospective Students
- Above the Law, Law Dean Takes to the New York Times Op-Ed Page to Blame Media for Declining Law School Applications
- Craig Calcaterra, The Shady Economics of Law School
- Paul Campos, Too Many Lawyers? Says Who?
- Comedians at Law, Is Law School Worth It – Not When You Can Own a Subway Franchise
- Legal Ethics Form, Two Arguments in Favor of Law School Debt
- Matt Leichter, If Law School Is Worth the Money, Why Subsidize It?
Blank Presents Collateral Compliance Today at Columbia
As most of us are aware, the failure to comply with the tax law can lead to civil and criminal tax penalties. But tax noncompliance has other consequences as well. Collateral sanctions for tax noncompliance, which are imposed on top of tax penalties and are often administered by agencies other than the taxing authority, increasingly apply to individuals who have failed to obey the tax law. They range from denial of hunting permits to suspension of driver’s licenses to revocation of passports. Further, as the recent Supreme Court case Kawashima v. Holder demonstrates, some individuals who are subject to tax penalties for committing tax offenses involving “fraud or deceit” may even face deportation from the United States. Criminal law scholars have written dozens of articles on the collateral consequences of convictions. Yet tax scholars have virtually ignored collateral tax sanctions, even though their use by the federal and state governments is growing.,/p>
This Article offers a comprehensive analysis of collateral consequences in the taxation context. While many criminal law scholars have proposed ways to alleviate collateral consequences, this Article argues that, when applied in connection with violations of the tax law, collateral consequences may offer previously unappreciated social benefits. In many cases, collateral tax sanctions can promote voluntary tax compliance more effectively than additional monetary tax penalties, especially if governments increase public awareness of collateral tax sanctions. Governments should therefore embrace these sanctions as a means of tax enforcement and taxing authorities should publicize them affirmatively.
After considering the effects of collateral tax sanctions under each of the predominant theories of voluntary compliance, I propose principles that governments should consider when designing collateral tax sanctions. These principles suggest, for example, that initiatives to revoke driver’s licenses from individuals who have failed to pay outstanding taxes or professional licenses from individuals who have failed to file tax returns would likely promote tax compliance. However, whether the sanction of deportation for tax offenses involving fraud or deceit will have positive compliance effects is far less certain. Finally, I suggest how taxing authorities should publicize these sanctions to foster voluntary compliance.
Henderson: Is Tax Evasion Normatively Good?
Much of tax law scholarship concerns how to improve tax compliance; in this literature, tax evasion is held out as normatively undesirable. A senior researcher at the London-based Royal Society of Arts recently published a paper in which he argues that tax evasion in the UK might (actually) be a good thing. In Untapped Enterprise, Benedict Dellot argues that the “informal economy” – those workers who do not declare their income for tax purposes – are an important part of the formal economy and that "formalization" itself is a process that occurs over the lifecycle of a business. In some parts of the developing world, for example, the informal economy accounts for up to 90% of GDP. The authors argue “If we rely too heavily on deterrence measures, we run the risk of derailing this[formalization] journey and preventing the entrepreneurial potential of thousands of hidden entrepreneurs from being realised.”
The study, of course, has some application limitations, but it’s an interesting read. Should tax policy accommodate certain forms of “productive” noncompliance? Does it already do so? I'd love to hear from some of our tax readers on this!
WSJ: Companies Race to Pay Dividends to Avoid Obama Tax Scythe in January
Wall Street Journal editorial: The Great 2012 Cashout: Dividends Offer a Lesson in Tax Rates and Investor Behavior:
Perhaps you've heard from various economic sages that tax rates don't matter either to economic growth or taxpayer behavior. Don't tell that to the companies and individuals who are busy cashing out their investments or paying dividends to get ahead of the Obama tax scythe in January. ...
The Journal reports that as of Wednesday morning some 173 companies had announced special dividends, compared to only 72 in the same period a year ago. A recent Bloomberg analysis found that from September to mid-November, 59 companies on the Russell 3000 stock index had declared one-time cash payments to shareholders, four times last year's pace.
"I find no precedent like this at all going all the way back to the 1950s," Howard Silverblatt of S&P Dow Jones Indices told the Journal. Then again, there's no precedent for the Obama Presidency. ...
When government raises taxes on dividends and capital gains, it is lowering the after-tax return on stocks. Share prices will fall over time to adjust to that new rate of return, reducing overall wealth in the private economy, all other things being equal. As for the feds, history suggests they'll see a capital gains and dividend revenue windfall this year, but then a decline next year even at the higher rate.
It's the oldest lesson in tax policy: Tax something and you get less of it. In this era when envy trumps growth, the government is raising taxes on thrift, investment and risk-taking in the name of fairness and to finance more government spending. No one should be surprised when there are fewer dividends and capital gains to tax.
Minnesota Tax Court Chief Judge Accused of Missing Deadlines, Evading WorkABA Journal, Top Tax Court Judge in Minnesota Is Accused of Missing Deadlines, Evading Work:
The chief judge of Minnesota’s tax court is accused in a judicial misconduct complaint of routinely missing the statutory three-month deadline to issue decisions and handling fewer cases than his colleagues.
The Board on Judicial Standards filed the complaint (PDF) against Judge George Perez on Tuesday, report the St. Paul Pioneer Press and Minneapolis Star Tribune. The board alleges Perez sometimes misrepresented his workload or health to get parties to agree to delays, concealed his misconduct by improperly dating decisions, and submitted false certifications that he was meeting statutory requirements.
The deadline problems began soon after Perez was appointed to the tax court in 1997, the complaint says. He often told others that the quality of his decisions was more important that meeting the statutory deadline.
Fall 2012 1L Enrollment Down 9%; 75% of Law Schools Experienced Declines
ABA Section of Legal Education, Preliminary Fall 2012 First-Year Enrollment Data:
Early review of data on first-year enrollments at ABA-approved law schools reveals that 44,481 full-time and part-time students began their law school studies in the fall of 2012. This represents a decrease of 4,216 students (9%) from the fall of 2011 and is approximately 15% below the historic high 1L enrollment of 52,488 in the fall of 2010. ...
