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At President Obama’s urging, the US Department of Labor (DOL) has proposed a new regulation condoning state-sponsored private sector retirement programs. The proposed DOL regulation extends to such state-run programs principles already applicable to private employers’ payroll deduction IRA arrangements. If properly structured, payroll deduction IRA arrangements avoid coverage under the Employee Retirement Income Security […]

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The Little Sisters of the Poor, an international congregation of Roman Catholic women, are unlikely litigants in the US Supreme Court. Consistent with their strong adherence to traditional Catholic doctrines, the Little Sisters oppose birth control. They are now in the Supreme Court because of that opposition.

The post The Little Sisters, the Supreme Court and the HSA/HRA alternative appeared first on OUPblog.

The recent news about charitable contributions in the United States has been encouraging. The Giving Pledge, sponsored by Warren Buffett and Bill Gates, Jr., recently announced that another group of billionaires committed to leave a majority of their wealth to charity. Among these new Giving Pledgers are Judith Faulkner, founder of Epic Systems; Hamdi Ulukaya, founder of Chobani Yogurt; and Brad Keywell, a co-founder of Groupon. Moreover, Giving USA reported that charitable donations in 2014 reached an all-time high of $358 billion.

The post The continuing benefits (and costs) of the Giving Pledge appeared first on OUPblog.

In a letter addressed to President Obama, 26 members of the United States Senate expressed their support for the private sector retirement savings laws adopted in Illinois and California, and also being considered in other states. In particular, the senators asked that the United States Treasury and Labor Departments resolve three legal issues clouding the prospects of these adopted and proposed state laws.

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The Obamacare “Cadillac tax” is currently scheduled to go into effect in 2018. However, last week, sixty-six members of the House of Representatives, including both Republicans and Democrats, proposed to repeal the Cadillac tax before it becomes effective. The Cadillac tax will be imposed at a 40% rate on the cost of health care insurance, exceeding statutorily-established thresholds. Unions and many of their Democratic stalwarts, otherwise supportive of Obamacare, oppose the Cadillac tax because generous union-sponsored health care plans will trigger the tax.

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Tomorrow night’s appearance before a joint session of Congress by Israeli Prime Minister Benjamin (“Bibi”) Netanyahu raises four important questions. 1. Should Speaker John Boehner have invited the Israeli Prime Minister to speak without first consulting with President Obama? Answer: No. As a matter of law, the Speaker had the authority to extend this invitation to the Israeli Prime Minister without consulting with the President. As a matter of policy, however, this was a bad practice.

The post Four questions for Boehner, Bibi, Barack, and Biden appeared first on OUPblog.

In his State of the Union address, President Obama proposed several tax increases aimed at affluent taxpayers. The President did not suggest one such increase that some Republicans might be persuaded to support: limit the estate tax deduction for bequests to private foundations. In light of the significant economic and political power wielded by the families which control such foundations, it is compelling to limit the estate tax charitable deduction for bequests to such foundations.

As I discuss in a recent paper in the Florida Tax Review, the federal estate tax charitable deduction is unlimited. In contrast, the federal income tax charitable deduction includes detailed limitations which restrict the proportion of an individual taxpayer’s income which may be deducted as a charitable contribution. Through these limits, the income tax charitable deduction implements the ethic that everyone – even taxpayers who devote their entire incomes to charity – should pay some federal income tax.

The federal estate tax should be amended to similarly restrict an estate’s charitable deduction to a percentage of the estate. Then, every estate large enough to trigger federal estate liability would pay some estate tax, even if that estate devolves in its entirety upon charitable recipients.

In the current political environment, this change does not seem feasible. However, it might be possible to garner bi-partisan support for a less sweeping reform, namely, an estate tax charitable deduction limit only applicable to bequests to private foundations.

On the one side are the policy of encouraging charitable bequests to maintain a vibrant charitable sector and the recognition that resources transferred to charity do not directly descend to the decedent’s family. On the other hand, the public fisc has legitimate claims for the services it provided during the decedent’s lifetime. The estate tax is the final accounting for the governmental benefits the decedent received while alive. Most importantly, bequests to a private foundation often, in dynastic fashion, perpetuate substantial economic and political power for the decedent’s family which controls that foundation.

Many private foundations are admirable institutions. I am a fan of the Gates Foundation and of the Buffett family’s charitable efforts. These private foundations appear to be well run, genuinely charitable enterprises.

However, other private foundations are considerably less commendable. Such foundations often serve the thinly-disguised political and economic interests of the families controlling them. Even laudable foundations, like the Gates and Buffett foundations, entail considerable political and financial power for the Gates and Buffett families.

William Gates, Sr., is an attorney and a leader of Responsible Wealth, a coalition of wealthy individuals who favor a federal estate tax. Attorney Gates has written eloquently of the need for federal estate taxation. Few, if any, Republicans will join his call for retaining the federal estate tax.

But some Republicans may be concerned about the realities of private foundations. Looking at these realities, Republicans and Democrats might agree that the estate tax charitable deduction should be limited for bequests to private foundations including the Gates and Buffett families’ foundations.

Image Credit: “Tax.” Photo by Alan Cleaver. CC by 2.0 via Flickr.

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The “lame duck” session of the 113th Congress managed to avoid a shutdown of the federal government, but did not accomplish much else. Among the unfinished business left for the new, 114th Congress assembling this month is the Marketplace Fairness Act (MFA).

The MFA would permit states to require out-of-state Internet and mail order sellers to collect sales taxes if such sellers have annual gross revenues of $1,000,000 or more. The MFA would thus establish parity between such large out-of-state, online sellers and in-state sellers which must collect taxes on their sales because of their in-state physical presence.

Passage of the Marketplace Fairness Act is long overdue. It is neither fair nor efficient that a traditional brick-and-mortar store must collect sales taxes while an out-of-state Internet firm can ship the same products into the state without collecting sales tax because such Internet firm lacks an in-state physical location. While Internet and mail order purchasers are legally obligated to pay use taxes on their purchases, in practice, it is difficult for states to collect these taxes. The MFA would establish a level playing field by requiring large out-of-state sellers to collect taxes owed just as their in-state competitors must collect such taxes.

An interesting development during the 113th Congress was the growing recognition by many Republican lawmakers that the MFA implements conservative values. In the past, Internet firms have denounced the MFA as imposing a “new” tax, a label that is poison in the current political environment. However, as Rep. Steve Womack of Arkansas has recently observed, the status quo permits Internet shoppers “knowingly and willfully” to flout their obligation to pay use tax when Internet sellers do not collect such tax. Such disregard for legal duties, he states, “has never, never been a conservative value.”

Another important development has been the growing recognition by free market advocates that the status quo effectively constitutes heavy-handed industrial policy as the government effectively hobbles brick-and-mortar retailers in their competition with Internet sellers who do not collect sales tax.

A third interesting development has been the convergence of the business models of many Internet sellers and traditional retailers. Internet firms, most prominently Amazon, have sprouted local distribution centers to provide same day (sometimes one hour) delivery of products ordered online. In those states where Amazon builds distribution centers, Amazon must collect sales tax because of its in-state physical presence.

To compete with same day delivery, some traditional retailers are experimenting with Internet ordering. Under these experiments, customers purchase online with traditional retailers and then pick-up their goods that day at the store or have their goods shipped to them that day from a traditional brick-and-mortar location. Thus, the once bright line is blurring between traditional retailers required to collect sales tax and Internet sellers which need not collect tax because they lack in-state physical presence.

As Amazon and other electronic sellers collect sales tax in additional states, it is all the more anomalous for other Internet and mail order companies to refuse to collect such tax because they lack in-state physical presence.

The Marketplace Fairness Act would excuse from the duty to collect sales tax truly small Internet sellers, defined as those firms selling less than $1,000,000 annually over the Internet or by mail order. The only compelling objection to the MFA is that, if the MFA became law, a single dollar sale into a particular state would compel a covered seller to collect that state’s sales tax.

