Tag: IRS

Government Essentially Concedes Commerce Clause Challenge to Obamacare, Calls Individual Mandate a Tax

This Sunday’s New York Times had a fascinating story about how the defense of the individual mandate has shifted from the Commerce Clause – even though the law itself is replete with boilerplate about “economic activity” – to Congress’s taxing power.  Here’s the first paragraph (h/t Jonathan Adler):

When Congress required most Americans to obtain health insurance or pay a penalty, Democrats denied that they were creating a new tax. But in court, the Obama administration and its allies now defend the requirement as an exercise of the government’s “power to lay and collect taxes.”

This is huge.  After months of arguing that cases like Wickard v. Filburn (Congress can regulate the wheat farmers grow for personal consumption) and Gonzales v. Raich (Congress can regulate personal growth of state-allowed medicinal marijuana) justify the requirement that every man, woman, and child buy a health insurance policy, government lawyers (and spokesmen) now say the mandate is just a regulation accompanying a lawful tax (the penalty you pay for not buying insurance).  After I spent most of April and May criss-crossing the country debating the constitutionality of Obamacare, it turns out that my opponents were barking up the wrong tree!

But don’t just take it from me.  Here’s Georgetown law professor and Cato senior fellow Randy Barnett’s dissection of the Times story and its significance.  An excerpt:

Now there are cases that say (1) when Congress does not invoke a specific power for a claim of power, the Supreme Court will look for a basis on which to sustain the measure; (2) when Congress does invoke its Tax power, such a claim is not defeated by showing the measure would be outside its commerce power if enacted as a regulation (though there are some older, never-reversed precedents pointing the other way), and (3) the Courts will not look behind a claim by Congress that a measure is a tax with a revenue raising purpose. 

But I have so far seen no case that says (4) when a measure is expressly justified in the statute itself as a regulation of commerce (as the NYT accurately reports), the courts will look look behind that characterization during litigation to ask if it could have been justified as a tax, or (5) when Congress fails to include a penalty among all the “revenue producing” measures in a bill, the Court will nevertheless impute a revenue purpose to the measure. 

Now, of course, the Supreme Court can always adopt these two additional doctrines. It could decide that any measure passed and justified expressly as a regulation of commerce is constitutional if it could have been enacted as a tax. But if it upholds this act, it would also have to say that Congress can assert any power it wills over individuals so long as it delegates enforcement of the penalty to the IRS. Put another way since every “fine” collects money, the Tax Power gives Congress unlimited power to fine any activity or, as here, inactivity it wishes! (Do you doubt this will be a major line of questioning in oral argument?) 

Well, at least they’re not (yet) relying on Rep. John Conyers’s “Good and Welfare Clause.”  (Conyers, remember, is a lawyer and chairman of the House Judiciary Committee).

For a concise legal argument against the use of the taxing power to justify the individual mandate, see Cato’s amicus brief supporting Virginia’s challenge to the health care reform.  And for a great resource on all the state lawsuits against the new law, see this new blog/website run by Santa Clara law professor Brad Joondeph.

Americans Voting with their Feet

The Financial Times reports that the number of Americans giving up their citizenship to protect their families from America’s onerous worldwide tax system has jumped rapidly. Even relatively high-tax nations such as the United Kingdom are attractive compared to the class-warfare system that President Obama is creating in the United States.

I run into people like this quite often as part of my travels. They are intensely patriotic to America as a nation, but they have lots of scorn for the federal government.

Statists are perfectly willing to forgive terrorists like William Ayres, but they heap scorn on these “Benedict Arnold” taxpayers. But the tax exiles get the last laugh since the bureaucrats and politicians now get zero percent of their foreign-source income. You would think that, sooner or later, the left would realize they can get more tax revenue with reasonable tax rates. But that assumes that collectivists are motivated by revenue maximization rather than spite and envy.

From the FT article:

The number of wealthy Americans living in the UK who are renouncing their US citizenship is rising rapidly as more expatriates seek to escape paying tax to the US on their worldwide income and gains and shed their “non-dom” status, accountants say. As many as 743 American expatriates made the irreversible decision to discard their passports last year, according to the US government – three times as many as in 2008. …There is a waiting list at the embassy in London for people looking to give up citizenship, with the earliest appointments in February, lawyers and accountants say. …“The big disadvantage with American citizens is they catch you on tax wherever you are in the world. If you are taxed only in the UK, you have the opportunity of keeping your money offshore tax free.”