Approximately three fourths of 201 ABA-approved law schools experienced declines in first-year enrollment. Ninety law schools reported declines exceeding 10% from last year, while fewer than 10 had increases of 10% or more. ...
ABA Section of Legal Education Preliminary Fall 2012 First-Year Law School Enrollment Data
- Total 1L enrollment (full-time and part-time) 44,481
- Changes in 1L enrollment, 2011 – 2012
- Schools showing increase: 48
- Schools showing no change: 4
- Schools showing decrease: 149
- Schools with 1L enrollments within +/- 5 students from previous year: 39
- Schools showing 10% or more increase from previous year: 8
- Schools showing 10% or more decrease from previous year: 90
Matt Leichter, Number of 1Ls Per Law School Drops to 43-Year Low:
2011 saw the lowest ratio since 2000, but 2012 takes us back to when law school was probably far out: 1969!
The last time the total number of 1Ls was this low was 2001 (45,070), but since then the ABA has accredited 18 law schools. ...
Here’s the ratio to applicants:
Two-Thirds of Millionaires Left Britain to Avoid 50% Tax Rate
In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs. This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election.
The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government.
It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes.
George Osborne, the Chancellor, announced in the Budget earlier this year that the 50% top rate will be reduced to 45% from next April
Ex BigLaw Partner Who Lied on Child’s School Financial Aid Applications Is Disbarred
An Illinois lawyer has been disbarred by the state supreme court for misrepresenting his income on his child's private school financial aid applications, in order to qualify for $22,830 in assistance over an approximately four-year period.
In addition to providing falsified copies of his tax returns to the Francis W. Parker School in Chicago, Bruce Paul Golden also "understandably offended" most members of the hearing panel, it noted in an earlier report, by refusing to provide requested information and “antagonistic, sometimes rude" conduct, recounts Forest Leaves, a suburban news publication. Golden worked for more than 20 years at McDermott Will & Emery.
Warren Buffett: Tax Hikes on Rich Would 'Raise Morale of the Middle Class'
Real Clear Politics, Buffett: Tax Hikes On Rich Would "Raise Morale Of The Middle Class":
MATT LAUER, TODAY: So bottom line, would raising taxes on the wealthiest
Americans have a chilling effect on hiring in this country?
WARREN BUFFETT: No, and I think would have a great effect in terms of the morale of the middle class, who have seen themselves paying high payroll taxes, income taxes. And then they watch guys like me end up paying a rate that's below that, you know, paid by the people in my office.
NY Times: Still Dodging Reality on Taxes
New York Times editorial: Still Dodging Reality on Taxes:
Congressional Republicans seem to think they are being flexible on taxes simply because a few of them have grudgingly admitted that some new revenues can be part of the current fiscal negotiations. We’re unimpressed.
No credit is due to a party that has suddenly accepted the obvious when it has no choice, particularly after two years of irresponsibly reducing the deficit only from the spending side. True flexibility means acknowledging that tax rates for the rich have to go up, and then negotiating how much and which ones. But, so far, Republicans have been just as closed to that reality as they have been for years, ignoring both the election results and the plain arithmetic of deficit reduction.
November 28, 2012
Bartlett: Tax Cuts, Tax Rates and Tax Shares
Last week, the IRS posted the latest individual income tax data for tax year 2010. Supporting the Republican worldview, the data show that the share of total income taxes paid by the rich increased; supporting the Democratic worldview, they show that the wealthy’s share of total income increased more, leading to a decline in their average tax rate. Sorting through these competing facts is a bit like determining whether the glass is half-empty or half-full, but I’m going to try.
96% of Political Donations From Ivy League Faculty & Staff Went to Obama
CampusReform.org: 96% of Political Donations From Ivy League Faculty & Staff Went for Obama:
From the eight elite schools, $1,211,267 was contributed to the Obama campaign, compared to the $114,166 given to Romney.
The highest percentage of Obama donors came from Brown and Princeton, with 99% of donations from faculty and staff going towards his campaign.
Dartmouth and Pennsylvania’s faculty contributed to the President’s campaign in the lowest numbers, with only 94% percent donating to the Obama campaign.
- Brown: 129 Obama donors gave $67,728, 1 Romney donor gave $500
- Columbia: 652 Obama donors gave $361,754, 21 Romney donors gave $34,250
- Cornell: 282 Obama donors gave $141,731, 11 Romney donors gave $8,610
- Dartmouth: 90 Obama donors gave $51,018, 6 Romney donors gave $2,850
- Harvard: 555 Obama donors gave $373,556, 30 Romney donors gave $34,500
- Princeton: 277 Obama donors gave $155,008, 4 Romney donors gave $1,901
- Pennsylvania: 376 Obama donors gave $209,839, 26 Romney donors gave $22,900
- Yale: 399 Obama donors gave $186,834, 13 Romney donors gave $8,655
Nate Silver: Congressional Proposal Would Create 'Bubble' in Tax Code
New York Times: Congressional Proposal Could Create ‘Bubble’ in Tax Code, by Nate Silver:
The coming Congressional debate over fiscal policy is sure to feature a wide array of proposals, some of which would hit certain taxpayers harder than others. But one idea being floated by Congressional negotiators, as described in an article by The New York Times’s Jonathan Weisman on Thursday, is hard to defend from the standpoint of rational public policy making. Its arithmetic could require that the 300,000th dollar of income was taxed at a rate of about 50% -- even while the three millionth dollar of income, or the three billionth, was taxed at a lower 35% rate instead.
The math behind these calculations is not all that complicated. It’s just a matter of understanding how marginal tax rates work.
Take an American who earns $400,000 a year in taxable income. (This is roughly the threshold at which a taxpayer reaches the top 1% of households.) The top marginal federal income tax rate is now 35%, and kicks in at earnings above $388,350. Someone making $400,000 is above the $388,350 threshold. Does this mean that she’d be taxed at a 35% rate on all $400,000 of income, meaning that she’d owe the government $140,000?
Not under current law. Instead, only a small fraction of the taxpayer’s income – the $11,650 she earns after she’s already reached $388,350 – is taxed at the top 35% rate. This is because the tax rates are applied on a marginal basis. ...[U]nder [the] proposal, the taxpayer making $400,000 would in fact pay 35 percent in overall income taxes and would owe $140,000 — about $23,000 more than she does currently. ...
