S. Hrg. 104-840
PROPOSED CONSTITUTIONAL AMENDMENTS
TO REQUIRE A TWO-THIRDS VOTE
TO INCREASE TAXES AND
TO PROHIRIT RETROACTIVE TAXATION
GOVDOC
^ 4. J 89/2:S.Hrg.
HEARING
BEFORE THE
SUBCOMxMITTEE ON THE CONSTITUTION,
FEDERALISM, AND PROPERTY RIGHTS
OF THE
COMMITTEE ON THE JUDICIAKY
UNITED STATES SENATE
ONE HUNDRED FOURTH CJ
SECOND SESSION
ON
S.J. Res. 8
A RESOLUTION PROPOSING AN AMENDME
OF THE UNITED STATES TO PROHIBIT
TAXES
S.J. Res. 49
A RESOLUTION PROPOSING AN AMENDMENT TO THE CONSTITUTION
OF THE UNITED STATES TO REQUIRE TWO-THIRDS MAJORITIES FOR
BILLS INCREASING TAXES
BOSTON PUB:...t./ V,.,
OVWWf^NT COCUMEPiTS jB'Ari I iVto% APRIL 15, 1996
D
MAR C « 2000 ! S-ialNo^04-72
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1997
For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington. DC 20402
ISBN 0-16-054969-8
loMr-L'A
S. Hrg. 104-840
PROPOSED CONSTITUTIONAL AMENDMENTS
TO REQUIRE A TWO-THIRDS VOTE
TO INCREASE TAXES AND
TO PROHIRIT RETROACTIVE TAXATION
GOVDOC
I 4. J 89/2:S.Hrg.
HEARING
BEFORE THE
SUBCOMMITTEE ON THE CONSTITUTION,
FEDERALISM, AND PROPERTY RIGHTS
OF THE
COMMITTEE ON THE JUDICIAKY
UNITED STATES SENATE
ONE HUNDRED FOURTH CJ
SECOND SESSION
ON
S.J. Res. 8
A RESOLUTION PROPOSING AN AMENDME
OF THE UNITED STATES TO PROHIBIT
TAXES
S.J. Res. 49
A RESOLUTION PROPOSING AN AMENDMENT TO THE CONSTITUTION
OF THE UNITED STATES TO REQUIRE TWO-THIRDS MAJORITIES FOR
BILLS INCREASING TAXES
BOSTON PUB. ..1.V V,.,
lOVWNf^NT COCUl'i/IENTS uB'Aii i ivl:c(>i . APRIL 15, 1996
\ R/ir ~ r a nrym ? Serial No. J-104-72
I WIAk C b 2000 1
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
39-805 cc WASHINGTON : 1997
For sale by the U.S. Government Printing Office
Superintendent of Document.s. Congressional Sales Office, Washington, DC 20402
ISBN 0-16-054969-8
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South CaroUna JOSEPH R. BIDEN, Jr., Delaware
ALAN K. SIMPSON, Wyoming EDWARD M. KENNEDY, Massachusetts
CHARLES E. GRASSLEY, Iowa PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania HOWELL HEFLIN, Alabama
HANK BROWN, Colorado PAUL SIMON, IlUnois
FRED THOMPSON, Tennessee HERBERT KOHL, Wisconsin
JON KYL, Arizona DIANNE FEINSTEIN, California
MIKE DeWINE, Ohio RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan
Mark R. Disler, Chief Counsel
.^,. Manus Codney, Staff Director and Senior Counsel
• Cynth^ C. Hogan, Minority Chief Counsel
{\ ' . ,„ Karen A. Robb, Minority Staff Director
SjjbcomSiit?^ on the constitution, Federalism, and Property Rights
' HAN^ BROWN, Colorado, Chairman
ORRIN G. HATCH, ^Utah-"'' A PAUL SIMON, Illinois
JON KYL, Arizona - ; '"'.>1.-? V, \ EDWARD M. KENNEDY, Massachusetts
MIKE DeWINE, Ohio ' :. „J. ■ -^ RUSSELL D. FEINGOLD, Wisconsin
SPENCBR-ABRAIDCM, Michigan
David Miller, Chief Counsel
Susan Kaplan, Minority Chief Counsel
(II)
CONTENTS
STATEMENTS OF COMMITTEE MEMBERS
Brown, Hon. Hank, U.S. Senator from the State of Colorado 1
Kyi, Hon. Jon, U.S. Senator from the State of Arizona 19
CHRONOLOGICAL LIST OF WITNESSES
Panel consisting of Jack Kemp, co-director. Empower America, and chairman.
