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March 27, 2013 10:15AM

Issa: IRS Is Violating ObamaCare by Illegally Taxing Employers in 33 States

House Committee on Oversight and Government Reform chairman Darrell Issa (R-CA) writes in the Washington Examiner

To combat the sticker shock of Obamacare's numerous requirements on health insurance premiums, the law creates expensive subsidies, which take the form of tax credits, for individuals who purchase a government-approved insurance plan. In order to avoid the appearance of a federal takeover of health care, the law ties the availability of these premium tax credits to an "Exchange established by the State." Importantly, the way the law was written, if tax credits are not available within a state, then the expensive employer mandate tax does not apply to companies within that state.

With so many states refusing to play the role the law's drafters envisioned, the Obama administration has embarked on a legally dubious effort to bypass the plain language of the law. Obama's IRS has issued a rule that delivers the expensive subsidies through federally run exchanges as well. If it stands, this extralegal rule will undermine the decision-making role offered to states by Obamacare, and cause hundreds of billions of dollars of taxes and spending not authorized by the president's health care law...

The language that limits tax credits to state-established exchanges should not now shock Obamacare's supporters. Early in 2009, legal scholar Timothy Jost, one of Obamacare's leading proponents, explicitly suggested linking the tax credits to state-established exchanges as a way to encourage states to set up the exchanges.

The Obama administration may be surprised and disappointed that many states have not found the refundable tax credit to be a sufficient incentive to set up their own exchanges, exposing their citizens to the other taxes and penalties associated with the law. But this does not justify the administration's effort to ignore the plain language of the law that Obama championed and signed.

For more on this issue, see Jonathan Adler's and my Health Matrix article, "Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA."

March 27, 2013 9:50AM

Only the Little People Oppose Common Core

With the Common Core -- national curricular standards in English and math -- having been adopted by 45 states, it seems Core supporters' heads might be getting a bit big. Or, at least, they are starting to more openly express their feelings that Core opponents are very small. Like "little people" who pay taxes small.

The reputed Leona Helmsley quote is, actually, highly apropos for the view expressed by Mitchell Chester, education commissioner for the state of Massachusetts, at a recent AEI conference on implementation and governance of the Common Core. At the end of a session in which, alas, there was a fair amount of contempt expressed for supposedly conspiracy-theorizing Core opponents, Chester gratuitously threw in a small diatribe excoriating anyone who would object to the Core based on its cost. Keep in mind, reasonable estimates of the cost of fully bringing on Common Core hit as high as $16 billion

Start at the 1:10:00 mark to hear Chester say, essentially, if it will help kids, people simply have no "right" to object to the Common Core based on costs:

Chester may, indeed, think that only the little people pay taxes, or at least only very small people would care how tax dollars are spent if spending is supposed to help "the children." Of course, that's much easier to feel when you are using other people's hard-earned money. It's far less painful to act like any decent person would be above worrying about something as pedestrian as cost when you are not the one getting hit with the $16 billion bill.

Alas, this was not the only contempt expressed by Core supporters at the conference. Playing on comments made in Mitchell Chester's panel suggesting that Core opponents were weaving ridiculous conspiracy theories, such as the United Nations using the Core to take over the country, in the subsequent panel Chester Finn, President of the Thomas B. Fordham Institute, responded to my fears that the federal government would take responsibility for enforcing the Core by flippantly saying the U.N. or OECD would do it. Start at the 36:10 mark to catch my comments and Finn's dismissive, evasive response:

That's right, forget Race to the Top, NCLB waivers, federally selected and funded tests -- oh, and the Obama Administration's NCLB reauthorization proposal, which put national standards at its accountability core -- and stop with all the "federal control" falderal! Heck, even forget Finn's own writing on this!

Common Core opponents, you are very small people. But even you deserve much more openness and seriousness than some Common Core supporters appear willing to give you. After all, your money -- and your children -- are wrapped up in this, too.

March 27, 2013 9:05AM

Targeting Multinationals, the OECD Launches New Scheme to Boost the Tax Burden on Business

I've been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that's just the tip of the iceberg.