To grasp the extent of this problem, here are blurbs from two other recent stories. Time magazine discusses the unfriendly rules that make life a hassle for overseas Americans:

For U.S. citizens, cutting ties with their native land is a drastic and irrevocable step. …[I]t’s one that an increasing number of American expats are willing to take. According to government records, 502 expatriates renounced U.S. citizenship or permanent residency in the fourth quarter of 2009 — more than double the number of expatriations in all of 2008. And these figures don’t include the hundreds — some experts say thousands — of applications languishing in various U.S. consulates and embassies around the world, waiting to be processed. …[T]he new surge in permanent expatriations is mainly because of taxes. …[E]xpatriate organizations say the recent increase reflects a growing dissatisfaction with the way the U.S. government treats its expats and their money: the U.S. is the only industrialized nation that taxes its overseas citizens, subjecting them to taxation in both their country of citizenship and country of residence. …Additionally, the U.S. government has implemented tougher rules requiring expatriates to report any foreign bank accounts exceeding $10,000, with stiff financial penalties for noncompliance. “This system is widely perceived as overly complex with multiple opportunities for accidental mistakes, and life-altering penalties for inadvertent failures,” Hodgen says. These stringent measures were put into place to prevent Americans from stashing undeclared assets in offshore banks, but they also make life increasingly difficult for millions of law-abiding expatriates. “The U.S. government creates conflict and abuses me,” says business owner John. “I feel under duress to understand and comply with laws that have nothing to do with me and are constantly changing — almost never in my favor.” …Many U.S. expats report being turned away by banks and other institutions in their countries of residence only because they are American, according to American Citizens Abroad (ACA), a Geneva-based worldwide advocacy group for expatriate U.S. citizens. “We have become toxic citizens,” says ACA founder Andy Sundberg. Paradoxically, by relinquishing their U.S. citizenship, expats can not only escape the financial burden of double taxation, but also strengthen the U.S. economy, he says, adding, “It will become much easier for these people to get a job abroad, and to set up, own and operate private companies that can promote American exports.”

The New York Times, meanwhile, delves into the misguided policies that are driving Americans to renounce their citizenship.

Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship. …[F]rustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete. American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income. One Swiss-based business executive, who spoke on the condition of anonymity because of sensitive family issues, said she weighed the decision for 10 years. She had lived abroad for years but had pleasant memories of service in the U.S. Marine Corps. Yet the notion of double taxation — and of future tax obligations for her children, who will receive few U.S. services — finally pushed her to renounce, she said. …Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad. Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision.

Bennett’s Ouster: a Sign That Conservatives Have Started Paying Attention to Health Care?

Utah Republicans will not be re-nominating U.S. Senator Bob Bennett (R-UT) for another term.  A principal reason appears to be their displeasure over a health care bill that Bennett teamed with Sen. Ron Wyden (D-OR) to sponsor.

Some commentators decry how Bennett’s ouster demonstrates that the Republican party has lurched to the right.  That’s a reasonable interpretation if you believe, as conservative Washington Post columnist Kathleen Parker does, that Wyden-Bennett was a moderate, “market-driven” bill.

Rather than a moderate, market-driven bill, Wyden-Bennett would have created “Medicare Advantage for All.” It would have made health insurance compulsory for all Americans, and imposed stringent government controls on what type of coverage Americans must purchase.  It would have imposed federal price controls on health insurance.  As I explain elsewhere, once you have those elements in place, you’ve got socialized medicine.

Wyden-Bennett went further.  It would have created a new government entitlement to insurance subsidies.   Yes, the legislation would have given workers more insurance choices – at first.  But it would have set in motion economic and political dynamics that would reduce choice and innovation, forcing all Americans into a narrow range of health plans.  It effectively would have prohibited employer-sponsored health insurance, forcing even more Americans to give up their current coverage than ObamaCare would.

Wyden-Bennett was more honest than ObamaCare, in that it would have forced workers to pay their premiums to the IRS.  That would have made it explicit that the mandatory premium payments are indeed a tax.  Those tax payments would have appeared in the federal budget, and the American people would have been able to evaluate the law based on its actual cost. In contrast, ObamaCare’s authors assiduously worked to keep those mandatory (read: tax) payments out of the federal budget.

But on policy grounds, as National Review notes, Wyden-Bennett is more radical than ObamaCare – which itself was so radical that a majority of voters oppose it, and Democrats could just barely corral enough members to pass it.

“Okay, Cannon,” you might object, “but if Wyden-Bennett is even further to the left than ObamaCare, then why do its cosponsors include not just Bennett, but other conservative Republican senators like Lamar Alexander (TN), Mike Crapo (ID), and Judd Gregg (NH)?” Good question.

The answer: conservatives and Republicans just don’t pay as much attention to health care as they should.  (Ask any leftist or free-market health policy wonk; they’ll agree.)  As a result, the health care industry and the Left can easily seduce them into supporting legislation that violates their limited-government principles.  Sen. Wyden pulled it off by dangling the words “choice” and “health savings accounts” in front of his Republican colleagues.  Even when Republicans do pay attention to health care, it’s often after someone convinces them that a left-wing goal like universal coverage can be done in a free-market way. (Exhibit A: Mitt Romney.)

Viewed from this perspective, Bennett’s ouster is not evidence that the GOP has lurched rightward.  It is a sign that conservative voters may be starting to pay attention to health care.  And it gives hope that conservative politicians will do the same.