National Commission on Economic Growth and Tax Reform, Washington,
DC; Lloyd N. Cutler, Wilmer, Cutler, and Pickering, Washington, DC; Pete
du Pont, policy chairman. National Center for Policy Analysis, and member.
National Commission on Economic Growth and Tax Reform, Wilmington,
DE; Hon. David Skaggs, a Representative in Congress from the State
of Colorado; and Hon. Joe Barton, a Representative in Congress from the
State of Texas 2
Panel consisting of John O. McGinnis, professor of law, Benjamin N. Cardozo
School of Law, New York, NY; and David Strauss, professor of law. Univer-
sity of Chicago School of Law, Chicago, IL 66
Panel consisting of Hon. John Shadegg, a Representative in Congress from
the State of Arizona; Grover G. Norquist, president, Americans for Tax
Reform, Washington, DC; Robert Greenstein, executive director. Center
on Budget and Policy Priorities, Washington, DC; and WiUiam A. Niskanen,
chairman, Cato Institute, Washington, DC 81
Hon. Paul Coverdell, U.S. Senator from the State of Georgia 116
Panel consisting of Joseph E. Schmitz, Patton Boggs, Washington, DC; Roger
Pilon, senior fellow, and director. Center for Constitutional Studies, Cato
Institute, Washington, DC; Mortimer Caplin, Caplin and Drysdale, Wash-
ington, DC; and Joanne Dixon, retired farmer, Jirard, GA 119
ALPHABETICAL LIST AND MATERIAL SUBMITTED
Barton, Joe: Testimony 58
Brown, Hon. Hank: Prepared statement of Hon. Pete Wilson, Governor of
California 17
Caplin, Mortimer M.:
Testimony 132
Prepared statement 134
Coverdell, Hon. Paul:
Testimony 116
Prepared statement 118
Cutler, Lloyd N.: Testimony 44
Dixon, Joanne: Testimony 137
du Pont, Pete:
Testimony 47
Prepgired statement 48
Greenstein, Robert:
Testimony 96
Prepared statement 98
Kemp, Jack:
Testimony 2
A report Unleashing the American Spirit" 6
Kyi, Hon. Jon, submitted the following:
Prepared statement of Hon. George Allen, Governor of Virginia 23
Letter from William F. Weld to Senator Kyi, dated Apr. 15, 1996 23
(III)
IV
Page
Kyi, Hon. Jon, submitted the following — Continued
Prepared statement of Lowell Gallaway, Department of Economics, Ohio
University 23
The Impact of the Welfare State on the American Economy by Lowell
Gallaway and Richard Vedder 25
Prepared statement of Hon. Rod Grams, U.S. Senator from the State
of Minnesota 43
McGinnis, John O.:
Testimony 66
Prepared statement 67
Niskanen, William A.:
Testimony 105
Prepared statement 106
Norquist, Grover G.:
Testimony 83
Prepared statement 85
Appendix A: Supermajority Reqviirements in the U.S. Constitution .... 89
Appendix B: Supermajority requirements at the State Level 90
Appendix C: State Supermajority Initiatives 91
Appendix D: Suppermajority Legislation Introduced at the State
Level in 1995 and 1996 92
Pilon, Roger:
Testimony 124
Prepared statement 126
Schmitz, Joseph E.:
Testimony 119
Prepared statement 122
Shadegg, John B.:
Testimony 81
Prepared statement 83
Skaggs, David E.:
Testimony 53
Prepared statement 55
Strauss, David A.:
Testimony 70
Prepared statement 72
APPENDK
Proposed Legislation
S.J. Res. 8, a resolution proposing an amendment to the Constitution of
the United States to prohibit retroactive increases in taxes 147
S.J. Res. 49, a resolution proposing an amendment to the Constitution of
the United States to require two-thirds majorities for bills increasing
taxes 149
PROPOSED CONSTITUTIONAL AMENDMENTS
TO REQUIRE A TWO-THIRDS VOTE TO IN-
CREASE TAXES AND TO PROHIBIT RETRO-
ACTIVE TAXATION
MONDAY, APRIL 15, 1996
U.S. Senate,
Subcommittee on the Constitution, Federalism,
AND Property Rights,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in room
SD-226, Dirksen Senate Office Building, Hon. Hank Brown (chair-
man of the subcommittee) presiding.
Also present: Senator Kyi.
OPENING STATEMENT OF HON. HANK BROWN, A U.S. SENATOR
FROM THE STATE OF COLORADO
Senator Brown. The subcommittee will come to order. The sub-
ject of the hearing is a constitutional amendment proposed by Sen-
ator Kyi that would change the way we have done business in this
country for most of our history by imposing a super-majority stand-
ard of a two-thirds vote to effect tax increases.
The measure has enormous significance. It would literally change
modem legislative processes to an enormous degree.
