How Norms and Laws Might Further Limit Executive Branch Influence Over Investigations

Recent stories in the news raise important questions about the ability of government to impose constraints on abusive government investigations.

I’m not here to judge the credibility of the allegations that President Trump used his office to encourage foreign governments to investigate Joe Biden’s son or that a Treasury Department official interfered with audits of the President’s or Vice-President’s tax returns. Instead I want to turn to the history of the IRS to draw out important lessons in how issues such as these have been addressed in the past and then use that information as a base from which Congress can consider further guardrails to prevent future abuses. Among the possibilities are to further require, not simply offer protection for, whistle-blowing.

The first line of defense, of course, is the integrity of public officials themselves and the norms they help create. More than four decades ago, White House Counsel John Dean gave IRS Commissioner Jonnie Mac Walters a copy of President Richard Nixon’s “enemies list” that included about 200 Democrats whose tax returns he wanted audited. Walters and Treasury Secretary George Schultz agreed between themselves to throw the list into a safe and forget about it.

When Walter’s successor, Donald Alexander, discovered that a handful of IRS staffers had been assigned to investigate the returns of about 3,000 groups and 8,000 individuals, often because of their political views, he disbanded the group. Those of us who knew him are aware of how proud he was for standing up to the White House and protecting the integrity of the IRS.

Interestingly, it wasn’t until 1998 that Congress turned this normative prohibition into law. The Taxpayer Bill of Rights, part of a bill that restructured the IRS that largely came out of a Republican-led Senate, said this:

It shall be unlawful for any applicable person to request, directly or indirectly, any officer or employee of the Internal Revenue Service to conduct or terminate an audit or other investigation of any particular taxpayer with respect to the tax liability of the taxpayer.

Congress said applicable persons include the President, Vice President, and any employee of the White House and most Cabinet-level appointees.

The Taxpayer Bill of Rights made clear that Congress was concerned about protecting potential victims, not just punishing offenders. Each individual is entitled to equal justice under the law, and Congress determined that politically motivated investigations violated that justice standard. The Joint Committee on Taxation staff in their explanation of the law listed another reason: The concern that improper executive branch influence could have a “negative influence on taxpayers’ view of the tax system.”

The 1998 law not only prohibited this improper influence, it explicitly required disclosure:  

Any officer or employee of the Internal Revenue Service receiving any request prohibited by subsection (a) shall report the receipt of such request to the Treasury Inspector General for Tax Administration.

It says “shall.” Disclosure is not optional. Congress made it a crime for “any person or employee of the IRS receiving any request” to fail to report it, whether it was direct or indirect. No explicit quid pro quo necessary to get the Inspector General involved.

In the current context, the statute is clear: Anyone in the IRS, including the Commissioner, must report any improper attempt by high-level executive branch officials at interfering with audits of the president and vice-president or anyone else.

Thus, there are at least five bulwarks against inappropriate political interference with IRS investigations.

  • Appointment of professionals and strong leaders who will protect the integrity of their offices;
  • Social norms that most politicians would feel reluctant to violate;
  • Penalties on those who interfere in the investigative process;
  • A requirement that those receiving the unlawful request report it;
  • Penalties on those who fail to report the request (to go along with the penalties on the requestor).

No law is perfect, and a president or other person could find their way around current law or protect others who abuse it. Still, norms and laws do constrain the quantity and extent of bad actions. So does a transparent disclosure system for revealing abuses. Even if some figure out how to violate legitimate boundaries, fences still can limit trespassing.

As citizens, and taxpayers, we all have rights to equal justice. Enforcing those rights often requires laws, as well as norms. The development of law protecting taxpayers against abuses of the IRS audit process may set an example for Congress to apply to elected officials, officers, and employees beyond the IRS and to investigations undertaken by other agencies.

This column first appeared on TaxVox on October 15, 2019


Multi-Trillion Dollar Fiscal and Monetary Gambles

Under pressure from President Trump and worried about a worldwide economic slowdown, the Federal Reserve recently cut short-term interest rates. By continuing to push rates down, the Fed may be doubling down on a $25 trillion gamble with future costs yet to be covered.

At the same time, the Trump Administration reportedly is considering tax cuts—that would add the deficit– to boost the economy in the short term. It too may be making another giant bet, with interest and debt repayments to be made by future taxpayers.

