Will Republicans Accidentally Increase Taxes on the Rich by Playing Another Game of Debt Ceiling Roulette?

Posted in: Constitutional Law

Republicans in Congress fervently claim that the debt ceiling is a matter of grave importance, a bulwark against supposedly disastrous increases in the national debt. Strangely, however, the debt ceiling has actually not existed for much of the last few years, yet the debt is growing more slowly than at any time since George W. Bush was president.

Even so, the debt ceiling will return this coming Monday, and the question is whether the Republicans will again try to use the threat of federal default to try to achieve their policy goals. Although the leaders of both the House and the Senate have tried to reassure everyone that they know that they must “govern responsibly,” there is reason for skepticism. The recent near-shutdown of the Department of Homeland Security suggests that there might yet be another showdown over the debt ceiling in our future.

If the voices calling for confrontation ultimately succeed in creating yet another debt ceiling-driven crisis, what will happen? The answer, strangely enough, might be that the Republicans will guarantee that taxes on businesses and wealthy Americans would go up.

The Debt Ceiling, the Threat of Default, and the Trilemma

There have been multiple showdowns between President Obama and House Republicans in recent years, several of them directly the result of Republicans’ insistence on using the debt ceiling as a weapon. An early scare came in late July and early August of 2011, when the then-new Republican majority in the House decided to try to extract additional spending cuts from the president by threatening to allow the country, for the first time, to default on its obligations. Similarly, in October 2013, the infamous government shutdown was accompanied by another brush with disaster, with House Republicans again coming within a day or so of forcing a debt ceiling-related default.

What kind of disaster am I talking about? The conventional wisdom holds that if the debt ceiling is not increased, a moment will come when the Treasury Department can no longer “juggle the books” to prevent a default. Tax revenue will be inadequate to cover required payments by the government, and additional borrowing would be prohibited by the debt ceiling statute. At that point, the president would, for the first time in U.S. history, supposedly have no choice but to default on those required payments to hospitals, veterans, retirees, government contractors, and so on.

As it happens, that conventional wisdom is wrong. My Verdict colleague and Cornell Law Professor Michael Dorf and I have written a series of scholarly articles over the last few years in which we have shown that the president would be constitutionally required to honor those required payments, even if doing so meant that he had to issue debt in excess of the statutory ceiling. We summarized our argument in a co-authored column here on Verdict two years ago.

The central point of our argument was that, if the Republicans refused to increase the debt ceiling, they would leave the president with three choices, all of them unconstitutional. He could (1) default on required payments that Congress has appropriated under its spending power, or (2) collect more revenues than Congress has authorized under its taxing power, or (3) incur more debt than Congress has authorized under its borrowing power. For the president to usurp any of those powers would violate the Constitution.

We thus described the president’s impossible choice as a “trilemma,” in which he would have to choose one (or more) constitutional violation out of the three possibilities described above. We further concluded that the “least unconstitutional” choice would be for the president to violate the debt ceiling statute, because that would minimize the amount of de facto legislating that he would engage in, and because Congress could most easily undo any damage from that decision, compared to having the president rewrite the spending or taxing laws to his own liking.

There was, however, a twist. In our most recent law review article (which I described in a column here on Verdict early last year), we noted an additional, unexpected nuance to the constitutional analysis, which further supported our conclusion. Specifically, if the president were to default on required payments when they came due, he would do so while promising that, after the debt ceiling crisis was resolved, the parties who had been stiffed by the government would finally receive their legally required payments. Better late than never.

If the president did not make such a promise, he would violate a different provision of the constitution that forbids repudiation of government debt. But if he did promise eventually to make the wronged parties whole, he would simply be acknowledging a debt that Congress’s spending laws had already created. Such debt would be added to the government’s outstanding obligations, and it would mean that the president would be unable to avoid violating the debt ceiling, even if he wanted to do so.

All of that analysis, however, has been little more than academic musings for the past year or so, because in early 2014 Senator Mitch McConnell put together a deal that suspended the debt ceiling until March 15, 2015. Now that the debt ceiling is coming back to life, we need to know what will happen next. In August or September of this year, the Treasury’s so-called extraordinary measures will be exhausted, and it will then no longer be possible for the president to avoid a constitutional violation (or, if he insists on defaulting on required payments, multiple constitutional violations), if the Republicans again insist on taking the economy hostage by not increasing the debt ceiling.

