ataxingmatter

Murphy and Emotional Distress Damages: Plan to appeal

BNA reports this afternoon that David Colapinto, attorney for Marrita Murphy, plans to appeal the case to the Supreme Court.  The D.C. Circuit denied a petition for rehearing en banc on September 14, after the three-judge panel in "Murphy II" overturned its original August 2006 decision holding that section 104(a)(2) was unconstitutional.

Will the Supreme Court deny cert or take on the case? I welcome your thoughts in the comments section.  (I'm betting on denial of cert.)

Relief of Debt on Foreclosure: Grassley, Smith and Roberts

Yesterday, I wrote a bit about the housing slump and the tax consequences that may surprise taxpayers who lose mortgaged houses in foreclosure proceedings (or in-lieu-of process).  See this post.   In a nutshell, my key points were:

• insolvency and bankruptcy exceptions on recognition of cancellation of debt (COD) income when debt on residences is forgiven may well apply to many individuals whose creditors forgive part of the debt (either because the creditor accepts the proceeds of a "short sale" for less than the amount of the debt  without redress against the seller for the full amount or because a foreclosure auction or in-lieu-of-foreclosure procedure results in an amount less than the full value of the mortgage and the creditor cannot or agrees not to seek further redress from the seller), while section 121 (which excludes gain on a home sale if certain residence and ownership requirements are met) may apply to exclude gain from a foreclosure sale;
• the IRS has issued a Q/A to respond to the concern that many taxpayers will have to face this issue for the first time and be uncertain about tax consequences
• the Bush administration and various members of Congress are calling for more relief through amendments to the Code (which relief is hard to justify, except just maybe if it is shaped as relief for those who are very very close to bankruptcy or insolvency); and
• various groups are pushing for Congressional action--realtors, as a way to bolster their industry and others that appear to be from the libertarian anti-tax and anti-government fringe--with commentary that often appears biased by casting the IRS as a devil that created the taxation of COD income out of whole cloth. 

I left out one item of interest that I should have mentioned--a letter from Senators Grassley, Smith and Roberts to the IRS urging action by the IRS to solve the problem and asking the IRS to let Congress know if it thinks Congress should do something.  This is a strange letter, to say the least.  Congressional action is both (i) the appropriate means of enacting a subsidy for a particular group of taxpayers, if subsidy there must be, and  (ii) likely to be much more impactful  at an earlier point than the offers in compromise that will take some time to wend their way into the tax administration system.

What is most interesting about the Grassley letter, however, is not Grassley's apparent tossing of the ball out of Congress's court.  It is the attachment (at least on Grassley's website presentation of the text of the letter) of a New York Times article by Geraldine Fabrikant, After foreclosure, a Big Tax Bill from the IRS (Aug. 20, 2007), that was likely intended to illustrate the housing slump with human interest stories that garner our sympathy, but which mimics the tone of the libertarian fringe group discussion of the issue.  The article discusses taxation of COD income as "an Internal Revenue Service policy that treats forgiven debt of all types as income even if the taxpayer has nothing tangible to show for it, unless the debt is canceled through bankruptcy".  It quotes a professor at Chapman who makes a similar statement that "the IRS says you owe tens of thousands of dollars in taxes because you got a windfall when the debt was forgiven." Yet this rule is clearly part of the tax laws enacted by Congress:  section 61 of the Internal Revenue Code includes COD amounts in income, while section 108 provides various exceptions, including for bankruptcy and insolvency.  Both of these statements could mislead Americans into thinking that the tax they pay on the economic benefit they received from a loan that is later forgiven is just another example of a perverse agency that, willy-nilly, takes away their money based on crazy views of what is taxable.  That article merits criticism for casting the IRS as the devil and for failing to point out the fundamental tax norm operating in this context--that people who have debt forgiven have received a substantial economic benefit that should be taxed, unless the taxpayer is in economic straits and unable to make payment, in which case the Code provides appropriate help through the insolvency and bankruptcy exceptions.