Infrequent and casual sales into any particular state should not trigger the obligation to collect that state’s sales tax. Hence, Congress should amend the MFA to require that an Internet seller need not collect the taxes of any particular state until that seller’s sales have have met some minimum threshold in that state. I would recommend that an Internet (or mail order) seller with $1,000,000 in aggregate sales be required to collect taxes for each state into which it sells $10,000 or more in any year.

So amended, the 114th Congress should enact the Marketplace Fairness Act.

Headline image credit: © hjalmeida via iStock.

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There is a reason that Congress’s post-election meetings are called “lame duck” sessions. They often aren’t pretty. Senators and representatives not returning to Congress (because they retired or were defeated for re-election) may not have strong incentives to legislate responsibly. Senators and representatives who will be part of the new Congress starting in January may feel that the lame duck session is an imposition on them since they will be returning to Washington in the new year.

Nevertheless, it is sometimes possible for “lame duck” convocations of Congress to be productive. Some observers, for example, thought that the legislative session following the 2010 election was constructive. Among other accomplishments, that session of Congress abolished Don’t Ask-Don’t Tell and extended President Bush’s tax cuts – though, of course, opponents of those decisions would have preferred that Congress hadn’t legislated on these matters.

Can the “lame duck” congressional session following the 2014 election be productive? In the hope that it can be, I suggest that the 113th Congress enact in its final days the Multi-State Worker Tax Fairness Act, previously known as the Telecommuter Tax Fairness Act.

The Multi-State Tax Worker Tax Fairness Act has been introduced in the House by Representatives Himes, DeLauro, and Esty as H.R. 4085. In the Senate, the Act has been introduced as S. 2347 by Senators Blumenthal and Murphy.

The Act is aimed at the pernicious tax practice by which New York (and other states) impose income taxes on nonresident telecommuters for days such telecommuters work at their out-of-state homes and never set foot in the Empire State. New York’s extraterritorial taxation results in double taxation of nonresident telecommuters as New York taxes the income earned on these days while the state in which the telecommuter lives and works legitimately taxes this day also since the home state is providing public services to the telecommuter on the day she works at home.

Telecommuting is growing because, in a modern economy, it can entail significant benefits. Telecommuting extends job opportunities to individuals for whom traditional commuting is difficult, for example, the disabled, parents of small children, persons who live far from major employment centers. Telecommuting is also good for the environment, reducing the carbon footprints of employees who spend some of their work days at home and need not physically commute to work on those days.

Our concerns about Ebola reinforce the benefits of telecommuting. In an earlier time, a firm combating contamination simply had to shut its operations. Today, modern technology – the internet, email, cell phones, social media – can instead permit individuals to work and communicate with each other from their homes.

The benefits of interstate telecommuting explain why a diverse coalition supports the Multi-State Tax Worker Fairness Act to avoid double state income taxation of telecommuters on their days they work at home. Among the groups supporting the Act are the American Legion, the Christopher and Dana Reeve Foundation, the National Taxpayers Union, The Small Business & Entrepreneurship Council, the Association for Commuter Transsportion, The Military Spouse JD Network, and the Telework Coalition.

It is, in short, anomalous for New York to double tax the income of nonresident telecommuters on the days such telecommuters work at their out-of-state homes and never enter the Empire State. New York engages in this double taxation throughout the country. In one instructive case, New York taxed Mr. Manohar Kakar of Gilbert, Arizona on the income he earned working at home in the Grand Canyon State. New York engages in such double taxation despite the long-term costs to New York of chasing from its borders firms which embrace interstate telecommuting. Thus, the Multi-State Worker Tax Fairness Act would be good, not just for telecommuting, but for New York itself by encouraging firms which rely on out-of-state telecommuters to stay in the Empire State.

The upcoming “lame duck” session of Congress might fit the dominant pattern of post-election convocations of the House and Senate which accomplish little. But maybe not. If members of the 113th Congress choose to spend their final days in office productively, a productive place to start would be the Multi-State Worker Tax Fairness Act. Passing the Act would be good for the country by making state income tax systems safe for interstate telecommuting.

The post “Lame Duck” session of Congress should pass Multi-State Worker Tax Fairness Act appeared first on OUPblog.

        

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As President Obama ponders whom he will nominate as Eric Holder’s successor as attorney general, he should consider President Ford’s appointment in 1975 of Edward Levi to head the nation’s Department of Justice.

Four decades ago, the United States was reeling from Watergate. President Nixon’s first attorney general, John Mitchell, was on his way to federal prison while Ford’s pardon of Nixon remained controversial.

In this difficult environment, President Ford reached outside his official and personal circles to appoint as attorney general a preeminent legal scholar, Edward Levi.

Levi was a distinguished law professor, an accomplished dean of the University of Chicago Law School, and the widely-admired president of the University of Chicago. In a contentious political setting, Edward Levi was confirmed as attorney general by a voice vote in the United States Senate. Everyone understood that Ford had gone beyond politics as usual to choose an outstanding attorney general capable of restoring confidence in the Department of the Justice.

Ed Levi didn’t need the job. But the United States needed Ed Levi.

Levi’s tenure as attorney general did not disappoint. When Levi left the Justice Department at the end of the Ford Administration, the department’s reputation had been restored in large measure because of Levi’s integrity, professionalism, and independence.

President Obama should strive for an Ed Levi-type appointee for his second attorney general.

Many fine individuals are being mentioned to replace Holder. Most of these individuals are excellent lawyers and, under other circumstances, would be good leaders for the Department of Justice. But the United States today, like the United States in 1975, requires more than a good lawyer as attorney general. It requires someone with Ed Levi’s gravitas.

Some might retort that nothing comparable to Watergate has transpired in recent years. True. But we are a nation badly fractured on political lines. Legitimate concerns have been raised about the recent performance of the Department of Justice. In this difficult atmosphere, it is vital to reaffirm that the Department of Justice is an institution of law, not just another hyper-partisan political arena.

Like President Ford, President Obama should look beyond his official family and his circle of acquaintances to find an attorney general whose prime credentials are professional, not political. Holder’s replacement should be perceived as an independent attorney general who doesn’t need the job.

This heavyweight appointee could, like Ed Levi, come from academia or could come from the private sector. Another potential source for such an attorney general is the judiciary. Among those meeting the Ed Levi-test would be such personages as Justice Sandra O’Connor and Judges Richard Posner, Jon Newman and Jose Cabranes of the U.S. Court of Appeals.

President Ford’s historical reputation improves with each passing year. His pardon of Richard Nixon, widely condemned at the time, is now seen as an act of statesmanship which helped to move the United States beyond Watergate. Ford’s appointment of Edward Levi as attorney general was similarly an act of high statesmanship which reaffirmed America’s commitment to the rule of law. President Obama should make a comparably outstanding appointment for his second attorney general.

The post Mr. President: Nominate Another Ed Levi as Attorney General appeared first on OUPblog.

        

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Maryland State Comptroller of the Treasury v. Brian Wynne requires the US Supreme Court to decide whether the US Constitution compels a state to grant an income tax credit to its residents for the out-of-state income taxes such residents pay on out-of-state income.

Brian and Karen Wynne live in Howard County, Maryland. As Maryland residents, the Wynnes pay state and county income taxes on their worldwide income. The Maryland income tax statute provides that Maryland residents who pay income taxes to states in which they do not live may credit against their Maryland state income tax liability the taxes paid to those states of nonresidence. However, the Maryland tax law grants no equivalent credit under the county income tax for out-of-state taxes owed by Maryland residents on income earned outside of Maryland.

When the Wynnes complained about the absence of a credit against their Howard County income tax for the out-of-state income taxes the Wynnes paid, Maryland’s Court of Appeals agreed. Maryland’s highest court held that such credits are required by the nondiscrimination principle of the US Constitution’s dormant Commerce Clause. The absence of a credit against the county income tax induces Maryland residents like the Wynnes to invest and work in-state rather than out-of-state. This incentive, the Maryland court held, may impermissibly “affect the interstate market for capital and business investment.”

For two reasons, the US Supreme Court should reverse. First, Wynne highlights the fundamental incoherence of the dormant Commerce Clause test of tax nondiscrimination: any tax provision can be transformed into an economically equivalent direct expenditure. No principled line can be drawn between those tax provisions which are deemed to discriminate against interstate commerce and those which do not. All taxes and government programs can incent residents to invest at home rather than invest out-of-state. It is arbitrary to label only some taxes and public programs as discriminating against interstate commerce.