Washington Rakes in the Money

The Washington Post launches a new weekly today, Capital Business, covering business in the Washington area. The cover of the first edition is striking:

As the cover line exults, “There’s a wave of government money headed our way – bringing opportunities in health care, green energy, cybersecurity and education.” Of course, it’s not actually “government money” – it’s money taxed or borrowed from those who produce it in the 50 states and then sprinkled liberally around the Washington area, which now contains 6 of the 10 richest counties in America.

If the Capital Business cover image had a few more arms, it would look like the logo for this year’s Cato University, “Confronting Grasping Government”:

Awful Tax System Causing a Growing Number of Americans to “Go Galt”

Being an American citizen is an honor in many ways, but it is a huge millstone around the neck for highly successful investors and entrepreneurs because of an oppressive and complex tax system. This is particularly true for those based in and/or competing in global markets. Indeed, because the tax system (and regulatory system) is so onerous and because it is expected to get far worse in the future, a growing number of Americans are actually giving up citizenship and “voting with their feet.” The politicians view these people as “tax traitors” and are trying to erect higher barriers to hinder economic migration, particularly in the form of confiscatory “exit taxes” that are disturbingly reminiscent of the totalitarian practices of some of the world’s most unsavory regimes. The Wall Street Journal recently reported on this issue:

The number of American citizens and green-card holders severing their ties with the U.S. soared in the latter part of 2009, amid looming U.S. tax increases and a more aggressive posture by the Internal Revenue Service toward Americans living overseas. According to public records, just over 500 people world-wide renounced U.S. citizenship or permanent residency in the fourth quarter of 2009, the most recent period for which data are available. That is more people than have cut ties with the U.S. during all of 2007, and more than double the total expatriations in 2008. …Others are giving up their U.S. nationality to avoid tax increases in the U.S., as the government struggles under huge budget deficits. The top marginal tax rate is set to rise to 39.6% from 35% at the end of this year. A proposal to tax fund manager pay at ordinary income rates, instead of the 15% capital gains rate, is gaining currency in Congress. “Everybody sees the tax rates are going up. At a certain point, it gets beyond people’s pain threshold,” said Anthony Tong, a tax partner at accounting firm PricewaterhouseCoopers in Hong Kong. Unlike most jurisdictions, the U.S. taxes the income of citizens and green-card holders no matter where in the world it is earned.

The Joy of Tax Serfdom

Like a good peasant, I have already filed an extension, so I am at least temporarily compliant with the friendly people at the IRS. But since it is tax day, perhaps a slight bit of criticism of the tax code is warranted. I have already posted my video on the flat tax and warned about the risks of adding a value-added tax on top of the income tax in another video. I also posted a very successful video narrated by a former Cato intern about the harsh compliance costs of the internal revenue code. So it is time to reach into the archives and post this classic video produced by Caleb Brown and Austin Bragg of the Cato Institute.

P.S. Not that I would ever want to put my thumb on the scale of any contest, but I am defending the flat tax in an online debate for U.S. News & World Report with someone who favors the current system. You can cast a vote if you have an opinion on the matter.

P.P.S. Caleb has independently produced a video on the meaning of free enterprise. With politicians acting as if the business community is an ATM machine to finance a bigger welfare state, Caleb’s video puts a human face on what it means to be a risk-taking entrepreneur.

New Video Exposes Nightmare of IRS Complexity

My former intern, Hiwa Alaghebandian, has just narrated a new Economics 101 video about the cost of the tax code. I won’t spoil the surprise by giving the details, but you if you’re not angry now, you will be after watching.

In the video, Ms. Alaghebandian notes that a study from 1996 (back when the tax code was not nearly as complex) estimated that a flat tax would reduce the compliance burden of the income tax by 94 percent. In my video on the flat tax, I mostly focused on how a single-rate, consumption-base system would boost growth and competitiveness, but simplicity also would be a remarkable achievement. Not only would real tax reform reduce compliance costs by hundreds of billions of dollars, it would also put a big dent in the corrupt practice of distorting economic choices with deductions, exemptions, credits, preferences, shelters, and other loopholes. That’s a profitable game for politicians and lobbyists, but the rest of us pay the price because the tax code is even more of a nightmare.

There is also an under-appreciated connection between simplicity and fairness. My colleague Will Wilkinson sagely observed that “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.” The tax code is a good example. Many leftists want the tax system to penalize success with high tax rates. I’ve explained why this is economically misguided in a video on class-warfare tax policy, but it’s also worth pointing out that a simple and fair tax system like the flat tax makes it much more difficult for the well-connected to take advantage of complexity. Simply stated, the tax system should not punish the rich with high rates (notwithstanding the neurotic views of self-loathing trust-fund heirs), and it shouldn’t reward them with special deals.

The good news is that we know the policies that will fix the current system. The bad news is that politicians keep making the system worse. Putting the IRS in charge of enforcing key parts of Obamacare is just the latest example of why America needs a tax revolt.