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on "Addressing Base Erosion and Profit Shifting" that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new "BEPS" initiative.

...the BEPS report...calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. ...The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

...the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. ...Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD's anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.

The OECD justified that campaign by asserting there was a need to fight illegal tax evasion (conveniently overlooking, of course, the fact that nations should not have the right to impose their laws on what happens in other countries).

The BEPS initiative is remarkable because it is going after legal tax avoidance. Even though governments already have carte blanche to change business tax policy.

...governments already have immense powers to restrict corporate tax planning through “transfer pricing” rules and other regulations. Moreover, there is barely any mention of the huge number of tax treaties between nations that further regulate multinational taxation.

So what does the OECD want?

...the OECD hints at its intended outcome when it says that the effort “will require some ‘out of the box’ thinking” and that business activity could be “identified through elements such as sales, workforce, payroll, and fixed assets.” That language suggests that the OECD intends to push global formula apportionment, which means that governments would have the power to reallocate corporate income regardless of where it is actually earned.

And what does this mean? Nothing good, unless you think governments should have more money and investment should be further penalized.

Formula apportionment is attractive to governments that have punitive tax regimes, and it would be a blow to nations with more sensible low-tax systems. ...business income currently earned in tax-friendly countries, such as Ireland and the Netherlands, would be reclassified as French-source income or German-source income based on arbitrary calculations of company sales and other factors. ...nations with high tax rates would likely gain revenue, while jurisdictions with pro-growth systems would be losers, including Ireland, Hong Kong, Switzerland, Estonia, Luxembourg, Singapore, and the Netherlands.

Since the United States is a high-tax nation for corporations, why should Americans care?

For several reasons, including the fact that it wouldn't be a good idea to give politicians more revenue that will be used to increase the burden of government spending.

But most important, tax policy will get worse everywhere if tax competition is undermined.

...formula apportionment would be worse than a zero-sum game because it would create a web of regulations that would undermine tax competition and become increasingly onerous over time. Consider that tax competition has spurred OECD governments to cut their corporate tax rates from an average of 48 percent in the early 1980s to 24 percent today. If a formula apportionment system had been in place, the world would have been left with much higher tax rates, and thus less investment and economic growth. ...If governments gain the power to define global taxable income, they will have incentives to rig the rules to unfairly gain more revenue. For example, governments could move toward less favorable, anti-investment depreciation schedules, which would harm global growth.

You don't have to believe me that the BEPS project is designed to further increase the tax burden. The OECD admits that higher taxes are the intended outcome.

The OECD complains that “… governments are often under pressure to offer a competitive tax environment,” and that “failure to collaborate … could be damaging in terms of … a race to the bottom with respect to corporate income taxes.” In other words, the OECD is admitting that the BEPS project seeks higher tax burdens and the curtailment of tax competition.

Writing for Forbes, Andy Quinlan of the Center for Freedom and Prosperity highlights how the BEPS scheme will undermine tax competition and enable higher taxes.

...the OECD wants to undo taxpayer gains made in recent decades thanks to tax competition. Since the 1980′s, average global income taxes on both individuals and corporations have dropped significantly, improving incentives in the productive sector of the economy to generate economic growth. These pro-growth reforms are the result of tax competition, or the pressure to adopt competitive economic policies that is put on governments by an increasingly globalized society where both labor and capital are mobile. Tax competition is the only force working on the side of taxpayers, which explains the organized campaign by global elite to defeat it. ...If taxpayers want to preserve gains made thanks to tax competition, they must be weary of the threat posed by global tax cartels though organizations such as the OECD.

Speaking of the OECD, this video tells you everything you need to know.

The final kicker is that the bureaucrats at the OECD get tax-free salaries, so they're insulated from the negative impact of the bad policies they want to impose on everyone else.

That's even more outrageous than the fact that the OECD tried to have me thrown in a Mexican jail for the supposed crime of standing in the public lobby of a public hotel.

March 27, 2013 9:02AM

When Did Laws Denying Same‐​Sex Couples Marriage Licenses Become Unconstitutional?