Suppose, for example, that Howard County seeks to improve its public schools, its police services or its roads. No court or commentator suggests that this kind of routine public improvement violates the dormant Commerce Clause principle of nondiscrimination. However, such direct public expenditures, if successful, have precisely the effect on residents and interstate commerce for which the Court of Appeals condemned the Maryland county income tax as discriminating against interstate commerce: Better public services also “may affect the interstate market for capital and business investment” by encouraging current residents and businesses to stay and by attracting new residents and businesses to come.

There is no principled basis for labeling as discriminatory under the dormant Commerce Clause equivalent tax policies because they affect “the interstate market” of households and businesses. Direct government outlays have the same effects as do taxes on the choice between in-state and out-of-state activity. If taxes discriminate against interstate commerce because they encourage in-state enterprise, so do direct government expenditures which make the state more attractive and thereby stimulate in-state activity.

Second, the political process concerns advanced both by the Wynne dissenters in Maryland’s Court of Appeals and by the US Solicitor General are persuasive. Mr. and Mrs. Wynne are Maryland residents who, as voters, have a voice in Maryland’s political process. This contrasts with nonresidents and so-called “statutory residents,” individuals who are deemed for state income tax purposes to be residents of a second state in which they do not vote. As nonvoters, nonresidents and statutory residents lack political voice when they are taxed by states in which they do not vote.

Nonresidents and statutory residents require protection under the dormant Commerce Clause since politicians find it irresistible to export tax obligations onto nonvoters. The Wynnes, on the other hand, are residents of a single state and vote for those who impose Maryland’s state and local taxes on them.

In reversing Wynne, the Supreme Court should decide narrowly. The Wynnes, as residents of a single state, should not receive constitutional protection for their claim to a county income tax credit for the out-of-state taxes the Wynnes pay. However, the Court’s decision should not foreclose the Court from ruling, down the road, that credits are required to prevent the double income taxation of individuals who, for income tax purposes, are residents of two or more states. Such dual residents lack the vote in one of the states taxing them and thus require constitutional succor which the Wynnes do not.

Dissenting in Cory v. White, Justice Powell (joined by Justices Marshall and Stevens) argued “that multiple taxation on the basis of domicile” is unconstitutional. Since the Wynnes are taxed by only one state, the Supreme Court need not now confront this issue again. However, the Court should decide Wynne in a fashion which allows the Court to revisit this question in the future by holding that credits are constitutionally required to prevent the double taxation of dual residents.

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By Edward Zelinsky

Few recent decisions of the US Supreme Court have engendered as much controversy as Burwell v. Hobby Lobby Stores, Inc. In that case, the Court decided that a closely-held corporation’s employer-sponsored medical plan need not provide contraception if the shareholders of such corporation object to contraception on religious grounds.

Responding to the resulting controversy, Senator Patty Murray, along with many of her Democratic colleagues, has proposed legislation to overturn Hobby Lobby. Senators Kelly Ayotte and Deb Fischer, along with many of their Republican colleagues, have introduced legislation confirming Hobby Lobby. In the current political environment, there is little chance of either bill becoming law any time soon.

However, there is a response to Hobby Lobby which would address the concerns of both contraception advocates and of religious objectors to contraception. In particular, any employer which objects to providing birth control should instead be required to fund for its employees independently-administered health savings accounts (HSAs) or health reimbursement arrangements (HRAs). An HSA or HRA permits the covered employee to spend employer-provided, pre-tax health care dollars on any medical service the employee chooses, from birth control to an MRI, without implicating the employer in the employee’s spending decision.

The HSA/HRA alternative respects the religious rights of sponsoring employers. With conventional insurance or self-insured health plans, the sponsoring employer’s plan provides a menu of choices which frames the employees’ decisions. In contrast, the HSA/HRA approach permits employees to spend health care dollars on whatever medical services employees select including services to which the employer objects – without the employer’s plan framing the employees’ choices. HSAs and HRAs are thus like cash wages which, when spent by the employee, do not entail participation by the employer.

Justice Alito’s Hobby Lobby opinion identifies two other possible ways to provide contraception services without violating the rights of objecting employers. First, HHS might extend to closely-held for-profit firms the regulatory accommodation now limited to religious nonprofit entities other than churches. Under this accommodation, insurers or third-party administrators provide employees with contraception at no cost to the religious employer. Alternatively, the federal government might itself make birth control available to women who lack contraception coverage from their employer-sponsored health plans.

Commentators have expressed reservations about both these approaches. Some women’s health groups argue that a federal program will stigmatize the women who receive their contraception from such a program. Moreover, the problems of the Department of Veterans Affairs suggest the need for skepticism about the federal government as a provider of medical services. A number of religious groups contend that the current regulatory accommodation for religious employers does not go far enough and still makes employers participate in the provision of birth control to which they object.

In light of these concerns, HSAs and HRAs are compelling alternatives. HSAs and HRAs are analogous to cash wages which the employee spends as he chooses. Such accounts can assure women of the ability to obtain contraception which they seek with employer-provided, pre-tax health care dollars without burdening the religious beliefs of employers who object to involvement with contraception.

Suppose, for example, that Hobby Lobby is required to establish for each of its employees an HSA or HRA administered by the company’s bank. A Hobby Lobby employee could submit receipts to the bank for any type of medical care the employee selects. The employee would subsequently receive from the bank a reimbursement check for this care from his or her HSA/HRA account. Alternatively, HSA/HRA debit cards have become popular devices. These cards allow a covered employee to swipe when receiving health care services with the card.

These accounts could be used by each employee to defray any medical expense the employee elects including, but not limited to, the kinds of contraception to which the employer objects. However, the employer would not be complicit in the employee’s medical choices just as the employee does not participate in an employee’s decision to spend her wages on something with which the employer disagrees.

The HSA/HRA approach potentially has political legs. HHS (along with the Departments of the Treasury and Labor) could adopt regulations implementing this approach. Conservatives like HSAs and HRAs since these accounts implement a consumer-driven approach to health care. Liberals want to assure employees of contraception even if employers object to contraception. The HSA/HRA response to Hobby Lobby thus has bi-partisan appeal and is a compelling compromise as a matter of law and public policy.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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Image credit: Doctor With Piggy Bank. Photo by prosot-photography, iStockphoto.

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By Edward Zelinsky

The sad story of Casey Kasem’s last illness is now over. Casey Kasem was an American pop culture icon. Among his other roles, Mr. Kasen was the disc jockey host on the legendary radio program, American Top 40. He was also the voice of Shaggy Rogers of Scooby-Doo.

Unfortunately, for many Americans Casey Kasem is now known as the subject of a bitter dispute between his widow Jean and his children from his first marriage. In the face of Mr. Kasem’s debilitating dementia, Mrs. Kasem wanted to continue medical care while his three children from his prior marriage had concluded that care was pointless and should be discontinued. Mr. Kasem’s children prevailed in the California courts based on a document Mr. Kasen had signed in 2007. Life support was accordingly withdrawn and Casey Kasem died shortly thereafter.

At one level, it is surprising is how rarely we hear today of such stories of conflict over end-of-life care. Cases involving Nancy Cruzan, Karen Ann Quinlan, and Terri Schiavo were once prominent in our public discourse.

An unheralded accomplishment of the American political and legal systems is the largely successful privatization of end-of-life health care decisions. Through documents variously denoted as living wills, health care proxies, medical powers of attorney, and health care instructions, an individual while mentally competent can plan for the end of his life. Central to such planning is the designation a medical decisionmaker and the specification of the criteria to be applied by such decisionmaker if an individual becomes incapable of making medical decisions for him- or herself.

Macro of a living will document. © zimmytws via iStockphoto.

These planning procedures, while not panaceas, have largely ensured that end-of-life decisionmaking will be made, not in courtrooms, but where such decisions belong: by the dying individual’s designated loved ones.