To understand why, keep in mind that what matters when government tries to spur economic growth is not the current rate of change in fiscal or monetary policy, but the change in the rate of change. For instance, the short-term economy grows (all else equal) when the Fed accelerates the pace of growth in the money supply or when Congress increases Treasury’s rate of borrowing by cutting taxes or increasing spending. Acceleration spurs growth, deceleration dampens it.

Suppose federal borrowing rises to 4 percent of national output. In a steady economy, merely keeping borrowing at 4 percent in future years adds no new stimulus. But raising the deficit to 5 percent of GDP, or more than $1 trillion  today, would stimulate growth through a larger budget deficit relative to the size of the economy. To keep the wheel spinning, Congress needs to borrow ever greater amounts—increasing the rate of change in debt accumulation. In an actual downturn, that additional borrowing would be on top of the old rate of borrowing plus the new borrowing forced by the decline in revenues—which is why many economists fear that each new fiscal gamble in good times increasingly deters future fiscal responses to a recession.

The same goes for monetary policy. Though not the only factor involved, the extraordinarily low short-term interest rates the Fed has maintained over recent years has helped promote an increase in the rate of wealth accumulation. The measured wealth of households rose from a long-term average of less than 4 times GDP to well over 5 times GDP. While that ratio fell closer to its historical level in the Great Recession, it has since risen to an all-time high. That’s about a $25 trillion increase that, if history is a guide, could become a $25 trillion loss if the ratio of wealth relative to income merely reverts to its average.

All those additional budget deficits and increases in household wealth, in turn, spur consumption. For instance, a recent NBER working paper by Gabriel Chodorow-Reich, Plament T. Nenov, and Alp Simsek suggests that a $1 increase in corporate stock wealth increases annual consumer spending by 2.8 cents. Building on that estimate, conservatively suppose each dollar increase in all types of wealth boosts annual consumption by about 2 cents. That would mean that a $25 trillion wealth bubble would spur this year’s consumption by about $500 billion, or about 2.5 percentage points of GDP more than had wealth simply grown with income.

What do you do if you’re Congress and an economy operating at full employment starts to slow down a bit? To spur the economy, you need to increase budget deficits at an even faster rate than before. If you’re the Fed thinking about sustaining or increasing consumption based on the wealth effect, then you try to maintain or increase the wealth bubble by not allowing housing or stock prices to fall.

How does this end? Science tells us: Not well. For instance, imagine an insect species identifies a new food source. The insect population will multiply rapidly until the demand from its accelerating birth rate outstrips the supply of food and the insect population crashes.

The economist Herb Stein described this phenomenon as simply and clearly as possible: “If something cannot go on forever it will stop.”

Our fiscal situation may not be that dramatic, but large budget deficits can lead to economic stress, and eventually, a crash. That has been the fear historically, though the recent experience of easy money across the globe, very low interest rates, and associated wealth bubbles may have offered a reprieve of sorts. However, interest rates that turn negative on an after-inflation, after-tax basis can lead to unproductive investments, which, in turn, can slow real economic growth even without a crash.

The modern economy may protect us in some ways. For example, the flow of international trade may mitigate economic slowdowns in any one region. And a service economy may not face some of the tougher business cycles that threaten an industrial one. But none of these factors overcomes Stein’s Law: Fiscal and monetary policy cannot always operate on an accelerating basis. To maintain the flexibility to accelerate sometimes, they must decelerate at other times.

Right now, we’re living with a $25 trillion wealth gamble by the Fed and trillion-dollar deficit bets by the Congress and the President. We’ve yet to see how it all ends and how the bills will be paid. How safe do you feel that your winnings will cover your share of those bills?

This was originally posted on TaxVox on August 29, 2019.


How Much State Spending Is On Autopilot?

This column was co-authored with Tracy Gordon and Megan Randall and was first published on Tax Vox.

In his 2005 State of the State address, California Governor Arnold Schwarzenegger sounded like he was being chased by the new Terminator T1000: It is on automatic pilot.

It is accountable to no one. Where will it all stop? How will it stop unless we stop it?

He was not talking about a threatening cyborg but rather a school funding formula added to the California constitution by ballot initiative (Proposition 98) backed by teachers and other public school advocates.

