The Debt Ceiling Law Is Fatally Flawed and Cannot Be Fixed

Posted in: Constitutional Law

In my most recent column here on Verdict, published on March 12, I asked: “Will Republicans Accidentally Increase Taxes on the Rich by Playing Another Game of Debt Ceiling Roulette?” The central point of that column was that, if Republicans again threaten not to increase the debt ceiling unless the president capitulates to their demands on other policy matters, President Obama could be compelled to do everything possible to delay the date on which the federal government could not meet all of its legally required payments. And that could most definitely result in the president’s using his executive authority to increase tax revenues.

Because the Republicans have made such a big deal out of this president’s alleged overuse of executive authority—accusing him of acting like a king, a tyrant, and worse—there is more than a bit of irony inherent in the possibility that another debt-ceiling standoff could force the president to pull out all the stops on executive actions, looking for every way possible under the law to collect tax revenues that are currently not being collected.

The further irony, of course, is that Republicans purport to be deeply committed to reducing taxes, yet a debt-ceiling showdown could force the president to increase tax collections in order to avoid violating the Constitution. Even if their ardor in trying to force the president to come to the table to negotiate a debt-ceiling deal, therefore, does not lead to a full-on economic and constitutional crisis, it could at least lead to the president’s being required to take actions that no Republican would otherwise want him to take.

There is, therefore, plenty to worry about, now that the debt ceiling clock is once again ticking, with the next drop-dead date likely to arrive as early as August of this year. The debt ceiling law is clearly dangerous and has recently been abused. In this column, I want to address the question of whether it is possible to change the debt ceiling statute such that it is less dangerous and damaging, or whether the statute is rotten to its core. The answer is that the debt ceiling must be tossed in the ashbin of history. It serves no useful purpose, and it can only do serious damage if it continues to exist.

The Debt Ceiling and the Constitution

The debt ceiling is not well understood, even by people who are supposed to know better. For example, a recent short analysis by the usually reliable Congressional Budget Office describes the debt ceiling as “the maximum amount of debt that the Department of the Treasury can issue to the public and to other federal agencies.” That, however, is an incomplete description, because the debt ceiling law covers all current obligations of the federal government at any given moment, not just the total current value of outstanding Treasury securities, which are the means by which the government typically borrows money from the public.

In other words, if the president were to try to “honor the debt ceiling” by refusing to issue the additional Treasury securities that would be needed to finance the spending mandated by Congress, the government would nonetheless violate the debt ceiling, because the president would surely tell the disappointed parties that they will eventually be paid. That statement itself would necessarily mean that the government had gone further into debt.

As I suggested in my March 12 Verdict column, the only way that this outcome could be avoided would be for the president to say, “You’re not getting the money that you are owed today, when it’s due, and you’re never going to get it.” That, however, would violate the Constitution in a different way. This means that the debt ceiling statute does not, in fact, put a ceiling on the debt. When Congress passes its spending and taxing laws, it determines the future path of the federal debt.

As I further described in that Verdict column, the president would be able to delay—but not ultimately prevent—a default by pulling out all the stops and using his executive authority to collect all of the revenues that could possibly be collected under the law.

But are we not already collecting every dollar that could be collected? Actually, Congress frequently writes laws in a way that gives the president the authority and ability to reduce tax collections below the maximum levels that would be authorized under the law. That is why the president would, to delay a debt ceiling-induced default, be constitutionally required to “increase taxes,” not in the sense that he would be increasing the maximum amount of taxes that the Internal Revenue Code allows, but by changing his executive interpretations that currently leave tax money on the table.

In a post on Dorf on Law that I also published on March 12, “Debt Ceiling + Constitution = Tax Increase?” I noted some additional aspects of this problem that relate to timing. That is, changing executive orders in a way that would allow the president to collect as much tax revenue as possible cannot be done overnight. It would involve making changes in administrative regulations, changes that can take months or years to achieve under our administrative procedures. Even after the rules were changed, it would take yet more time for the changed rules actually to yield more tax revenues.

On the comments board for that blog post on Dorf on Law, one reader pointed out that simply initiating the administrative steps that would be necessary to maximize tax revenues could itself be a politically strategic move on the part of the president. The president could announce that he had no choice but to move in that direction, even though he would be hoping that the debt ceiling would ultimately be increased, which would make the proposed changes to the tax regulations unnecessary.

Even if the president were not to do so for strategic reasons, however, the reality is that any prudent president would be compelled to start the process by which tax rules could be changed, to inoculate himself (or herself) against the charge that he did not do everything under the law necessary to avoid a federal default.

Clearly, this would be a terrible state of affairs. For decades, Congress has felt comfortable writing tax legislation (as well as other laws, including spending laws) that gives the president’s executive agencies some latitude in how they apply the law in the real world. Although the current situation with a Democratic president and an extremely hostile Republican-majority Congress has put presidential discretion under an unusually intense spotlight, the fact is that both parties (for very good reasons) rely on executive discretion to allow the government to be nimble enough to deal with real-world problems that Congress cannot anticipate when writing laws of general applicability.