Two important lessons emerge from the Kasem family’s unfortunate experience. First, spouses are not automatically medical decisionmakers for each other. Spouses should formally designate each other as medical decisionmakers, if that is what they want.

Unfortunately, debate over same-sex marriage has confused matters, leading many individuals to erroneously believe that, simply by virtue of marriage, spouses are automatically each other’s medical decisionmakers. They are not. For example, Michael Schiavo’s status as husband did not guarantee him the right to make medical decisions for his wife Terri.

It is sensible to require that spouses must formally designate each other as their end-of-life medical decisionmakers. To take the most obvious case, suppose that spouses are estranged and that a healthy spouse will gain financially through an inheritance on the death of a wealthy, ill spouse. We would not want the healthy spouse in this setting to terminate medical care unless the ill spouse had signaled that that was what he wants. Or, to take a more benign situation, spouses may love each other but still think that other persons, e.g., the children from prior marriages, will be better decisionmakers under the stress of an end-of-life situation.

The bottom line is that spouses should execute the formal instrument of their respective state, however that instrument is designated, if they want each other to be health care decisionmakers. Marriage, by itself, is not legally sufficient to make spouses medical decisionmakers for each other.

The second lesson of the Kasem story is that, even if all of the proper documents have been signed, terminating medical treatment at the end of life is a difficult and painful decision. For example, one commonly used formula specifies that medical treatment should be withdrawn when an individual’s condition is “terminal.” Unfortunately, the physicians advising in end-of-life settings do not always agree when a conditional is “terminal.” If consensus exists, it is still painful to withhold medical care even if an ill individual previously authorized such withholding while he was healthy and competent to decide.

Casey Kasem left Americans with wonderful memories. His parting contribution to the American people was to remind us of the need for proper end-of-life planning and to demonstrate that, even with such planning in place, medical decisions at the end-of-life can be painful and difficult.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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By Edward Zelinsky

Lucio Noto worked for Mobil and ExxonMobil in Virginia and Texas before retiring in 2001. In his retirement, Mr. Noto and his wife Joan maintain homes in Greenwich, Connecticut and in East Hampton, New York. For state income tax purposes, the Notos are residents of both Connecticut where they are domiciled and New York where they spend at least 183 days annually at their second home.

During his employment in the oil industry, Mr. Noto earned stock options and deferred compensation. In 2005 and 2006, he exercised these stock options at considerable gain and also received the deferred compensation he had earned earlier during his employment. Both New York and Connecticut taxed the resulting income in full without providing a credit for the income tax levied by the other. Consequently, the Notos, as dual residents of both the Empire State and the Nutmeg State, paid double state income taxes on their stock option and deferred compensation income.

The New York Supreme Court (the Empire State’s trial court) recently upheld this double state income taxation by holding that New York could tax the Notos’ income in full, even though Connecticut taxed that income as well. The Noto court correctly applied the tax and constitutional law as it today governs dual state residents like the Notos. While double taxation of dual state residents is currently legal, such double taxation is neither fair nor economically efficient.

Tax by Phillip Ingham. CC BY-ND 2.0 via Flickr.

In a recent article in the Florida Tax Review, I argue that, as a matter of both tax policy and constitutional law, it is time to apportion state personal income taxes to eliminate the double state income taxation of dual residents like the Notos. As to income which two or more states tax only on the basis of residence, such states should apportion, based on the dual resident’s relative presence in each state of residence. This apportioned approach would eliminate the double taxation of dual residents’ incomes and would comport better with modern patterns of residence and mobility.

The Noto decision illustrates the need to eliminate the double state income taxation of dual residents. In a case like the Notos’, New York and Connecticut should each tax only a pro rata share of the Notos’ option-derived and deferred compensation income based on the days the Notos spend in each of these two states of residence.

On days when a dual resident lives in his second state of residence, the first state provides no services which justify taxing the part of the individual’s income properly apportioned to the time in his second state of residence, the state which provides services on those days. Part-year benefits do not justify full-year taxation. The status quo is economically inefficient as the specter of double residence-based taxation causes unproductive tax-motivated behavior to avoid such taxation. Such economically unproductive behavior inhibits individuals from moving across state lines as they would without interference by tax considerations.

So far, the US Supreme Court has been unwilling to declare unconstitutional the kind of double state taxation imposed upon dual state residents like Mr. and Mrs. Noto. Moreover, most states have been unwilling to abate such double taxation by extending a credit for the tax imposed by the taxpayer’s second state of residence. The result is the kind of double taxation imposed on the Notos by New York and Connecticut.

It is easy to dismiss this type of double state income taxation as a quandary of the proverbial one percent. However, the problem of double residence-based personal income taxation, once limited to the very rich, is moving down the income scale as more individuals maintain second residences in different states, e.g., the Baby Boomer retiree who establishes a winter home in a warm climate; the dual career couple that balances the demands of work and family by maintaining two homes in different states.

In this environment, the traditional acquiescence to double state income taxation of dual residents is no longer acceptable. Congress could eliminate this double taxation through a federal law requiring states to apportion income when taxpayers are residents of two or more states. The US Supreme Court could reach the same result by requiring under the Constitution’s Commerce and Due Process Clauses that states apportion the income of dual residents. The states could, on their own, move toward such apportionment, either by unilateral adoption of rules of apportionment (including tax credits) or by mutual agreement.

The kind of double state income taxation imposed upon dual state residents like the Notos is an anomaly in the 21^st century. In the interests of fairness and economic efficiency, this anomaly should be eliminated by requiring states to apportion the income of dual residents.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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By Edward Zelinsky

As the American public debated the legislation ultimately enacted into law as the American Taxpayer Relief Act of 2012, no person was more influential than the Oracle of Omaha, Warren Buffett. Much attention was given to billionaire Buffett’s complaint that his federal income tax bracket was lower than his secretary’s tax rate. President Obama invoked “the Buffett Rule” to bolster the President’s successful effort for the Act to raise income tax brackets for high income taxpayers.

In his most recent letter to the shareholders of Berkshire Hathaway, Buffett issued another oracular pronouncement about America’s fiscal health. Buffett warned that many public pension plans are dangerously underfunded:

Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford….[A] gigantic financial tapeworm…was born when promises were made that conflicted with a willingness to fund them….During the next decade, you will read a lot of news –- bad news – about public pension plans.

Many of those who heeded Buffett’s call for higher tax brackets for the wealthy ignore his current warning about the parlous financial condition of public pension plans. One of the problems of being an oracle is that your listeners will pick and choose which prophecies to follow.

Attached to Buffett’s most recent shareholders’ letter was a 1975 memo on pensions Buffett sent to Katharine Graham, then chair of The Washington Post Company. Buffett’s observations in this now released memo are as compelling today as they were forty years ago. It is easy to grant pension benefits payable in the future while failing to fund that pension promise today as “making promises never quite triggers the visceral response evoked by writing a check.” Typical defined benefit formulas, which gear pensions to an employee’s final salary before retirement, are particularly expensive for the employer to finance since higher final salaries will, at the end of an employee’s career, escalate his pension entitlement. It is tempting, but futile, to assume that the underfunding of defined benefit plans can be remedied by every plan continuously earning above average returns on pension assets: “yes, Virginia, maybe every football team can have a winning season this year.”

All of this explains why many of the nation’s public pension plans are today seriously underfunded: Elected officials promise pension benefits without properly funding them and rely on unrealistic assumptions about future rates of return to deny the reality of underfunding.

Buffett’s observations resonate with particular force in Connecticut where I live. Connecticut competes with Illinois for the distinction of being ground zero in the public pensions crisis. In this election year, neither the Governor nor the legislature will acknowledge that the Nutmeg State’s public pensions are seriously underfunded.

Consider in this context Buffett’s warning that pension plans should not assume that they will earn superior investment returns. Connecticut contends that its pension plans will earn 8% annually. Most other states make similarly optimistic assumptions. The National Association of State Retirement Administrators has recently determined that the average state public pension plan currently assumes that its investments will earn an annual rate of return of 7.72%.