The question is when the government would collect the additional $23,000 of taxes. [T]he taxpayer would owe about $117,000 in taxes if she made $399,999, but $140,000 if she made $400,000 instead. Thus, that one additional dollar of income would cost the taxpayer about $23,000 in taxes. ... For example, the taxpayer might be asked to pay additional taxes on the $150,000 of earnings between $250,000 and $400,000. To collect the extra $23,000, the government would need to tax this income at a rate of about 15 % — in addition to the marginal tax rates that are already applied under current law, which now range between 33 and 35%.Thus, the taxpayer would owe close to 50% in federal income taxes on earnings between $250,000 and $400,000. ...
There is still a perversity introduced by this proposal. Specifically, after the taxpayer had hit her 400,000th dollar of income, her marginal tax rate would then decline. Rather than owing 50 cents for each dollar earned, she’d be back to a 35% rate instead. ... This is what’s known as a “tax bubble”: when someone earning less income might be taxed at a higher marginal rate than someone making more.
It’s also a question of whether the tax increase would make the tax code more efficient or less so. One might favor a flatter schedule of marginal tax rates or a steeper one. All taxes have the potential to discourage work. But smoother increases in marginal tax rates, as under current law, create less economic friction, and fewer deadweight losses, then those with a number of peaks and valleys. It is hard to see the economic rationale for creating a bubble in the middle of the tax code.
(Hat Tip: Ed Kleinbard.)
What a Wealth Tax and Lindsay Lohan Have in Common
Following up on last week's post, New York Times op-ed: To Reduce Inequality, Tax Wealth, Not Income: Forbes: What a Wealth Tax and Lindsay Lohan Have in Common, by Bernie Kent:
Yesterday’s New York Times contains an op-ed article by Daniel Altman, To Reduce Inequality, Tax Wealth, Not Income, that suggests replacing the income and estate tax with a wealth tax. Much of the article talks about the growing wealth and income inequality in the United States over the past thirty years. Mr. Altman, adjunct associate professor of economics at the New York University Stern School of Business, then suggests some possible rates and exemptions for a wealth tax, such as 2% of wealth over $1,000,000, 1% on wealth between $500,000 and $1,000,000, and no tax on wealth of less than $500,000. Mr. Altman concludes that this tax would have a significant impact on wealth inequality over time and then discusses some of the difficulties in implementation. I believe that he has underestimated two of the problems with a wealth tax which are, if not insurmountable, quite daunting. I have discussed this in a prior blog and will repeat these obstacles now.
While a wealth tax might address inequality in the long run, there are too many problems in implementation to make it a viable addition to the current debate regarding tax policy.
Cooter & Siegel: A Theory of the Taxing Power
Robert D. Cooter (UC-Berkeley) & Neil Siegel (Duke), Not the Power to Destroy: A Theory of the Tax Power for a Court that Limits the Commerce Power, 98 Va. L. Rev. 1195 (2012):
The Supreme Court’s “new federalism” decisions impose modest limits on the regulatory authority of Congress under the Commerce Clause. According to those decisions, the Commerce Clause empowers Congress to use penalties to regulate interstate commerce, but not to regulate noncommercial conduct. What prevents Congress from penalizing non-commercial conduct by calling a penalty a tax and invoking the Taxing Clause? The only obstacle is the distinction between a penalty and a tax for purposes of Article I, Section 8. In National Federation of Independent Business v. Sebelius (NFIB), the Court considered whether the minimum coverage provision in the Patient Protection and Affordable Care Act (ACA) imposes a penalty or a tax by requiring most individuals to either buy health insurance or make a payment to the IRS. Writing for the Court, Chief Justice Roberts concluded that the minimum coverage payment is a tax for constitutional purposes, even though Congress called it a penalty.
This Article develops an effects theory to distinguish between penalties and taxes. We believe that it provides the best theoretical justification of the tax-power holding in NFIB. The effect of a penalty is to prevent conduct, thereby raising little revenue, whereas the effect of a tax is to dampen conduct, thereby raising revenue. Three opposing characteristics of an exaction give incentives for preventing or dampening conduct, and thus provide criteria for distinguishing between penalties and taxes. A pure penalty condemns the actor for wrongdoing; she must pay more than the usual gain from the forbidden conduct; and she must pay at an increasing rate with intentional or repeated violations. Condemnation coerces expressively and relatively high rates with enhancements coerce materially. Alternatively, a pure tax permits a person to engage in the taxed conduct; she must pay an exaction that is less than the usual gain from the taxed conduct; and intentional or repeated conduct does not enhance the rate. Permission does not coerce expressively and relatively low rates without enhancements do not coerce materially.
The ACA’s required payment for non-insurance has a penalty’s expression and a tax’s materiality. Its constitutional identity depends on the reasonable expectations of Congress concerning its effect. If Congress could have reasonably concluded that the exaction will dampen—but not prevent—the general class of conduct subject to it and thereby raise revenue, then courts should interpret it as a tax regardless of what the statute calls it. If Congress could have reasonably concluded only that the exaction will prevent the conduct of almost all people subject to it and thereby raise little or no revenue, then courts should interpret it as a penalty. In the case of the minimum coverage provision, the Congressional Budget Office predicts that the exaction for non-insurance will dampen uninsured behavior but not prevent it, thereby raising several billion dollars in revenue each year. Accordingly, the exaction is a tax for purposes of the tax power.
Florida State to Host Symposium on 100 Years of the Federal Income Tax
Florida State is hosting a symposium on One-Hundred Years of the Federal Income Tax on March 1-2, 2013:
1913 is the centennial of the modern U.S. income tax. Florida State will host a distinguished array of experts who will offer perspectives on what we have learned in 100 years and where we should go in the future.
