Tuesday, August 04, 2015

Can Anything Happen in U.S. Politics Without a Forcing Event?

by Neil H. Buchanan

The annual scholarly conference of the Southeastern Association of Law Schools (SEALS) was held last week in Boca Raton, Florida.  As has become her custom, Professor Jennifer Bird-Pollan of the University of Kentucky Law School organized a number of tax-related panels, including the now-annual roundtable at which a dozen or so tax professors discuss issues large and small related to our field.  Here, I will summarize and expand on the comments that I made at this year's roundtable, focusing on what I think is an interesting question about the politics of tax and budgetary policy making in the United States in the 21st Century.

[Before I turn to those remarks, however, I do want to respond to a passing remark that Professor Eric Segall reported in his Dorf on Law post yesterday.  Professor Segall, summarizing a SEALS panel on which he participated last week, made some very interesting points about Supreme Court transparency.  I was troubled, however, by one professor's "suggest[ion] that perhaps transparency was not always a positive force. He asked whether any of us would openly admit that we were sitting in this delightful conference room in this beautiful hotel in Boca Raton, Florida, discussing transparency mostly or fully because we like school-paid boondoggles?"

[I get the joke, but it is a dangerous one.  The fact is that the SEALS administrators figured out some time ago that one could hold a very good conference in a Florida location in late July and early August at dirt-cheap rates.  Airfares and rental car rates are similarly reduced during the off season.  Who, after all, wants to be in Florida during the hottest days of summer?  Apparently, not many.  So few, in fact, that it would have been more expensive for my law school (based in D.C.) to pay for me to go to a conference in Pittsburgh.  (I know, because I paid out of pocket for a family trip to Pittsburgh earlier in the summer.)  It is true that the facilities that host these conferences feature 1920's-era over-the-top decor, but the in-season chumps pay for that.  We get a deal.

[I normally would not have bothered to comment on that throwaway line, but in the current environment, we do no one of good faith any favors by making untrue comments about boondoggles or other such incendiary comments.]

Now, what about the politics of U.S. tax law?  My motivating question was based on the observation that the job description of tax law scholars is to critique U.S. tax law, sometimes to defend it from others' critiques, but in general to try to improve the law.  Because "improve" has many components, this is a full-time job.  This basic job description also applies to scholars in other fields, but here is where the tax story becomes unique.  I asked: Are U.S. tax scholars now conjuring up suggestions for improving the tax laws in a world where there are no longer any "forcing events," such that our suggestions will almost certainly go nowhere?

A forcing event is something that essentially gives political actors no choice but to do something, rather than continuing to do nothing -- which, in this context, is not the result of the various actors wanting to do nothing, but instead flows from classic political gridlock.  When a forcing event looms, everyone knows that muddling along is no longer possible.

The biggest, most recent forcing event was the expiration of the Bush tax cuts at midnight on December 31, 2012.  Because of a political game in 2001 that resulted in the Bush tax cuts being shoehorned into a ten-year budget frame (which President Obama had extended for two years), the status quo ante loomed on New Year's Eve in 2012.  That status quo ante would have meant very large tax increases for everyone, most especially those at the top of the income and wealth distributions.  The estate tax in 2001, for example, had an exemption amount of under one million dollars, and the marginal estate tax rate was 55%.  (To be clear, I do not view those numbers as unreasonable for the estate tax, even today, but that is beside the point.)

Nearly everyone in Washington hated the prospect of the tax laws reverting to their 2001 state.  For Republicans and many Democrats, the problem was that rich people were going to see their taxes increase.  For others (including, as far as one could tell, President Obama), the biggest issue was that the still-weak recovery simply could not stand the negative jolt of anti-stimulus that the expiration of the Bush/Obama tax cuts would have inflicted on the American economy.

As a result, people were forced to act.  I still think that the Obama Administration was foolish to treat January 1, 2013 as a do-or-die date, because they probably could have achieved much better outcomes by allowing the laws to revert, and then legislating against an unacceptable new reality, with everyone actually feeling the results of inaction.  Perhaps I am wrong, however.

In any event, the forcing event had its intended effect, and a big new law was passed.  That law, however, contains no forcing events, with nearly everything now "permanent legislation."  No expiration dates mean that, for example, the people who think that the estate tax is still too onerous -- even though it now has a combined exemption level just short of $11 million, with annual adjustments for inflation, and the tax rate on the amounts above that exemption amount is 40% -- have no surefire way to bring the other side to the table.

As a result, the current presidential candidates' various promises to make big changes in the tax law are even more silly than usual.  There is simply no reason to imagine that a President Paul could convince a divided Congress to adopt a 14.5% so-called Flat Tax, other than through the normal channels of deal-making and compromise that he and his colleagues scorn.