Readers of this blog know that Cato filed a brief in Hollingsworth v. Perry arguing that state prohibitions on same-sex marriage violate the Equal Protection Clause of the Fourteenth Amendment.  But since when have they done that?  More broadly, to quote a colloquy between Justice Scalia and Ted Olson in the Perry argument:

JUSTICE SCALIA: I’m curious, when -­ when did — when did it become unconstitutional to exclude homosexual couples from marriage? 1791? 1868, when the Fourteenth Amendment was adopted? Sometimes — some time after Baker, where we said it didn’t even raise a substantial Federal question? When — when — when did the law become this?

MR. OLSON: When — may I answer this in the form of a rhetorical question? When did it become unconstitutional to prohibit interracial marriages? When did it become unconstitutional to assign children to separate schools.

JUSTICE SCALIA: It’s an easy question, I think, for that one. At — at the time that the Equal Protection Clause was adopted. That’s absolutely true. But don’t give me a question to my question. When do you think it became unconstitutional? Has it always been unconstitutional? . . .

MR. OLSON: It was constitutional when we -­ as a culture determined that sexual orientation is a characteristic of individuals that they cannot control, and that that -­

JUSTICE SCALIA: I see. When did that happen? When did that happen?

MR. OLSON: There’s no specific date in time. This is an evolutionary cycle.

With due respect to Ted Olson, a former solicitor general who's argued more cases than I've watched, I think he missed the mark on this one.  How do rights spontaneously emerge?  To pick up on one of the above examples, was segregation constitutional in 1900 but then somehow not 50 years later?  No, Plessy v. Ferguson was incorrectly decided in 1896 and Brown v. Board of Education overruled it rather than merely asserting that there was an "evolutionary cycle."  Justice Scalia himself recognized that state racial discrimination of all kinds became unconsitutional when the Fourteenth Amendment was ratified, in 1868 -- and not at some time in future when each particular instance of it was found to violate that provision.

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And so, either it was unconstitutional to exclude same-sex couples from marriage in 1868 or it's still constitutional to do so.  Josh Blackman and I wrote about doing this "originalism at the right time" in our exegesis of the Privileges or Immunities Clause in the context of the right to keep and bear arms, Keeping Pandora's Box Sealed.  (Josh later extended that analysis in a short piece on gender equality and sex discrimination.)

Which isn't to say that what the challengers have to prove here that the drafters or ratifiers of the Fourteenth Amendment had gay marriage in mind.  But it does mean that you have to look at what "equal protection of the laws" in 1868 and apply that understanding accordingly.  As Elizabeth Wydra, my co-counsel on our Perry brief, wrote on the Constitutional Accountability Center's blog:

While race was obviously at the forefront of the minds of the Amendment's drafters -- after all, they had just secured an amendment banning slavery in the wake of a brutal civil war--they specifically chose language that would protect against unequal treatment based on more than just racial discrimination, and in fact affirmatively rejected narrower proposals that would prohibit only racial discrimination.

Even so, had Olson given Justice Scalia the answer I have suggested, Scalia surely would have retorted that there was no way the American people were thinking of marriage equality for gay and lesbian couples when they ratified the Amendment. That's not the point. No originalist -- not even Justice Scalia -- believes that the plain words of the Constitution apply only in the ways the framers expected. The ruling Justice Scalia announced from the bench just before the start of arguments this morning is a perfect example: just because there weren't drug-sniffing police dogs in 1791, doesn't mean their use can't violate the Fourth Amendment's protection against unreasonable searches and seizures, as the Court held today in Florida v. Jardines.

The Constitution guarantees equal protection of the laws to "any person." In looking to what rights were understood to be protected equally, the framers of the Fourteenth Amendment understood state-sanctioned marriage as a personal, individual right that must be made available on an equal basis to all persons. Accordingly, by writing into the Constitution a requirement of equality under the law and equality of basic rights for all persons, which included the right to marry, the Amendment's framers ensured that discriminatory state laws would not stand in the way of Americans exercising their right to marry the person of their own choosing. Laws that discriminate and deny to members of certain groups, including gays and lesbians, the right to marry the person of one's choice thus contravene the original meaning of the Fourteenth Amendment.