Take the article's disussion of the case of Agnes Mouser, a sixty-five-year-old who paid high points to Beneficial to get a high interest home equity loan in an improbably high amount on her old trailer to pay off her credit card debt, after Beneficial's appraiser gave the trailer an improbably high value.  Later, when she (predictably) had trouble paying off the loan, she got the lender to release the lien but found she owed tax on the amount forgiven.  Note that Ms. Mouser received a loan to pay off credit card debt.  That was a real economic benefit that, if not repaid, is clearly income.  Yet the quote from her lawyer implies that the IRS was inappropriately seeking taxes on that income, perhaps even harassing her. “It took a letter from an accountant and two letters from me to get the I.R.S. to go away.”

What one can't help thinking in reading the Times article is that the real culprit in Ms. Mouser's case is Beneficial, an apparently rapacious lender that wanted those very high interest rates and so sold her on a loan that she really couldn't afford.  Congress would do better to leave the insolvency exception to do its work to protect homeowners from COD income in appropriate cases and instead cast a critical eye on the practices of lenders, from charging exorbitant "points" up front, to piling on one fee after another, and for using high pressure tactics with vulnerable people to get them to agree to too much at too high a rate in the first place. 

(And while they are considering that, they should look into the practice of lenders and affiliates who send out official looking "notices" "response required" to new borrowers to get them to sign up for additional costly services, like "mortgage protection" after they have the loan.  I've received at least a dozen of those letters, which I've collected to send along to my representative with a letter about this issue, since I bought my home in Detroit in late May of this year. I suspect that the people who can least afford it are the ones who are the most vulnerable to this pressure.)

Relief of Debt on Foreclosure: tax consequences

As everyone has noticed by now, the country is in a housing slump--it's harder to sell a house, new or old.  Houses are staying on the market longer, increasing the costs to sellers (mortgage costs continue to require monthly payment, taxes, and utilities).  Some would-be sellers end up unable to keep up the payments, resulting in loss of their homes to foreclosure.   The mounting foreclosures then affect prices, resulting in more owners selling for less than they had hoped and sometimes for less than the mortgage on the house.  And the owners who lose their homes may face tax consequences because of cancellation of debt (COD) income.  See this discussion of COD income at taxalmanac.org.

A number of people who have limited means may be affected by this.  There are, in fact, a number of provisions in the law that can help.  For example, COD income may not be taxable if the homeowner  comes within a provision of the laws providing for exclusion of COD income because of the homeowner's bankruptcy or insolvency.  Or if the homeowner has gain on the foreclosure related to a nonrecourse mortgage loan, that homeowner may be eligible for an exclusion for that gain based on qualified ownership and residence.

Some websites carry information about the treatment of COD income, but described in language that appears to instill misunderstandings. One such example is Dan Green's Daily Mortgage Report which discusses COD income at this link.  Note that blogger Green talks about "a nasty piece of IRS tax code"  and suggests that it is an arbitrary decision by the IRS to treat the COD income as taxable income. 

Another example is another libertarian blog (which seems to be an advocacy blog for congressman Ron Paul's version of libertarianism).  From Reason to Freedom talks about an "unfair IRS tax policy" --as though treating the release from an obligation to repay money borrowed (and therefore the ability to have used the borrowed money without having to pay it back) as taxable income is an invention of the tax administrator rather than a fair and reasonable part of the laws as administered by Congress.  This blog ends with a line which shows its ideological bent--anti-tax and anti-government. 

Strict reins must be put on the IRS by Congress to limit as much as possible the damage it does to the taxpayer and to the American dream.  Id.