For a simple example, consider a provision buried in section 121 of the Internal Revenue Code. There, an exception is available to taxpayers who have engaged in certain actions “by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances” (emphasis added). Congress, in other words, specifically told the president that the Treasury Department should define “unforeseen circumstances” for purposes of Section 121.

Generally speaking, we would want Treasury’s lawyers to draft such a regulation with an eye to achieving Congress’s apparent policy goal, in light of Americans’ experiences in their everyday lives. However, if the president must now ensure that the maximum revenue possible is being collected at all times, the regulation would have to be written in the least generous manner possible.

The overall result, therefore, would be to change the way our system of government works. Perhaps there are arguments that the laws should generally not be written in a way that delegates so much authority to executive agencies, but it is crystal clear that Congress is generally loath to take controversial positions even on larger issues. Expecting it to write detailed laws without ultimately relying on executive discretion is, at best, wishful thinking.

Moreover, the process of rewriting, or even talking about the need to begin to rewrite, revenue laws to collect more revenue—but only if the debt ceiling ends up again being used as a weapon by Congress against the president—can only generate crippling uncertainty in tax planning for citizens and businesses.

Of course, our current president has recently adopted a strategy of simply refusing to do anything about the debt ceiling in advance of the drop-dead date, all but daring Republicans to see whether he will blink. But if the government ever really were to default on its obligations, the president could be impeached for usurping one or more of Congress’s powers. One of the ways for this or a future president to avoid being charged under articles of impeachment would be to show that he did everything he could have done to avoid default.

The Prospects for Reform: The Debt Ceiling Cannot Be Fixed

Even if he does not feel compelled to engage in the full set of anticipatory executive actions that I described above, the president will have been put in an impossible position because of the Republicans’ continued use of the debt ceiling to try to extract concessions from the president and his fellow Democrats. To a certain degree, of course, this is partly President Obama’s fault, because he gave Republicans exactly what they hoped for when they first tried out this strategy in 2011. We are still dealing with the negative fallout from the spending cuts (both domestic and defense-related) to which the Obama Administration agreed at that time.

In the president’s defense, however, he really was facing the possibility of a constitutional crisis, and a completely unnecessary one at that. Avoiding an economic meltdown, especially so soon after the Great Recession, was a laudable goal. But that is exactly the reason that the debt ceiling must be repealed. (In fact, given that repealed laws can be revived, only a Supreme Court ruling that the debt ceiling is unconstitutional could completely end the threat that the debt ceiling law represents. That, however, is a question for another day.)

Even so, some self-styled fiscal hawks have recently been suggesting that the debt ceiling can be updated in a way that maintains its supposedly good aspects, while removing those nasty Armageddon-threatening negative aspects. For example, a recent conference announcement from the Brookings Institution claimed that the debt ceiling “has helped focus attention on the debt situation and has often been used as a vehicle to enact future deficit reduction policies or other fiscal reforms.”

Well, yes, if someone holds a gun to your head, you are likely to do things that the gun-wielding maniac wants you to do. That is exactly why the president did what he did in 2011, as I noted above. Yet it is also exactly why the debt ceiling statute is an irredeemably terrible law; it encourages Republicans to continue to take the economy (and the Constitution) hostage, in the hope of getting political concessions in return.

If the argument is that the debt ceiling statute needs to be kept around (perhaps in a slightly different form), because only the threat of full-on economic disaster will cause the political system to reduce the deficit or enact fiscal reforms, then that is simply false. There are many examples of the U.S. adopting policies to reduce deficits (even when doing so is a terrible idea economically), under our existing laws and procedures.

Indeed, it would be helpful to take a step back here and remember that Congress and the president have the opportunity at least once a year to address any and all of the country’s fiscal problems, and that it is not possible to avoid doing so. We have, after all, an annual budgeting process, through which the parties engage in the give and take that results in annual appropriations bills, tax changes, and so on.

In some cases, those procedures break down. For example, we have recently seen Congress adopt “continuing resolutions” that fund the government not for an entire fiscal year, but for only months or even mere weeks at a time. In the worst case, a failure to reach agreement results in a government shutdown, such as the one we experienced in October 2013.

As bad as a shutdown is, however, it is nothing compared to the damage that would be wrought by a first-ever U.S. government default. And this explains why the argument that the debt ceiling law has “been used as a vehicle” for supposedly positive outcomes is so dangerous. Saying that those purportedly important outcomes justify the risk of an economic implosion from a federal default is simply beyond comprehension.

The people who want to preserve some version of the debt ceiling statute are essentially saying that they cannot get what they want through the normal political process, so they want another bite at the apple through a constitutionally illegitimate attempt to extort changes that they cannot otherwise accomplish.

So long as there is a debt ceiling law, it will be possible that Congress will pass spending and taxing laws that collide with that debt ceiling. If Congress wishes to reach targeted levels of debt, it can do so by setting the spending and taxing laws appropriately. This is why there is always a limit on the debt, and Congress has the power to set that limit, by adjusting spending and taxing laws as it sees fit. Anything short of full repeal of the debt ceiling statute is a cynical ploy to elevate one group’s views of fiscal probity above the normal political process. Nothing could be less democratic, or more damaging to the country’s future.