R. Glenn Hubbard:

Closing the spending gap shown us by the Ghost of Tax Day Future with tax increases would eventually require all taxes on average to increase by more than 50%. Such a tax increase is not simply a larger check made out to “U.S. Treasury.” Economic research suggests that larger governments are associated, all else equal, with slower economic growth because of the tax and regulatory burdens associated with a larger state. Using the estimate of Eric Engen of the Federal Reserve Board and Jonathan Skinner of Dartmouth College, meeting our entitlement spending wave through tax increases would ultimately depress our annual rate of economic growth by about a full percentage point.

That such tax increases would build up over many years does not dull the observation that tax increases of this magnitude would carry serious consequences for our future living standards. Their sheer size would restrain incentives for innovation and flexibility, and the entrepreneurship and productivity growth that have characterized relatively strong U.S. economic performance. Indeed, the “tax increase” shadow could ultimately crowd out about as much of the rate of growth as the productivity growth boom of the past decade has contributed.

Lynnley Browning:

Federal judges are beginning to question why companies are cutting off legal fees to their executives when they become caught up in criminal investigations.

The judge in the tax-shelter trial of former tax professionals at KPMG last week ordered a hearing to determine whether prosecutors had improperly put pressure on the accounting firm to stop paying the defendants’ legal bills. Last month, a federal judge in New Hampshire granted five former executives of Enterasys Networks a three-month reprieve in their trial after he questioned whether there was undue influence to cut off their legal payments. (The company has since restored them.)

The questions have emerged as other companies, including Symbol Technologies and HealthSouth, have stopped paying former executives’ bills for lawyers.

Scott Rosenberg:

Over at Slate, Daniel Gross is explaining, once more, the role the Alternative Minimum Tax continues to play in the Bush administration’s deceptive tax policies.

The AMT is a bizarre parallel-universe of taxation with its own set of complex rules that differ from the normal IRS system. It was passed decades ago as an effort to prevent gazillionaires from using elaborate tax shelters to reduce their tax bills to zero. For many years it was easily ignored by the vast majority of Americans, and as recently as a few years ago the only non-super-rich people who worried about it were tech-industry types who’d hit the stock-option jackpot but played their cards wrong.

But the AMT was designed with its very own time-bomb: It was never indexed for inflation, and so each year the rising tide of inflation — even the slow, relatively benign inflation the U.S. has experienced in the last decade — lifts more and more middle-class Americans into its maw. The obvious answer is to fix it, either by repeal or by indexing it for inflation so it continues to apply only to the gazillionaires who were its original target. Shouldn’t be so hard, right?

Cynthia Crossen:

The problem came to light during a Senate investigation of the 1929 stock-market crash: Some of America’s wealthiest citizens, including the banker J.P. Morgan and his partners, were legally paying nothing in federal income taxes.

The solution, endorsed by majorities of both parties in Congress: Make individuals’ income-tax information public, and shame the evaders into paying their fair share.

Under the Revenue Act of 1934, anyone who filed a federal tax return would also complete another — pink — form, with his or her name, address, income, deductions and total taxes paid. Everything on the pink slips was public information, available to reporters, nosy neighbors or former spouses alike.

Yesterday’s hearing in the complex KPMG tax shelter case brought about some interesting discussions:

• Reuters:
  

  A federal judge accused prosecutors Thursday of overreaching in their attempt to show that former KPMG executives sold questionable tax shelters to wealthy clients.

  Lawyers involved in the case expect U.S. District Judge Lewis Kaplan to reject defendants’ calls to dismiss the case.

  The New York judge, however, faulted what he called the government’s “shameful” activity that led the accounting firm not to pay defendants’ legal bills, contrary to past practice. He also suggested that prosecutors drop some lesser counts.

• Lynnley Browning:
  

  A federal judge raised questions yesterday about the prosecution of 16 former KPMG employees over aggressive tax shelters, criticizing prosecutors for what he called murky definitions of fraud and evasion.

  The judge, Lewis A. Kaplan of Federal District Court in Manhattan, said he was confused by what prosecutors said was a conspiracy by the defendants to make and sell aggressive shelters that allowed hundreds of wealthy investors to evade $2.5 billion in taxes from 1996 to 2002.

  “Frankly, I’m very bothered by it,” the judge said, saying the document “puts the government’s thumb on the scales” and raises questions about the Sixth Amendment constitutional right to legal representation.

  No court has ruled the shelters illegal, but the I.R.S. has never considered them valid for deductions.

  Nonetheless, Steven Bauer, a lawyer who represents John Larson, a former KPMG partner who is one of the 18 defendants, said prosecutors had withheld important information detailing, among other things, debate inside the I.R.S. over whether the shelters were legitimate.

  Judge Kaplan ordered the prosecution to turn over any withheld information.