Friday, April 29, 2011

Arbitration Decision Suggests SCOTUS Majority Are Pro-Business More Than Jurisprudential Conservatives

By Mike Dorf

On Wednesday, the Supreme Court handed down a 5-4 ruling in AT&T Mobility LLC v. Concepcion.  In an opinion by Justice Scalia, the Court found that the Federal Arbitration Act (FAA) preempts California's contract rule treating class action waivers as unconscionable (where the individual harm is not large enough for the typical claimant to file suit).  The opinion is unpersuasive.  Indeed, the case is arresting because the Court's ruling runs away from principles that conservatives purport to value in other contexts.

First, a brief recap of the issue.  The petitioner (an entity I shall oversimplify by calling AT&T) advertised a "free" cell phone, but subscribers were charged roughly $30 as a tax on the retail value of the phone.  Subscribers brought a class action in federal district court alleging false advertising (and other claims) to recover the tax and other relief.  AT&T sought to compel arbitration, citing the agreement to arbitrate in the service contracts, and the FAA.  The lower courts ruled that arbitration was not required because California law made a contractual waiver of the right to bring a class action unenforceable as unconscionable, and the FAA contains an exception to the general obligation to enforce arbitration agreements where non-enforcement is based "upon such grounds as exist at law or in equity for the revocation of any contract.”   Because California law forbids enforcements of waivers of the right to bring a case as a class action whether in court or in arbitration, the lower courts reasoned that these were neutral grounds for non-enforcement, rather than discrimination against arbitration.

AT&T had argued that California's law, though nominally arbitration-neutral, was in fact discriminatory.  In the briefs and oral arguments, AT&T offered the following sorts of analogies: Suppose state law forbade enforcement of an agreement to waive a right to submit a case to a jury, or suppose state law forbade enforcement of an agreement to waive a right to conduct adversarial discovery.  Such prohibitions would be thinly veiled efforts to render arbitration agreements unenforceable, because arbitration, by contrast with litigation,  characteristically does not use juries or the discovery process associated with litigation.

In my post-oral argument discussion of the case, I characterized this argument as weak because, whereas juries and formal discovery are foreign to arbitration, class-based resolution of disputes in arbitration is routine.  The four dissenters agreed.  But the majority did not.  Justice Scalia thought that class treatment was like a jury or discovery because class treatment of a case is less expeditious than individual arbitration.  Justice Scalia cited statistics showing that typical class arbitrations take substantially longer to resolve than do individual-case arbitrations.  His argument is not especially persuasive, and for reasons I'll explain, it's particularly odd coming from him and the other conservatives in the majority.

On its own terms, Justice Scalia's claim that class arbitration is less expeditious than individual-case arbitration is suspicious because his time-to-completion stats compare apples to oranges.  He cites statistics showing that the average time to resolution of class arbitrations is nearly four times as long as for individual arbitrations.  However, in that longer time, arbitrators are resolving thousands of cases.  The longer time that class treatment takes may well be justified by the efficiency of resolving many cases at once.  At the very least, that seems like a sufficient possibility to undermine the conclusion that class resolution is in some fundamental sense contrary to the purposes of arbitration.

And that brings me to the core problem with the opinion coming from these Justices: In other contexts, the conservatives, led by Justice Scalia, have been very hostile to the notion that a statute should be interpreted according to its purpose, where that purpose is not clearly expressed in the text.  As Justice Scalia, Judge Easterbrook, and other textualists in the sway of public choice theory like to say, statutes are compromises among legislators serving multiple purposes, and part of the legislative deal is a decision not to pursue all purposes at all costs.  Thus, they say, courts should stick to the text.

Indeed, Justice Thomas wrote a concurrence in AT&T explaining that he was uncomfortable with the majority's reliance  on the FAA's purposes and objectives, rather than its text.  He concurred rather than dissented because he proferred a reading of the FAA's saving clause that would only validate state court non-enforcement on grounds that there was a defect in the making of a contract (such as fraud), but no other Justice joined him in this theory that had not been briefed or argued by the parties.  Putting aside Justice Thomas's idiosyncratic (but perhaps correct) reading of the saving clause, his separate opinion underscores how in this particular case and pre-emption cases more generally, the other conservatives are seemingly willing to elevate the interests of big business--which generally favors pre-emption--over their jurisprudential commitments to textualism and federalism.

In the AT&T case, moreover, the majority opinion exhibits tension with another jurisprudential principle favored by Justice Scalia and other conservatives.  In cases under the Equal Protection Clause and the Free Exercise Clause, Justice Scalia and his fellow travelers have repeatedly argued against disparate impact tests.  To discriminate, they say, is to use a criterion that on its face draws an impermissible distinction or, in rare circumstances, to use a formally neutral criterion that was adopted for the purpose of discriminating and has a disparate impact.

Yet in the AT&T case, the majority is willing to find that California's no-class-waiver rule does not apply to "any contract" because, even though it does apply to any contract, it impedes what Justice Scalia deems to be the purpose of the FAA.  It is possible to make this argument for the hypothetical no-jury-waiver and no-discovery-waiver rules, because then the state rule, while formally applying to any contract, would really apply only to arbitration contracts.  But the existence of arbitration class actions means that it's very hard to say that the California law's (supposed) disparate effect on arbitration must be evidence that the California no-class-waiver rule was adopted for the purpose of singling out arbitration.  Consequently, it appears that the Court's conservatives are betraying their general hostility to disparate impact for its own sake.

Now it is possible to go overboard with charges of result orientation.  I'm not saying that the conservatives have no principles and simply use purported jurisprudential commitments as a cover for substantive ideological ones.  After all, the Court, in an elegant opinion by CJ Roberts, recently invoked textualist principles to rule against AT&T (as I discussed here).  The basically legal realist claim I am making here is more subtle: That the conservatives frequently (not always) abandon the jurisprudential principles they otherwise espouse because of their ideological commitments.

Do the liberals do the same thing?  Sure.  But there is an asymmetry.  Liberals generally acknowledge the fact that a judge's values influence how she decides a case, except during their confirmation hearings, when they become formalists.  Conservatives espouse formalism even after they have been confirmed, and also claim that their methodological druthers, unlike the liberals' methodological druthers, don't leave substantial room for the imposition of their values.  That claim is not worth very much when the people making it abandon their preferred methodology to reach results that match their normative commitments.

Finally, let me note an unrelated peculiarity of the case.  The standard-form contract in the case was in some respects very generous to arbitration plaintiffs, conferring advantages in arbitration that would have been unavailable in ordinary litigation.  That fact is discussed by the majority but it is ultimately a distraction.  The Court's rule will apply across the board to arbitration contracts, including those that are much less favorable to plaintiffs.

Thursday, April 28, 2011

Ignoring the Debt Limit

-- Posted by Neil H. Buchanan

If the U.S. government were to exceed its legal limit on issuing debt, what would happen? In the context of budget debates, this question is usually posed in its smart-alecky version: "What, are you going to put everyone in Washington in jail?" In a way, this is a variation on Stalin's famous rhetorical question: "How may battalions does the Pope have?" We can say that we have a budget rule, but what happens if we simply ignore it?

Earlier this week, Professor Dorf (here) and I (here) discussed why the Republicans' current attempts to use the debt limit to force concessions on spending are in a new category of outrageous political conduct. The stakes are so high, we both argued, that holding the debt limit hostage to policy disagreements was to tempt a horrible fate. Our analyses, however, assumed that the inevitable consequence of a failure to increase the debt limit would be default -- that is, that some U.S. debt obligations could not be paid, leading to loss of confidence in U.S. financial securities, and ultimately to global depression.

A postscript to Professor Dorf's post, however, provided a link to a column on CNBC's website that argued that this is all much ado about nothing. The column (written by their Senior Editor John Carney, about whom I know nothing beyond what he wrote in the column in question) argues, in essence, that there is no debt limit, because Treasury Secretary Geithner has the power -- extra-legal power, but power nonetheless -- to continue to issue debt even after the legal limit is reached. Could this be true? And if it is, how should that change the political calculus of the debt limit standoff?

An excellent report from the Congressional Research Service, dated March 7 of this year, provides a summary of the history and current data relating to the debt limit. The debt limit is a statutory requirement, not a Constitutional mandate. Section 3101(b) of Title 31 of the U.S. Code is an unassuming little provision that dates to 1917, amended regularly, stating: "The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $xx, outstanding at any one time." ($xx currently equals just under $14.3 trillion.) Getting rid of the debt limit entirely would involve repealing sec. 3101(b).