Governors and lawmakers have long decried constitutional and statutory formulas, federal grant requirements, and court rulings that limit how they can spend money. But how much of a state’s spending is actually out of current governors’ and legislators’ control? How much have past budget decisions limited states’ “fiscal democracy”?

Focusing on six states (California, Florida, Illinois, New York, Texas, and Virginia), we estimated that anywhere from 25 to 90 percent of budgets may be predetermined. For example, at the high end of our estimates, 86 percent of California’s spending was potentially restricted in 2015. At the low end, only 40 percent of California spending was restricted in that year.

Why the big range? Because spending constraints fall along a continuum of flexibility, and there is no consistent definition of mandatory spending across states. The federal government explicitly defines “tax expenditures” and “mandatory spending” in law and reinforces these concepts through the annual budget process. But most states do not rigorously or transparently assess the long-term cost of those tax breaks and spending programs that are either fixed in size or grow automatically without policy changes.

All states treat debt service and Medicaid as required spending. But many are more flexible when it comes to how they treat spending subject to federal rules, state revenue earmarks, or court decisions. Still other spending may be tied to changes in caseloads and costs. For example, state contributions to public employee pension plans and the portion of K-12 education funding determined by a fixed formula may be considered restricted. But it depends on an individual state’s constitution and any court decisions that apply.

Then there’s politics. A consistent theme in our interviews with state budget officials was “everything is flexible, especially in a crisis.” But even if the law technically allows it, elected officials may be reluctant to take the heat for changing the rules, reducing built-in program growth, or raising taxes. For example, few elected officials want to be seen as cutting K-12 education, although failing to budget for forecasted enrollment and cost increases happens all the time.

In all, we discovered that governors and legislators must weave their way through a multifaceted and complex maze of restrictions, not just to adopt a budget and make appropriations, but also to set new priorities.

In the end, something’s got to give. Our results suggest that when so much of state budgets are fixed, programs such as poverty assistance or higher education get squeezed. State leaders also may be reluctant to undertake new initiatives, such as expanding pre-K education, that require either new money or shifting funds from more protected programs. State budget restrictions may beget more restrictions, as advocates push lawmakers to lock in spending or earmark revenues for their favored programs.

How can elected officials break this cycle? They could start with more disclosure. Public budgets should show by program the inflation-adjusted cost of maintaining existing services given projected caseload and price increases and project how that cost changes over time. Although state budget officials routinely assemble the information they need for such current services budgets, few prepare multiyear projections, use them as a baseline from which to assess new policies, and make them public.

Only by consistently examining budget commitments over time can governors, legislators, and voters understand how much flexibility state governments have to meet short- and long-term priorities, plan for the future, and, most importantly, respond to new challenges and opportunities.


The SECURE Act Falls Far Short Of Enhancing Retirement Security

This column first appeared on TaxVox.

Congress seems about ready to pass a package of about 28 retirement and pension plan changes the House calls the SECURE (Setting Every Community Up for Retirement Enhancement) Act. This bill demonstrates bipartisanship, generally good policy, and a willingness to finance its tax cuts with some offsetting tax increases, features that have been in short supply in Congress.

Still, despite its title, the SECURE Act only modestly enhances retirement security. Congress has yet again failed to tackle broad–and badly needed–reforms.

The bill’s most costly provision increases from 70 to 72 the age at which individuals must start to take required minimum distributions (RMDs) from retirement accounts. This is a modest but worthy adjustment since people are living longer than in 1974 when many of the current RMD rules were written. By 2029, this change would cost about $900 million per year.

The bill’s second most-costly provision would make it easier for employers to organize retirement plans covering workers from multiple firms. This should make it easier for smaller firms to offer retirement benefits to their employees, expanding coverage somewhat.

The bill’s biggest revenue-raiser requires children and other beneficiaries to take distributions from their inherited retirement accounts more quickly, thus forcing them to pay taxes that they otherwise would defer. Curbing a tax break that does nothing to enhance the retirement security of deceased persons who did not spend all their pension wealth would generate about $2.5 billion by 2029.

Still, the bill accomplishes very little for the population as a whole.

First, the bill tinkers with several provisions of pension law, worth a few billion in tax subsidies but is likely to have little effect on overall retirement savings in the US. The total amount of tax benefits for pension and retirement savings was about $250 billion in 2018. By 2029, annual Social Security costs are projected to increase by about $500 billion relative to 2018 in inflation-adjusted 2018 dollars. And the total value of pension and retirement accounts of all types in the US is about $25 trillion.