More realistic assumptions about rates of return would expose the underfunding of public pensions described by Buffett. Under the Internal Revenue Code, private sector pensions this month must calculate their obligations to pay retirement benefits using interest rates ranging from 1.19% (for pension benefits payable soon) to 6.76% (for pension benefits payable furthest down the road). If Connecticut or any other state with similarly underfunded pensions assumed these more sobering rates of return (as they should), Buffett’s dire assessment of pension underfunding would be dramatically confirmed.

Equally instructive is the recent contract settlement brokered by New York Governor Andrew Cuomo between the Metropolitan Transportation Authority (MTA) and Local 100 of the Transport Workers Union (TWU). With much fanfare, Governor Cuomo announced that TWU workers will receive increased wages but that the MTA will not elevate fares to cover these increased wages. Only after the cheering stopped did we learn how this alchemy is to be accomplished: by reducing the MTA’s scheduled contributions for pensions and retiree health care costs. Governor Cuomo, the MTA, and the TWU have decided to underfund pensions for MTA workers. No doubt, they will justify this underfunding by predicting superior investment returns on the pension’s investments.

The Oracle of Omaha is, unfortunately, right. Many states and localities will soon have to choose whether to pay pensions promised to retired workers, or whether to put police on the streets and teachers into classrooms, or whether to increase taxes significantly to pay pensions and maintain public services.

It is regrettable that many who marched under Buffett’s banner when he favored higher taxes on the rich ignore his message about the troubled state of public pensions.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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By Edward Zelinsky

In a unanimous decision, New York’s Court of Appeals, the Empire State’s highest court, recently held that John Gaied was not a New York resident for income tax purposes because he had no New York home.

Mr. Gaied was domiciled in New Jersey and had a business on Staten Island to which he commuted daily. He purchased a multi-family apartment building near his business in New York, both as an investment and to house his parents who lived in the building’s first floor apartment.

New York’s tax commissioner claimed that this Staten Island building made Mr. Gaied a New York resident for tax purposes. The New York Tax Appeals Tribunal and the New York Appellate Division affirmed the commissioner’s determination that this building constituted Mr. Gaied’s “permanent place of abode” in New York – even though Mr. Gaied personally did not lived there.

The good news is that Mr. Gaied ultimately prevailed. The bad news is that he had to fight his way to New York’s highest court to prevail. As that court held, “in order for a taxpayer to have maintained a permanent place of abode in New York, the taxpayer must, himself, have a residential interest in the property.” Since it was Mr. Gaied’s parents who lived in the first floor apartment, not Mr. Gaied himself, he was not a New York resident for tax purposes.

Mr. Gaied’s lawyer, Timothy P. Noonan of Hodgson Russ, LLP, is entitled to be proud of this victory for tax sanity in New York. The problem is that such sanity is all too rare. Mr. Gaied had to go to New York’s highest court to establish the common sense proposition that a “place of abode” is a location at which the taxpayer actually lives.

Unfortunately, the kind of irrationality manifested by New York’s tax commissioner in Gaied is endemic to New York’s tax system. Consider, for example, New York’s insistence that the modest beach house owned and used by Mr. John J. Barker for a handful of vacation days each year transforms Mr. Barker into a New York resident, even though his permanent home is in Connecticut. Or consider New York’s “convenience of the employer” doctrine under which New York taxes the income earned by nonresident telecommuters on the days such telecommuters work at their out-of-state homes and don’t set foot in the Empire State. There is much that is irrational and self-destructive in New York tax policy.

Governor Cuomo has eloquently proclaimed that New York can no longer be “the tax capital” of the United States. The Governor is right. Hopefully, Gaied will signal to New York’s policymakers the need to reform New York’s self-destructive approach to personal income taxation. Repairing New York’s definition of residence and abolishing the “convenience of the employer” doctrine would be good places to start.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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By Edward Zelinsky

The American Taxpayer Relief Act of 2012 is widely understood as a victory for President Obama. However, the long-term story is more complicated than this. The Act in large measure confirms in bi-partisan fashion the tax-cutting priorities of George W. Bush.

In the Act, President Obama achieved his proclaimed goal of increasing income taxes on the country’s most affluent taxpayers through higher income tax rates and reduced deductions. The Act creates a new 39.5% income tax bracket for individuals with taxable incomes above $400,000 and for married couples filing jointly with taxable incomes above $450,000. It phases out personal exemptions for individuals with adjusted gross incomes over $250,000 and for married couples with adjusted gross incomes over $300,000. It also reduces itemized deductions for these affluent taxpayers.

For high income taxpayers, the Act increases the maximum capital gains tax rate from 15% to 20%. When combined with the new Medicare tax on investment income, this results in a combined tax of 23.8 % on capital gains for the highest income taxpayers.

It is thus unsurprising that the Act has been heralded as a triumph for Mr. Obama and his vision of a more progressive income tax law.

However, the reality is more complex than this. For the long run, the winner under the Act was Mr. Obama’s predecessor, George W. Bush. The Act, as it gave Mr. Obama some of what he wanted, also made permanent much of what Mr. Bush desired as a matter of tax policy. Indeed, as a result of the Act, federal taxes are in important measure now permanently at the lower levels where President Bush wanted them.

The vast majority of Americans are not affected by the Act’s changes for the highest income taxpayers. For most taxpayers, the Act thus permanently ratifies the lower federal income tax rates championed by Mr. Bush in 2001. Moreover, the Act confirms that corporate dividends will be taxed at lower capital gains rates rather than as ordinary income. True: capital gains rates are now higher for the most affluent of taxpayers as a result of the Act. However, even at these higher rates, taxing dividends as capital gains, rather than as regular income, significantly reduces the tax burden on such dividends.

Consider, moreover, the federal estate tax. When President Bush took office in 2001, the federal estate tax applied to estates over $675,000. That floor was scheduled to increase in stages to $1,000,000. The maximum federal estate tax rate was then 55%.

While President Bush did not succeed in abolishing the federal estate tax, the Act provides that federal estate taxation will only apply to estates over $5,000,000 adjusted for increases in the cost of living. For 2013, an estate must be over $5,250,000 to trigger federal estate taxation. When it applies, the estate tax will be levied at a flat rate of 40%.

In the area of tax policy, President Bush did not achieve all he sought. No president does. If we define success more realistically, the 2012 Act confirms President Bush’s triumph in permanently lowering federal income tax rates for most Americans, reducing the effective tax burden on corporate dividends, and significantly reducing the reach of the federal estate tax.

To some, these tax reductions are welcome restraints on the federal leviathan. To others, the Bush tax reductions, now permanent, regrettably hamper the federal fisc. What cannot be doubted is that the Internal Revenue Code we have today in large measure reflects the tax-cutting priorities of George W. Bush. In adopting the Act, a Democratic President and Senate, along with a Republican House, permanently confirmed much of these tax-reducing priorities.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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By Edward Zelinsky

One widely-discussed possibility for reforming the federal income tax is limiting the deduction for charitable contributions. Whether or not Congress amends the Code to restrict the income tax deduction for charitable contributions, Congress should limit the charitable contribution deduction under the federal estate and gift taxes. Such a limit would balance the need for federal revenues with the desirability of encouraging charitable giving.

On December 11th, the advocacy group Responsible Wealth called for the federal government to tax estates over $4,000,000 at rates starting at 45%. Among those joining this call were heirs to old fortunes such as Abigail Disney and Richard Rockefeller and owners of new wealth such as Bill Gates, Sr. Most notably, Warren Buffett agreed (as he has in the past) with this recent plea for higher estate taxes.

I am a fan of my fellow Nebraskan and agree with him that the federal government should impose estate taxes, particularly on large fortunes. I also admire Mr. Buffett for the Giving Pledge which he has promoted with the younger Mr. Gates. Under that Pledge, wealthy individuals commit to giving at least half of their wealth to philanthropy.

There is, however, considerable tension between the Buffett commitment to federal estate taxation and the Buffett commitment to philanthropy. By virtue of the estate tax charitable deduction, when a wealthy decedent leaves part or all of his estate to charity, no estate tax is paid on these contributed amounts.