Should we abolish the debt limit? Obviously, yes. Even before the current political craziness set in, the periodic debates on the debt limit amounted to nothing more than political theater. Everyone was given a chance to talk about how irresponsible the government is, and then they would vote to increase the debt limit. The exercise was silly, but harmless. Now, it has become harmful, and potentially catastrophic, because we might not be treating it as a fait accompli (and not just because that is a French phrase).

The CRS report noted above briefly discussed the question of whether there should be a debt limit. The best they could find on the "pro" side was the claim that the debt limit "expresses a national devotion to the idea of thrift and to economical management of the fiscal affairs of the government." Even by Washington-speak standards, that is embarrassingly fatuous. (On the "con" side, CRS noted that Bruce Bartlett, a former tax official in Republican White Houses, is in favor of abolishing the limit.)

Even if one believed that it is important to express national devotion to thrift, however, the debt limit is a ridiculous way to go about it. There is no good argument, based on any serious economic analysis, that the dollar amount of debt matters. Having $14 trillion in nominal debt when the economy is producing $15 trillion in GDP is quite different from having $14 trillion in debt when the economy is producing $1.5 trillion or $1,500 trillion in GDP. Moreover, the debt limit includes debt held within government accounts, treating such internal debt as "outstanding." Roughly one-third of the government's debt subject to the limit is held in internal federal accounts, making that debt "outstanding" only in a formal sense, not a meaningful economic sense.

All of which adds up to the argument that we should abolish the debt limit, or at least transform it into a limit on the ratio of debt to GDP, where we only include in the numerator debt held by the public. That, however, is not the current law. In the article noted above on CNBC's website, Carney argues that Secretary Geithner will simply ignore the law, rather than allow the government to default. This argument cannot be based merely on Geithner's infamous personal tax problem (failing to pay certain taxes while he was at the IMF). That is, Carney's suggestion is not that Geithner will ignore the law but that any responsible Treasury Secretary would do so, under those extreme circumstances. I agree, but I do not think that doing so would ultimately do enough to limit the damage that the threat of default is already having on U.S. creditworthiness.

Carney raises some of the important "Pope's battalions" questions. He suggests, for example, that no federal judge would stop the Treasury from doing what is necessary to protect the nation's credit-worthiness, essentially as a matter of justiciability, but also because no "judge wants to be known in the history books as the guy who ordered America to default."

One can certainly imagine the political firestorm that would erupt if, after failing to reach an agreement with Republicans to increase the debt limit, the Obama administration were simply to order the Treasury to continue to issue more debt. Surely, we do not tolerate rank lawlessness in this country! The outrage that would emanate from the Right (including a big segment of the Democratic Party, I would add) would dwarf their hysteria over TARP or the health care law.

Despite our claims of innocence, however, we are quite accustomed to ignoring blatant violations of the law in this country. The years 2001-09 were, to a large degree, an extended experiment in seeing just how much an administration can get away with, if its leaders are only brazen enough to try. (Torture? Redefine it.) The political calculus of Cheney et al. was simply that they could not be stopped. If someone at a government agency or a U.S. attorney's office tried to do his job under the law, that person would find himself either fired or the recipient of an intimidating visit by Cheney himself. Even since January 2009, no one has tried to arrest Bush or Cheney for the war crimes to which they have happily confessed.

We have good reason, of course, to suspect that Obama is nothing like Bush or Cheney in this regard. Either because of a fear of political consequences, or perhaps due to a deeper sense that the ends do not justify the means, Obama might well choose not to allow his Treasury secretary to save the republic by ignoring the law.

Even if Obama were so inclined, however, it might not be enough simply to issue debt after the statutory limit is reached. The only way to calm markets would be to announce in advance that we will not default, no matter what. That option is obviously off the table, for any number of reasons. The best that we could imagine, therefore, is an ad hoc action to prevent default, announced shortly after it is carried out. The ensuing political fistfight would lead to promises that such a thing could never happen again.

Even such a brazen effort to save the creditworthiness of the United States, therefore, could not avert the damage that such a political battle would inflict. While we would still have a clean record in terms of never having defaulted on U.S. government debt -- which is extremely important -- so much damage would have been done that we would not emerge from the crisis with the sense that "the U.S. government really will never default on its debts." The current crisis, caused by the new Republican majority's insistence on taking a nonsensical and self-destructive stand against government debt -- is already harming the country. In the next few months, it will only get worse.

Wednesday, April 27, 2011

Did King & Spalding Breach Professional Ethics in its DOMA Withdrawal?

By Mike Dorf

In explaining why his law firm was not going to defend the constitutionality of DOMA, after having agreed with House Republicans a week earlier to take the case, King & Spalding partner Robert Hays said: "In reviewing this assignment further, I determined that the process used for vetting this engagement was inadequate."  This explanation doesn't really pass the laugh test, but seems designed to avoid the implication that K&S acted unethically in dropping the case.  Lawyers have considerably greater discretion in choosing what cases to take in the first place than they have in dropping existing clients.  By invoking improper vetting, Hays appears to be saying that his firm goofed in taking the case and so should be understood to be redoing the original intake.  He thus could be read to be saying that the K&S decision was not really a decision to abandon a client but a retroactive decision not to take the client in the first place.

That shouldn't wash.  Whether or not there was a procedural irregularity in the K&S vetting of a case, the firm in fact took the case and no matter how much "inadequate vetting dust" Mr. Hays sprinkles on the decision to abandon the case, it remains a decision to abandon, rather than a retroactive decision not to take the case.  Moreover, everybody knows that the real reason K&S dropped the case was the fear of adverse consequences: Chiefly other clients that might stop doing business with K&S and top attorneys who would either leave the firm or not go to work for the firm.  This Talking Points Memo discusses the behind-the-scenes pressure that was brought to bear on K&S.

So, did K&S violate its professional obligations in dropping the case?  The firm is based in Atlanta, though the client is based in DC.  Fortunately for our purposes, the relevant professional responsibility provisions are the same: Both Georgia and DC follow (versions of) the ABA Model Rules of Professional Conduct.  The key provision is Rule 1.16.  I'll quote the Georgia version, but the DC version and the ABA version are mostly the same, with two relevant exceptions I'll mention below.  Part (a) addresses an issue not presented here.  The Rule then continues:
(b) except as stated in paragraph (c), a lawyer may withdraw from representing a client if withdrawal can be accomplished without material adverse effect on the interests of the client, or if:
(1) the client persists in a course of action involving the lawyer's services that the lawyer reasonably believes is criminal or fraudulent;
(2) the client has used the lawyer's services to perpetrate a crime or fraud;
(3) the client insists upon pursuing an objective that the lawyer considers repugnant or imprudent;
(4) the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer's services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled;
(5) the representation will result in an unreasonable financial burden on the lawyer or has been rendered unreasonably difficult by the client; or
(6) other good cause for withdrawal exists.
(c) When a lawyer withdraws it shall be done in compliance with applicable laws and rules. When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation.
(d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee that has not been earned.
The maximum penalty for a violation of this Rule is a public reprimand.
Did K&S comply?  Here are a few reasons why the answer could be yes.  First, given that the representation had only been underway for a week, perhaps there was no "material adverse effect on the interests of the client."  I think the answer depends on how one understands that term.  If the question is whether the House Republicans were prejudiced by the actions of K&S, the answer may be no.  They only lost a week and are thus not really worse off than they were before they hired K&S.  Moreover, the pro-DOMA argument will still be made by Paul Clement, the outstanding attorney they had in mind as the lead lawyer.

However, it's not clear that the Rule calls for that sort of reliance inquiry.  It may simply ask whether the client is worse off than it was before the withdrawal from representation.  The answer to that question seems pretty clearly yes.  Clement's new firm is a conservative boutique without all of the resources of K&S.  Moreover, the public flap probably means that if Speaker Boehner wants to take the case to a big firm, he'll have an even harder time finding one now than he would have before the K&S decision and un-decision.  So there's a pretty good argument that there was material adverse effect on the client.

What about the exceptions?  Exception (3) for a client's insistence on a "repugnant" course of action could work.  Many people, including me, find DOMA repugnant, but nothing has changed to make defense of DOMA more repugnant now than a week ago, when K&S took the case.  A legal ethics scholar with whom I spoke insisted that the exception is available even if nothing has changed since the representation began, which strikes me as facially consistent with the text of the exception but nonetheless at odds with the overall structure of the Rule.  It's also worth noting that one of the key differences between Georgia and DC is that the DC Code does not contain a repugnance exception.  So, despite my lack of expertise in this area, I'm going to buck the experts and say that Exception (3) is best read as not applying in circumstances like these.