This country throughout most of its history had a small Govern-
ment, small in terms of the portion of the GDP it consumed and
small in terms of its regulatory impact. That has changed dramati-
cally during this century. Prior to 1930, this Nation's government
never exceeded 10 percent of the GDP, with two exceptions. Those
exceptions were 1 year during the Civil War and 1 year during
World War I. But outside of that, this Nation's tax burden and
spending burden by the Federal, State, and local governments all
combined never exceeded 10 percent of its GDP.
Since the 1930's, it has never been below 10 percent of the GDP.
It has grown dramatically and now approaches 40 percent of the
GDP, but the change isn't just in the dramatic increase in the por-
tion of our GDP taken by government. The change is also in terms
of who spends it. Originally, local and State governments spent by
far the largest share of government expenditures, but since the
1930's that has reversed, with by far the largest share coming from
the Federal Government.
The tax burden to support these dramatic increases in expendi-
tures has grown on a consistent basis since the 1930's. Since 1980,
(1)
the Federal tax burden per capita has more than doubled and
hardly a year has gone by where we haven't had a significant se-
ries of tax increases. Thus, on this 15th day of April, tax day, it
is appropriate that we consider this issue and review the dramatic
changes that our colleague from Arizona has proposed for us.
We are fortunate to have a very distinguished panel and I will
ask our first witness, Congressman Jack Kemp, who is head of Em-
power America, to start us off.
PANEL CONSISTING OF JACK KEMP, CO-DIRECTOR, EMPOWER
AMERICA, AND CHAIRMAN, NATIONAL COMMISSION ON ECO-
NOMIC GROWTH AND TAX REFORM, WASHINGTON, DC;
LLOYD N. CUTLER, WILMER, CUTLER AND PICKERING,
WASHINGTON, DC; PETE DU PONT, POLICY CHAIRMAN, NA-
TIONAL CENTER FOR POLICY ANALYSIS, AND MEMBER, NA-
TIONAL COMMISSION ON ECONOMIC GROWTH AND TAX RE-
FORM, WILMINGTON, DE; HON. DAVID SKAGGS, A REP-
RESENTATIVE IN CONGRESS FROM THE STATE OF COLO-
RADO; AND HON. JOE BARTON, A REPRESENTATIVE IN CON-
GRESS FROM THE STATE OF TEXAS
STATEMENT OF JACK KEMP
Mr. Kemp. Well, Senator, thank you so very much for holding
these hearings on a day on which most Americans are pretty much
frustrated, depressed, and in many cases rather cynical about a
system that was built over the years and which, as you alluded to
in your opening comments, has been frustrating, cumbersome, and
I would make a case today, Mr. Chairman, that it is causing a very
severe dampening effect on the output, the productivity, the — ex-
cuse the expression — supply side of the economy.
It seems to me that if you look at the history of taxation, you can
either approach it from the standpoint that all taxes raise revenue
or taxes have a significant impact upon the behavioral instincts
and incentives of people. I would make the case that it has both
of those impacts. It does affect incentives and it obviously has to
raise revenue.
There is no man or woman on this distinguished panel, there
was no one on the Dole-Gingrich commission which I chaired — Gov-
ernor du Pont was a very valuable and key member, holding hear-
ings for over 6 months — there was no member of our panel that did
not want to raise revenue in the most efficient and effective way
without slowing down the ability of this economy to grow and with-
out helping American families and American working men and
women deal with the tax system of America.
We started out our hearings with the basic predicate that the
purpose of taxation was to raise revenue, not to redistribute
wealth. It was interesting to me, Mr. Chairman, that there are
many bipartisan Members of the Congress — I am sitting here with
Representative Skaggs, but you could find many Democrats, I am
sure, including Dick Gephardt, who said as recently as a few weeks
before our commission — I guess it was a couple months ago, now
that I think about it — that once the 1986 tax law had been passed,
it was not long before taxes were raised. The American people had
some deductions taken out and rates were cut from 5 rates to 2
rates, 15 and 28. Within a very short period of time, sometimes
rather circuitously, taxes began to cUmb.
The purpose of, as I understand it, the Kyi amendment — I can't
speak for Senator Jon Kyi, of Arizona, a very good friend of mine,
as are you, Mr. Chairman — and other cosponsors of this was to
come up with a way of reforming the tax code and making it more
difficult to raise taxes than to cut them. They seem to always go
up; they very seldom go down.
Joe Barton in the House, among other men and women, has in-
troduced this amendment in the House. I particularly believe it is
a propitious time to tell the American people on this April 15 that
the Congress is not going to do business as usual; that it is going
to be more difficult to raise taxes than to cut them; that the pur-
pose of taxation is not just revenue neutrality, albeit you could
even argue with that over the short term.