- Steven Bank (UCLA)
- Joseph Bankman (Stanford)
- Joseph M. Dodge (Florida State)
- Brian Galle (Boston College)
- David Gamage (UC-Berkeley)
- James R. Hines, Jr. (Michigan)
- Steve R. Johnson (Florida State)
- Douglas A. Kahn (Michigan)
- Jeffrey H. Kahn (Florida State)
- Leandra Lederman (Indiana)
- Gregg D. Polsky (North Carolina)
- Chris William Sanchirico (Pennsylvania)
- Daniel N. Shaviro (NYU)
- Lawrence A. Zelenak (Duke)
Progressive Tax Rates Peak at $2 Million Income
[N]ationally, the tax code is still broadly progressive. The more your make, the more taxes you pay as a percentage of your income. According to new data from the IRS, people who make $1 million or more had an average tax rate of 20.4% in 2010. Tax filers who earned $30,000 to $50,000 paid an average rate of 4.8%, while those who made between $50,000 and $100,000 paid 7.7%. Those making under $30,000 had a negative effective rate, meaning they paid no federal income taxes after deductions and credits. Put another way, millionaires pay a rate that’s more than four times that of the middle class.
One caveat: Rates go up as income goes up — but only to a point. Once you hit a certain magic number among super-high earners, your tax rates start to fall slightly. According to the IRS, average tax rates increase as income increases — until you get to around $1.5 million in annual income. Once you make $2 million, average tax rates start to decrease. The average tax rate peaks at 25.1% for those making between $1.5 million and $2 million.
After that it starts to go down, and falls to 20.7% for those making $10 million or more. So the millionaires who pay the highest average tax rates in America are those who make between $1.5 million and $2 million. That $2 million could be called the “Top Turning Point” on the income ladder, where rates reverse.
Wilson: No Method to the Tax Strategy Patent Madness
Darryl C. Wilson (Stetson), No Method to the Madness: The Failure of Section 14 of the Patent Reform Act of 2011 to Make Any Obvious Changes for the Better, 6 Akron Intell. Prop. J. 337 (2012):
This article briefly examines the short history of openly expressed concerns regarding tax patents and the legislative response crafted to address them. The goal here is not so much to argue in favor of tax patents, although there is nothing wrong with them in terms of basic legal principles, as it is to criticize the weak language of the bill, which in attempting to satisfy so many, or perhaps based on the substantive lack of understanding of the bill sponsors, led to the poor draftsmanship of an unnecessary part of the new patent act.
Federal Tax Liens and the Unrecorded Divorce Decree
J. David Beasley (J.D. 2012, Nebraska), Note, Federal Tax Liens and the Unrecorded Divorce Decree, 91 Neb. L. Rev. 214 (2012):
The following cases demonstrate the need for standardized treatment of the IRS in relation to a state's recording requirements, especially when dealing with an unrecorded divorce decree. While state law defines what interest a taxpayer retains after such conveyance, this Note suggests that future courts should adopt the majority approach when determining what interest the IRS acquires after issuance of a § 6321 tax lien on a taxpayer's real property. This Note begins, in Part II, by discussing the major cases in the circuit courts that have led to this dispute, along with the recent IRS General Counsel Memorandum which has reignited the conflict. Then in section III.A, this Note demonstrates that a § 6321 tax lien should only attach to the interests of the taxpayer and not to the interests of the taxpayer's creditors. In section III.B, this Note analyzes the application and purpose of state recording acts when integrated with a federal tax lien. Next, in section III.C, this Note argues against a court's treatment of the IRS as a creditor without notice. That section further discusses a possible undeveloped argument that a docketed divorce decree dividing interest in property should qualify as constructive or inquiry notice upon the IRS when a tax lien arises. The Note concludes, in section III.D, with suggestions of judicial and legislative solutions to standardize the treatment of the IRS in tax lien proceedings with regards to conveyances contained in unrecorded divorce decrees.
If 10% Is Good Enough for Jesus, It Ought to be Enough for Uncle Sam
November 27, 2012
Yin Presents The Creation of the Joint Committee on Taxation Today at Boston College
George K. Yin (Virginia) presents James Couzens, Andrew Mellon, the 'Greatest Tax Suit in the History of the World,' and Creation of the Joint Committee on Taxation and Its Staff at Boston College today as part of its Tax Policy Workshop Series hosted by Jim Repetti and Diane Ring:
In early 1924, James Couzens was a Republican Senator from Michigan and reportedly the richest member of Congress. Andrew Mellon was beginning his fourth year as Secretary of the Treasury — a service that would eventually span 11 years under three Republican Administrations — and one of the wealthiest persons in the entire country. This article describes how a feud between these two men, an ensuing investigation led by Couzens of the Bureau of Internal Revenue (BIR) (predecessor to the modern-day IRS), and a tax case against Couzens that was described as the “greatest tax suit in the history of the world,” helped lead to creation of the U.S. Joint Committee on Taxation (JCT) and its staff. The events — filled with political intrigue, backstabbing (real or imagined), and unintended consequences — antagonized Congress’s relationship with the executive branch, but improved cooperation between the House and Senate, and both were instrumental in the JCT’s creation. The story also provides insight on the unique role the JCT has played in Congress for over 85 years. Finally, the article explains how creation of the JCT became entangled with two of the most contentious tax issues of the day — the publicity of tax return information and the depletion allowance for oil and gas production — and played a role in changing the law in both areas.
Lawsky: How Tax Models Work
Unlike many social and physical sciences, legal scholarship includes little or no discussion of what models mean, how they are connected to the real world of law and policy, or how they should, and should not, be used by legal scholars. This void exists notwithstanding legal scholarship’s increasing reliance on explicit modeling in fields such as law and economics. This article uses the example of economic modeling in tax scholarship to investigate how legal scholarship uses models, and how models in legal scholarship work. The article lays out a path between two extremes. At one extreme is scholarship that employs models without either reflection or self-consciousness to make real-world recommendations; at the other is scholarship that rejects models because their assumptions are too far from reality. This article argues that neither approach is correct. Models are useful and important for legal scholarship, but not in the way that some critics and proponents seem to believe. Drawing from literature in the philosophy of science, this article argues that we reason from economic models through a mix of deductive and ampliative logic, through leaps, creativity, and intuition. Models cannot provide certainty about what the law should be; rather, economic models are merely one kind of voice in an ongoing and necessarily inconclusive conversation. This article concludes by drawing on this deeper understanding of models and modeling to propose ways that legal scholarship can and should use economic models.