Exception (5) for an "unreasonable financial burden" may work.  In light of the campaign targeting the other clients of K&S, keeping the case could have cost K&S quite a bit.  But I suspect this exception is meant to cover actual direct costs of representation, rather than indirect costs due to public opprobrium.  Interpreting the exception otherwise would mean that a lawyer would be justified in withdrawing from representing an unpopular client any time that unpopularity led to financial harm to the lawyer.  That seems inconsistent with an important purpose of the Rules, which is to promote representation for everyone.  So I think the better (though not inevitable) reading of Exception (3) is that it shouldn't apply.

That leaves the catchall of "other good cause" for withdrawal.  For the reasons just stated, I don't think that "adverse publicity" should count as other good cause.  Nor should improper vetting, unless that vetting failed to uncover a conflict of interest or fraudulent misrepresentation by the client, which is not the case here.

Thus, there is a decent argument that K&S did violate Rule 1.16 here, although I acknowledge that this could just be my own lack of expertise talking.  There have been several posts on Legal Ethics Forum on the controversy, and none of them even mentions Rule 1.16, which could mean that my analysis is so wildly off base that it doesn't even register on the radar screen. Or it could mean that the experts are blinded by their assumptions and an outsider like me knows the truth.  (Anyway, I'm not entirely an outsider.  I am a member of the bar who practices law, and while a faculty member at Columbia, I did teach legal ethics in a mini-course most years.  Plus, the so-called experts in legal ethics in the legal academy are mostly just moral philosophers who happen to teach legal ethics.  I can read the rules as well as they can.  So can you.)

If there is a violation, that could call into play the other key difference between Georgia and DC.  In Georgia, the maximum penalty for a violation of Rule 1.16 is a public reprimand.  The DC version of the Rule does not contain that limitation.  Fortunately for Mr. Hays, he's a member of the Georgia bar, not the DC bar, but other members of the firm who may have been involved in the termination decision are members of the DC bar.

Tuesday, April 26, 2011

Of Debt Limits and Economic Explosions

-- Posted by Neil H. Buchanan

In yesterday's post, Professor Dorf worked through the various ways in which the inflammatory term "terrorism" could be applied to the Republicans' current threats to allow the U.S. government to reach its debt limit next month -- and, presumably, thus to allow the country to default on its obligations soon thereafter. He concluded that it could be accurate to call these threats terroristic if either: (1) all hardball tactics in negotiations are called terroristic, regardless of content, (2) the term terroristic carries with it condemnnation of the substantive goals that the Republicans are trying to achieve, or (3) the Republicans' position is too "demanding," by which he means that they are insisting upon cuts in spending that had "nothing to do with running up the deficit and debt" while preserving and worsening the policies that had everything to do with our having arrived at the current situation, or "they'll blow up the economy."

I had been planning to write about the debt limit in any event, of course. There is no economic policy question that is of greater moment than whether the United States will default on its debts. Indeed, even during the Congressional hearing about which I have written recently (here, here, and here), I was not surprised when the topic of the debt limit was raised (by Rep. Neal, D-MA), who asked me about the issue, even though the topic of the hearing was tax simplification. The debt limit question is so profoundly important that it is bound to seep into nearly every discussion in Washington (and elsewhere). Unfortunately, Mr. Neal posed his question as his time was expiring, so I was only allowed to give a one-sentence answer, which was: "Nothing is worth threatening the credit-worthiness of the United States."

Although I was disappointed not to have had the opportunity to expand on those thoughts at the time, I was comforted by the knowledge that I would be able to do so on Dorf on Law -- clearly a much more influential venue than a hearing of the Ways and Means Committee!

Professor Dorf's post yesterday included an analogy to labor contract negotiations, likening the take-it-or-leave-it positions that are natural to any contract negotiation to the Republicans' position on raising the debt limit. If this is an accurate analogy, however, then the only way to explain the Democrats' current position is to suggest that they simply do not know how to negotiate, because they are not willing to take their own hard-line position on the debt limit.

While there is plenty of evidence to suggest that the Democrats are terribly (or comically) ineffective negotiators, even I think that it is an overstatement to say that they do not understand how to negotiate. During negotiations in December over the fate of the Bush tax cuts, after all, some Democrats at least raised the possibility of allowing all of the tax cuts to expire, including the tax cuts that both sides supported, in an effort to force the Republicans to agree to the more limited extension of cuts for the non-rich. The Democrats blinked first, of course. That does not mean, however, that they are ignorant of hardball tactics.

Much of the work in Professor Dorf's final point, it turns out, is done by the phrase "blow up the economy." He discusses the contract negotiations in the National Football League, and their potential to lead to a stalemate that will hurt both sides. The limitation on that analogy is not, however, that the damage from a lockout/strike is limited to the parties at the table. The damage of a work stoppage would go well beyond the players and the owners. Just ask the non-player employees of the teams, as well as the broadcasters, memorabilia vendors, restaurant and hotel workers, and so on. Also, although they would not lose financially, the fans of the game would surely consider themselves victims of any stoppage as well.

Which brings us back to what it means to "blow up the economy." The issue is not collateral damage, but quite simply the stakes. The worst that could happen to the NFL, after all, is that they will alienate their fan base. While this could lead to a death spiral for the game, the leaders on both sides of the negotiations surely remember that Major League Baseball suffered briefly from its last serious labor dispute (in the early 1990's), but that the game ultimately came back even stronger than before the lost 1994 season. Moreover, even if the country permanently turned against football, the damage to the country as a whole would be rather limited. Restaurants and hotels would find other ways to make sales, unemployed beer vendors would ultimately find jobs elsewhere, people would learn to care about soccer, and so on.

Even with much more at stake than the NFL's negotiations, the negotiations over the extension of the Bush tax cuts were categorically less frightening than the looming standoff over the debt. The worst that could have happened (as I argued at the time) is that the tax cuts would have expired on December 31 at midnight, and the unemployment benefits would not have been extended on the schedule that President Obama demanded. Both of those outcomes are clearly unfortunate. Both, however, would also have been temporary. My position at the time was that Obama should have been willing to allow the cuts to expire for everyone, because that outcome -- while not anyone's first choice -- was neither catastrophic nor irreversible.

The costs of deadlock in December, on the tax side, would have involved some administrative and planning nightmares. Even so, everyone would have proceeded in the knowledge that the ultimate deal could be made retroactive to January 1. Yes, that would have probably required some extensions of filing deadlines, but there is no reason to think that that would have caused any irreversible harms. The uncertainty involved in tax planning would have been intensified, of course. How much worse, however, would that uncertainty have been, compared to the final year of the Bush tax cuts (all of 2010), when everyone realized that Congress had actually allowed the estate tax to expire for a year, even though everyone -- and I mean everyone -- had been assuming that Congress would have been forced to act before then? The marginal increase in uncertainty that would have been caused by the standoff over the Bush tax cuts lasting into 2011, in other words, seems relatively small.

Of course, there could have been genuine harm to genuinely innocent people from such a standoff. Obama's big selling point to his fellow (?) Democrats was that he had prevented millions of people who had lost their jobs through no fault of their own from losing their lifelines. This is no minor consideration, but it also is temporary. Everyone knew that even the Republican leadership would ultimately capitulate on some extension of unemployment benefits, simply because the economy remains so weak. While even a few months can be disastrous in the context of unemployment benefits, the degree of harm was still within the range of what is typically at stake in U.S. political negotiations.

All of which brings me back to my reply to Rep. Neal: "Nothing is worth threatening the credit-worthiness of the United States." While that statement has some limits (involving, for example, trading off slavery or genocide as a condition for paying the country's debts), within the range of possibilities that we now face, the consequences of a debt default are simply too awful to contemplate. We are, after all, talking about a financial crisis that would lead to a global economic crisis that would make the recent Great Recession look like child's play. The last time something like that happened, it took ten years and a world war to end the economic devastation. The resulting political instability, moreover, is what led to that war. As bad as I think the Tea Partiers are, they could easily be replaced by (or, in some cases, morph into) violent, anti-democratic mobs. Nothing is worth that risk.