These blogs should be debunked.  The treatment of COD income as taxable is Congress's rule and it is a reasonable one.  The IRS doesn't  damage the taxpayer or the American dream by enforcing the basic tax laws in a reasonable way.  The IRS is not the enemy here, even though liberatarians these days try to paint it as such. See, e.g., Machon (Chapman business professor, Hoover Institution), The Feudalist and Socialist Nature of Taxation and Machon, No Taxation With or Without Representation: Completing the Revolutionary Break with Feudalist Practices (claiming that taxes are inherently bad and a vestige of monarchism and feudalism and that "sovereign individuals" should not fund governments through taxation but through a voluntary system). As someone on the tax prof listserve noted today, the IRS is not the enacter of the tax code: It is Congress, elected by the people, that passes tax laws, which are codified in the Internal Revenue Code.  The IRS is merely the tax administrator that attempts to implement the laws.  The treatment of COD income has been around for quite a while, and most tax experts consider quite reasonable the Code's treatment of COD income as taxable income, unless one of the exceptions like bankruptcy or insolvency applies to exclude the COD income from consideration.  The borrower had the benefit of the loan and the property purchased with the loaned proceeds without paying tax on the debt amount, on the assumption that the borrower would pay off the principal.  When that assumption proves wrong, then the borrower has gotten an economic benefit and should be taxed currently for that past benefit received.  The IRS is being a reasonable enforcer of the laws in treating forgiven debt as income.

But several people have suggested that the government needs to take action--either to help lenders who stand to lose a considerable amount because of their eagerness to extend credit  to people with not-so-good creditworthiness (so-called "subprime loans") or to help borrowers who got in over their heads.  There are a number of the latter.  Some people bought properties to "flip", thinking that there was no trajectory but up.  Other people bought homes, and face the loss of that home due to foreclosures.

Does the government need to protect lenders who let themselves get carried away with the profits possibly to be made by high interest rates on subprime loans and forget the real risks of losses due to default?  Seems like that would be a mistake.  After all, businesses take risks all the time, and many of them fail because of the risks they have taken. 

Does the government need to protect borrowers?  Surely most borrowers should not be protected--where it's a business or investment (flipping), then borrowers should bear the risk they entered into.  Where a borrower has considerable assets (and hence is not eligible for the bankruptcy or insolvency exceptions or anywhere near eligible), surely the government shouldn't step in to reduce the tax liability otherwise owed and force other taxpayers to share in that borrower's loss.  And even for most people with very few assets, the government doesn't need to create new protections, since there are already bankruptcy and insolvency exceptions to taxation.  There may, at the margins, be some real concern for people who are just at the border of insolvency but not eligible for the exception or for people who were victims of aggressive lenders who pushed them to take out more credit than they otherwise would have.  At most, Congress might act to extend the application of the exclusion  to some portion of the COD income for those foreclosed borrowers just at the brink of insolvency. 

The Bush administration has proposed that the government intervene, at least for some borrowers, by making refinancing of adjustable rate mortgages (ARMs) easier to obtain.  See this White House Release and this commentary on Debthelp.com.  The Federal Housing authority would make it easier for homeowners with ARMs by providing insurance that facilitates refinancing the ARMs.

The Bush administration has also said it would support a provision now before Congress to forgive COD income that arises in connection with home mortgages.  See this White House release.  The bill being considered is HR 1876 and its Senate companion, S 1394.  See H.R. 1876, the Mortgage Cancellation Relief Act of 2007, with text of the bill at this link.  Various groups with a good bit of self-interest at stake are supporting passage of the bill.  See this argument by NAR, which paints a misleading picture of the problem while glossing over the existing exceptions to recognition of COD income and the potential application of the section 121 gain exclusion rule for home sales.  And this lobbying effort by Tennessee Realtors.

The act is frequently discussed as needed from a fairness perspective.  See, e.g.,  Tax Relief Bill Could Ease Homeowners' Struggles, Herald Tribune.  But readers beware:  why is it that home mortgage debt relief should be tax free when the home owner, after all, had the benefit of the home purchased with that debt and now has no obligation to repay the debt?  What about others who used debt proceeds to buy other assets and who will be appropriately taxed on their debt relief.  Our basic notion of fairness rebels against provision of special relief to one group (homeowners) that other groups don't have. 

In fact, homeowners already are subsidized extensively under the Code through the mortgage interest deduction, which operates as an upside down subsidy--rich people get much more of the benefit than poor people do.  We don't need to add yet another subsidy that will be most beneficial to people at the top of the income distribution, especially when the bankruptcy and insolvency exceptions take care of the people we most care about not being hurt by the foreclosure/COD problem.  Similar ideas are expressed in a Kamen blog entry opposing the bailout provision, at this link, along with some interesting comments by readers.

