Saturday, November 29, 2008

My background and perspective

Here's some background about me that may be helpful in understanding my perspective---Mary O'Keeffe

I'm a public policy economist excited about teaching Union's service learning course Income Tax Policy & Practice and coordinating the Union College/Schenectady Department of Social Service VITA site. The course was originally launched in 2005 by Union's dean and academic vice president, Therese McCarty. I took over teaching the course in January 2006, so this will be my fourth year as the course instructor and VITA site coordinator.

I was born and raised in Washington, DC, coincidentally just a few miles north of IRS national headquarters. (As a kid, I never did get to visit the IRS. I do have vivid memories of school field trips to other government agencies. It was exciting to get fingerprinted at the FBI and to watch sheets of currency shoot out of the printing presses at the Bureau of Engraving and Printing. I'm not sure that there would have been anything too exciting for us kids to watch if we'd been allowed to take a field trip to the IRS. It wasn't until I was an adult that I finally visited IRS headquarters, when I was doing some consulting for them in the 1980s.)

Even as a small child, however, I can remember my fascination with the mysterious and often inscrutable provisions of the income tax instruction booklets which came through our mail slot each year at the end of December. I was the kind of kid who was curious about everything, who always wanted to figure out why things were the way they were. I read encyclopedias, I read dictionaries, I read phone books, I read cereal ingredient labels, and I read income tax manuals. I guess I thought the mysteries of the universe had to be revealed in one of those somewhere! Some parts of the income tax struck me as logical and reasonable, but other complexities were just mystifying. (I'd say the tax code has only gotten more complex since then. Policymakers with the best of intentions have tried to simplify the tax code, but politics and messy real-world reality always seem to wind up making our tax system more, rather than less, complicated.)

One very big thing has changed since I was a child: marginal tax rates have come down a lot.

The top marginal tax rate for high-income taxpayers was 90% in the 1950s and early 1960s. That means that a very wealthy taxpayer only got to keep 10 cents of the last dollar earned in taxable income. The Kennedy tax cuts of the early 1960s were a big deal when I was in elementary school--that lowered the top rate to 70%, still very high compared to today's rates. As you can imagine, that kind of high marginal tax rate gave enormous incentives for those high-bracket taxpayers to seek out every bizarre, weird, and creative loophole they could find. There were a few scandalous stories of very wealthy taxpayers who managed to find legal ways to pay little or no taxes. Those stories led to the passage of the Alternative Minimum Tax (AMT) almost four decades ago. The AMT is currently a very hot political topic (because it now reaches many more taxpayers, as it is not indexed for inflation) and we'll talk about the AMT later in the class. Fortunately for our clients, the AMT does not apply to them.

Nowadays, the top marginal income tax rate for high-income taxpayers is less than 40%. You probably recall the recent presidential campaign controversy over the Obama campaign proposal to raise the top marginal bracket from 35% to 38%. In the light of the current economic situation, he now suggests that proposal be put on hold, and certainly nobody is suggesting that rates should go as high as they were in my childhood. High-bracket taxpayers still look for creative ways to divert taxable income into a tax-favored form of income, but Congress and IRS have eliminated many of the most outrageous tax loopholes that were available back in the 1960s. Even with lower rates, there is still quite a bit of tax avoidance (the term for legal tax loopholes) and tax evasion (the term for illegal tax dodges.)

Another big thing that has changed since I was a child: computers. When I was young, the IRS had large and expensive (but very primitive by today's standards!) mainframes for processing tax returns, while individuals and small businesses didn't even have simple pocket calculators in those days. Even professional taxpreparers didn't have calculators or computers back then. Pocket calculators finally became readily available when I was in grad school, and personal computers a few years after that.

Nowadays, of course, the IRS also has far more powerful computers than it used to have. However, it still has many old "legacy" computer systems. The IRS is so huge that it is prohibitively expensive for it to upgrade all its computers every time a new generation of technology comes out.


These days taxpayers also have powerful personal computers and software. The majority of individual income tax returns are now filed electronically, and the IRS is very happy about this, because e-filing improves accuracy and reduces the IRS's administrative costs. (Even today, a significant number of paper returns are still filed, and large numbers of IRS employees sort those paper returns into categories at the quaintly named "Tingle Tables," like those shown in this picture.) However, the IRS does not provide electronic filing software for all taxpayers. Middle-income and upper-income taxpayers have the choice to use their own computers and software or pay a tax professional to prepare their returns. Unless they can find a free service like our VITA program, low-income taxpayers often find themselves forced to pay high fees to a paid tax preparation service like H&R Block.