There is, in addition, an irony here. The reason that Republicans say they are unwilling to allow the government's debt to continue to rise is that they fear a debt crisis. That is, if we wait too long to address our debt, the global bond market's vigilantes will punish us, just as surely as they have punished Greece, Ireland, Portugal, and Spain. The willingness to block an increase in the debt limit, therefore, amounts to the following statement: "Because political negotiations might ultimately fail, resulting in our debt becoming worthless, we must definitely make our debt worthless right now." That is the stark reality. If we allow the U.S. government to default on its debt, everything changes. There is no substitute for having a spotless record of paying one's debts. One default means that further defaults are possible, changing our economic situation forever.

The negotiations over the debt limit, therefore, are genuinely different from all other political issues that separate the parties. The Democrats take the position that we should be unwilling even to flirt with the idea that we will not pay our creditors. The Republicans openly threaten to allow the U.S. government to default. Even as a negotiating position (and even if it were not tied to bizarre ideological minutiae like NPR's funding), this is irresponsibility at its most extreme.

Monday, April 25, 2011

Are Republicans More Like Terrorists or Temper-Prone Children?

By Mike Dorf

There is a longstanding debate over whether it makes sense to call someone a "terrorist" simply in virtue of the means he uses to achieve his political ends.  On one view, whether someone is a terrorist depends on whether he deliberately attacks civilians for political ends, while on another view, everything depends on the justice of the underlying cause, its history, and so forth.  In this second view, means that, if used for an unjust end, would be properly deemed terrorism, are something else (like "armed resistance") if used for a just end.  I tend to favor the former view, which might allow that terrorism could perhaps be justified in extreme cases for righteous causes but it would still be terrorism.  However, I don't have a substantial intellectual or moral investment in that position and will not attempt to defend it here.  Instead, I want to draw a parallel to an increasingly common usage that has been emerging: The tendency to treat the impending tea party/Republican bargaining position on the debt ceiling question as a kind of "legislative terrorism," as characterized by George Packer in last week's New Yorker.

The basics of the metaphor should be clear enough.  Most sensible people agree that a U.S. default on its debt would be very bad for the U.S. and the world economy in both the short term and the long term.  I'll stipulate that there are probably some tea partiers and other Republicans in Congress who sincerely think that defaulting on the debt would not be as bad as continuing to add to the debt at current rates, but I'll also beg the reader's indulgence in assuming that at least some Republicans--especially among the party leadership--believe that it would be better to raise the debt ceiling either cleanly or by agreeing to whatever compromise ordinary politics produces on spending, than it would be to default on the debt because they don't get as much in spending cuts as they want.  If so, these Republicans are engaging in Packer's "legislative terrorism."  Indeed, we might even call it "legislative suicide bombing": They are willing to blow up the economy--and themselves--to get what they want.

But is that really any different from many tough-minded negotiations over legislation or other matters?  Consider the NFL contract negotiations.  Professional football generates more revenue than goes into it, so the parties have an incentive to reach a deal: The cancellation of the season would mean that money that could have been divided up between the players and the owners will not be generated.   (NFL owners could be much better off in the short run if there is no season, should they get to keep the tv revenue to which their contracts entitle them but don't have to pay the costs of fielding teams.  I'm doubtful that this will hold up, but in any event, if this example isn't quite accurate for my purposes, assume a labor negotiation that is.)  In any labor or other dispute, each side wants to get as much of the surplus as it can, and the more willing one side is to appear to be crazy--i.e., willing to accept a cancelled season or otherwise take a loss--the more leverage that side has.  If we don't think of the NFL owners as engaging in "terrorism" when they lock the players out, or, in other circumstances, if we don't think of workers as engaging in "terrorism" when they strike, then why should the Republicans in Congress be branded as terrorists?

The answer is that they shouldn't be--at least if we assume that terrorism in bargaining should be defined as any willingness to use hardball tactics.  But what if we use an analogy to the second way of defining terrorism, by reference to not just means but also ends?  Implicit in Packer's article and other uses of the terrorism trope is that the Republicans' substantive bargaining position is unreasonable.

In no particular order, the main drivers of the deficit and debt are: 1) the Bush tax cuts, grudgingly extended in the lame duck session by Obama due to Republican insistence in the Senate;  2) increased military spending to fund wars that have been supported by Republicans and Democrats, but the former more enthusiastically; 3) health-care cost inflation; and 4) the recession.  The Republican position puts 1 and 2 off the table.  The Ryan plan would ostensibly address 3 by converting Medicare into a block grant program, which could reduce the overall rate of growth in federal spending but mostly by limiting care rather than bringing down costs, and for that reason, enjoys only tepid support from other Republicans.  As for the recession, conservative anti-Keynesian dogma says that the best way to fight it is to promote economic growth by shrinking government regulation and transfer programs.

Suppose one thinks that whether the term "legislative terrorism" is apt depends on the substantive goals to which threats of non-cooperation are turned.  If one also thinks, as I do, that the Republican policies are bad on all fronts, then that could be a basis for the judgment that they are "legislative terrorists," in the way that one's view that al Qaeda and Sendero Luminoso are terrorist organizations might depend not just on the fact that they use violence against civilians to achieve political ends but also on the respective conclusions that the establishment of a modern Caliphate and the replacement of the Peruvian government with a Maoist dictatorship are illegitimate ends (or at least ends that don't justify blowing up civilians).

However, the difficulty with making the aptness of the term "legislative terrorist" turn on the substance of the policy goals is that--as with real terrorism--the term then loses its distinctive meaning.  It begins to look like just another way of saying that whoever is condemning the Republicans' tactics has policy disagreements with them.  If the positions were reversed and the Democrats had spines, would someone who agreed with the Democratic policy choices want to say that Democrats who used a debt-ceiling vote as leverage to repeal the upper end of the Bush tax cuts was engaging in legislative terrorism?

Nonetheless, the "legislative terrorist" label may be appropriate after all because there may be a third way of understanding the circumstances that makes some reference to the content of policy disagreements but does not directly depend on one's policy views as such.  The Republican bargaining position isn't unreasonable just because the Republicans' underlying policy commitments are wrong; indeed, for the Republicans who hold those commitments, they're right.  What makes the Republican position unreasonable even if one starts from a point of policy neutrality is that it is so demanding.  They want to drastically cut spending that had virtually nothing to do with running up the deficit and debt, while preserving and extending tax breaks for the wealthy, preserving military spending at levels that dwarf those of all other countries, and effectively end an entitlement program that has been a cornerstone of the social contract for half a century--and if they don't get their way on each of these measures (and some restrictions on Planned Parenthood and NPR to boot), they'll blow up the economy.

Still, the terrorism analogy is at least inflammatory. A better analogy might be that of a young child who pitches a fit if he doesn't get his way.  Such children can be extremely effective negotiators precisely because they are willing to act against their own interests.  Calling their bluff is risky because they're not bluffing.  And so, to return to the debt ceiling question, the key question for the next round of negotiations is whether Speaker Boehner is simply using the threat of Tea Party terrorism/tantrums to get as good a deal as he can--in which case a deal can and likely will be struck--or whether the our-way-or-the-highway wing of the Republican Party is actually in control.

Postscript: The foregoing assumes that failure to raise the debt ceiling would eventually lead to a default.  However, as noted in this CNBC story, Secretary Geithner could certainly avert that result temporarily and perhaps even indefinitely.

Friday, April 22, 2011

Progressivity, Political Strategy, and Consumption Taxes

-- Posted by Neil H. Buchanan

In response to my post last Friday, a loyal Dorf on Law reader/commenter raised some interesting points about consumption taxes. He suggested that, even though consumption taxes are not (contrary to much political hype in the U.S.) inherently less complicated than income taxes, there could nonetheless be good reasons (even for those who believe in progressive redistribution) to support a move to a consumption tax. He posed two questions to explore this possibility, one of which I will address here. (I hope to address the second question in a later post.)

Can a consumption tax system can be designed to be more progressive than an income tax system? Answering this question requires some important background work.

Because non-rich people tend to save very little of their incomes, all (or nearly all) of their incomes would be subject to taxation under a consumption tax, whereas the high-saving rich folks would see large amounts of their incomes exempted from taxes in a consumption tax regime. If the new system will be used to raise revenues at approximately the same levels as the old system, this would represent a regressive change in the tax system, with tax liability shifting downward from higher- to lower-income people.

