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Thursday, October 3, 2013

Can the U.S. President Unilaterally Raise the Debt Limit?

Does the Fourteenth Amendment to the U.S. Constitution give the president authority to order the Treasury Secretary to raise debt above the existing debt limit? I contend such authority does not exist, at least as of 2013.

In December 2012, Jay Carney, the White House spokesman, had “flatly renounced the 14th Amendment option, saying: ‘I can say that this administration does not believe that the 14th Amendment gives the president the power to ignore the debt ceiling — period.’”[1] During October 2013, Wall Street, including investors and bank executives, was quietly coming to the opposite conclusion. Of course, fear of a declining stock market in the wake of a governmental default means that the financial sector has a strong financial interest in forestalling default by finding sufficient presidential authority in the Fourteenth Amendment.

   Are these Wall Street execs qualified, whether by virtue of their jobs or wealth, to advise the White House administration on matters of constitutional interpretation?   Image Source: Jason Reed/Reuters

“At the end of the day if there is no action and the United States has a default looming, I think President Obama can issue an executive order authorizing the Treasury secretary to make payments,” said David Kotok, chief investment officer of Cumberland Advisors. “There’s always been more flexibility in the hands of Treasury than they’ve acknowledged.”[2] Kotok could cite some lawyers teaching in American law schools who claimed that “the president could essentially ignore the debt limit imposed by Congress, because the 14th Amendment states that the ‘validity of the public debt of the United States, authorized by law,’ including for debts like pensions and bounties to suppress insurrections, ‘shall not be questioned.’”[3] Authorized by law is the key to unpacking the fourth section of the amendment. The relevant passage in the section states: “The validity of the public debt of the United States, authorized by law, . . . shall not be questioned.”[4] Let’s unpack it.

The validity of the debt incurred and being held by the Federal Government shall not be questioned. The reference in the section to debt incurred to suppress insurrection or rebellion provides a hint as to at least one of the section’s purposes. The amendment was ratified in 1868 in the wake of the war between the USA and CSA. Affirming the validity of the U.S. Government’s debt implies that the debt incurred by the CSA was not valid and thus not an additional obligation foisted on the U.S. Government. In any rebellion, moreover, the validity of the government’s debt is naturally subject to dispute, thus lessening its credibility even among citizens not in rebellion. So the section acts to fortify by exclusion the validity of U.S. Government debt. The question then becomes, which debt?

Is any debt that is incurred by the U.S. Treasury automatically to be regarded as valid? Here we have arrived at the crux of the matter. The “authorized by law” clause in the section qualifies the public debt that is valid to that which has been authorized by law. Having only a veto legislatively, the president cannot make law. That is the legislature’s task in the system of separated powers. Debt that is incurred without legislation passed by Congress—such as by an executive order by the president—is not valid because such debt is not “authorized by law.” In fact, section five gives Congress the “power to enforce, by appropriate legislation, the provisions of” the amendment.[5]

Obviously financial and political interests go into how various parties interpret the amendment. Even so, it is odd that rational beings would ignore “authorized by law” and conclude that an executive order is sufficient. Yet it is conceivable that given the severe economic and political impact of governmental default, some might argue as a political analyst has done that “(d)esperate times require desperate measures.”[6] In other words, the end justifies the means.

I suspect that Wall Street executives would find it rather easy to justify to themselves that the ends justify the means. In this case, the means involves overlooking a clause in the amendment’s fourth section, and thus violating logic and reasoning as if with impunity—as if knowledge itself were valid only where it serves a particular financial good.

1. Nelson D. Schwartz and Charlie Savage, “Wall St. Fears Go Beyond Shutdown,” The New York Times, October 2, 2013.
2. Ibid.
3. Ibid.
4. Legal Information Institute, Cornell University Law School (accessed October 3, 2013). http://www.law.cornell.edu/constitution/amendmentxiv
5. Ibid.
6. Nelson D. Schwartz and Charlie Savage, “Wall St. Fears Go Beyond Shutdown,” The New York Times, October 2, 2013.

Wednesday, October 2, 2013

The U.S. Government Shutdown: A Future of Clogged Consolidation?

Stalemate. A government shutdown. Well, not actually completely shut down, but significantly enough for many people to suffer as a result. Resisting the temptation to expound off the media reports, I proffer an alternative hypothesis altogether: The continuing impact from natural selection through 70,000 years when the homo sapiens species was in the state of nature manifests even today as an innate proclivity to a sort of wandering myopia. With tigers as predators of man and no available refrigerators for food, natural selection favored an orientation to one’s immediate surroundings and needs. 

The complete essay is at "Is the E.U. a Federal System?"