Second, these changes do little to address a major disincentive for people to save through tax-advantaged accounts—their complexity. While some provisions of the SECURE Act do simplify the law, many of the changes would create additional savings options and add administrative costs to savers.

Third, many of these new provisions mainly increase tax benefits that already inure to the benefit of higher income people. Low- and moderate-income people, for instance, often have little retirement saving, and, if they do, they generally can’t wait until age 72 to draw upon them. Michael Doran, in a June 10 Tax Notes article, lays this criticism on almost all recent pension tax legislation.

For decades, Congress has been unable to deal with the great inequality in retirement assets, tax subsidies for retirement, and, more generally, wealth. The result is that most households go into retirement with limited assets to support many years of old age while some households accumulate large amounts in a tax-favored fashion. I hate to criticize the SECURE Act. After all, it does represent modest progress, something sorely lacking on so many legislative fronts. But in the end, it is another missed opportunity.


Can One Think Charitably About The Bryce Harper Deal?

This column first appeared on TaxVox.

As a long-time baseball fan, I’m happy that my office moved closer to the Washington Nationals ballpark, where I expect to take in more games this year. But I’ll do so with some misgivings, in part because of how the Nationals and their former star Bryce Harper missed an opportunity. Not because Harper left DC for the rival Philadelphia Phillies, but because Harper and the teams he negotiated with whiffed on their chance to send an important message about acting charitably toward their communities.

For months, there appeared to be large dollar differences between the kind of contract Harper sought and the contracts teams were willing to offer. Eventually, Harper signed with the Phillies who paid him $330 million over 13 years. However, there was a missed opportunity to bridge the gap between the parties. For instance, the team could have proposed to donate much of the difference to charities, a foundation or a donor advised fund at a community foundation to support Harper’s charitable efforts. This would not only have benefited others, but likely returned substantial value to Harper and the team’s owners through enhanced goodwill in the community.

The same principle could apply to other sports negotiations. For instance, a team could use a similar charitable transfer to hang onto a popular older player who is less productive than he once was and whose high-dollar re-signing would create potential problems with salary caps and luxury taxes. The team could pay him less in salary and shift some of the difference to his favorite charity.

Even beyond sports, donations to charity can be a great way to mediate differences in all sorts of disputes. It can work for business contracts, lawsuits, or even divorces. Because of their visibility, however, athletes and team owners have a unique opportunity to demonstrate how to convert dollar disputes into charitable benefits.

Yet, a foundation official who previously worked for a major sports team told me that she had never seen charitable giving in the playbook of either teams or professional athletes. But just as Bill and Melinda Gates drove charitable giving among fellow billionaires through their “Giving Pledge” initiative, a group of team owners could do the same among their sports connections. They could even hire famous retired athletes who have a record of generosity to lead the effort.

Let’s face it, communities contribute substantially to these owners and players, not just by buying tickets but through considerable taxpayer support. The federal government exempts Major League Baseball from antitrust laws. State and local governments often grant teams concessions through tax breaks, zoning rules, development of roads or public transportation to ballparks, and much more. And much of the income of successful team owners comes in the form of accrued capital gains that may never be subject to income tax.

Of course, some players and team owners already are generous donors to their communities—often quietly. But the press rarely provides a thorough accounting of owners’ and players’ charitable efforts. Indeed, the pizza joint that donates $10 per home run gets vastly more attention than the charitable giving—or lack of giving—by athletes and team owners.

A charitable gift in lieu of a portion of salary can raise tax and other issues. For instance, the money may be more valuable if it is first given to the player, who would in turn donate it to charity (the IRS might deem the contribution to essentially be the player’s compensation in either event). And, this approach would also raise the issue of whether the donated money would be counted as compensation subject to league rules on salary caps and luxury taxes. Those challenges could be overcome, and the likely outcome favorable because owners would not want to be seen as creating rules that “taxed” charitable contributions.

The real issue, though, is whether some future Bryce Harper will step to the plate and hit a home run for the community. Let’s hope so.


Alice Rivlin: The George Washington of the Congressional Budget Office

On June 21, the family and friends of Alice Rivlin joined with much of Washington’s public policy community to celebrate her life and extraordinary public service. This note represents only a small addition to the outpouring of tributes made to her.