If we reach the point where the Republicans refuse to adjust the debt ceiling to accommodate the borrowing required by Congress’s own spending and taxing laws, what will happen next? It turns out that Professor Dorf and I might have been wrong, but in a way that the Republicans will hardly find pleasing. They might, in fact, end up forcing the president to increase taxes on businesses and wealthy individuals.

Executive Action to Increase Tax Revenues Could Be Constitutionally Required

In our original law review article analyzing the debt ceiling, Professor Dorf and I considered all three possible choices that a president facing a trilemma could make: default on spending, increase taxes, or violate the debt ceiling. We actually concluded that unilateral tax increases were “less unconstitutional” than defaulting on spending, but because the possibility of a president choosing to increase taxes was so politically unimaginable, our subsequent writing focused only on the choice between defaulting on spending or issuing additional debt.

Every aspect of our analysis, however, was based on the assumption that the president did not have a legal avenue available to avoid the trilemma in the first place. That is, the president would face our fateful three choices only if Congress’s laws do not give him an alternative by which he could obey all of the laws and still avoid a constitutional violation.

But what if there are in fact legal means by which the president could reduce spending, or increase taxes, or issue additional debt? Or perhaps there is a way to end-run the whole problem. Indeed, when the debt ceiling first became a hot-button issue, there was some discussion about the so-called “platinum coin option,” by which the president could supposedly avoid the debt ceiling crisis entirely by exploiting a loophole in the Coinage Act that would allow him to deposit trillion-dollar coins in the government’s account at the Federal Reserve.

The platinum coin option did not withstand scrutiny, for reasons that are not important here. Even so, it is true that the president is required to exhaust all legal options to avoid a constitutional crisis. The Buchanan-Dorf trilemma analysis has always been relevant only in situations where the president has run out of all available legal choices.

Last week, the right-wing echo chamber was briefly abuzz with claims that President Obama was “very interested” in increasing taxes through executive action. This was actually a distortion of a response to a question by the White House Press Secretary, but we can set that aside for present purposes. The more interesting question here is how the president could, in fact, change the tax laws in a way that would collect more revenues.

On February 27 of this year, Senator Bernie Sanders sent the president a letter in which he described how the president could use unilateral executive action to increase tax revenues in a progressive manner, collecting more taxes from businesses and wealthy individuals, but doing so in ways that are allowed by current law. Although the letter describes these possible executive actions as simply good policy, one of the unappreciated implications of the Sanders letter is that it could have pointed a way out of the next debt-ceiling crisis.

What kind of tax changes are we talking about? As Senator Sanders notes, there are many aspects of the tax law that Congress essentially leaves blank, to be filled in by regulations issued by the Treasury Department. Because Congress has authorized the issuance of such regulations, the president possesses the legal authority to change the regulations that already exist, and to issue regulations that do not currently exist.

The Sanders letter identifies six changes to tax regulations that could allow the government to collect more money than it currently collects. For example, the senator notes that the so-called “check-the-box loophole” allows multinational corporations to reduce their taxes in ways that could be changed by executive action. Similarly, options exist to use executive action to close the carried interest loophole and other problems in the tax law.

Of course, it is also possible for a president to change regulations in ways that would be regressive, but the point is that the tax laws as currently written allow a president to increase tax revenues without further congressional action.

As I noted above, Professor Dorf and I have not put much emphasis on the possibility of a presidential decision under a trilemma to increase taxes, because it seemed so unthinkable that a president would ever try to collect more tax revenue than Congress had authorized. Here, however, the analysis is quite different, because the president would not even be permitted to consider defaulting on spending or issuing debt in excess of the debt ceiling, if there exists a method under current law to avoid doing so.

That does not mean, however, that the current White House would embrace this approach. It might, in fact, decide as a political matter that it would rather face a first-ever federal default rather than obey the law by increasing tax revenues. If so, then we will have not only an economic crisis driven by the default, but a full-on constitutional crisis as well. And perhaps Republicans would prefer it that way, too.

