New Incentives to Relabel Spending as Tax Cuts

-- Posted by Neil H. Buchanan

There has been a lively discussion on this blog and elsewhere regarding the President's constitutional obligations and options in the current political impasse, with the possibility of a government default looming only weeks away. When Professor Dorf informed me that Professor Tribe wanted to publish a second guest post on the topic here on Dorf on Law, responding to my most recent post, I was delighted, and I suggested that we give him the last word on that debate. Our exchange has brought clarity to some issues, and it was generous of Professor Tribe to provide two guest posts, but all good things must end. Reading the content of his second post confirms my sense that the back-and-forth between us has graduated to the stage where it would be better continued (if the parties decide to do so) in a journal format, rather than on various blogs. (If nothing else, it is notable that my most recent post and Professor Tribe's response were both close to 3,000 words, which is roughly three times the normal length of a DoL post.) In any case, I thank Professor Tribe for his time and effort.

In Professor Dorf's post on Wednesday, he offered a useful summary of the debate, describing the points of disagreement and apparent agreement between Professor Tribe and me. I think it is fair to say that nothing in yesterday's post by Professor Tribe would alter the essence of Professor Dorf's summary, especially the nature of the choices that the President faces in the next few weeks. Professor Tribe's description of the option to mint platinum coins adds an interesting possibility, of course, but if the President does not engage in that novel option (nor in Professor Dorf's suggestion of selling Alaska back to Russia), the President would be faced with the choice of increasing tax revenues, cutting expenditures, or issuing debt above the debt ceiling. Professor Tribe has argued that the President's proper choice is to exercise (constrained) discretion in reducing spending below appropriated levels, whereas I have argued (both under a 14th Amendment analysis and a separation-of-powers analysis) that the least bad choice is to borrow in excess of the current debt ceiling.

As I noted above, our reasons for continuing to disagree could best be explored elsewhere. My purpose here is to analyze the consequences of something on which Professor Tribe and I apparently agree. Each of us have said that Congress's power to tax is so central to its role and purpose in our system of government that it would be a serious matter indeed for any president to impose taxes without congressional authorization.

The spending power is arguably in a different category. Professor Dorf reads both Professor Tribe and me as saying that it would be worse for a president to raise taxes unilaterally than to cut spending unilaterally. While that is a fair reading, I deliberately did not go quite that far. Instead, I limited myself to saying that both the spending power and the taxing power have been "jealously guarded" by Congress, more guarded in any case than the power to borrow money. (My post was already so long that I decided to leave it at that, rather than getting into this issue, which was not essential to the matter then at hand.)

I was being circumspect for a reason that goes beyond my debate with Professor Tribe. My concern in creating a hard distinction between the spending power and the taxing power is that the real-world distinctions between taxing and spending are notoriously porous. One of the most important debates within tax policy circles, which has intensified over the last few years, concerns the concept of "tax expenditures" -- a term that captures the counter-intuitive idea that a government can spend through the tax code. In a world where every politician wants to be in favor of tax cuts (which has been especially true for the last thirty years or so) and against spending increases (which has become even more politically salient in the last few years), politicians have figured out that it is expedient to call relabel all of their favored projects "tax cuts."

The list is familiar. We could send checks to people who buy houses, but instead we let them reduce their tax payments by giving them a deduction for mortgage interest. We could pay businesses to increase the wages of the working poor, but instead we create an earned-income tax credit that uses the Internal Revenue Code to increase the living standards of those workers. We could spend money to reimburse people for extraordinarily large medical bills, but instead we allow a deduction for medical expenses in excess of 7.5% of adjusted gross income. And on an on. From a budgeting standpoint, this is nothing more than a labeling exercise. Spending $50 billion on farm subsidies is the same as not collecting $50 billion in revenues due to farm "incentives," and the deficit or surplus is the same in either case.

From my perspective, therefore, it is difficult to assess the relative importance to Congress as an institution of its power to tax versus its power to spend. Even so, I can see a strong case to be made that, from both a political and a constitutional standpoint, taxes are importantly different from expenditures.

Suppose, in any case, that there is no budget deal by Aug. 2. (As of this writing, there is no deal even between the President and Republican leaders -- much less reason to believe that any deal will get through Congress.) Suppose further that, whether for reasons such as those offered by Professor Tribe or for any other reason, the President then decides that the best response is to prioritize spending, thus using his discretion to withhold payment from people and businesses who otherwise would have received checks from the federal government. For that matter, even if the current impasse is resolved before Aug. 2, suppose that people come out of this crisis believing that spending will be withheld at the president's discretion in the budget showdowns that are sure to follow.

All of this creates a clear incentive to relabel as "tax cuts" as many spending programs as possible. As I noted, there are already strong political incentives to do so. This crisis will, therefore, intensify those incentives. Any legislator worth her salt is now on notice that it is not sufficient to win a battle to include spending for any particular program in the current budget. Appropriated spending -- under easily foreseeable circumstances -- might well never be disbursed. We should, therefore, expect to see congressional staffs try ever harder to run everything through the tax code.

As a tax professor, I guess this is good news for me! Are there, however, any reasons to worry about this new incentive to relabel government activities? Many of my colleagues believe that the trend toward spending through the tax code is categorically a bad thing. I confess that I am fairly skeptical of that position, for reasons that I will surely write up as a blog post sooner or later. For now, I will leave that normative question aside. As a predictive matter, it seems clear that we should expect the current political crisis to accelerate the trend of reducing "spending" and increasing "tax cuts." Should future presidents need to find spending to withhold, therefore, they will find fewer candidates for the ax.