Wednesday, August 30, 2006

A note on diminishing marginal returns

From Lewellen, "The Cost of Capital":

The second million, while still worth having, is not quite as valuable to him as the first million, since the latter has already provided him with most of the material satsfactions he wanted out of life. Three summer homes do not really generate half again the happiness of two."

It should be called the "Three summer house rule" and take its place in the legal pantheon along side the "Three pony rule."

Also in 1934

Tom Baker, whom I will always think of as the real Dr. Who, was born on January 20.

According to wikipedia

On March 3, 1934 John Dillinger escaped from jail in Crown Point, Indiana using a wooden pistol. Ten days later, he and Baby Face Nelson robbed a bank in Mason City, Iowa. Busy guy. If I escaped from jail, I would lay low for a while, maybe head to Mexico and relax on the beach, ala Shawshank Redemtion.

Cloudy day, sleepy day

When I wake up and look outside and the sky is overcast, I just want to stay in bed. That's not to say I don't like a cloudy day every now and then, but I prefer them when I'm curled up in bed. However, I'm not in bed right now. I'm at school. I'm about to read about the effect of risk on the valuation of both a firm's assets and its stock. More of a finance reading than a law reading, but you've got to get the background stuff out of the way before you can delve(sp?) into the law.

Saturday, August 26, 2006


Pronounced gooey-ducks. Read this Wikipedia entry. This is one amazing animal!

Wednesday, August 23, 2006

Murphy v. IRS

Yesterday, the DC Circuit court handed down what is being called a "bombshell" decision in Murphy v. IRS. And indeed it is. For on August 22, 2006, the Circuit court declared Section 104(a)(2) of the Internal Revenue Code unconstitutional as applied to compensation for emotional damages. The relevent text of 104 is:

"(a) Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include -

(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;"

A brief summary of the facts: Taxpayer was fired from her job and sued for damages. The parties settled for $70k. $30k was identified as compensation for emotional distress and psychological damages and $40k was for reputational damages. Neither is excludable from income under 104.

To put this in perspective, and maybe to offer a prediction on whether this holding will stand on its inevitable review either en banc or by the Supreme Court, the Supreme Court itself has only once, since the ratification of the 16th amendment declared a tax unconstitutional. The case was Eisner v. Macomber, and is fairly long and a bit boring, but has to do with stock dividends. The DC Circuit holding will not stand on review.

An interesting note about 104(a), in 1996 it was modified to include the line "For purposes of paragraph (2), emotional distress shall not be treated as a physical injury or physical sickness." Congress was reacting in a regressive way and putting there foot down, saying, in effect, "Non-physical injuries are too difficult to verify and so will not be recognized for federal tax purposes, unless there are physical manifestations." It's hard to fault Congress for taking this stance in an era of quack doctors and over-zealous trial lawyers. Regardless, this determination is well within Congress's broad legislative and taxing powers.

This case is worth a read, as it cites some really fantastic tax and non-tax cases that most of us are familiar with: US v. Morrison, Eisner v. Macomber, Glenshaw Glass, Rust v. Sullivan, McCulloch v. Maryland, and Raytheon to name a few.

Before I really talk about the tax part of the case, there is something that confuses me about the opinion. The first section of the opinion deals with whether the taxpayer sued the right party. In other words, can the IRS be sued in this venue. On page 6 of the opinion, the court concludes: "Therefore, we hold the IRS, unlike the United States, may not be sued eo nomine in this case." In other words, TP sued the wrong party. There is a procedural flaw in the case. At this point, the court moves on to the analysis of the substantive issues and declares a tax statute unconstitutional. I don't get it. Isn't the case over when the court holds that your opposing party can't be sued. My limited understanding is that this case should have been brought in the tax court, not the district court. If I'm right on this, and there's no indication I am, the en banc or supreme court review should dispose of the case on this issue without addressing the constitutionality.

But apart from the procedural stuff, it's a pretty interesting decision which seems to rest on an unsupportable analogy. The taxpayer argues that when one sustains an mental injury, it is the same as, say, a section of an office building catching fire. When you recieve compensation for the injury, that compensation is merely making you whole, restoring your tax-paid capital investment in yourself. As such, you are not enriched. There is no net increase in your wealth, and so there is nothing for Conress to tax.

It is a persuasive argument, but one which has never been supported by Congress and which was explicitly rejected in the 1996 amendment. But this is a constitutional argument, so what Congress says is not very relevent. To support her position, taxpayer cites three sources from the period Congress first enacted section 104’s predecessor: an Opinion of the Attorney General, a Decision of the Department of the Treasury, and a Report issued by the Ways and Means Committee of the House of Representatives. The court justifies relying on these sources because “in defining “incomes,” we should rely upon the commonly understood meaning of the term which must have been in the minds of the people when they adopted the Sixteenth Amendment.”