This column first appeared on TaxVox.

Alice Rivlin, who passed away on May 14, was among the greatest public servants of the modern era. I admired her so much that I once told her I’d quit my job and join her campaign if she would run for president. Even in a likely loss, it would be a winning proposition, I asserted, to finally have someone honest and forthright in a presidential debate.

A few years ago, George Kopits, now at the Wilson Center, asked Alice and me to write chapters on the Congressional Budget Office (CBO) for a book he edited on independent fiscal institutions. Alice was as famous among budget experts abroad as she was in the US for her role as founding director of CBO–widely regarded as the best and most independent fiscal institution in the world.

Along with her immediate successors, Rudy Penner and Robert Reischauer, Alice created two crucial roles for CBO. First, of course, it assessed the macroeconomic and budgetary consequences of existing and new policies. But despite a fair amount of Congressional opposition, CBO did more than cost estimates. It also assessed the efficiency and distributional effects of programs.

Her chapter, “Politics and Independent Analysis,” (Restoring Public Debt Sustainability: the Role of Independent Fiscal Institutions, Oxford, 2013) described how an institution could tell politicians what they  didn’t want to hear and still thrive. Few other countries, even the most democratic, have succeeded in creating a fiscal institution with the same degree of independence as CBO. And in today’s political environment, it is risky to take such institutions for granted.

Increasingly, these non-partisan technocratic organizations are threatened by those who want to control the policy narrative. An effort to create an independent fiscal institution in Hungary, first headed up by George Kopits, became one of the first casualties of Prime Minister Viktor Orban’s government. In the US, CBO is increasingly important as executive branch agencies become more politicized by presidents who want to control the public narrative. In her 2017 keynote speech at an OECD conference, Alice reaffirmed her lifetime devotion to principles of good governance at a time when they are being challenged by governments at home and abroad. 

Alice always was being asked to take on new tasks. Fortunately, her commitment to good citizenship often overcame her reluctance. A few years ago, already in her eighties, she agreed to temporarily lead the health policy group at the Brookings Institution– not because she wanted to, but because she thought it was important.

In the late 1990s, Alice reluctantly took on the thankless role of chairing the District of Columbia’s Financial Responsibility and Management Assistance Authority (known as the Control Board). Carol Thompson Cole, now the president and CEO of Venture Philanthropy Partners (an organization that invests in children and youth throughout the Greater Washington area) helped convince Alice to take on the difficult task. Carol told her the board needed her prestige and trustworthiness to establish the stability and stature it needed to get the District’s finances under control. Once she accepted the role, Alice used her skills and good will to help set the District on a solid fiscal path.

One of my fondest Alice stories comes from Bo Cutter. In the early days of Bill Clinton’s presidency, Bo, now at the Roosevelt Institute, was a senior White House economic adviser and Alice was deputy director of the Office of Management and Budget.

Like candidates before him, Clinton had promised more in his campaign than he could deliver. In his case, he pledged more spending and tax cuts even as he pled for fiscal sanity. At an early meeting of budget advisers, Clinton was furious that by laying out the fiscal facts, his staff was forcing him to backtrack on his promises. Alice responded, “But Mr. President, you are president and now we have to decide.” As they were leaving, Alice explained to Bo that “the most relevant training [for her job] is being a mother.”  

Of course, these are only a few of the many great stories about Alice, one of the most brilliant, modest, resourceful, and effective policy makers and analysts I have had the privilege of knowing.

Thanks to Carol Thompson Cole, Bo Cutter, and George Kopits for sharing these anecdotes.


The Legacy of George H.W. Bush: Some Further Notes

“For where the rewards of virtue are greatest, there the noblest citizens are enlisted in the service of the state.” – Pericles’s Funeral Oration, as told by Thucydides

At least from the time of ancient Athens to this day, we extol the virtuous actions of those who have died, less as a tribute to them—after all, they have passed on—than as a challenge to ourselves and our youth to find actions to emulate. In recent decades, we have also become much more sensitized to the danger of sentimentalizing history by ignoring the limitations and prejudices of our past.