Miller: Taxation in the Bible
Given the range of biblical references, contested issues of sources and dating, and limited information about legal institutions and social practices, conclusions about taxation in the Bible must be drawn with caution. The available information, however, suggests that taxation was an important aspect of public administration in biblical Israel.
Dick Morris: Immaculate Taxation
The Impact of Tax Reform on Major League Baseball
Fox News: Tax Increases Could Factor in MLB Negotiations, by Ronald Blum:
As free agents negotiate deals this offseason, tax policy is an area that comes up along with the usual issues. Some players are wrangling for as much money as they can get before the end of the year to avoid a take hike in 2013. ... With baseball contracts worth as much as $275 million (Alex Rodriguez) and the major league minimum $480,000, tax policy affects every player who spends most of the season in the big leagues. ...
According to an analysis done by a tax lawyer on the staff of agent Scott Boras, a player with a $10 million salary and average deductions who plays in Florida and is a resident of that state will see his taxes rise from $3.45 million this year to $4.09 million next year under current law. If traded to the Blue Jays, that player's 2013 tax would rise to $4.27 million. And if dealt to a California team, the tax would go up to $4.4 million.
By moving money from salary into signing bonuses, players can sometimes lower their state tax bills. Shifting money into December this year could reduce federal taxes.
In the end, most free agents choose teams based on where they want to play, not on lowering the tax cut on their income.
Tax Prof Poll: Taxes and the Fiscal Cliff
1. The Fiscal Cliff:
Congress will act before Dec. 31, so we do not go over the Fiscal Cliff: 54.2%
Congress will not act before Dec. 31, but will act shortly after we go over the Fiscal Cliff: 42.4%
Congress will never act, and the Fiscal Cliff will go into force permanently: 3.4%
2. The highest marginal tax rate on ordinary income in 2013 will be:
Less than 35%: 1.7%
More than 35% but less than 39.6%: 37.3%
More than 39.6%: 5.1%
3. The highest marginal tax rate on long-term capital gain in 2013 (not counting the Medicare Tax) will be:
Less than 15%: 1.7%
More than 15% but less than 20%: 10.2%
More than 20%: 6.8%
4. The highest marginal tax rate on dividends in 2013 (not counting the Medicare Tax) will be:
Less than 15%: 1/7%
More than 15% but less than 20%: 11.9%
More than 20%: 33.9%
5. Which of the following tax expenditures will be eliminated or curtailed (check all that apply):
No elimination or curtailment 
Employer-paid health insurance 
Mortgage interest 
401(k) and other pensions 
Charitable contributions 
State/local taxes 
Earned income tax credit 
Child tax credit and/or dependency deductions 
6. True or false: all deductions will be preserved, but they will be phased out or down for higher-bracket taxpayers.
7. The highest marginal tax rate, whatever it may be, will apply to joint filers with taxable income exceeding:
$250,000 [currently taxed at 33%]: 29.3%
More than $250,000 but less than $388,350: 12.1%
$388,350 [where 35% rate begins under 2012 law]: 34.5%
More than $388,350: 24.1%
8. The Estate & Gift Tax:
Will be eliminated: 1.7%
Will apply to estates over $1,000,000: 5.2%
Will apply to estates over $3,500,000: 47.4%
Will apply to estates over $5,120,000 [2012 law]: 47.4%
Will apply to estates over some amount greater than $5,120,000: 0%
NY Times: Mortgage Interest Deduction Under Fire
New York Times DealBook: Mortgage Interest Deduction, Once a Sacred Cow, Is Under Scrutiny, by Peter Eavis:
A tax break that has long been untouchable could soon be in for some serious scrutiny.
Many home buyers deduct their mortgage interest when assessing their tax bill, a perk that has helped bolster the income of millions of families — and the broader housing market.
But as President Obama and Congress try to hash out a deal to reduce the budget deficit, the mortgage interest deduction will likely be part of the discussion.
Limits on a broad array of deductions could emerge in any budget deal. It is likely that any caps would be structured to aim at high-income households, and would diminish or end the mortgage tax break for many of those taxpayers.“This is definitely a chance worth jumping for,” said Amir Sufi, a professor at the Booth School of Business at the University of Chicago. “For a fixed amount of revenue, it’s better to remove deductions than increase marginal tax rates.” Such a move would be fiercely opposed by the real estate industry. The industry has played a crucial role in defending the tax break, even as other countries with high home ownership have phased it out.
(Hat Tip: Mike Talbert.)
WSJ: Republicans, the Fiscal Cliff, and Grover Norquist
Following up on yesterday's post, Grover Norquist and the Fiscal Cliff: Wall Street Journal editorial, Republicans and the Tax Pledge: Grover Norquist Is Not the Problem in Washington:
One of the more amazing post-election spectacles is the media celebration of Republicans who say they're willing to repudiate their pledge against raising taxes. So the same folks who like to denounce politicians because they can't be trusted are now praising politicians who openly admit they can't be trusted.
The spectacle is part of what is becoming a tripartisan—Democrats, media, some Republicans—attempt to stigmatize Grover Norquist as the source of all Beltway fiscal woes and gridlock. Mr. Norquist, who runs an outfit called Americans for Tax Reform, is the fellow who came up with the no-new-taxes pledge some 20 years ago. He tries to get politicians to sign it, and hundreds of Republicans have done so. He does not hold a gun to their heads. ...
If Republicans in Congress want to repudiate the pledge, they are free to do so at any time. They could even quote Edmund Burke's line that a democratic representative owes his electors his best judgment, not a slavish fealty to majority opinion. But that would mean saying they didn't mean it when they signed the pledge. So they are now busy pretending that Mr. Norquist is a modern Merlin who conned them into signing the pledge and must be eliminated before they can do the "right thing" and raise taxes.
The fact is that Republicans and Mr. Norquist both face a new political reality on taxes. ... The one thing Republicans shouldn't do is join the media and Democratic chorus that Mr. Norquist and his pledge are the root of our political and economic woes. The real problems are a political class that won't control its spending and economic policies that are retarding growth. That's where the GOP should keep its public focus. ...