Read the opinion and chew on it for a while. I’ve got to get some other work done now, but I will no doubt return to this case. Some topics: Is the “human capital” theory right? Does it argue too much? Should college expenses be treated as an investment in capital and depreciable over an income-producing career? Does the court rely too heavily on three somewhat obscure sources for a rather broad proposition? Why didn’t the court even mention in passing the Haig-Simmons definition of income? This case raises a lot of questions, and I’m willing to discuss any of them.

Thursday, August 17, 2006

I shook hands with a guy...

...who shook hands with Bill Clinton! It's true. Not only that, but I lived with a guy for four years who ate dinner in the same room as Bill Clinton. That guy's name is Froser, and he's the guy who's not Bill Clinton in the picture below.

Edward Markey on Oil Subsidies

"It's like subsidizing a fish to swim."

I just thought that was clever. That's all.

Monday, August 14, 2006

To provide some balance... is my top 5 list of foxy ladies. No particular order. Feel free to post your own foxy lady list in the comments.

1. Monica Bellucci
2. Ellen Pompeo
3. Diane Lane
4. Kate Beckinsale
5. Katherine Heigl

Sunday, August 13, 2006

Continuation of Estate Tax Discussion

I thought I'd start a new thread cause the old one was getting long. So if you didn't like the last one, you need not read this one.

Let's start with a recap of SP's last comment. Here is SP’s setup:

"x = a business's yearly profits without the estate tax.
y = the money that must be paid out yearly from the business because of estate taxes (whether to the government or in payments to a lender who has loaned money to pay the estate tax)

No estate tax: yearly profits are x
With estate tax: yearly profits are x-y

If y > x, a business goes from profitable to unprofitable because of the estate tax."

I just don’t think I can disagree with SP. An estate tax can potentially require an heir to liquidate his interest in a business in order to pay the taxes on the estate. It is easy to hypothesize such a situation, as SP did. Whether or not it is likely (and empirically it is not likely) it is possible and must be addressed.

A problem I have with SP’s argument is that just because something is possible under an undefined estate tax regime doesn’t mean we should abandon an estate tax all together. At best it means we should see if we can adjust the structure of the tax so that small or medium-sized businesses are not forced to liquidate for an heir to pay off his tax liability. For instance by raising the exclusion amount. We are of course dealing with proxies here, the value of the estate being a proxy for liquid assets. After all, if the estate in question is really valuable but is devoid of liquid assets then the exclusion rate is irrelevant. We can always hypothesize a more valuable business while not increasing the availability of cold, hard cash. But we have to deal with proxies, and they are always imperfect. The value of the estate, though, seems to be a fairly accurate proxy, as evidenced by the small number of actual liquidations forced by the current tax with its high exclusion amount.

Of course, I personally think that even if a small number of businesses or family farms go belly up every year due to the estate tax, it’s a small price to pay for the amount of revenue raised by such a tax. Might Jimmy and Suzi have to sell the family farm to pay the tax? Sure, they might. But I think I’ll save my pity for the working-class family struggling to make ends meet rather than the new millionaires who are forced to move into a penthouse in the city and live the rest of their lives off the interest of their investments. Is society worse of because a family business has been eliminated? I guess so. But the liquidation also frees up capital for new investment, leading to more new business. Circle of life. Beautiful. Some money is lost from the business cycle, of course, due to government bungling and overhead. But current budget policy has most of this lost money returning to society through faith-based charities, no-bid government contracts, and freedom-building military expenditures. So we might lose some businesses. New ones will pop up in its place, fueled by tax expenditures for new small businesses.

Is this callous? Am I also in support of eminent domain? I don’t know. Maybe. But we live in a society that worships the economist and strives for efficient use of resources.

But as I said earlier, forced sales are not a necessity of any and all estate taxes. They certainly don’t seem to be a necessity in ours. There are a half-dozen or so principles that people say are fundamental to good tax policy: horizontal and vertical equity, substance over form, economic neutrality, etc. But there’s a principle that is not at all unique to tax that is relevant for the discussion here, and that is stability of law. Laws should remain as constant as possible over time in order to let people know with some certainty what the consequences of the actions will be. In the field of taxation, where major changes seem to occur with some frequency, the estate tax has been on the books since 1916. Rates and exclusion amounts have varied over time, but one thing has remained constant: when you die, your estate will incur a tax liability.

As SP has said, just because some big companies can afford accountants and lawyers to reduce their effective rate to 20-22%, that doesn’t justify imposing the tax on all estates or businesses. You are in effect punishing small businesses who don’t have the resources or will to manipulate the system. While I don’t totally disagree with this, I would also point out that just because some small business owners are negligent in their failure to provide for the continuation of their business at their death, that doesn’t mean we should abandon any and all incarnations of the estate tax.