Unfortunately, the use of all this technology often makes taxpayers see our tax system as a mysterious "black box" that they can't possibly understand. Although we will certainly use computers in this course, one goal is to make sure that you fully understand the tax returns you are preparing for your clients, because you, in turn, will need to explain their tax returns to them. The taxpayer is ultimately accountable for the accuracy of his or her own return, so it's our responsibility to make sure that clients understand what they are signing. Many of our past clients have been very grateful to Union student preparers because of the clarity of their explanations. They frequently remark that their previous commercial preparer never took the time to explain their return to them.

But I digress. I was trying to introduce myself and give a bit of my own background.

I went to a small liberal arts college for my undergraduate degree, Bryn Mawr College, in Pennsylvania. I am proud to say that the National Taxpayer Advocate, Nina Olson, was also a member of my graduating class of 200 students!

I majored in mathematics, but I took a lot of classes in economics as an undergrad, so I wound up going to graduate school in economics at Harvard, where I got my PhD in 1981. My two special fields in grad school were mathematical economics and public finance. Studying public finance caused me to think deeply once again about income tax system, trying to figure out the fairness and incentive issues it raises. I had some very interesting professors (my advisers included Kenneth Arrow, Martin Feldstein, and Mike Spence) and I also had some very interesting classmates (including Larry Summers, who later became Secretary of the Treasury and got to sign those dollar bills shooting through the presses at the Bureau of Printing and Engraving. Even after he left the Treasury and became president of Harvard, he still enjoyed personally autographing people's money! President-elect Obama recently announced that he will be appointing him as one of his top White House economics advisors.)

As an undergraduate student, I remember writing a paper about what seemed at that time to be a hopelessly pie-in-the-sky pointy-headed academic idea: "a negative income tax." Conservative economist Milton Friedman had proposed the idea and a pilot experiment ran during the Nixon administration. As I wrote in my paper, the experiment did not have very promising results and, aside from Friedman, most economists of that time dismissed the negative income tax as impractical and politically unworkable. So it's ironic that decades later, the negative income tax has indeed materialized and prevails in the form of the Earned Income Tax Credit.

While finishing my Ph.D. thesis, I taught at the University of Houston for 3 semesters. It was very interesting living in Texas around 1980, because high oil prices were creating a huge boom economy. Taxes were very low in Texas, but public services were also very minimal. In general, Texans seemed to have a very low interest in public expenditures of the sort I had known in the northeast. Libraries, jails, and public transit all seemed to operate on a shoe-string. (A Texas politician once said that it was good to have poor, undependable bus service, because it would give poor people a better incentive to work hard so they could afford a car. He struck me as a latter-day version of Marie Antoinette!) The one public expenditure where Texas spent generously was the University of Texas, thanks to the fact that their endowment happened to include a good deal of land which turned out to be loaded with oil!

After a couple of terms teaching at Caltech, I returned to Massachusetts (in those days known as "Taxachusetts"), where taxes and public services were significantly higher than in Texas. I was happy to be back in a place with great public transit and excellent public libraries. Many Massachusetts taxpayers were in open revolt against the growing tax burden, however, and Proposition 2 1/2 and other tax cutting legislation soon came along, placing some serious constraints on funding public education and public services in Massachusetts. Two decades later, the name "Taxachusetts" is not particularly appropriate--tax cutting legislation has lowered the state & local tax rates in Massachusetts a great deal. (Three decades ago, Massachusetts taxes were 122% of the national average; they've now dropped to 96%. In NYS, they have fallen slightly in the same period but remain high--from 143% three decades ago, they are at 132% of the national average currently. Meanwhile, taxes in Texas have risen from 83% of the national average to 90%. Source: Tax Policy Center Tax Facts ) These differences in state and local tax rates are currently a significant public policy issue in the Alternative Minimum Tax (AMT) debate, which we'll talk about during the course.