Republican voters know that elections have consequences and that Mitt Romney's defeat means there will be policy defeats too. But they will give the House and Senate GOP credit if it fights for its principles and drives a hard bargain. The voters are also smart enough to know that Republicans who focus on Mr. Norquist are part of the problem.
Warren Buffett Supports the Buffett Rule
I support President Obama’s proposal to eliminate the Bush tax cuts for high-income taxpayers. However, I prefer a cutoff point somewhat above $250,000 — maybe $500,000 or so. Additionally, we need Congress, right now, to enact a minimum tax on high incomes. I would suggest 30% of taxable income between $1 million and $10 million, and 35% on amounts above that. A plain and simple rule like that will block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours. Only a minimum tax on very high incomes will prevent the stated tax rate from being eviscerated by these warriors for the wealthy.
Above all, we should not postpone these changes in the name of “reforming” the tax code. True, changes are badly needed. We need to get rid of arrangements like “carried interest” that enable income from labor to be magically converted into capital gains. And it’s sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.
But the reform of such complexities should not promote delay in our correcting simple and expensive inequities. We can’t let those who want to protect the privileged get away with insisting that we do nothing until we can do everything.
Our government’s goal should be to bring in revenues of 18.5% of GDP and spend about 21% of GDP — levels that have been attained over extended periods in the past and can clearly be reached again. ... In the last fiscal year, we were far away from this fiscal balance — bringing in 15.5% of GDP in revenue and spending 22.4%. Correcting our course will require major concessions by both Republicans and Democrats.
Mr Buffett never mentions doing anything to eliminate the tax-avoidance strategies that he uses most aggressively. In particular:
- His company Berkshire Hathaway never pays a dividend but instead retains all earnings. So the return on this investment is entirely in the form of capital gains. By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.
- Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain. His unrealized capital gains are untaxed.
- He is giving away much of his wealth to charity. He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.
- When he dies, his heirs will get a stepped-up basis. The income tax will never collect any revenue from the substantial unrealized capital gains he has been accumulating.
To be sure, there are pros and cons of changing the provisions of the tax code of which Mr Buffett takes advantage. Tax policy always involves difficult tradeoffs. But it seems odd to me that whenever Mr Buffett talks about taxing the rich more, the "loopholes" that he uses never seem to enter into the conversation.
Mankiw: Tax Policy Inside Barack Obama's Mind
Here is the dialogue, as I imagine it, between the two policy wonks — the Moderate Obama and the Liberal Obama — struggling for control of the president’s soul. ...
MOD: According to the Tax Policy Center, if we cap itemized deductions at $50,000 and keep tax rates as they are today, we’d raise $749 billion in tax revenue over 10 years. And 96.2 percent of the extra revenue would come from the top fifth of taxpayers, with 79.9 percent from the top 1 percent.
LIB: I have a couple of concerns about that.
LIB: First, if you limit deductions, people in high-tax states will be hit particularly hard, because state and local taxes are deductible.
MOD: Isn’t that fair? I don’t see why states and towns that choose to have very high taxes should be subsidized by everyone else.
LIB: These states generally have liberal agendas, which I want to encourage, not penalize. And many of them, like New York and California, vote Democratic. After they helped us win such a great victory, I don’t think we should be asking our allies to bear a disproportionate share of the burden....
LIB: We can both broaden the base and raise the top tax rates. The economist Peter Diamond, whom we tried to appoint to the Federal Reserve, has calculations suggesting that the top tax rate should be 73 percent. That is close to the 75 percent rate that President Hollande of France is now pursuing.
MOD: Are you nuts? I don’t want to become France.
LIB: We don’t have to go that far, but we can go higher than where we are now. California just created a new tax rate for married couples earning more than $1 million a year and singles earning more than $500,000. Maybe the federal government should do the same thing.
November 26, 2012
Vermont Law School to Downsize, Offer Buyouts to Staff; Faculty May Be Next
Boston Globe: Vt. Law School Cutting Jobs, Preparing for Changes:
Vermont Law School is offering voluntary buyouts to staff and may do so soon with faculty as it prepares for what its president and dean says are revolutions about to sweep both the legal profession and higher education.
A sharp drop in the numbers of Americans applying to law schools -- triggered by a drop in the number of legal jobs open -- already is being felt at the independent law school’s bucolic campus on the south bank of the White River.
The class due to graduate in the spring with juris doctor degrees numbers just over 200. The class that will follow it in 2014 numbers about 150.
"When our enrollment goes down, we have to downsize," Marc Mihaly, the school’s president and dean, said in an interview. "No matter what, we’re going to see fewer on-campus JD students (traditional law students pursuing juris doctor degrees). And we have to adjust to that because we do not run deficits in this school." ...
Both Mihaly and Paul Campos, a leading critic of legal education and law professor at the University of Colorado, said some law schools likely will have to close. Campos argued that many have allowed their tuitions to rise so much that law school no longer is a wise investment for most students.
Campos scoffed at VLS advertising itself as the place to go for people who want to work in public-interest environmental law. Just a tiny percentage of lawyers end up in such jobs, he said. "You might as well say your career aspiration is to be an NBA power forward," he said.
Update: National Law Journal, New Vermont Law School Dean Taking on $3.3M Budget Shortfall
TaxProf Blog Named Top 100 Law Blog by ABA Journal
I am thrilled that, for the fifth year in a row, TaxProf Blog has been named to the ABA Journal's list of "the 100 best Web sites by lawyers, for lawyers, as chosen by the editors of the ABA Journal" -- the 2012 Blawg 100, selected from more than 3,600 blawgs. TaxProf Blog is one of fourteen blogs nominated in the Niche category. Here is the ABA Journal's description of TaxProf Blog:
Paul Caron of the University of Cincinnati goes well beyond his bread-and-butter tax law and covers law schools and the controversies that surround them. He offers particular insights into law school rankings, doing his own analysis to highlight important developments.