In this vein, to the many tributes made on behalf of our 41st president, I want to make two observations on the president’s legacy that have become especially relevant at a time when public officials attack good budget and tax policy, and private citizens attack those who engage in major philanthropic endeavors or public service, modern-day forms of “noblesse oblige.”

In doing so, I don’t mean to discount the continuing cost of his failures, as reflected in Lee Atwater attacks, race-baiting Willie Horton ads, and nonsensical “No new taxes” pledges. This is a time to celebrate the good a person has accomplished.

Memories of Bush’s pragmatism on budget and tax policy

President Bush’s interests and strength in working with people was nowhere better served than in the field of foreign affairs. But that skill—and willingness to do the right thing, even at personal cost—also played out in budget and tax policy.

Much attention has focused on the controversy surrounding the president’s willingness to violate his “No new taxes” pledge in agreeing to a 1990 budget agreement. Less attention has been paid to the ways that Republicans have largely repudiated that budget agreement, while Democrats have largely used that repudiation to exaggerate their own success through a slightly smaller budget agreement in 1993 under President Clinton.

Consider: each agreement reduced the deficit by $500 billion over five years, but in 1990, $500 billion was larger in real, inflation-adjusted, terms and as a share of GDP. Both bills significantly expanded the earned income tax credit, but the 1990 increase was larger, though phased in partly during the Clinton administration. Perhaps the most important part of both bills was acceptance of a so-called pay-as-you-go rule that in the 1990s essentially required new tax cuts and new entitlement spending to be paid for.

These two bills represented the primary legislative budget achievements of the decade. What then brought down the deficit so much by the turn of the century? A temporary stock market increase led to a large increase in revenues through capital gains recognition. Health cost growth slowed temporarily through the expansion of health maintenance organizations and preferred provider organizations. And the baby boomers entered peak earning and productivity years. Finally, there was a long stalemate on major give-away legislation reinforced by the pay-as-you-go rule.

George H.W. Bush’s pragmatism also had a significant effect on the successes of the Reagan administration. At the start of that administration, a war broke out between the more ideological and the more pragmatic sides of that administration. As is usual with almost all administrations, the ideologues eventually move on, as their strength comes from protesting and tearing down, not governing.

Among the pragmatists who accompanied then–vice president Bush to Washington and helped create many of the domestic successes for President Reagan was a group sometimes called the Texas Mafia (an appellation often meant to be friendly), who knew and often had worked with the vice president. These included James Baker and my friend and then-boss John E. (Buck) Chapoton.

Baker’s successes as White House chief of staff and as Treasury secretary (later secretary of state under President Bush) are well known. Less recognized, Buck played a significant role as an assistant secretary in leading the Tax Policy Office at Treasury through 1982 and 1984 deficit-reduction agreements and 1983 Social Security agreements—all of which had tax increases. He then negotiated the minefield that allowed us on the Treasury staff to develop the tax reform study of 1984 that led to the Tax Reform Act of 1986.

Buck, who at one time lived in Houston around the corner from the future president, also tells me a story about an issue that came up in the early 1980s and has been rejuvenated recently in the Trump administration: attempted Office of Management and Budget overview of Treasury regulations. Buck decided to call the vice president, who then had oversight over deregulatory matters.

Buck says he started having second thoughts about his boldness in making the call. He realized he could no longer call him “George,” and, when the vice president got on the line, Buck felt the need to stand up and address him by his title. He explained to the vice president that slowing down interpretative, rather than policy, regulations would hurt, not help, taxpayers who needed the information. The vice president had no problem accepting this pragmatic advice, and whether he later interceded, the problem for the most part was solved.

These examples show how success follows from a willingness to work and listen to people, a lack of fear of having smart people around oneself, and a readiness—no, more than that, a sense of obligation—to tackle important problems when they need to be tackled.

Extolling those who help society from a position of advantage

In many policy arenas, it is common to attack those with power and wealth. After all, often that power or wealth may not have been earned or distributed fairly by some standards, as in the case of inheritance or luck or being among the winners in a winner-take-all economy.

Those attacks often extend to what I will call the “oblige” side of “noblesse oblige”—the obligations rather than entitlements of the wealthy. Why should buildings be named after contributors or charitable deductions be allowed, or, for that matter, the famous be extolled for actions no finer than those taken daily by some of our relatives?