For tax types, this is old news. Most real-world consumption tax systems (such as state sales taxes) include exemptions for "necessities," such as food and medical care, which requires higher rates to raise the same amount of revenue. Similarly, most academic proposals to adopt a consumption tax in the U.S. include some kind of "demo-grant," which is a cash benefit from the government that is sent to all (or, under means-testing, some) taxpayers. If, for example, everyone received a $10,000 annual grant from the government, this could effectively offset the regressivity of the consumption tax (and then some, depending on the size of the grant). The tax rate would, again, have to be set at a higher level to pay for the grants. The idea, however, is that you would then have a tax system that is not an income tax, but that shifts the tax burden (net of tax benefits) onto higher income earners.

This is, admittedly, an appealing idea. Indeed, the liberal democracies of Northern and Western Europe are able to combine consumption taxes with benefit programs that significantly narrow the gap between rich and poor in those countries. It is, therefore, realistically possible to have a fiscal system that is progressive overall, even if it includes a consumption tax.

Even so, I think that the realities of U.S. fiscal politics make it a bad idea to agree to a grand bargain by which we adopt a consumption tax coupled with progressive redistribution. My concern is that, even if we were able to negotiate an agreement that would be more progressive than the current (at best weakly progressive overall) system -- a highly unlikely possibility, I should say -- we would be much more likely to see movement in regressive directions almost immediately, for reasons that are unique to the design of a consumption tax.

The U.S. political debate is, after all, deeply preoccupied with "giveaways," the idea that the government should not give people something for nothing. Progressive consumption tax regimes tend to rely on mechanisms that can all too easily be mischaracterized as giveaways. The most obvious target, of course, would be the demo-grant. Even though the grants could be designed specifically to offset the consumption tax liabilities of poorer citizens, it still amounts to the government cutting checks to poorer people.

The current debate over the refundability of the Earned Income Tax Credit suggests just how easy it is to deride as giveaways programs that are designed to offset tax liabilities. An effective demo-grant system would have to be much broader, involving much larger checks, to offset the effects of switching to a consumption tax regime.

Admittedly, it would be more difficult to attack progressive exemptions and progressive caps as giveaways to the poor -- or, at least, not inherently easier than attacking similar provisions in an income tax system. The problem is that those provisions are more necessary in a consumption tax system to guarantee overall progressivity than they are in an income tax system.

It seems a safe prediction, therefore, that the first thing we would witness after adopting a progressive consumption tax system would be a concerted attack on the parts of it that are most essential to making it progressive. In addition, the politics of setting tax rates under a consumption tax regime would tilt the playing field against progressivity. Under an income tax system, there are simple ways to raise money from only the wealthiest taxpayers, most obviously by raising high-income rates. Under a consumption tax system with a single rate (the preferred system for most consumption tax advocates), you can only enact a progressive change if you raise rates while increasing the demo-grant (or while widening the other exemptions to benefit the non-rich).

We could, on the other hand, adopt a consumption tax system with a graduated set of rates (which is only administrable, by the way, if we continue to have people submit annual tax returns, rather than setting the system up as a sales-tax equivalent). Doing so, however, does not get us where we need to be. Because higher-income people's incomes would be largely exempt from a consumption tax, it requires (compared to an income tax system) larger increases in rates to collect the same amount of additional revenue from richer taxpayers. The usual arguments against high rates would thus be intensified under a consumption tax.

Progressivity in both spending and taxation are under fierce attack. Nothing that I have written here should be interpreted to suggest that I think that our income tax is sufficiently progressive, nor that I think that it is easy to achieve progressivity under an income tax regime. On balance, however, I think that the income tax system provides -- even under our current political constraints -- a better framework for defending, and perhaps increasing, progressivity in the U.S. fiscal system. Any system could be designed to be more progressive. The income tax requires less work to make it so.

Thursday, April 21, 2011

Set Phase-Outs to Stun

-- Posted by Neil H. Buchanan

Continuing my discussion of the Ways and Means Committee's hearing last Wednesday on tax simplification, previously blogged here and here, I now take up the question of "tax phase-outs." After describing the purpose and mechanics of phase-outs, I will discuss critically the Republican majority's desire to eliminate phase-outs from the tax code.

A phase-out is a mechanism by which a tax provision's effect is reduced, and ultimately eliminated, in a gradual manner, rather than by setting a strict cut-off rule. In our federal income tax system, provisions are usually phased out over a range of income. For example, you could have a tax benefit that is fully available for anyone with income up to $25,000, not available at all to anyone with income above $50,000, and available in decreasing degree as income rises from $25,000 to $50,000. Usually, this is done as a simple linear progression, so that taxpayers with $40,000 in income would be eligible for 2/5 of the benefit in question, because their incomes are 3/5 of the way through the phase-out range. A $1000 tax credit, for example, thus would be reduced to $400.

As I pointed out in my testimony, the mechanics of a phase-out are no different from the mechanics of tax computations themselves. Although you will hear politicians talk a lot about how a single rate of tax would simplify matters ("Just multiply your taxable income by 17%!"), the same fear of math that causes people not to be able to calculate sales taxes or tips is at play in the federal income tax as well. A study a few years ago showed that people would want to be given tax tables, even if there were only one tax rate. Find your income on the table, and write down the number associated with it for tax liability. That is a simple process that works for any system of tax rates.

The same mechanism works for phase-outs. If you are willing and able to do simple arithmetic, the process is easy. If you are not, the IRS can do it for you. Again, the broader point is that the arithmetic is NOT what makes the tax code complicated. Determining whether a taxpayer is eligible for certain provisions at all (for example, various child credits) is what makes life complicated and worrying for taxpayers.

I confess to being surprised by the Republicans' interest in eliminating phase-outs, because it simply never occurred to me that this was a big issue for anyone. The conservative economist who testified at the hearing, however, focused in his prepared testimony on the supposed problems caused by the existence of a collection of different phase-out rules for different provisions in the tax code. I conceded that he had a very minor point, which is that an accumulation of different phase-out rules for different tax provisions can become somewhat time-consuming. Even that was not enough for one member of the committee, who wasted much of his time trying to get me to explain why phase-outs were not inherently complicated. When I finally said, "Twenty different phase-outs are complicated, while one phase-out is not," he backed down (not at all happily, by all appearances).

Even under the current set of rules, a person can look at phase-outs to determine whether it is even worth it to engage with the specifics of a tax provision. After I graduated from law school (as a middle-aged person), for example, I noted that there is a tax credit for higher education expenses. I then saw that the provision phased-out entirely at an income level much lower than mine, making it unnecessary to proceed further. Drawing on that experience, I offered to the Ways and Means Committee a simple solution to dealing with multiple phase-out rules: replace all existing (and future) phase-outs with a single phase-out. (I have not seen this proposal elsewhere, but I would not be surprised to learn that I had reinvented the wheel). This would allow higher-income people to know that all phased-out provisions are simply unavailable to them, and it would tell moderate-income people the fraction of any benefits for which they are eligible. Lower-income people would know that their incomes are low enough to qualify for full benefits.

The other witnesses at the hearing were unable to make a case for repeal of phase-outs. The CPA pointed out that the complications of tax provisions affect planning as well as filling out tax forms. This is true, but it has nothing to do with the issues here. If I know that, say, I am eligible for 32% of any tax benefit for which I am otherwise eligible, then I can plan appropriately. Will I do what is necessary to qualify for a $1000 credit, if I know that it will be worth $320 to me? I can make that decision, based on information that is knowable in advance -- or, to be more precise, information that is just as knowable as all other information for planning purposes.

The argument that phase-outs complicate tax planning, therefore, is simply false. The conservative economist on the panel, however, offered a different argument. He suggested that Congress needed a good reason to exclude certain people from being eligible for the "incentives" that tax provisions provide. If, for example, we want to give people a tax benefit for child care, then we apparently need to explain why that credit is not available to people earning relatively high incomes.

Although this argument is clearly better than the argument that phase-outs complicate tax planning (in that it is not simply a false assertion), it is quite easy to answer, both in terms of efficiency and equity. In terms of efficiency, we have good reason to be confident that some decisions are "marginal" for lower-income taxpayers, but "infra-marginal" for higher-income taxpayers. Higher-income people are likely to spend for higher education, for example, whether there is a tax benefit or not. Spending for child care, similarly, is highly unlikely to depend on tax benefits for higher-income people, but is very likely to be responsive to tax benefits for lower- and moderate-income taxpayers.