It is perfectly plausible to call for estate taxation only for those who don’t distribute their wealth to philanthropy. It is, however, hard to reconcile that position with Responsible Wealth’s advocacy of strong estate taxation. Mr. Gates, Sr., for example, declared that “it would be shameful to leave potential revenue on the table from those most able to pay.” However, that is precisely what happens when large estates go to charity, namely, estate tax revenue which would otherwise flow to the federal government is instead diverted to charity. Such charity may be worthwhile but it does nothing to reduce the federal deficit.

Similarly, Ms. Disney argued that “a weak estate tax” falls “on the backs of the middle class,” presumably because the federal government will respond to reduced estate tax revenues by deficit financing, by raising other taxes on the middle class or by reducing government spending. However, when an estate is distributed to charity free of estate taxation, the government confronts these same choices.

A compromise could preserve the incentive for charitable giving while also generating some estate tax revenues for the federal government: Limit the estate (and gift) tax charitable deduction.

Many, including President Obama, have suggested such limitations on the income tax charitable deduction. If, for example, an individual is in the 35% federal income tax bracket, the President has proposed that the donor receive a deduction as if he or she were in the 28% bracket. In a similar fashion, the estate tax charitable deduction could be curbed, thereby generating some additional revenues for the federal fisc while also keeping a tax-incentive for charitable giving.

Consider, for example, a billionaire who leaves his entire estate of $1,000,000,000 to charity. To simplify the math, let’s assume that this billionaire would pay estate tax at the 40% rate if he did not bequeath all his assets to philanthropy. Because this $1,000,000,000 bequest is fully deductible for federal estate tax purposes, no tax is paid in this example. If this billionaire had not made this charitable bequest but had instead left his money to his children, the federal government would have received estate tax revenues of $400,000,000.

Suppose now that Congress limits the federal estate tax deduction to 70% of the amount donated to charity. In this case, the billionaire would leave a taxable estate of $300,000,000. At a 40% rate, this would require a federal estate tax payment of $120,000,000.

To provide the cash to pay this tax, this billionaire would probably reduce his charitable bequest to retain cash to pay this estate tax. However, at the end of the day, charity would receive the bulk of this billionaire’s assets while the federal government would receive some estate tax.

A limit on the estate tax charitable deduction could be constructed to fall only on relatively larger estates. For example, the first $10 million of charitable bequests could be fully deductible for estate tax purposes and only the amount gifted over that threshold would be deductible in part.

Alternatively, the limit could be phased in as charitable contributions increase. For example, the first $10 million of charitable bequests could be fully deductible for estate tax purposes. Then the next $50 million of philanthropic gifts could be 90% deductible and any further gifts would be 70% deductible for federal estate tax purposes.

The details are less important than the basic policy: By limiting the estate tax charitable deduction, all large estates donated to philanthropy would pay some federal estate tax revenues at a reduced rate. This would balance the need for federal revenues with the encouragement of the kind of charitable bequests quite commendably encouraged by Mr. Buffett and the Giving Pledge.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears here.

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By Edward Zelinsky

Among the bitter but unnecessary controversies of this election year was the dispute about the federal government’s mandate that employers provide contraception as part of their health care coverage for their employees. Employers religiously opposed to contraception believe this mandate infringes their right of Free Exercise of religion under the First Amendment. Advocates of the contraception mandate characterize it as vital to women’s health and choice.

This acerbic controversy is totally unnecessary. This dispute can be diffused by health savings accounts (HSAs) or similar employer-funded medical accounts under the employee’s control. Such a solution should be appealing to political leaders committed to civil discourse and mutual respect for opposing views. Unfortunately, such leaders appear to be in short supply.

Substantively, the most recent event in this controversy is the decision of US District Judge Reggie B. Walton. Judge Walton recently held that the contraception mandate violated the rights of Tyndale House Publishers, Inc., a Christian publishing company opposed on religious grounds to certain of the mandated forms of contraception. Judge Walton held that the contraception mandate violates the Religious Freedom Restoration Act.

Earlier in the year, Missouri’s legislature, overriding the veto of Governor Jay Nixon, declared that Missouri employers religiously opposed to contraception need not provide contraception as part of their employees’ medical coverage. This Missouri law directly defies the contrary federal mandate adopted as part of President Obama’s health reform package.

On this issue, serious and sincere people come to different conclusions. These differences can be accommodated by requiring employers with ethical or religious qualms about any particular type of medical care to fund HSAs or similar accounts under employees’ control. Such accounts enable the employees to make their own decisions about the medical services such employees obtain with their employer-funded health care dollars.

HSA supporters tout such accounts to control medical costs and to increase consumer autonomy. But HSAs can also diffuse religious and ethical controversy by shifting contentious choices from employers to employees.

If employers have religious or ethical scruples about providing contraception or other medical services, they should instead pay into independently-administered HSAs for their employees. Employees who want these services could then purchase such services with the pre-tax funds in these accounts – just as such employees can today purchase these services with their post-tax salary dollars.

Like all compromises, this proposal is imperfect. A religious employer might object that it knows that its payments to independently-administered HSAs are underwriting services to which the employer objects. But the employee can use his or her salary dollars in ways to which the employer objects. At some point, the religiously sincere employer must acknowledge that control of compensation has shifted from the employer to the employer’s employees. And health care dollars are part of the employee’s compensation package.

The proponents of birth control and other similar medical services can object that employees purchasing such services through HSAs or similar accounts will pay more than employers who can purchase such services more cheaply because of economies of scale. That is an argument for improving the operation of the market for medical services through better information about the prices of such services and for the proponents of such services to themselves harness economies of scale by aggregating purchasers.

Many details must be decided before implementing this proposal. Most obviously, we must decide how much the religious employer must contribute to each employees’ HSA for the employer to be released from the mandate he considers religiously objectionable. This concern, like others, can be resolved by those committed to civil management of our differences.

While the public discussion has to date been stimulated by employers religiously opposed to providing contraception and abortion services, there may be other employers whose religious convictions preclude them from providing other kinds of health care services. Some employers who are Christian Scientists, for example, might object to some or all of the package of medical services being mandated by the federal government. If so, these employers should also be given the alternative of funding HSAs or other similar accounts which shift control of health care dollars to the employees.

A genuinely diverse society must be tolerant of genuine diversity. In this spirit, employers with religious objections to particular medical practices and services should be given the alternative of funding employees’ HSAs instead.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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By Edward Zelinsky

By selecting Representative Paul Ryan as the Republican vice presidential nominee, Romney confirmed the decline of the traditional role of vice presidential candidates as providers of geographic balance. Ryan’s selection reinforces the shift to a more policy-oriented definition of the vice presidency. This shift reflects the nationalization of our culture and politics and the increased importance of the general election debate between vice presidential candidates.

Traditionally, a vice presidential candidate usually came from a large swing state in a section of the country removed from the presidential candidate’s home state. The classic (and most successful) instance of this once conventional pattern was John Kennedy’s selection in 1960 of Lyndon Johnson as Kennedy’s running mate. Johnson was picked to deliver the electoral votes of Texas and other southern states to a ticket headed by a candidate from Massachusetts. It worked.

A generation later, another Democratic presidential nominee from Massachusetts, Michael Dukakis, emulated Kennedy by selecting as his vice presidential nominee Texas Senator Lloyd Bentsen. This time it didn’t work, but the Dukakis-Bentsen ticket fell well within the tradition of geographic balancing.

The new, policy-oriented pattern commenced in the next election in 1992 when Bill Clinton of Arkansas named as his running mate the senator from next door, Tennessee’s Al Gore. In terms of geographic balance, a Clinton-Gore ticket made no sense — two southerners from neighboring states.

Clinton saw the role of the vice president differently. Gore possessed Washington experience and connections Clinton lacked. Gore thus provided, not geographic balance, but national experience and expertise. This departure from traditional geographic ticket balancing worked for the Democrats both in 1992 and in 1996.

When it was Gore’s turn to choose a running mate in 2000, Gore too departed from tradition, turning to Connecticut’s junior senator, Joe Lieberman. True, Lieberman came from a northern state, Connecticut. But the Nutmeg State, then with eight electoral votes, was not a great electoral prize nor was it in serious doubt for the Democratic ticket. Gore turned to Lieberman because the ethically-challenged image of the Clinton Administration was a problem for Gore. Lieberman’s reputation for ethical probity provided useful ballast to the Democratic ticket.