The answer, I think, obvious. We want those who succeed or have success handed to them to feel great obligation toward society. We want them to join, not separate, themselves from us. We want them to join the military when action is required. We want them to share their wealth.

Someone who makes $1 million and gives it away to true charitable causes contributes more to society than someone who makes the same amount and pays $300,000 in taxes. Removing incentives to give, an increasing tendency in modern tax policy, expands alternative uses of their money for conspicuous or wasteful consumption, empowering their heirs, or exercising political power to further aggrandize their wealth.

Antitrust and tax policy can and should focus on the entitlement or noblesse side of noblesse oblige, but such policies must build up wealth from the bottom, not simply level it from the top.

When the George H.W. Bushes of the world feel compelled to return to society some of the gifts it has made to them, and to be willing to accept the cost of rightful action, we’re all better off. Thank you, Mr. President, for this reminder in the midst of today’s raw political circus.


Regulation, Kavanaugh, Trump & the Indexing of Capital Gains

This column first appeared on TaxVox.

The issue of government regulation promulgated by unelected officials is central to many of today’s political and policy debates. It has surfaced in the confirmation battle over Supreme Court nominee Brett Kavanaugh, a strong critic of regulatory actions that are unsupported by legislative or constitutional authority. And we see it in the Trump administration’s contradictory regulatory initiatives: aggressive deregulation when it comes to environmental law paired with enthusiastic administrative efforts to reduce taxes on capital—absent clear legislative authority.

While the nation’s regulatory wave crested four decades ago, long before President Trump, the pattern has always been inconsistent. President Jimmy Carter jumpstarted the modern deregulatory push by cutting red tape for everything from airlines to home-brewed beer. Every president since has laid claim to at least part of the antiregulatory mantle. Yet, every recent president, including Trump, has also attempted to achieve policy goals through administrative power.

The current administration has been especially enthusiastic about using regulations to achieve tax policy ends. Senior White House advisers have asserted that Treasury and IRS can issue regulations to provide for the indexing of capital gains. The president himself has asked Treasury to liberalize the treatment of required distributions from retirement plans. Both share a common goal: to cut taxes on returns to wealthholders without enacting a statute.

In truth, presidents and political parties favor regulation mainly when it when it advances their own agenda, regardless of the number of pages it adds to the Federal Register. Interestingly, both presidents Trump and Obama have turned to administrative and regulatory initiatives in frustration when they felt they could not achieve their policy goals with Congress. And, when it comes to the sausage they do seek and get from Congress, their antiregulatory fervor falls by the wayside; witness all the regulation that IRS still struggles to issue around the Tax Cut and Jobs Act of 2017.

But what are the criteria by which an affirmative decision to regulate should be made? In theory, they are twofold: benefits should exceed costs and the actions should be constitutionally and legislatively allowed.

Using regulation to interpret the law can simplify life for taxpayers by providing rules surrounding the large number of possible transactions and arrangements into which they may enter. Such a requirement is often implicitly, if not explicitly, allowed by the legislation itself. While the law may not pass the benefit-cost test, regulations to taxpayers on how to be law-abiding usually does. Though the line between interpretation and exercising authority ceded in legislation is never perfectly clean, the Treasury and IRS have always viewed their guidance as mainly interpretative.

Yet, most administrations, not just the current one, often are tempted to wade into technical tax issues about which they have limited knowledge. A strong Treasury Secretary or Assistant Secretary can constrain such efforts, sometimes by making clear that meddling is unnecessary and potentially politically dangerous.

Extending to administrative agencies non-interpretative, legislative-type authority raises more complicated benefit-cost and statutory authority questions.

The Constitution explicitly requires that the President, not the Congress, “take care that the laws be faithfully executed.”  Even if it didn’t, Congress has neither the time nor the expertise to execute laws, and implementation inevitably requires discretion. Anyone who has ever sat at a congressional drafting session knows how much Congress leaves unspecified in legislative language. Long before a tax bill becomes law, congressional staff have begun consulting with Treasury and other agencies over how to fill in the inevitable gaps in the statute.

Bottom line: Think twice before generalizing about the costs or benefits of regulation or even its constitutional basis. And remember that the political and ideological arguments for or against regulation, particularly as something good or bad in and of itself, tend to be selective and supported by weak legal and economic reasoning. Mostly, though, remember that the best way to avoid bad regulation or rule making is to avoid bad law making.