Whatever minimal relief might make sense (and it should be minimal and only directed towards those at the bottom of the income distribution), it is clear that helpful and accurate information about the impact of foreclosures on potential taxes is important.  Today, the IRS issued a news release related to the issue of relief from liabilities upon foreclosure that addresses this need.  See IR-2007-159.  In the release, the IRS announced information on its website about possible tax consequences of foreclosures.  The IRS provides a Q/A which explains some of the different consequences of recourse and nonrecourse debt and the various possible exceptions that may apply to make cancellation of debt income not taxable (e.g., bankruptcy, insolvency).  This increase in transparency about the tax laws that apply to foreclosures and debt relief is helpful.

Note (added 9/18/09):  Deborah Geier has an article addressing the different treatment of recourse and nonrecourse debt.  See Deborah A. Geier, Tufts and the Evolution of Debt-Discharge Theory, 1 Florida Tax Review 115 (1992).

Budget Deficits: Citizens for Tax Justice Release

Citizens for Tax Justice (CTJ) has just released a new analysis of the U.S. budgetary situation, in light of the Senate Finance Committee's legislation to increase the debt limit, yet again, to $9.815 trillion.  CTJ, as usual, puts together some very effective (and colorful) graphs to make its points.

For most of us, it is very hard to comprehend a trillion dollars.  Yet under Bush, this country's debt limit has expanded from $5.950 trillion to $9.815 trillion in only seven years.  Perhaps this is just a reflection of the basic position of many of this administration's top executives.  After all, back in 2002, Cheney made clear his view that “Reagan proved deficits don’t matter.”  See John Cassidy, Taxing, The New Yorker, Jan. 26, 2004.  And the administration has pushed through a series of revenue reductions over its one and one-half terms that have handed back money to the best off while failing to fund programs at the level required and yet spending billions in a war that few people think we should be fighting.  As the CTJ report notes, federal tax revenues are "near their lowest levels as a share of the GDP in 55 years" while the cost of the Bush tax cuts (taking into account financing costs) are about half of the increase in the government debt.

the August 2007 Census Report on Income, Poverty and Health Insurance Coverage

There was an interesting report on Income, Poverty, and Health Insurance Coverage in 2006 by the U.S. Census Bureau released on August 28, 2007.  The report is analyzed by Robert Greenstein at the Center on Budget and Policy Priorities, at this link.  For good graphs showing the trend in income, poverty and health coverage, see this link.  The report shows a very small decline in the poverty rate and a modest rise in income, as noted in the New York Times articles by Abby Goodnough, Poverty Rate Falls, but More Are Uninsured, N Y Times, Aug. 28, 2007 and Census Shows a Modest Rise in Income, NY Times, Aug. 29, 2007.

Here's the disturbing news. Living standards for many Americans are going down, not up.  First, even though there was a modest rise in household income, it is attributable to more people in the household working for the first time or to workers working longer hours.  It is not attributable to general increases in pay received for work done.  Instead, real median earnings for men and women employed full time declined for the third straight year.  Income disparity continues, with more than half of the income going to folks in the top 20%--their highest share since 1967.  And even the very slight decline in the poverty rate (from its peak of 12.7% in 2004, it moved down to 12.6% in 2005 and to 12.3% in 2006) is not very good news when compared to the 11.3% poverty rate in 2000.  See Nation's Poverty Rate Fell Last Year, Report Says, AP, Aug. 29, 2007, at this link.

Second, the uninsured increased from 44.8 million in 2005 to 47 million in 2006.  That increase is attributable in part to the loss of employer-provided health insurance.  So those people who are entering the work place, and being paid lower wages for longer hours, are likely often not receiving the benefit of being able to enroll in health insurance at work.  And the number of uninsured children, which had been falling in recent years because of the SCHIP program, increased from 8 million to 8.7 million.  The Times quotes Bernstein of the Economic Policy Institute who notes that the publicly available system of purchased health insurance hasn't filled the gap left as the "employer-based system slowly unravels."