By this time, I had finished my Ph.D. and I became a member of the faculty of Harvard's Kennedy School of Government, teaching graduate students in public policy and public administration. My teaching included courses in public finance, financial management of public and non-profit organizations, and management information systems. I also taught economics at Harvard Law School, which was beginning to develop a very strong law and economics program. Personal computers revolutionized business, government, and education during my years teaching public policy at Harvard, and I became the chair of the computer committee and developed a course in management information systems. I'm proud to say that one of my former students from the Kennedy School, David Williams, who also worked as my teaching assistant, is now the IRS official in charge of refundable credits and electronic filing in general. (You can read a Washington Post profile of Dave here.) I also served on graduate admissions committees there and would be happy to talk to any of you who are considering graduate school in public policy or public administration.

While at Harvard, I had the opportunity to do a number of interesting public sector consulting projects, including some work for the IRS. They were very interested in modernizing their services and also improving their service to taxpayers. Although there is still plenty of room for improvement, it's been exciting to see the progress they've made. One of my favorite parts of teaching this course is our partnership with some really terrific people at the Internal Revenue Service. The people we work with at the IRS have a commitment to making the tax process as efficient and positive an experience as possible, given the very challenging political and economic constraints of our tax system. (The IRS doesn't get to make the tax law--Congress does that. It's the IRS job to make it possible for us all to comply with the tax law as fairly and accurately as possible.) The IRS employees like our "relationship manager," Joanne Passineau and her colleagues that I've had the opportunity to work with at the IRS inspire me with their dedication and commitment to public service under sometimes difficult circumstances.

I have always loved teaching and was delighted when the Kennedy School students honored me with the Carballo Award for Excellence in Teaching and Public Service, named in honor of the late Manuel Carballo, a former faculty member at the Kennedy School who was also a former Commissioner of the New York State Department of Social Services, the predecessor of one of our VITA site's partner agencies, the NYS Office of Temporary and Disability Assistance.

After spending almost 14 years in Massachusetts, my husband's career brought our family to upstate New York at the beginning of the 1990s. Since then I've done a mixture of consulting, teaching, and community service while raising two wonderful young women. My older daughter is a graduate student studying math in England. My younger daughter is a freshman at Bryn Mawr. Both my daughters and I have enjoyed coaching local math teams as well as directing and acting in plays.

My husband, Ross Miller, runs Miller Risk Advisors and teaches finance to MBA students at SUNY Albany. His strong background and interest in private sector finance gives me useful perspectives and insights that inform my understanding of public finance issues.

I am looking forward to teaching " Eco 391: Income Tax: Theory and Practice" and to getting to know each of you as we work together in the Volunteer Income Tax Assistance Program. We will endeavor to make sense of the mystifying labyrinth of complex compromises that is our current income tax code. In the short run, we can help our low-income taxpayer clients get the full amount of the tax refunds to which they are legally entitled. In the long run, perhaps we can use our improved understanding of income tax policy to join others in effective research and advocacy for a better income tax system, one that promotes economic efficiency, equity, and long-run economic growth.

4 comments:

  1. So you're not a CPA. But I still love your website and your message.

    ReplyDelete
  2. Hello Ms O'Keefe,

    I'd like to invite you to become an Expert on the Focus Expert Network.

    Could you forward me your email? Mine is sgans@focus.com.

    Thank you,
    Sandy Gans
    Focus Expert Network
    Focus.com

    ReplyDelete
  3. Hello,

    I enjoy your site, it's nice to see someone else who thinks boredom and taxes are not synonymous. I'd like someone this tax season to ask questions when I have them. My business is expanding and I'm looking for a more experienced person to go to when I have a question. I will pay for this, I just want a fairly pleasant person who I can ask questions when I have them via phone or gchat/email.

    I own Brass Taxes, we provide tax preparation for freelancers and artists, of which I am one, who started working for a tax preparer and realized I was doing my own not that well. Please email me if you'd be interested or have any suggestions as to who may be. brasstaxes (at) gmail

    Rus

    ReplyDelete
  4. Your background is certainly more extensive than mine, but I spent almost 5 years as the Deputy Commissioner & Counsel '95-'99 trying to revise and update the NYS tax system. sorry to say I basically failed, but the ideas were good and still valid. If you ever want to speak give me a call 439-4413

    ReplyDelete