Five other members of our Law Professor Blogs Network also were named to the Blawg 100:
Legal Profession Blog (one of 14 blogs nominated in the Niche category)
The Legal Whiteboard (one of 9 blogs nominated in the Business of Law category)
Legal Writing Prof Blog (one of 6 blogs nominated in the Legal Research/Writing category)
M&A Law Prof Blog (one of 5 blogs nominated in the Corporate category)
- Wills, Trusts & Estates Prof Blog (one of 14 blogs nominated in the Niche category)
In addition, Legal Profession Blog was one of ten blawgs to make the Inaugural Blawg 100 Hall of Fame. And kudos to Tax Girl, nominated in the Niche category. To vote, go here. (Voting ends December 21.)
Sanchirico Presents Optimal Tax Policy and the Symmetries of Ignorance Today at Washington University
Chris Sanchirico (Pennsylvania) presents Optimal Tax Policy and the Symmetries of Ignorance, 66 Tax Law Rev. ___ (2012), at Washington University today as part of its Tax Colloquium Series hosted by Adam Rosenzweig:
What government-observable characteristics should determine the taxes that an individual pays and/or the transfers that she receives? This article focuses on a specific aspect of this fundamental question of tax policy: the implications of policymakers’ uncertainty regarding the outcomes of tax policy choices. The article identifies and questions two implicit premises in policy-uncertainty-based arguments against including taxable attributes other than labor earnings in the base. The first is that greater uncertainty surrounds the optimal taxation of non-labor-earnings attributes than surrounds the optimal taxation of labor earnings. The second is that tax policymakers ought to follow a kind of precautionary principle under which uncertainty regarding an attribute counsels base exclusion. The article explains why both premises are flawed.
NY Times: IRS Challenges 'Synthetic Consolidation' Tax Shelter
The IRS works in mysterious ways. Its wheels grind slowly, but grind they do, as seen in the case of Fairfax Financial Holdings of Toronto.
Close readers of this column may recall that Fairfax, an insurer, received a sweet $400 million tax benefit through a complex transaction that ran from 2003 to 2006. Tax experts have questioned the deal for years, but Fairfax has defended it — as it did in this space in March.
Then, in a bolt from the blue, the IRS issued an opinion in June. In a memorandum providing generic legal advice to IRS agents [AM 2012-007 (June 27, 2012)], the service sided with the skeptics. It said that the terms of the transaction failed the most basic test required under tax laws to generate the $400 million benefit. ...
Robert Willens, an authority on accounting and tax law in New York, is among the skeptics on the transaction. Writing about the deal in Tax Notes in 2009 [Synthetic Consolidation: Tne Next Big Thing, 123 Tax Notes 1013 (May 25, 2009)], Mr. Willens said it had no business purpose and was “flawed” for the reasons recently cited by the IRS Fairfax criticized him and his article, calling it false and misleading.
In an interview last week, Mr. Willens said the legal advice published by the IRS was a surprise after all these years. Where it might lead is anybody’s guess.
(Hat Tip: Ann Murphy, Mike Talbert.)
Rattner: More Chips For Tax Reform
Almost lost in the tug of war over whether the top income tax rate should be 35% or 39.6% is another consequential tax issue: the proper rate for capital gains and dividends.
It was the absurdly low rate on those forms of income — just 15% — that yielded Mitt Romney’s embarrassingly small tax payments. And that’s what also led to Warren Buffett’s lament that his tax rate was lower than his secretary’s.
So as we scurry around looking for new revenue to help address the yawning budget deficit, let’s zero in on this special preference.
President Obama has proposed much of the needed adjustment, including eliminating the special treatment of dividends and raising the tax on capital gains to 20% for the rich. Personally, I would go further and raise the capital gains rate to 28%, right where it was during the strong recovery of Bill Clinton’s first term, and grab hold of a total of $300 billion of new revenues over the next decade. ...
Increased revenues, meaning higher taxes, will be a central element of any successful long-term budget plan, and President Obama is right to insist that the wealthy — the slice of America that has come through the recession in by far the best financial health — should provide those funds.
Here’s the math: We need at least $4 trillion of long-term deficit reduction, with a substantial portion — on the order of $1.2 trillion — coming from new revenues.
So I’m all for raising rates as President Obama has proposed. But in a divided government, compromise is needed, and happily there are other chips that can be put on the table as we bargain over how to raise the needed revenue from the wealthy.
(Hat Tip: Ann Murphy.)
Charlie Sheen Paid Lindsay Lohan $100,000 to Help Cover IRS Tax DebtTMZ: Charlie Sheen Paid Lindsay Lohan $100K to Cover Tax Debt:
Don't ever say Charlie Sheen's not the charitable type -- because he recently cut Lindsay Lohan a $100,000 check to cover the actress' six-figure tax bill. ... [S]he and Charlie became close pals while on the set of "Scary Movie 5" back in September. ...
During their bonding period, we're told Lindsay and Charlie talked about everything -- and at one point, Lindsay mentioned her ongoing tax problems. We're told Charlie offered to cut her a check then and there to get the IRS off her tail, but Lindsay refused. Fast forward to last week -- sources close to Lindsay tell TMZ, Lindsay's biz manager received a check from Charlie for $100,000. We're told Lindsay was blown away by Charlie's generosity -- and immediately applied the money to her outstanding tax bill. TMZ broke the story ... Lindsay allegedly owed Uncle Sam $233,904 in unpaid taxes for 2009 and 2010 -- but thanks to Charlie, that number's nearly been cut in half.
Sheen presumabky will be filing a gift tax return to report the transaction. (Hat Tip: Ann Murphy.)
Update: Forbes, Sorry Charlie: Sheen's $100K Taxes For Lindsay Lohan Itself Is Taxable, by Robert W. Wood
Tax Reform: What Would Reagan Do?
As Washington grapples with the budget, it might be worth asking a simple question: What would Ronald Reagan do?
He was the last president to preside over a significant tax reform, one that did exactly what both candidates in this year’s presidential election said they want to do: lower tax rates and close loopholes.
And a critical part of that reform was to end the historical system of taxing capital gains at lower rates than ordinary income.In the name of fairness, the Tax Reform Act of 1986 raised the maximum tax rate on long-term capital gains to 28% from 20% at the same time it reduced the maximum rate on ordinary income to 28% from 50%.