Not surprisingly, the Bush Administration seized on the modicum of good news in the Census report to claim proof that tax cuts are working!  See Matthew Benjamin and Aliza Marcus, Americans Without Health Benefits Rose to 47 Million, Bloomberg, Aug. 28, 2007.  And Bush has already indicated that he would veto any expansionof the SCHIP program.  See A Bit Richer, but a Bit Sicker, The Economist.com, Aug. 30, 2007.

When an administration is determined to see merit in cutting government revenues (and giving the related tax cuts predominantly to the rich) no matter what the economic picture is, it makes it very hard to have an informed and probing discussion of long term tax policies.  What if we had additional billions in tax revenues that could be used to bolster higher education with grants, aid inner cities with work projects, rebuild the aging and sagging infrastructure of bridges and roads around the country, and fund the restoration of the marshes in New Orleans to protect that city from future disasters?  Clearly those projects have genuine merit.  Could the funding to do them be garnered through judiciously enacted increases of taxes on those who benefited most from the last few years of tax cuts focused predominantly on the high-income bracket taxpayers?  It is hard to see why not, when we have actually had very high growth even when taxes were much higher than restoration of the pre-Bush rate structure would require. Shouldn't this Census report, showing a country with increasing disparity between the haves and have-nots and a country where workers have to work longer to earn more money because wages and benefits like health insurance are going down, tell us something about how to think about those tax decisions we need to make?

KPMG tax shelter case: another guilty plea

Another defendant in the giant KPMG tax shelter case has pleaded guilty and agreed to cooperate with prosecutors in their case against the remaining defendants.  The plea deal was announced yesterday for David Amir Makov.  Makov was a partner, with two former KPMG employees, in Presidio Advisory Services which promoted and sold so-called "BLIPS" or "bond linked issue premium structures" tax shelters to rich investors.  The Presidio partners also sheltered income with BLIPS deals. 

The BLIPS deals used partnership structures and artificially inflated bases to generate artificial losses for investors that would offset genuine gains and thereby reduce investors taxes.  Proving just how arcane many of these tax shelters are in their use of technical rules to create the desired tax outcome, Makov was apparently able to explain the way the BLIPS shelter worked in an intelligible manner, whereas the New York Times notes that the judge overseeing the KPMG trial has complained at previous hearings that the prosecutors have been unable to clearly explain how the BLIPS shelter purportedly worked.  See Lynnley Browning, Guilty Plea Seen Aiding Tax Shelter Prosecution, NY Times, Sept. 11, 2007.

Makov's plea is significant for another reason.  He explicitly states that there was no economic substance to the BLIPS deal, and that the purported loan did not involve any amount at risk.  The promoters merely "created the appearance of economic substance, rather than the reality."  Id.   The "sole purpose" of the shelter was to generate losses.  See Paul Davies, Defendant in KPMG Case Pleads Guilty, Agrees to Cooperate, Wall St. J., Sept. 11, 2007, at A16.   

It is appropriate that this kind of language be picked up in the press, so that the jaundiced view reflected in some courts against the application of the economic substance doctrine can wither away to a deserved natural death.  The economic substance judicial doctrine is, in fact, courts doing what they must do--exercising their interpretive skills to ensure that laws are upheld rather than mocked.

Josephberg Sentencing

Back in April, I wrote about the indictment of former Goldman Sachs investment banker Richard Josephberg for tax evasion in connection with transactions through his own firm, J.R. Cralin & Co.  See this post.   He was convicted on all 17 counts, including failing to file returns and health care fraud.  Today, the U.S. District Attorney's Office for the Southern District of New York announced that Josephberg has been sentenced to 50 months in prison for his participation in tax shelters in which Josephberg participated and which were promoted to investors through Cralin.  See this press release announcing the sentencing: Download josephberg22_sentence.pdf

Looking at the release (and the earlier materials covered in the earlier posting), it is hard to imagine that Josephberg had any goal other than ripping off the country for every penny he could get away with.  He engaged in various activities, from failing to file returns to claiming bankruptcy and setting up nominee accounts in children's names.  He even fell into the nanny trap--paying his youngest child's nanny in cash and failing to satisfy tax requirements.  When all was said and done, Josephberg's original $1.5 million tax liability for 1977-1985 mushroomed to $17 million in taxes, interest and penalties.    The 50-month sentence is his just deserts.