Not all forcing events have their intended effect.  The deal that ended the first debt ceiling-related showdown in August 2011 included a series of procedures (remember the Supercommittee?) that resulted in the imposition of "the sequester" -- cuts that were supposed to be so horrible, so arbitrary, and so widespread (threatening every legislator's most sacred cows) that no one could possibly tolerate them.  The problem was that many legislators of the Tea Party variety view any government spending cut as a good cut, and the sequester cuts went into effect.

Speaking of the debt ceiling, Republicans clearly viewed that odd variety of legislative cancer as a never-before-used forcing event, and they have tried to use it to that effect.  In 2011, they succeeded.  In subsequent years, not so much.  Instead, they are now back to talking about shutting down the government again, this time to try to force the Democrats to agree to cut all funding for Planned Parenthood.

Both of these strategies -- threatening a catastrophic default by refusing to raise the debt ceiling, and threatening to shut down the government -- are attempts to craft what amount to improvised explosive devices to try to force action.  Because these IED's are so destructive and so politically unpredictable, however, they are rightly viewed as unacceptable by all but the craziest people in Washington (a group that can sometimes control the Republicans' agenda in Congress).

Although President Obama's stare-down strategy has worked thus far in resisting debt ceiling-related hostage demands, I continue to think that the President would do everyone a favor by recognizing that this particular forcing event is not a forcing event at all.  Or, perhaps more accurately, he should announce that he will not allow default to happen, which will make it clear that the forcing event is purely political -- Republicans demanding that he violate the Constitution, in order to achieve spending cuts that they cannot achieve legislatively.

Are there any non-governance-related forcing events?  In my remarks at SEALS, I noted that the surprise budget surpluses at the end of the Clinton presidency acted as something of a forcing event.  The Bush tax cuts themselves received a major boost when then-chair of the Fed Alan Greenspan raised the specter of a world without any Treasury bonds, after the annual surpluses had caused the Treasury to retire all of its bonds.  As good as that might sound to the debt fear-mongers, Greenspan rightly pointed out that T-bonds are effectively a global currency, and although financial markets would surely come up with some kind of alternative in their absence, the transition would be needlessly expensive.  Better to have the government maintain a pool of debt that grows with the economy.

Once the deficit/debt situation had swung in the other direction by 2009, the deficit scolds gleefully tried to use pessimistic predictions of unsustainable debt -- including the threat of attacks by so-called bond vigilantes, who would dump U.S. debt and precipitate a crisis -- as a forcing event.  There were many reasons why that was all wrong, of course, both as a matter of forecasting and in terms of the proposed solutions.

Happily, medical cost inflation has moderated, so that the forecasts for long-term federal debt are now anything but scary.  On the other hand, those forecasts are not rosy, either.  The Congressional Budget Office's latest forecasts have the debt-to-GDP ratio staying essentially constant for a couple of decades -- in other words, far beyond the range within which economic forecasts are in any way believable -- and then trending up a bit.  This leaves both the deficit scolds and people like me without a forcing event.  The scolds cannot say, "Act now, or we'll all be destroyed by a mountain of debt," but I cannot say, "The debt situation is now spiraling out of control in the other direction, requiring immediate action."  We actually have to justify our policy preferences on the merits.  (Horrors!)

As Professor Bird-Pollan reminded us during the discussion on Sunday, the last big tax reform bill was passed in 1986.  That bill, which is now generally held up as a model of bipartisanship and sensible compromise, was passed (as BYU Law Professor Clifton Fleming pointed out) during the peak of President Reagan's popularity (immediatley before Iran-Contra and other matters turned the latter years of Reagan's second term into a mess).  And it so happened that the Democratic tax economists of that era were in close agreement with their Republican counterparts regarding what constituted good tax policy.  (Again, despite the generally rosy view of the 1986 bill, I should emphasize that I am still a dissenter from that consensus.)

In any event, the current situation is one in which the overall budget picture presents no forcing events, nor does tax legislation itself.  The only strategies remaining are: (1) the annual budgeting process, in which the threat of shutdowns is an extreme and foolish (but procedurally legitimate) strategy to force action, and (2) refusal to increase the debt ceiling, which is a more disastrous and entirely illegitimate strategy to force action.

I am not usually one of the people who wrings his hands and says that the problem with American politics is that people cannot come together and compromise.  In part, that is because such calls usually involve falsely claiming that both sides are equally to blame for being "too partisan."  Viewed in the light of my comments above, however, it is certainly true that the taxing and spending laws in the U.S. are stuck.  They are stuck because one side has pulled very far to the right, but they are nonetheless stuck.  And short of a Republican-instigated budgetary disaster of one sort or another, the only way out of this standoff is for the next election to be a sweep for one side or the other.