Doing that again in a tax reform act of 2013 would do more than raise revenue and increase fairness. It would bring an abrupt end to the “carried interest” tax dodge, in which managers in the private equity business are able to define their compensation as capital gains and thus pay far lower income tax rates than do ordinary people with far less income.
Ideally, there will be two tax reform efforts in the next 18 months.
The first, going on now, is a simple patch-up, aimed at dealing with the pending increases in taxes brought on largely by the expiration of the Bush “temporary” tax cuts. If the lame duck Congress and President Obama can avert disaster, raising some revenue while not devastating the economy, they will have succeeded.
But the next move should be aimed at comprehensive tax reform. The Obama administration should look to President Reagan’s second term for inspiration. The Reagan method included a comprehensive, well-thought-out proposal that dealt with the myriad details that can rise up to frustrate any efforts at change, put together painstakingly by the Treasury Department.
- The Fiscal Times, Why Reagan's Tax Reform Roadmap Won't Work Now
(Hat Tip: Mike Talbert.)
Sullivan: Deduction Caps Can Raise Marginal Rates, Cut Economic Growth
Martin A. Sullivan (Tax Analysts), Deduction Caps Can Raise Marginal Rates, Cut Economic Growth, 137 Tax Notes 939 (Nov. 26, 2012):
Long-run job creation through tax cutting is a two-step process. The first step is to lower marginal tax rates. Then those lower marginal rates increase taxpayers’ willingness to invest and seek employment. Most of the unending argument about the effect of taxes on job creation centers on step two — that is, the responsiveness of saving and labor supply to changes in marginal tax rates.
Despite all the effort, there is still enough uncertainty about the empirical research that both proand antitax partisans can cite plausible estimates to support their views. This article sidesteps the highly politicized component of the debate about the economic effects of taxes and instead focuses on step one, the oft-neglected arithmetic of the effects of tax reform on marginal rates.
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Grover Norquist and the Fiscal Cliff
- Atlanta Journal Constitution, Time to End Norquist’s Death Grip on Tax Policy
- Business Insider, Some Top Republicans Are Breaking With Grover Norquist On New Revenues
- C-Span, Grover Norquist Discusses Role of 2012 Election in Tax Policy
- CBS News, Grover Puts Himself Before Party And Country
- The Economist, It’s Not Over for Grover: He Has Taken a Few Blows, but Grover Norquist’s Anti-Tax Crusade Rolls on
- The Hill, Chambliss: ‘I Care More About My Country’ Than for Norquist Tax Pledge
- Huffington Post, Grover Norquist Defends Strength of Anti-Tax Movement Amid Signs Republicans Are Defecting
- Los Angeles Times (Doyle McManus), Grover Norquist the Has-Been
- National Journal, Republicans Buck Norquist on Tax Pledge
- New York Times (Jeremy Peters), For Tax Pledge and Its Author, a Test of Time
- Wall Street Journal (Siobhan Hughes), Norquist Derides ‘Fantasy’ of Higher Tax Rates
- Wall Street Journal (Stephen Moore), Grover Norquist: Washington Enemy No. 1: The Man Who Enforces the No-New-Taxes Pledge Is Under Fire Like Never Before. Why He Still Expects Republicans Will Hold the Line
- Washington Post (Rachel Manteuffel), United Against Grover Norquist
- Washington Post (Dana Milbank), Norquist in Denial About GOP Compromising on Taxes
- Washington Post (Sean Sullivan), Lindsey Graham, Peter King Break with Grover Norquist
Kristof: A Failed Tax Experiment
Half-a-century of tax cuts focused on the wealthiest Americans leave us with third-rate public services, leading the wealthy to develop inefficient private workarounds.
It’s manifestly silly (and highly polluting) for every fine home to have a generator. It would make more sense to invest those resources in the electrical grid so that it wouldn’t fail in the first place.
But our political system is dysfunctional: in addressing income inequality, in confronting climate change and in maintaining national infrastructure.
The National Climatic Data Center has just reported that October was the 332nd month in a row of above-average global temperatures. As the environmental Web site Grist reported, that means that nobody younger than 27 has lived for a single month with colder-than-average global temperatures, yet climate change wasn’t even much of an issue in the 2012 campaign. Likewise, the World Economic Forum ranks American infrastructure 25th in the world, down from 8th in 2003-4, yet infrastructure is barely mentioned by politicians.
So time and again, we see the decline of public services accompanied by the rise of private workarounds for the wealthy....
I’m used to seeing this mind-set in developing countries like Chad or Pakistan, where the feudal rich make do behind high walls topped with shards of glass; increasingly, I see it in our country. The disregard for public goods was epitomized by Mitt Romney’s call to end financing of public broadcasting.
A wealthy friend of mine notes that we all pay for poverty in the end. The upfront way is to finance early childhood education for at-risk kids. The back-end way is to pay for prisons and private security guards. In cities with high economic inequality, such as New York and Los Angeles, more than 1% of all employees work as private security guards, according to census data.
This question of public goods hovers in the backdrop as we confront the “fiscal cliff” and seek to reach a deal based on a mix of higher revenues and reduced benefits. It’s true that we have a problem with rising entitlement spending, especially in health care. But I also wonder if we’ve reached the end of a failed half-century experiment in ever-lower tax rates for the wealthy.
Since the 1950s, the top federal income tax rate has fallen from 90% or more to 35%. Capital gains tax rates have been cut by more than half since the late 1970s. Financial tycoons now often pay a lower tax rate than their secretaries.
All this has coincided with the decline of some public services and the emergence of staggering levels of inequality (granted, other factors are also at work) such that the top 1% of Americans now have greater collective net worth than the entire bottom 90%.
Not even the hum of the most powerful private generator can disguise the failure of that long experiment.
Nicholas Kristof has one of the most prestigious perches in American journalism: a regular, twice-a-week column on the op-ed page of the New York Times. Yet on Wednesday he wrote a piece that, had it been turned in to a freshman expository writing class (if such things exist anymore), it would have deserved to have been flunked cold. It would appear to have been written off the top of his head, without any fact checking that I can discern. He just dipped deeply into his prejudices and hit the keyboard.