Partnership Carried Interests: organizations speak

The debate on the appropriate treatment of partnership carried interests continues.  As readers may recall, Citizens for Tax Justice (CTJ) publicized an effort to have various non-profit groups sign off on a letter urging a change in the tax treatment of carried interests.  The special concerns for nonprofits in this context include tax fairness issues and appropriate determination of the tax base if the rules appear to allow a large group of very highly compensated persons to manipulate their tax treatment.

Briam Gumm for OMB Watch and Steve Wamhoff for CTJ issued a press release this morning announcing the delivery to Congress of a letter demanding equitable tax treatment of carried interests.  The letter has been signed by more than 300 different groups--including unions, advocates for families, faith-based organizations, and tax policy organizations.  The letter and the list of signatories is available at the following link. 

edited 8:20pm to correct link for letter and make other minor corrections

Partnership Carried interests: the JCT Reports

As the debate continues about the proper taxation of hedge and equity fund managers' management services income, Congress has scheduled another hearing on September 6 and the Joint Committee on Taxation has issued a two-part report on carried interest taxation.  See "Present Law and Analysis Relating to Tax Treatment of Partnership Carried Interests and Related Issues Part I  and Present Law and Analysis Relating to Tax Treatment of Partnership Carried Interests and Related Issues Part II.  Part I presents background information on the current treatment of carried interests and going-public transactions of partnerships in the financial services business, describes the current treatment of profits interests (as evolved through litigation and administrative development of interpretations) and publicly traded partnerships and other relevant partnership rules, sets out current legislative proposals, and discusses the primary issues of concern.  Part II discusses offshore structures for these financial services partnerships and deals primarily with related unrelated business income taxation for charities, international taxation, and deferred compensation issues.

Part I of the report ends with a fairly comprehensive discussion of the various arguments for and against taxing carried interests as compensation at ordinary income rates.  In my quick reading, I'd say the arguments come out fairly heftily on the side of taxing carried interests as compensation.  They include many of the arguments made and positions taken in my earilier postings on this blog.

In addition, Part I of the report includes a number of interesting statistics on hedge and equity funds.  I've picked out a few here for readers' quick perusal.

• partnerships control $13.7 trillion of assets
• 78.4% of those assets are in finance/insurance or real estate partnerships, with the largest concentration in securities/commodities financial partnerships
• On hedge funds:
  • since the first hedge fund was launched in 1949 with about $100,000 of funds to "hedge" long stock positions with leverage and short positions, hedge funds have grown to a staggering $1.4 trillion of assets under management, with enormous concentration, since the largest 100 funds control about $1 trillion of assets
  • the main investors in hedge funds are high net worth individuals and institutional investors like pension funds, endowments and foundations
  • one thing driving pension fund investment in risky hedge funds is a desire for the claimed high returns because pensions have projected returns higher than can be achieved with a standard mix of stock and debt assets (in spite of the fact that only 20% of hedge funds have returns after fees above the average S&P return-- see earlier posting on New Yorker article on Harry Kat: John Cassidy, Hedge Clipping, The New Yorker, July 2, 2007, at 28)
  • In the US, half of all endowment and foundations invested in hedge funds, and 10% of corporate defined benefit plans did so by end of 2005
  • hedge funds are highly leveraged, and leverage is continuing to rise
  • hedge fund performance is not transparent, for a number of reasons, though the JCT concludes that hedge funds outperform S&P 500 and that net of fees, they deliver returns at least as good as alternative investments with similar risks (for some information on the low after-fee returns of most hedge funds, see earlier posting on New Yorker article on Harry Kat: John Cassidy, Hedge Clipping, The New Yorker, July 2, 2007, at 28)
• on private equity funds:
  • the thirteen largest private equity funds manage about $350 billion in assets
  • buyout funds are the largest segment of the equity funds, and are highly leveraged
  • not all capital commitments for funds are called, because the funds do not find suitable investment targets  (there goes the so-called "laffer curve" proponents' that economic growth is always helped with lower capital gains taxes because it makes more capital available which is used to make more investments which determined growth)
  • public, corporate and union pension funds accounted for about 40% of private equity capital in 2006, and about another 35% was from wealthy individuals and wealthy families' investment arms, financial institutions, and insurance companies
  • for venture capital funds, for every $100 invested, managers will earn approximately $24 present value; for buyout funds, for every $100 invested, managers will earn approximately $17 present value