See also Josh Blackman and Orin Kerr.  And for more on the original meaning of the Equal Protection Clause, see my op-ed with CAC's president, Doug Kendall.

March 26, 2013 4:56PM

Comment on TSA Strip‐​Search Machine Policy — And Attend Our Event April 2nd

You can now comment on the TSA's proposed rule regarding its use of strip-search machines on American travelers at our nation's airports.

Under a July 2011 court order requiring it to do so, the TSA finally proposed the rule that explains its airport procedures with respect to strip-search machines. You can now know your rights and obligations in that process, how to opt-out of the strip-search machines, and where to register complaints if you feel you've been treated badly.

Just kidding!

This is the two-sentence statement it proposed to add to existing language about passenger screening:

(d) The screening and inspection described in (a) may include the use of advanced imaging technology. For purposes of this section, advanced imaging technology is defined as screening technology used to detect concealed anomalies without requiring physical contact with the individual being screened.

It took 20 months to produce these two sentences, which allow the TSA to do whatever it wants. My initial thoughts were to find TSA contemptuous of the court's order and wronly using secrecy to hide the analysis of its policies.

We'll be discussing the proposal at a Cato policy forum next Tuesday, April 2nd, called "Travel Surveillance, Traveler Intrusion," starting at noon Eastern. Like most Cato events, it will be live-streamed.

The event is a two-fer. Not only will we hear from Ginger McCall of the Electronic Privacy Information Center, the organization that brought the suit that finally produced this rulemaking. We'll also hear from Ed Hasbrouck, whose research reveals just how intensively the U.S. government monitors the air travel of every American.

Feel free to move about the country? Just wait until you learn how your movements are tracked---before and after you get your digital strip-search or prison-style pat-down.

Register now!

March 26, 2013 1:17PM

Oral Argument in Prop 8 Case: Kennedy Is Key but Technical/​Non‐​Decision Likely

To the extent oral argument is a predictor of anything -- recall how set the Supreme Court was to strike down Obamacare a year ago -- the most likely outcome in Hollingsworth v. Perry is a non-decision of some sort.  Only three justices (Scalia, Kennedy, Alito) seemed willing to find that the Prop 8 proponents had standing to bring the case to the Court and one of those (Kennedy) didn't seem comfortable either striking down or upholding California ban on gay marriage.  

Indeed, the main thing this argument did was to bring back questions of why the Court took the case in the first place.  Unlike the Defense of Marriage Act case of United States v. Windsor, which will be argued tomorrow, the lower court's ruling in Perry affected only California's peculiar circumstances: granting gay marriage (by judicial opinion), then taking it away (by popular vote), and otherwise granting same-sex couples all the rights and benefits of marriage except the word.  The Supreme Court tends to use any excuse available not to hear controversial cases, and this one was chock full of them (as even Ted Olson and David Boies argued in their opposition to the petition for certiorari).

But now we're left with two most likely scenarios: (1) the "liberal" justices potentially joining Chief Justice Roberts on a ruling that the petitioners lack standing, which would probably vacate the Ninth Circuit ruling but leave the district court's ruling against Prop 8 in place; or (2) no majority because Justice Kennedy (and perhaps others) would prefer to dismiss the case as improvidently granted (a "DIG" in insider terms), which would leave the Ninth Circuit's ruling in place -- so Prop 8 would also remain struck down, albeit on narrower grounds than in the first scenario.

Or we could have one other intriguing non-decision scenario: The Court sets the case for further briefing and re-argument on any number of potential issues -- the factual evidence regarding asserted state interests (e.g., outcomes for children raised by gay couples, the effect of allowing gay marriage on marriage and divorce rates more broadly), the historical meaning of equal protection (see Cato's brief), or some other real or pretextual reason for kicking this can down the road.  Because if there was agreement on one point this morning -- other than that the U.S. government's argument that states' only options were granting same-sex marriage or not giving gay couples any rights at all (the logical consequence of the Ninth Circuit's ruling) -- it was that gay marriage is a very new phenomenon that at present takes the Court into "uncharted waters" (to quote Justice Kennedy).  And so the justices may want to let the social science (and public opinion) develop for a while.