As a matter of equity, the case is even easier to make. The society at large has to make decisions about whether to subsidize certain activities; and it makes precious little sense to give wealthier people money to do things that they can afford to do on their own. Even to ask the question: "Why shouldn't this tax subsidy be extended to the wealthiest taxpayers?" is to expose the question as disingenuous.

The effect of eliminating phase-outs, after all, would be to make tax benefits more expensive. Without phase-outs, we would be left with three choices: (1) Pay the higher cost of making a benefit available to upper-income taxpayers, (2) Cut the benefit off without a phase-out, or (3) Eliminate the tax benefit. Choosing (1) would ultimately result in the need to impose higher taxes to pay for the benefits -- higher taxes that, the committee's Republicans would be quick to say, must not be imposed on the beleaguered upper class. This would ultimately mean that extending the tax benefit to the wealthy would be paid for by increasing taxes on the non-wealthy. Choosing (2) would create serious efficiency and equity problems, as the "cliff effect" problem would kick in. That is, taxpayers could lose an entire benefit by earning $1 more in income, if they are at the cutoff point.

That leaves (3), eliminating tax benefits for non-wealthy people. This is being sold as a way to simplify the tax code, but its effect (and, I suspect, the goal of the people pushing this idea) is to eliminate a way to make the tax code responsive to relative economic need. Indeed, the conservative economist went out of his way in his testimony to point out that phase-outs are an indirect way of raising effective marginal tax rates on the wealthy. Worse still, he said, this is not transparent, which is worse than simply raising statutory rates on higher incomes.

It is difficult to take such claims seriously. Saying that Congress could raise rates on upper-income people openly, if it wanted, is simply a way of saying: "We've won the framing war, making tax increases politically unacceptable. You now have to agree to have all progressive tax provisions framed as we want them to be framed, so that they will look to everybody like tax increases."

The sudden focus on phase-outs, therefore, is nothing more than an opportunistic effort to piggyback yet another regressive tax change onto the admirable goal of tax simplification. My proposal demonstrates that it is possible to maintain the progressivity of phase-outs without creating complexity in tax planning or filing. Anything beyond that is nothing more than a cynical attempt to reduce taxes on the wealthy.

Wednesday, April 20, 2011

Supreme Court to State: Go Sue Yourself

By Mike Dorf

Yesterday the Supreme Court decided a case that, on the surface, appears to be extraordinarily technical--so much so that it will be a challenge even to explain what it was about.  But I beg the reader's indulgence because it implicates issues that should be of general interest.

Let's begin with some background: The plain language of the original Constitution permits citizens of one state to sue other states.  In 1793, the Supreme Court in Chisholm v. Georgia ruled that that language means what it says.  Very shortly thereafter, the People adopted the Eleventh Amendment, which forbids federal courts from hearing such cases.  In an 1890 case called Hans v. Louisiana, the Court held that the Eleventh Amendment implies more than its literal text, and (5-4) decisions of the Rehnqhuist Court extended Hans so that the Court now enforces a general principle of state sovereign immunity, making states immune to private lawsuits for money damages.  There are a number of important exceptions to state sovereign immunity, however, including the ability of a private party to sue a state official for an injunction rather than for damages paid from the state treasury.  That was allowed in the 1908 case of Ex Parte Young, and (subject to its own exceptions), the Ex Parte Young exception has co-existed with state sovereign immunity ever since.

Yesterday's decision in Virginia Office for Protection and Advocacy (VOPA) v. Stewart raised a novel issue. An "independent" state agency sued a state official seeking an order that the state official comply with federal law.  Everyone agrees that if the plaintiff were a private party, the lawsuit would be allowed under the Ex Parte Young exception. However, the defendant state official argued--and the U.S. Court of Appeals for the 4th Circuit agreed--that because this was an "intramural" dispute between two different parts of the state, federal court adjudication would constitute the sort of insult to the state's "dignity" that the Court's sovereign immunity doctrine protects against.

Justice Scalia's majority opinion treats the defendant's argument (rightly, in my view) as a kind of non sequitur.  First, he expresses puzzlement over why the state suffers any greater insult when another part of the state sues than when a private party sues for injunctive relief against a state officer.  Second, he contends that state sovereign immunity does not, in any event, protect against all blows to a state's dignity.  He might have added a third point: that a state, as an artificial entity, doesn't have "dignity" in any direct sense, but such a claim would be inconsistent with the whole line of sovereign immunity cases, which Justice Scalia--along with Justices Kennedy and Thomas, who also joined the majority--has previously joined.  (CJ Roberts and Justice Alito dissented in VOPA; Justice Kagan was recused.)

Although the defendant's argument was a non sequitur, there are other reasons--having nothing to do with state sovereign immunity and thus not properly presented in yesterday's decision--why courts might want to hesitate before adjudicating "intra-governmental" disputes.  One worry is that the case may not involve a real contest and thus fails to satisfy the case-or-controversy requirement of the Constitution's Article III.  It is hard to know in the abstract when to take this concern seriously.  Suppose that the state Department of Parks sues the state Department of Transportation, seeking an order for the latter to clean up the damage that its snow plows did to some park lands.   If Parks wins, Transportation has to give Parks some money and so has less money to spend on everything else--unless the state shifts or raises more money for Transporation.  One would have to know more about the state budgeting process to know whether this sort of lawsuit only results in the shuffling of numbers on paper or results in a real reallocation of resources.

A second concern that intra-governmental lawsuits raise is separation of powers.  If you believe in the "unitary executive," then you will think that intra-executive disputes should be resolved by the chief executive making a decision, rather than going outside the executive branch to the courts.  That concern is not raised by either the majority or the dissent in VOPA, despite the fact that there are Justices in both the majority and the dissent who have previously expressed sympathy for the unitary executive theory.  Of course, that is a theory about the federal executive, whereas VOPA involved an intramural dispute within a state, so the unitary executive theory wasn't directly implicated.  Still, the federalism issues in VOPA are sufficiently analogous to the federalism issues in a case that involves federal agencies that it would not have been surprising to see them discussed.

Bottom Line: An interesting little case that hints at bigger issues than it decides.

Tuesday, April 19, 2011

A Fallback Provision for Spending Limits for Judicial Elections

By Mike Dorf

Erwin Chemerinsky and James Sample have an interesting Op-Ed in yesterday's NY Times.  They argue: 1) that the noble battle for appointed rather than elected state judges is a lost cause, because the public consistently rejects the idea--e.g., by a tidy margin in Arizona, even with retired Justice Sandra Day O'Connor vigorously campaigning for the change; 2) therefore, reformers should shift their efforts from seeking to replace elections with appointments and instead concentrate on mechanisms for reducing the baleful influence of cash on judicial elections; 3) to that end, state legislatures should enact campaign spending limits that even apply to so-called "independent expenditures," i.e., spending for ads and other efforts by private parties unaffiliated with the judges or their campaigns--including private parties who have or will have cases before the judges whose elections they bankroll; and 4) the Supreme Court should uphold such limits even though current doctrine makes similar limits unconstitutional in non-judicial elections.  Here I want to offer a friendly amendment to the Chemerinsky/Sample proposal.

First, some doctrinal background:  Ever since the 1976 Supreme Court ruling in Buckley v. Valeo, limits on campaign expenditures--the lion's share being money spent for political advertising--have been subject to closer judicial scrutiny than limits on campaign contributions.  The line has been questioned from both the right (which seeks to invalidate not just expenditure limits but nearly all contribution limits as well) and the left (which wants to permit greater restrictions on expenditures), but absent the formation of a 5-Justice consensus on what would replace Buckley, it survives.  Chemerinsky and Sample do not propose to do away with the expenditure/contribution line.  Rather, they argue that the very strong interest in ensuring unbiased justice justifies expenditure limits in judicial elections, even under the very-difficult-to-satisfy test the Court has articulated.

The key move for Chemerinsky and Sample is to generalize from the Supreme Court's 2009 decision in Caperton v. Massey from recusal to direct limits.  In Caperton, the Court found that $3 million in independent expenditures to elect a judge required, as a matter of due process, that that judge be recused from a case involving the financial interests of the person who made those expenditures.  In an academic article on which the Times Op-Ed is partly based, Sample argues in greater detail why Caperton should be understood to entail that states have a compelling interest in corruption of the judicial process that makes expenditure limits permissible in judicial elections even when they wouldn't be permissible in other elections.

What to make of this?  I think it is an open question whether Caperton's logic applies to actually limiting independent expenditures relating to judicial elections--as opposed to simply requiring recusals of judges in particular cases where some expenditure limit has been exceeded.  If I were a lower court judge, I would probably agree with Chemerinsky and Sample.  But I am not especially confident that five Justices of the Supreme Court would see it the same way.