Tax Prof posting on Republicans and higher taxes

On the August 30th Tax Prof blog, Paul Caron referenced an August 29, 2007 U.S. News and World Reports "capital commerce blog" item by James Pethokoukis, Can Republicans Explain Why Higher Taxes are Bad?  Pethokoukis noted that with the presidential campaign well under way, Republican candidates "seem to be assuming that their Democratic rivals are going to push for repeal of all the Bush tax cuts".  Instead, Pethokoukis says, it's likely they "will call for only the tax cuts on wealthier Americans to be repealed--such as raising the top rate from 35% to 40%." He notes that the candidates don't address that issue. 

Maybe Pethokoukis is thinking about the surveys that show Americans are supportive of progressive taxation.  With that as a given, those who want to end the progressive income tax system tend not to talk about progressive taxation in a way that is understandable and reminds Americans of the reasons they favor it.  The opponents tend to talk about "fair" taxes (even when they mean regressive ones) and "flat" taxes (even though most flat tax systems still have multiple rates and most such systems would require lower income taxpayers to pay a much higher share of the tax burden than a progressive tax).  So Pethokoukis has caught the "all taxes are bad" crowd out with his notice of their avoidance of the discussion of shifting the share of the tax burden back towards the upper side of the income distribution .

What I found interesting was the comment on the Tax Prof blog by "Dewey."  Dewey makes the following three arguments against raising taxes (he doesn't at all address the issue of raising taxes only on the top income distribution, or raising taxes there while lowering taxes on the lower and middle income distribution--this is a generic "all taxes are bad" argument).

first, population growth demands lower taxes

• the population is growing
• larger number of people require larger numbers of jobs
• larger number of jobs require larger investments
• larger investments are hindered by taxes
• therefore, we should not raise taxes

Second, we can lower taxes to get more revenues

• lower taxes increases revenues
• therefore we don't need to raise taxes

Third, competitiveness demands lower taxes

• larger numbers of jobs will be avaialble in the global marketplace
• we need to be competitive in the global market place
• taxes disadvantage our competitiveness in the global market place

The second point is the Laffer curve--a nice-sounding hypothesis, unproven, and not widely accepted.  The first has a number of hidden and unverified assumptions--that saved taxes will be put to the kind of investment that creates jobs at home (instead of returns from investments abroad), that saved taxes will be put to investment rather than spent on frivolity, that investment is currently at a level below the amount sustainable in creating new jobs, that the tax burden is already so high that it deleteriously impacts the kind of investment needed, etc.  Consider that about 50% of US public corporations paid no federal income tax whatsoever in 2003.  Or that hefty investors can't find investments worthy of their piles of cash--Warren Buffet is one example that springs to mind of having large cash hordes in his investment engine because of the lack of worthy investments.  The third point about competitiveness also makes a number of assumptions--that the main competitors of US companies abroad are foreign companies, and not US companies or affiliates, that tax rather than infrastructure and other issues is the major inhibitor to US success abroad, that US corporate success abroad has positive benefits for the domestic economy that outweigh the obvious negatives of moving jobs overseas, that US multinationals bear a substantial tax burden currently, etc.  These points are each as vulnerable as those in the first bullet.

Maybe this explains Pethokoukis' observation that candidates have been mum in response to the reasonable strategy of raising taxes on the uppermost distribution in order to keep them lower for the lower and middle classes.....