But, of course, these concerns -- as well as the procedural complications -- were present when the Court took the case in December, so why take it in the first place?  It could well be that either the "conservative" or "liberal" justices wanted to force Justice Kennedy's hand. Well, it was clear today that the gentleman’s not for forcing.

For further analysis, which I'm gratified to see is substantially similar,see Tom Goldstein and Lyle Denniston at SCOTUSblog.

March 26, 2013 1:16PM

Jardines: The Supreme Court Retreats to the Home

The Supreme Court ruled today in Florida v. Jardines that "use of trained police dogs to investigate the home and its immediate surroundings is a 'search' within the meaning of the Fourth Amendment."

It's the right result. The Court was divided 5-4, though, and the case shows some of the same fissures around Fourth Amendment doctrine that U.S. v. Jones did last year.

The majority opinion, written by Justice Scalia, won't clear up the doctrinal debates, which are sure to continue. Instead, it retreats to the home. The specific protection for "houses" in the Fourth Amendment, he wrote:

renders this case a straightforward one. The officers were gathering information in an area belonging to Jardines and immediately surrounding his house—in the curtilage of the house, which we have held enjoys protection as part of the home itself. And they gathered that information by physically entering and occupying the area to engage in conduct not explicitly or implicitly permitted by the homeowner.

Property law gives strangers an implied license to approach a house for the variety of purposes they may have. "But introducing a trained police dog to explore the area around the home in hopes of discovering incriminating evidence is something else. There is no customary invitation to do that."

Justice Scalia did use the case to answer a question left open by Jones. He emphasized that the "reasonable expectation of privacy" test from Katz v. United States (1967) built upon, and did not supplant, the Fourth Amendment's foundation in property. He specifically declined to use that test in the holding.

The dissent objected vigorously to the idea that approaching the front door of a home via the walk was a trespass.

"[G]athering evidence—even damning evidence—is a lawful activity that falls within the scope of the license to approach," Justice Alito wrote. "And when officers walk up to the front door of a house, they are permitted to see, hear, and smell whatever can be detected from a lawful vantage point."

The dissent also rejected an argument put forward by the concurrence: that the reasonable expectation of privacy test is an alternative ground for the holding.

Yes, Justice Kagan would also have used "reasonable expectations" to decide the case, but her concurrence covers more important ground than that. As she did at oral argument, she fixed on the government's use of the dog to perceive things that couldn't otherwise be perceived. That's what searching is.

"[P]olice officers came to Joelis Jardines’ door with a super-sensitive instrument, which they deployed to detect things inside that they could not perceive unassisted." And later: "[A] drug-detection dog is a specialized device for discovering objects not in plain view (or plain smell)."

In the Cato Institute's brief in the case, I emphasized that drug-dog detection was but one form of chromatography, the use of which the court should treat as searching because it "look[s] for or seek[s] out that which is otherwise concealed from view” (quoting Black’s Law Dictionary).

I also emphasized the poorly recognized twin-relationship in Fourth Amendment doctrine between "plain view" and constitutional searching: "A 'search' occurs when government agents seek out that which is otherwise concealed from view, the opposite condition from what pertains when something is in 'plain view.'"

And I argued: "This Court should find a 'search' to have occurred in this case because the use of a drug-sniffing dog made perceptible to government agents what they otherwise could not perceive."

I'm gratified to see Justice Kagan, joined by justices Ginsburg and Sotomayor, adopt this reasoning, whatever its source. The Court's women, it seems, have the best Fourth Amendment reasoning in this case.

The result today is clearly favorable for Joelis Jardines and mildly favorable for Fourth Amendment doctrine. Any case is a good case if it declines to use the failed "reasonable expectation of privacy" doctrine. And, as was the case in Jones, the concurrence is where the real action is.