That leads me to my friendly amendment.  I would urge any state legislature that is considering enacting the Chemerinsky/Sample proposal to include in it a "fallback provision" of the following form: In the event that a court holds the contribution and/or expenditure limits of this Act unconstitutional, any judge whose judicial election campaign was aided by any person or entity that made contributions or independent expenditures in excess of the foregoing limits shall be recused from sitting on any case involving the interests of that person or entity for a period of X years.

The fallback would be similar to a proposed New York law about which I previously blogged, but my fallback would be broader, applying to independent expenditures as well as to campaign contributions. Although it would probably be cleaner for a state legislature simply to set expenditure limits directly, as proposed by Chemerinsky and Sample, my proposed fallback has the advantage that it could potentially be sustained by the Supremes even if they are unwilling to apply Caperton to direct limits on expenditures.  And by structuring the provision as a fallback, rather than enacting only the Chemerinsky/Sample proposal and hoping for the best, a legislature could plan for the contingency of invalidation without having to work up the political momentum for a separate law (such as the fallback) after the invalidation of the initial law.

Monday, April 18, 2011

The Clash Between Women’s Right to Choose and Gender Selection

By Ori Herstein

According to The Economist (here), in India approximately 600,000 Indian girls are never born every year due to abortions performed for reason of gender selection. According to The Economist, upon performing an ultrasound test, many parents preferring to have a male child choose to abort female pregnancies. Reflecting on this phenomenon potentially brings one’s feminist values into conflict.

This apparently growing trend in India is problematic for several reasons. In addition to the fact that a gender imbalance in society will potentially have severe social implications for both younger and future generations, gender selection as a reason for abortion offends women as women. There is something wrong in these abortions that derives from the reason for undergoing them. And, there is a strong sense that – for feminist reasons – such abortions should be discouraged and even prohibited. In fact, India has done just that.

Prohibiting abortion when undergone for certain reasons clashes with the ideal of a “woman’s right to choose.” First, the right to choose by its very nature precludes limiting the choice to only certain and not to other reasons. The right to choose is in a sense also a right to do wrong: many accept that some abortions are wrong and still maintain that the State may not prohibit a woman’s right to make that choice. What is interesting in the Indian case is that a woman’s right to choose – often thought of as a feminist right – functions as a woman’s right to wrong women as women. This seems to put one’s feminist reasoning in a bind.

It is not impossible that in some places decisions about abortion are not really made by the pregnant women but by their families and husbands, and therefore perhaps full or better realization of a woman’s right to choose would yield less misogynistic results. But this is a factual speculation that, even if true, does not solve the theoretical puzzle.

Here is a possible solution: While gender selection is a feminist issue “all the way down” this is not the case for the right to choose. It seems to me that the right to choose is an autonomy and liberty right that happens to attach to women because of their sex, but could in principle attach to others. The fact that the right to choose is mostly a woman’s right to choose is, therefore, a matter of contingency and not category. In contrast, gender selection is categorically about gender. Thus, a feminist mostly devoted to the value of autonomy may favor – for feminist reasons – limiting the autonomy and liberty reflected in the right to abortion without internal contradiction.

Friday, April 15, 2011

Big Tax News (Relatively Speaking) From the Hearings

-- Posted by Neil H. Buchanan

The headline political event this past Wednesday was President Obama's speech at George Washington University, in which he outlined his new long-term budget proposal. I anticipate having much to say about the Obama plan in future posts (quick read: a pleasant surprise, in many ways). While the rest of the political world was waiting for the President to speak, however, the House Ways and Means Committee held a hearing on tax simplification for families and individuals. As I noted in yesterday's post, I testified at that hearing. Here, I want to discuss three rather big "wins" for the Democrats that came out of that hearing.

The hearing featured three witnesses invited by the Republican majority, and one witness (me) invited by the Democratic minority. Because the committee itself has more Republicans than Democrats, and because the Republicans focused their questions on their own witnesses (while the Democrats split their time more evenly among the witnesses), the Republicans should have held a distinct advantage in generating statements that support their policy preferences. Surprisingly, they not only failed to induce testimony that would support their policies, but they actually made matters worse for themselves.

It is not as if they did not try. The other witnesses included an economist who works at a very conservative DC think-tank, a representative of the American Institute of CPAs, and a Ceritified Financial Planner. The latter two testified that they have heard clients say that they will not work harder (or at all?) because of high taxes. One Republican Congressman asserted that this was the headline coming out of the hearing. It is difficult to agree with that assessment, given that any client is going to tell his tax planner that he hates paying taxes. (There are obviously other reasons to be skeptical of those claims.) In any event, the weakness of that claimed headline moment speaks to how little there was for Republicans to be happy about on Wednesday morning.

What were the moments that might have made waves on a day when the President was not delivering a major address?

"Rich" Means Making $250,000/year or Above

At one of the few points when a Republican member of the committee directed questions to me, he asked (in sarcastic terms) what it meant to be "rich." This tracks a common talking point among Republicans that liberals' desire to tax higher-income people is based on an arbitrary definition of "rich." I began my answer by saying that the concept was clearly a relative one, and I began to try to explain what might distinguish a rich person for tax purposes. (I was planning to talk about being past the point where saving is a real sacrifice, etc.)

The question, however, had been asked as the Member's allotted time was running out. The committee chair, Rep. Camp, called time and told me to "just give us a number," or words to that effect. I considered refusing, but then I decided that it was sensible to confront the question directly. I said (again, perhaps not verbatim, given that this is from memory), "I'm comfortable with the $250,000/year standard." The chair, looking unhappy with my answer, then decided to have all three of his witnesses answer the question. The financial planner agreed with the $250k figure. The CPA did as well. Finally, even the conservative economist (after stating that there are no absolutes) agreed that $250k was a reasonable definition.

I was astonished. I did not expect the hand-picked witnesses for the Republicans -- especially one who is a classic Washington insider -- to go so completely off script. The chairman's attempt to paint me into a corner had turned into a unanimous endorsement on the panel that President Obama's definition of "rich" is reasonable. Now it is in official testimony before Congress.

Tax Cuts Do Not Pay for Themselves

Several Democratic members of the committee wanted to explore the assumptions and claims in the budget plan issued by House Republicans last week. One of those assumptions is the old Laffer Curve. As Paul Krugman recently put it: "Republicans have once again gone all in for voodoo economics — the claim, refuted by experience, that tax cuts pay for themselves." Rep. Rangel asked the panel if any of us believed that tax cuts pay for themselves. The two non-economists raised their hands. Upon further questioning, both changed their answers. Rangel thus managed to get the entire panel to agree that cutting tax rates will result in lower revenues, not stable or higher revenues.

At least one Republican on the committee tried to undermine this consensus in follow-up questioning, with no success. The conservative economist offered the observation that the revenue loss from a tax rate cut would not be as large as one might expect, given the increase in economic activity that generally follows a tax cut. He stated clearly, however, that such an effect was not enough to offset the overall revenue loss. If asked, I would have readily agreed with that qualifying claim, i.e., that tax rate cuts can induce more economic activity and thus offset a fraction of the revenue loss. This need not be because "taxes distort economic activity" (the standard anti-tax economist's go-to sound bite), but for simple Keynesian reasons: taxes can reduce spending, which reduces GDP, which reduces tax revenues. There is nothing surprising in this, and it only makes it clearer why tax increases should be targeted on the rich, who are the least likely to reduce their spending in response to tax increases.

One humorous moment came when Rangel was trying to formulate a follow-up question. Rep. Levin, the ranking member, was sitting next to Rangel and whispered something while gesturing toward me. Rangel responded in a non-whisper: "I'm not asking him. He's with us." In one way, Rangel was wise to focus his questions on the others, because of the concessions that he ultimately extracted from them. On the other hand, it is a bit of a shame that he did not ask me, because I would have pointed out that Greg Mankiw, a former advisor to George W. Bush and a prominent Republican economist, had once (in his best-selling textbook) described people who believe that tax cuts pay for themselves as "charlatans and cranks." [Update: I now see that DailyKos had a piece quoting the "charlatans and cranks" line last Friday. And here I thought I was the only one who remembered that gem ...]

Notwithstanding that lost moment, the Republicans on the committee were unable to resurrect the Laffer Curve. Again, four out of four witnesses (three called by Republicans) had agreed that a key Republican talking point is wrong.