But it was the Bush-Cheney ticket in 2000 which truly broke the geographic balancing mold. Bush did not pick Cheney for the vice presidency to secure Wyoming’s three electoral votes. Rather, the Texas Governor selected Cheney to bring to the ticket Cheney’s perceived gravitas including his experience as Wyoming’s congressman, Secretary of Defense, and White House Chief of Staff.

By 2008, it was no longer innovative when Barack Obama selected Joseph Biden of Delaware as his vice presidential running mate. Biden was not placed on the ticket to secure Delaware’s three electoral votes or otherwise secure geographic balance. Like Gore and Cheney, Biden was perceived as a Washington insider and policy expert. Biden’s experience augmented a ticked headed by a presidential candidate whose tenure in the nation’s capital consisted of a single, not-yet-completed term in the US Senate.

Ryan fits comfortably within the newer, policy-oriented vision of the vice presidency. It doesn’t hurt that Ryan comes from Wisconsin, a state the Republicans are eager to put into play. But unlike some of the other individuals Romney considered for the vice presidential nomination (such as Senator Portman of Ohio or Senator Rubio of Florida), Ryan doesn’t come from a major swing state. Indeed, Ryan himself has never run for statewide office in Wisconsin.

Ryan was picked because he is a young, articulate conservative policy wonk. Romney chose Ryan because of Ryan’s ideas, not Ryan’s home state.

What has caused this evolution of the vice presidency? A key factor is the nationalization of our culture and our politics. Kennedy and Johnson (as well as Dukakis and Bentsen) were individuals deeply rooted in their respective home states. We have become a more mobile nation. Barack Obama (born and raised in Hawaii, educated in California, New York, and Massachusetts) was a senator from Illinois. But his biography is itself a story of geographic balance.

The same is true of Mitt Romney, born and raised in Michigan, educated in California, Utah, and Massachusetts. Romney’s business career occurred in Massachusetts as did his one term as the Bay State’s governor. But no one even expects Romney to carry Massachusetts in November.

Just as the life stories of the presidential candidates are no longer centered in their “home” states, the electorate reflects America’s mobility as a nation. Consequently, geographic ties mean less today than they did in the past; roughly 40% of Americans today live in a different state than the state in which they were born.

Moreover, modern communications instantly nationalize our political figures. Paul Ryan will soon be as well-known in Texas as he is in Wisconsin. In this world of mobility and instant national communications, geographic ticket-balancing is less compelling than it was in the past.

A second factor buttressing the evolution of the vice presidency is the emergence of the vice presidential debates. When Kennedy and Nixon conducted the first presidential debates in 1960, there was no vice presidential debate between Johnson and the Republican nominee, Henry Cabot Lodge.

Today, the vice presidential debate is an important event on the campaign calendar. In picking a running mate, a presidential candidate must consider this event. My son Aaron and his colleagues at the Presidential Debate Blog correctly observe that Senator Bentsen uttered the most famous line in presidential debating: “Senator, you are no Jack Kennedy.” However, debate skills don’t always correspond with geographic balance. Ryan was in large measure selected because of his ability to go toe-to-toe, rhetorically and intellectually, with Vice President Biden.

We will, no doubt, some day again see a presidential candidate select his or her vice presidential running mate from a large swing state in a section of the country far from the presidential candidate’s home state. But that geographic balancing mold is now longer dominant.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His column ‘EZ Thoughts’ appears on the OUPblog monthly.

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By Edward Zelinsky

Like many of us, President Obama is a Warren Buffett fan. Most prominently, the president advocates, as a matter of tax policy, the so-called “Buffett Rule.” This rule responds to Mr. Buffett’s observation that his effective federal income tax rate is lower than the tax rate of Mr. Buffett’s secretary. In President Obama’s formulation, the Buffett Rule calls for taxpayers making at least $1,000,000 annually to pay federal income tax at a 30% bracket.

President Barack Obama and Warren Buffett in the Oval Office, July 14, 2010. Photo by Pete Souza. Source: Executive Office of the President of the United States.

In his most recent letter to the shareholders of Berkshire Hathaway, Mr. Buffett makes another provocative observation. However, Mr. Obama has so far ignored this most recent observation from the Oracle of Omaha. Addressing the nation’s continuing housing malaise, Mr. Buffett wrote:

A largely unnoted fact: Large numbers of people who have “lost” their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost. In these cases, the evicted homeowner was the winner, and the victim was the lender.

In contrast, the dominant narrative about the national mortgage crisis focuses upon the banks which, the narrative goes, knowingly induced homeowners to borrow money the banks knew the borrowers could not repay. The banks then sold the resulting mortgages to unsuspecting investors who were misled by the banks and by the rating agencies which put their respective seals of approval on these unsound mortgages. Banks subsequently compounded their misdeeds by engaging in widespread abuse while foreclosing on the homes subject to these mortgages.

This anti-bank narrative underpins the recent settlement among the federal government, the states and five major lending institutions (Bank of American, JP Morgan Chase, Citibank, Wells Fargo and Ally Financial, previously known as GMAC). Under this settlement, the banks will give a total of $25 billion to homeowners who have been foreclosed upon or who are in danger of being foreclosed upon.

This anti-bank narrative has had legs because there is much truth to it. We now know, for example, that many banks lent money with optimistic public faces at the same time that bank executives knew the loans were unsound and overly-risky.

However, Mr. Buffett’s comments reveal the incompleteness of the anti-bank narrative; many borrowers were culpable along with the banks. It takes two parties — a lender and a borrower — to make a bad loan. Most Americans know a friend, relative, or neighbor who opportunistically gamed the mortgage system during the pre-recession bubble, borrowing against the bubble’s continuation and spending the borrowed funds for personal consumption. As Mr. Buffett suggests, to declare that borrower a victim is to mislabel a willing player in the nation�

By Edward Zelinsky

Public pension plans should not invest in private equity deals. These deals lack both transparency and the discipline of market forces. Private equity investments allow elected officials to assume unrealistically high rates of return for public pension plans and to make correspondingly low contributions to such plans. This is a recipe for inadequately funded pensions, an outcome good for neither public employees nor taxpayers.

Ben Bernanke. Source: United States Federal Reserve.

In this low return environment, public defined benefit pension plans generally assume that they can earn annual investment returns in the vicinity of 8%. Such aggressive return assumptions allow governors and legislators to authorize smaller tax-financed contributions to such public pensions on the theory that anticipated investment gains will fund the retirement benefits promised to public employees.

A primary defense of this practice is that plans’ assumptions should reflect long-term experience. From this vantage, the current low interest rate environment is an historic anomaly. For the long run, the argument goes, public pension plans will earn higher returns.

Whatever the theoretical merits of this approach, it is troubling in practice, an invitation to push into the future the problem of inadequately funded public pension plans. That problem exists today and needs to be confronted today, as the Baby Boomer cohort retires in unprecedented numbers and places corresponding demands on public and private retirement plans.

A second defense of high assumed rates of return is that public pension plans can earn aggressive gains through so-called “alternative” investments such as private equity partnerships. Publicity about Mitt Romney’s IRA has focused attention on the often lucrative results obtained by at least some private equity investors. Many public pension plans have effectively become addicted to private equity deals and their promises of outsized investment returns.

It is, however, doubtful that these promised returns are generally obtained by the private equity industry or that such returns are obtained on the scale sought by public pension plans. Private equity is, by definition, private. Much of the good news we hear about this industry comes from the industry itself. Since there are no active markets for these investments, investors in private equity deals are ultimately dependent upon valuations by the sponsors of these deals.

In a recent paper, Professor K.J. Martijn Cremers of the Yale School of Management concluded that private equity investors have in the last 10 years done no better than investors in the stock market. Others, such as Professor Steven Kaplan of th

As the year draws to a close, we’ve been reflecting on all the wonderful books published in 2011, and in doing so, we’ve also realized there are some classics worth revisiting. The authors and friends of Oxford University Press are proud to present this series of essays, which will appear regularly until the New Year, drawing our attention to books both new and old. Here regular OUPblog columnist Edward Zelinsky writes about My Antonia by Willa Cather.