Tuesday, October 1, 2013

US Income Tax Turns 100: Unintended Consequences

On October 3, 2013, the U.S. federal income tax turns 100. As the twentieth century demonstrates, a lot can change in a century. Given the sheer amount of time and even inevitable adaptations, a program's original purpose and design (i.e., what it was designed for) can easily become obscured to the naked eye. As a result, contemporary debates on a long-standing program or policy tend to be unnecessarily constrained because its original purpose and initial design tend to be excluded, even thought to be impossible! In their exchange of letters in retirement, Jefferson and Adams agreed that a virtuous and educated electorate is necessary for a republic to endure. Within the educated rubric, the history of the republic, including the history of existing policies and programs that are significant, is not a small matter. 

In terms of the federal income tax, the legislation passed in 1913 applied only to the rich. The personal exemption was $3,000 ($71,000 in 2013 dollars) for individuals and $4,000 ($94,500) for married couples. Interest and state/local taxes were deductable. After the exemption (none for dependents) and deductions, the rate of 1% was applied to the remaining income up to $20,000 ($472,500). The rate shot up all the way to 2% for income over $20,000 to $50,000 ($1,181,200)—then increments from 3% to 7 percent.[1]  It had been estimated that only 425,000 people out of the U.S. population of about 100 million would have to pay income tax.[2]

                          Remember this is after the exemption and deductions.  Source: IRS and US Dept. of Labor.

It follows that the assumption taken for granted in 2013 that everyone who has income should be taxed does not jive with the tax in 1913.  Arguing that people earning less than say $12,000 a year (before exemptions and deductions) should not have to pay any income tax looks incredibly heartless (as well as petty) from the vantage point of a personal exemption of what would be $71,000 in 2013 dollars.

The movement pushing the constitutional amendment and subsequent legislation had to do in part with tariff reform, rather than being sought as a means by which the federal budget could be expanded. In 1890, almost all of the federal government’s revenue can from tariffs (60%), taxes on alcohol (27%), and tobacco taxes (8%). Also in that year, the McKinley Tariff raised tariff rates appreciably, “principally for protectionist purposes, rather than revenue.”[3] In 1894, the Democrats enacted a modest income tax (2% on incomes over $4,000 ($110,000)) to “help finance a reduction in tariff rates.”[4]

Although the Pollock decision in 1895 declared the direct, non-proportional tax unconstitutional, even in 1913 the federal income tax was re-initiated (after ratification of the amendment) as a means to foster free trade. The disproportionate hit to the poor from alcohol and tobacco taxes was also a factor. The notion that everyone with income should be taxed on it was not in the mix. Nor was the Congress intent to “crowd out” the ability of the State governments to tax sufficiently to safeguard their governmental turf from encroachments by Congress.

Nevertheless, especially from World War II the federal income taxation expanded “downward” and thus in terms of the number of people subject to the tax; it became ubiquitous in application. Meanwhile, State legislatures faced increasing pressure to keep a lid on the revenue side at least from citizens launching tax revolts (especially in California). By 2013, the Federal Government had done what some of the delegates to the Constitutional Convention had feared; the feds had sucked up so much of taxation that Americans would accept that the States were starving for cash even to help feed and house their most vulnerable. Not coincidentally, the power of the Congress had come to dwarf that of the States, so the check-and-balance proffered by federalism could hardly function. Had what would come to pass influenced Congressional debate in 1913, I doubt the unintended risks would have had much sway—just as the incremental changes to the federal income tax would discount or ignore the original design (i.e., application) of the tax.

What can we learn from this case study? First, public and Congressional debate on whether to reform an extant program or policy should include some reference to its history. What did the program (including tax schemes) look like initially? What were the initial results? What policy objectives and political forces drove its adoption? Have subsequent problems stemming from the program proved the importance of including factors not considered in the legislative (or policy) process? 

In short, public and congressional debates on whether to change an existing policy or program can be broadened and deepened if its history is included. The initial assumptions and purpose(s) can be uncovered and treated as a sort of privileged alternative, or non-alien alien in juxtaposition to the existing basis. Initial blind spots,  such as unforeseen long-term negative impacts on the governance system itself, can be brought in, assessed and finally obviated. 

Moreover, the lesson here is that we as human beings tend not to  know what we don’t know. All too easily, we fall into the customary two well-worn groves, which can easily become a false dichotomy if as if we had no choice but to wear horse-blinders. Too often than not, the substance of the vaunted self-government consists of what Nietzsche calls herd animals

If a self-governing people, perhaps even aided by its media, publically questions assumptions hitherto taken for granted (i.e., critical thinking), the breadth of policy and program options could  increase substantially. Maybe the principle behind the U.S. federal income tax is not that everyone should contribute. Maybe the assumption that every possible source of income should be subject to the tax is unnecessarily harsh. Maybe the existing reliance of income tax to fund the U.S. Government is not only ahistoric, but risky and unwise. The matter may boil down to figuring out how to effectively counter the gravity of the status quo (and its vested interests). 

1. Bruce Bartlett, “Happy Centennial, Federal Income Tax,” The New York Times, October 1, 2013.
2. Ibid.
3. Ibid.
4. Ibid.