Consumption Taxes Are Not Simpler Than Income Taxes

The third major point arising from the hearing is, admittedly, less of a big deal than the other two. Because good things come in threes, however, and because so much of the Republican agenda involves moving away from taxing income toward taxing only consumption, a final moment is worthy of mention.

The conservative economist on the panel (who was, as I have noted, otherwise strikingly candid in many of his remarks) had not missed any opportunity to push the pro-consumption tax line. Because no one was posing questions to me on those topics, I did not have an opportunity to respond. It was difficult to hold my tongue. For example, at one point, a member of the committee opined that the tax code "punishes" all of the good things that we want to encourage, like saving and investment. This is an old, discredited line, but it is repeated constantly. I wanted to respond that, even if we accept the idea that taxes are punishment, a consumption tax punishes consumption, which the small businesses so idealized by the committee rely on to stay in business. There is an argument (with which I disagree) that consumption specifically needs to be discouraged, but that level of subtlety was not the order of the day. Everyone on one side of the committee believed that taxes are bad -- except for the taxes that the non-rich pay.

Even though I was not able to respond to the consumption tax argument, I was delighted by what happened next. The witness from the national CPA organization volunteered, essentially unprompted, that switching to a consumption tax from an income tax would do nothing to guarantee simplicity in the tax code. As she pointed out, all of the policy agendas that have led to the proliferation of complicated tax provisions in the income tax can (and surely will) be replicated in any consumption tax regime. Pointing out that the hearing was nominally about tax simplification, she suggested that the tax code was not likely to be any cleaner under a consumption tax regime. (She could have added that the complexity would be redistributed from individuals to those very same small businesses, who would have to comply with complicated exemptions, and who would be the target of all IRS scrutiny, since all of the tax collections would be at the level of retailers -- and there would be no individual taxpayers to audit.)

The CPA then suggested that the best approach might be to have both a consumption tax regime and an income tax regime. This was too much for one of the Republican members, who simply announced that such a mixed regime would be the worst of all possible worlds. (The Republicans are a bit at odds over consumption taxes, of course. Some like the idea of replacing the income tax with a national sales tax. On the other hand, the value-added tax (VAT), which is the most administrable form of a consumption tax, is derided as a "French tax system" that could collect too much money.)

In short, a hastily-convened hearing on a mom-and-apple-pie topic (simplifying taxes) effectively blew up in the collective face of the leaders of the Ways and Means Committee. They sat helplessly while their own witnesses agreed that people who earn more than $250,000/year are rich, that tax rate cuts actually do reduce tax revenue, and that consumption taxes can be as complicated as our current tax system. All in all, the Republican leadership must be happy that the spotlight this week was on Obama's speech.

Thursday, April 14, 2011

Congressional Testimony Regarding Tax Simplification

-- Posted by Neil H. Buchanan

Yesterday morning, I testified before the House Ways and Means Committee at a hearing on "How the Tax Code’s Burdens on Individuals and Families Demonstrate the Need for Comprehensive Tax Reform." I have copied below my prepared testimony. Tomorrow (and perhaps in follow-up posts next week), I will post some thoughts on the hearing.

Chairman Camp and Ranking Member Levin, and Members of the Committee:

Thank you for giving me the opportunity to address the Committee today. At the outset, at the risk of stating the obvious, I want to acknowledge that there are many areas of the Internal Revenue Code that could benefit from rationalization and simplification. In areas in which multiple provisions have accumulated over time, such as retirement savings and education incentives, the same incentives and benefits surely could be provided in a simpler fashion. That being said, I hope through my testimony to warn the Committee of some red herrings – issues that need not be addressed as you work to simplify the lives of Americans who honestly try to comply with the tax laws. Clearing away some tempting distractions will, I hope, provide more clarity – and time – for the Committee to focus on genuine tax simplification.

False Simplification

Assuming that the goal of simplifying the tax code is truly to simplify the lives of citizens, and that the exercise is not merely a cover for the elimination of the housing, education, retirement savings and other incentives that past Congresses have enacted to benefit the American people, the Committee should be wary of reducing “tax complexity” without reducing what we might call “overall complexity.” A simple way to reduce the complexity of the tax code, after all, would simply be to stop running certain benefits through the tax code and, instead, run them through some other agency of the government. The mortgage interest deduction, for example, could be turned into a benefit program run by HUD. The earned-income tax credit, which is a benefit to workers, could be run by the Department of Labor. The medical expense deduction could go through HHS.

Doing any of those things, however, would do nothing to make the lives of American taxpayers less complicated. If anything, compliance burdens would become even more onerous, as our citizens would now have to deal not just with the IRS but with newly-created administrative arms of other cabinet departments, or “mini-IRS’s” – which would also add to federal spending, by the way.

The IRS has the advantage of being a single agency with which citizens interact, and it is the logical agency to provide incentives and benefits the eligibility for which are conditioned on income levels. In addition, decades of experience have shown that the IRS and its employees possess the expertise, dedication, and experience – notwithstanding years and years of chronic under-funding – to handle the administration of important benefits that we administer through the tax code.

Multiple Rate Brackets

Reducing the number of tax brackets is not an important aspect of simplifying taxes, and it has the undesirable effect of making the tax code less progressive. Some analysts have asserted that the existence of multiple brackets is confusing, making it more difficult for taxpayers to figure out how much they owe in taxes each year. In fact, all of the work and uncertainty involved in tax compliance is related to what happens before tax rates even become relevant.

That is, once a taxpayer has determined his or her “taxable income,” it takes merely a few seconds to look at the relevant table to determine the tax owed. We could have ten or twenty tax rates without increasing the compliance burden. The taxpayer’s uncertainty is in figuring out what to include, exclude, deduct, credit, and so on, not in dealing with different rates. Again, it is the determination of taxable income, not the final step of determining the tax owed, that takes up all of a taxpayer’s time.


As a related matter, the existence of so-called phase-outs is not inherently complicated, either. Again, the difficult part of the process is in figuring out whether a person is eligible for a particular provision, and what facts must be known before one can even understand the provision in question. The arithmetic involved in the phase-outs is a relatively simple after-thought, and the IRS is perfectly capable of providing simple tables to assist the taxpayer in determining how a phase-out alters the final tax computation.

I should add the qualification that phase-outs can pile up, with a different phase-out for each of several different tax provisions, which complicates compliance somewhat. Combining separate phase-outs into a consolidated phase-out would, therefore, allow taxpayers to apply a simple adjustment to all of the relevant provisions for which they might otherwise qualify. For example, if we were to set a “universal phase-out” range from, say, $100,000 to $250,000 for a single taxpayer, then any single taxpayer earning more than $250,000 would know that it is not worth the time to work through the various tax benefits. Taxpayers with incomes below $100,000 would know that they qualify for full benefits, and taxpayers in between would know in advance the fraction of the benefits that they can expect to receive.

More to the point, however, as the Committee sets priorities, its time would be much better spent simplifying tax provisions themselves – who qualifies, what can be deducted, and so on – than on hunting down and eliminating phase-outs.

In addition, it is important to remember that phase-outs serve two important purposes: First, they limit the cost of any tax benefit, by reducing the benefits received by people who can afford to live without the deduction. They are, therefore, a way to means-test benefits – benefits that, after all, cost the federal government money. Second, phase-outs avoid abrupt, all-or-nothing changes to tax benefits, with a taxpayer suddenly losing all of a benefit after hitting an income limit or some other arbitrary threshold. Without phase-outs, taxpayers can face especially harsh tax consequences as they suddenly lose a benefit that they would otherwise have received.

My message today, Mr. Chairman, therefore amounts to taking three items off of the list of possible approaches to tax simplification. First, taking policies out of the tax code – and out of the IRS’s jurisdiction – can make citizens’ lives more complicated, rather than less so, as it would simply relocate the complexity that our citizens face, rather than actually reducing it. Second, the number of tax rates is a non-issue, as far as complexity and compliance burdens are concerned. And third, the existence of phase-outs is nearly a non-issue, and the complexity of phase-outs can be all but eliminated by harmonizing phase-outs across all provisions that Congress chooses to means-test.

The Committee’s work is daunting, involving important work in eliminating and combining duplicative and sometimes ineffective tax benefits. That work will be difficult enough without becoming distracted by false promises of reduced complexity. I hope that my testimony will prove useful in directing the Committee away from those distractions.

Thank you.