The first time I read My Antonia, I hated it. That was to be expected: It was required reading in my sophomore English course at Omaha Central High. This was during the Sixties. In the Age of Aquarius, no one was supposed to like assigned reading. That’s why it had to be assigned.

I next confronted My Antonia in college. Like Jim Burden, Willa Cather’s narrator, I had left Nebraska to go to east to continue my education. During those years, some feminists were arguing for Cather’s place in the women’s canon. Thus, Antonia, the Nebraska icon, was to be transformed into Antonia, the feminist icon.

This didn’t seem quite right to me. As I reread My Antonia in college half a continent away from Nebraska, Cather’s portrayal of Nebraska seemed more appealing than it had when I had grown up there. And Antonia was too rich a character to serve anyone’s political agenda.

It was when my eleven year old daughter discovered My Antonia that I came full circle. Jacoba was blessed with a wonderful English teacher who guided her to read challenging novels. My Antonia became Jacoba’s favorite book. This prompted me to confront Cather’s most famous Nebraska novel once again.

This time, I was really hooked as I read of Antonia, her family’s travails and her ultimate triumph on the plains of Nebraska. This book, I declared, was good; it deserved to be taken off the required reading list.

The following year, when we visited my mother in Omaha, Jacoba asked if we could go to Red Cloud, Willa Cather’s hometown which she fictionalized in My Antonia as Black Hawk. I told my mother we were going to Red Cloud because Jacoba wanted to. That was partially true.

Our day in Red Cloud remains one of the best memories of raising my daughter. The citizens of Red Cloud are understandably proud as they guide visitors through the many Cather-related structures still standing.

At the end of the day, our guide gently walked us toward the cemetery where Antonia is buried. The small, picturesque graveyard was dotted with Nebraska sunflowers. Standing at Antonia’s grave was one of the genuinely peaceful moments of my life.

As I stood by Antonia’s grave, I realized that, like Jim Burden, I had gone east to be educated and live my life as a lawyer, but that I had forever left behind an important part of me in Nebraska.

A few years later, when Jacoba’s twin brothers reached Bar Mitzvah age, the synagogue in Connecticut was decorated with Nebraska sunflowers.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears here.

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By Edward Zelinsky

Media reports have indicated that New York Governor Andrew Cuomo has been considering the use of public pension funds to finance the replacement of the Tappan Zee Bridge and to underwrite other infrastructure investments in the Empire State. This is a bad idea, harmful both to the governmental employees of the Empire State and to New York’s taxpayers. Using public pension monies in this fashion trades the immediate benefits of public construction for the long-term cost of underfunded public retirement plans.

If investment in the new Tappan Zee Bridge yields risk-adjusted, market rate returns, then private investors will step up to the plate and invest. Resorting to special financing arrangements with public pensions signals that a proposed investment does not pass the test of the marketplace. Market rate returns attract private capital. Such investments need not be subsidized with public pension monies.

There are projects which yield social benefits beyond their financial returns to investors. In a democracy, voters (or their elected representatives) can and should be persuaded in open deliberations to finance such projects with their tax dollars.

When governmental officials (however well-intended they may be) resort to special funding arrangements with public pension plans, it indicates that the investment in question flunks both the discipline of the market and the legitimacy of voter approval.

Such projects flout the venerable fiduciary standards for pension investments, namely, prudence and diversification.

An investment shunned by private investors is imprudent. When made by a state pension plan, such a below-market investment impairs the long-term interests of both the employees who depend on the plan for their retirement incomes and of the taxpayers who ultimately finance the plan. A prudent pension investment must, at a minimum, yield a risk-adjusted, market rate return. If pensions make investments rejected by private investors, such below-market investments are imprudent.

Moreover, an investment by New York pensions in New York infrastructure fails the test of diversification. In the private sector, it flouts the rule of diversification for a private retirement plan to invest its resources in the stock of the employer sponsoring the plan. The plan is already dependent upon the economic well-being of the sponsoring employer since the employer funds the plan. Placing the plan’s resources in the employer’s stock doubles the pension’s bet on the employer and its economic condition.

Similarly, if New York’s public pensions invest in New York projects, the pensions are doubling their bets on New York’s economy. These plans already count on New York’s economy for the tax revenues funding such plans. Concentrating New York pension investments in the Empire State is the opposite of diversification; the financial fate of these plans is already tied to New York’s ability to fund them.

The budgetary pressures on Governor Cuomo and other states’ chief executives today are severe. Those pressures make it tempting to turn to public pension funds to finance infrastructure when private investment can’t be obtained and voters cannot be convinced to pay taxes for such infrastructure.

It is precisely at such moments that the sage tests of prudence and diversification play their most important role –  protecting the long-term interests of retirees and taxpayers by precluding pension trustees from making investments which flunk the criteria for sound fiduciary decisionmaking.

The most recent reports indicate that Governor Cuomo may be reassessing the desirability of using public pensions to finance in-state infrastructure investments. Let us hope so. A new Tappan Zee bridge is a great idea. It should be pursued the right way, by formulating

By Edward Zelinsky

Although he had said it before, Warren Buffett struck a nerve with his most recent observation that his effective federal tax rate is lower than or equal to the effective federal tax rates of the other employees who work at Berkshire Hathaway’s Omaha office. Mr. Buffett’s observations have provoked extensive comments both from those supporting his position (e.g., President Obama) and those critical (e.g., the editorial writers of the Wall Street Journal).

In response to Mr. Buffett’s remarks, President Obama has promulgated what he calls “the Buffett Rule,” namely, that those making $1,000,000 or more per year should pay an effective federal tax rate higher than the effective rate paid by moderate income taxpayers. To implement this rule, Senate Majority Leader Harry Reid has proposed a 5.6% federal surtax on annual incomes over $1,000,000. The Congressional Research Service (CRS) has issued a report on the Buffett Rule. Deviating from Mr. Obama’s formulation of the Buffett rule, Mr. Buffett himself has indicated that he only favors higher income taxation for “the ultra rich,” a group which apparently consists of individuals earning substantially more than $1,000,000 annually.

The debate following Mr. Buffett’s comments has been spirited, but, for many, confusing. Here is my effort to clarify the facts and arguments.

1) FICA taxes are the predominant tax burden on most working Americans. As I discussed in last month’s blog, many working Americans pay little or no federal income taxes, but do pay significant FICA taxes to finance Social Security and Medicare. Democrats and Republicans alike have ignored this reality. Democrats prefer to ignore the heavy FICA tax burden on lower income Americans to preclude an honest discussion about the fairness of those taxes to younger Americans, even after considering the Social Security and Medicare benefits younger Americans may receive in the future. Republicans avoid the reality of FICA taxation because it undermines the mantra that half of all Americans pay no federal income tax. That statement is true but incomplete. Working Americans who don’t pay income taxes do pay significant FICA taxes. When Mr. Buffett compares his federal taxes to those paid by his secretary, it is the secretary’s FICA taxation which constitute much of the secretary’s obligation to the federal Treasury.

2) As to the taxation of the affluent, the real issue is the lower rates applicable to capital gains. The CRS estimates that approximately 1/4 of those with annual incomes over $1,000,000 violate the Buffett rule by paying federal taxes at effective rates equal to or lower than the effective tax rates of Americans of modest incomes. Besides the FICA taxes borne by working Americans, this phenomenon is caused by lower federal taxes on capital gains. Today, capital gains (including dividends) are generally taxed at a maximum federal tax rate of 15%. This is essentially the same as the combined employer-employee tax rate which applies under FICA to the first dollar of a working American’s wage income.

3) Millionaires pay higher taxes on their ordinary incomes. Mr. Buffett is evidently one of the millionaires whose income largely consists of lightly-taxed capital gains (including dividends). However, the bulk of those making more than $1,000,000 pay taxes at much higher rates than does Mr. Buffett because they earn ordinary incomes such as salaries and other business profits. These millionaires generally do not violate the Buffett rule since the federal inco