If, however, the president truly wants to honor his constitutional obligations, then a Republican refusal to increase the debt ceiling could force the president to do what Republicans claim is the worst possible choice under all circumstances. They could end up requiring the president to raise taxes on the rich.

  • tuckerfan

    I realize that this is largely an interesting intellectual exercise. I do note that the President is a lame duck, and none of the present Democratic contenders are that closely tied to him. This is probably the first President in my lifetime who would suffer virtually no repercussions from using regulatory powers to “tax the rich”.

  • PaulGScalora

    The federal govt is the sovereign monopoly issuer of a nonconvertible currency (the dollar). It creates money when it spends. Why does the federal govt issue debt instruments? It’s not to raise revenue; it does not need to raise revenue in order to have money to spend. The federal govt issues debt as an accounting operation to balance its books and to give holders of the currency a safe place to invest. Consider that 40% of the federal debt is held by various federal agencies. If the federal govt really needed to borrow (issue debt) to raise cash (in order to spend), it would never be able to own 40% of its own “debt”. When the U.S. abandoned the last vestiges of the “gold standard” in 1971, antiquated laws were left in place from the gold era. Thus we get the high drama and kabuki with “debt celings” that don’t have any real meaning.

    • Andrew Patton

      The power “to coin money and regulate the value thereof” is vested by the Constitution in Congress. Therefore, Treasury’s power to issue money is controlled by Congress. It would be illegal for Treasury to create new money without the consent of Congress. You can call this a legal fiction if you like, but Treasury is required to obtain money from taxes, fees or borrowing in order to spend, or else create new money in accordance with duly enacted laws granting them permission to create new money in such quantities and on such terms as Congress has authorized.

  • Andrew Patton

    You error because you have an overly broad definition of “debt.” Accounts payable are not debt on any balance sheet. The Federal Government is no exception: accounts payable are liabilities, but they do not count against the debt ceiling. Now what the President and Treasury Secretary could do is issue more Special Drawing Rights Certificates and convert our foreign exchange reserves to US dollars. Special Drawing Rights Certificates are dollars issued by the Treasury Department against our holdings of Special Drawing Rights in the Exchange Stabilization Fund, which is Treasury’s account for, among other things, all interactions with the IMF. These certificates would be deposited in the Federal Reserve, at which point the Federal Reserve will either credit Treasury’s account or cancel an equal amount of Treasury Securities held by the Federal Reserve. Issuing more SDR Certificates and converting our foreign currency cash deposits could raise about $40 billion without issuing new debt.

    Another legal source of revenue, albeit small, is that the Federal Reserve could immediately deposit its profits into Treasury’s account, rather than waiting a week. This would raise about $1-2 billion (the amount varies from week to week).

    The US Treasury can issue US Notes, which do not count against the debt ceiling, but this could only raise $61 million (perhaps a bit more if they could be sold as collector’s items). Treasury also keeps $25 million in debt ceiling headroom in reserve; this could be tapped in an emergency.

    It goes without saying that the debt issuance suspension period will be extended if the debt ceiling is not raised. As long as the debt issuance suspension period continues, Treasury will not invest new deposits in the CSRDF and G-Fund. Treasury can also redeem securities in the CSRDF early in the amount equal to the payments due to be made from the CSRDF during the debt issuance suspension period less the amount of securities already redeemed early. Since these securities would be redeemed to make the payments anyway, this is a short-term measure to address cash-flow problems (e.g. payments have to go out on Thursday the 1st, but the revenue needed to cover it won’t come in until Friday the 2nd). What I don’t know is if there are any limitations on how long a debt issuance suspension period can be announced for (i.e. could Secretary Lew announce that a DISP will last until January 3, 2017 for the sole purpose of giving him more space under the debt ceiling in the short term?). I also don’t know if it’s legal for Treasury to utilize float (e.g. Social Security checks go out on Wednesday, but Treasury won’t have the cash to cover them until Thursday, when the Treasury bill auctions clear, wherein the banks would agree to make the deposits available on Wednesday and get reimbursed from Treasury on Thursday). What is clear, however, is that Treasury must exhaust all legal measures before resorting to ignoring laws.