Any person alive in America today, with a couple of exceptions, has had the estate tax looming over them for every single day of their lives. This is not some tax that nobody saw coming. When the businessman incorporated the business, paid taxes year after year, managed payroll year after year, and was responsible for sundry other complicated and technical aspects of running a business, he was interacting with the complex systems of laws in this country. To suggest that an owner of a business with a value over $1m is so rustic and naïve as to be unaware of the looming tax liability is absurd. If he fails to plan for it, his newly minted millionaire heirs have no one to blame but the decedent.

Good tax policy is not and should not be made in a vacuum. Reality shows that the effect of the current estate tax is not the parade of horribles that SP’s dad and the Heritage Institute have suggested it could be.

Saturday, August 12, 2006

Random definition

So in a recent conversation I and a few others were wondering about the definition of 'tratoria.' So here is the answer:

la tratoria - informal restaurant

as opposed to

il ristorante - restaurant

Wednesday, August 09, 2006

A Note on the Globe-Democrat

Yesterday afternoon, prior to Nell, S.P. and myself becoming cripplingly ill from something in the margarita mix, S.P. and I were having a discussion re: the estate tax. S.P.'s father had conned her into thinking the estate tax was not a good thing, in part with a heart-wrenching story regarding the demise of the St. Louis Globe-Democrat in 1986. According to him, the Globe-Democrat had to be liquidated when its owner died and his assets were hit with the estate tax. Alas, his heirs did not have the liquid assets available to pay the tax and were forced to sell the newspaper to raise the money. Another small business, the victim of federal taxes.

Here is what the University of Missouri-St. Louis's Globe-Democrat website has to say about the matter:

"A casualty in the 1980’s of dwindling circulation due to competing forms of media, less income from advertising, and crippling strikes, the Globe-Democrat went the way of many urban dailies in the past generation, leaving a record of unmatched documentary and journalistic achievement as represented in its files."

incidentally, I met his poor orphan once. He had lung cancer from second-hand smoke. He said to me with his last dying breath, "Please, Fishfrog, please ...[coughing], don't let them cut the estate tax. If it weren't for the 2001 cuts [coughing up blood], I would have been able to get a new lung. Please... promise me you'll try... [dies]." Well damnit Timmy (that was his name), I''m try my hardest. For you Timmy. For you.

Wednesday, August 02, 2006


I like this picture. That is all.

Good news from Kansas

A victory for education. Apparently, the voters no longer want their children mocked on my blog.

Tuesday, August 01, 2006

Morality Monday (Tuesday Edition)

Arfanser inspired this Morality Monday post with his own very interesting posts on federalism. It made me want to talk about gay marriage. Now, it’s probably the case that out of the five or six people who read this blog, only one, or two tops, will disagree with any but the most minor points.

Let’s start with what I used to think, then what I think is wrong with that, and finally get to what I think now.

I used to be of the position that to placate the religious right who vehemently oppose gay marriage, we should legalize civil unions. Basically give homosexual couples all the legal rights of marriage, but call it something else. For a time, I was of the position that only churches should be able to enact marriages, and any secular coupling would be a civil union. Thus if two heterosexual atheists wanted to get married, they would get a civil union. If you wanted a “marriage” you would have to go to whatever church you thought was the right one and meet their standards. Thus the state gets out of the marriage business and into the business of recognizing consensual, semi-economical, rights-based unions between two consenting adults.

There are, I think, two major problems with this. First, I don’t think it would placate anyone vehemently opposed to gay marriage. They would probably view the compromise as a semantic game. They would be right. The second problem didn’t occur to me until the folks at South Park hit me over the head with it. Giving a homosexual couple all the rights of a marriage but calling it something else is actually a backhanded insult. Even if you use a term as innocuous as “civil union,” you are still saying, in effect, “Even though we’re giving you the same rights as us straight people, we want you to remember that you’re different, that you still are not an accepted part of society.” South Park made the point by suggesting that married gay couples be called “butt buddies.” Using a separate term further divides.

So my position now is that we open marriage up to any two consenting adults of any sex or gender. We let anyone get married and we call it marriage. As the opponents of gay marriage frequently point out, marriage is a stabilizing force in society. Married people live longer and make more money. Why wouldn’t we want everyone to get married??? Gender roles in marriage have vanished, if not in practice then at least in cultural perception. A man can stay home and raise the kids, a woman can work. Two men can adopt, and two women can use in vitro fertilization (or adopt). Every secular argument against gay marriage seems to be either false or actual supports gay marriage. As for religious arguments, I don’t think we should be making laws based on faith. We should allow people to have their own faith in the privacy of their own homes and churches.

Just because a book written a few thousand years ago says something is bad doesn’t make it so. And without some supporting evidence, we should not let it set policy that affects the irreligious and religious alike.