President Kennedy, in 1962 and also in 1963, suggested that the
purpose of cutting the tax rates was not to lose revenue. It was to
prevent a recession. It was to raise the size — or increase, I should
say, the size of the pie and to increase revenue.
I believe that Congress has backed itself into a comer, Mr.
Chairman. In attempting to balance the budget, we have passed
legislative amendments that would require revenue neutrality at
the lowest and revenue increases at the highest as the purpose of
public policy. In my opinion, the purpose or tax rates, again, should
he to increase the size of the economic pie, increase the number of
jobs, increase the climate for working and saving and investing and
engaging in entrepreneurial activity in America.
I would make a case, Mr. Chairman, that this is necessary not
only to tell Congress to stop — that is too harsh. It is not just Con-
gress. It is 0MB, the executive branch. It is many of our pundits,
both on the left and right. I mentioned Dick Gephardt. Dick Gep-
hardt, in testifying before our commission, said that once we get
tax reform in place, it should be not impossible to change the rate,
but it certainly should be difficult, and he suggested a national ref-
erendum.
To be frank, Mr. Chairman, I would be willing to go to the Amer-
ican people, the ultimate marketplace, for the purpose of raising a
tax rate subsequent to reforming the code, which du Pont, Kemp
and the National Commission on Economic Growth and Tax Re-
form suggested just a few months ago. We suggested one single tax
rate and that it be low.
Pete and I have probably informally come to the conclusion that
in peace time it ought not to be higher than 19 percent. It ought
to be progressive for the poor. Low-income people should not pay
at the same rate as so-called upper-income people, so we suggested
a generous exemption for low-income people. We suggested that
working men and women and families have a generous deduction
beyond just that exemption.
We thought and believed and recommended that the payroll tax
be deductible because, as you know, Mr. Chairman, the payroll tax,
the FICA tax, is a huge burden on about 60 percent of working
men and women and working families and low-income families in
America. We have tried to offset it with an EITC, the Earned In-
come Tax Credit. Both du Pont and Kemp and Ed Fuelner and Ted
Forstmann and Shirley Peterson, a former commissioner of the
IRS, among other men and women who served on our commission,
suggested that once we get fundamental tax reform in place, like
Dick Gephardt on the left of the aisle and those of us on the right
of the aisle, it should be very difficult to change it.
I would suggest that a two-thirds majority, such as that required
for overturning a veto by the President, would be a legitimate way
of showing the American people that we are serious about tax pol-
icy in America. A lot of people will say it can't be done. It is already
done, Mr. Chairman, at the State level. This is a great climate for
recommending Federal policy that is in sync and inextricably tied
to State policy.
Over 10 States have policies in which it requires a two-thirds
supermajority to raise taxes. There are States that have, with em-
pirical evidence, had higher levels of growth, more jobs created. In
my opinion, it makes more sense to the average taxpayer in the
country.
I would just close my informal remarks with the request that my
full text be submitted for the record, A, and, B, to close on a point
that both Pete du Pont, who has had very personal experience as
Governor of Delaware, and Jack Kemp as the author of the Reagan
tax cut of 1981 would also recognize empirical evidence.
There are two ways to raise revenues. You can either soak the
taxpayer, hit the working man and woman, attempt in some cases
to even soak the rich, albeit I would make the case that the rich
never seem to get soaked. They always have ways of escaping tax-
ation. It is the poor who get soaked. The incidence of taxation is
always different than the burden.
While we place the incidence of taxation on production, output,
work, savings, investment, and the supply side of the economy, the
burden of taxation falls on the men and women who go without
jobs, falls on the poor who can't get access to capital, falls on those
people who are trying to work their way out of poverty. You cannot,
in my opinion, Mr. Chairman, work your way out of poverty or
work your way off welfare without two things, education and a job,
and that ought to be at the forefront of the congressional mind's
eye as we look at this constitutional amendment which simply
would say raise revenue, but do it by expanding the size of the
economy. Don't keep attempting to take it out of the hard-working
men and women of America who not only want to work, but they
want to save.
I will close with this thought. Yesterday, I had a friendly debate
with one of your colleagues, John Breaux, of Louisiana, for whom
I have high regard. He kept saying that the trouble with Kemp and
du Pont and this issue is we favor the investor, the saver, the cou-
pon-clipper, against the wage-earner.
I wanted to say then, and I didn't — I was on the CNN show with
my friend, Jon Kyi, of Arizona, and I missed an opportunity, al-
though I thought about it several times. I think the most fun-
damental mistake being made in America today is that somehow
the wage-earner and the saver are different people. They are not
different people. The wage-earner and the man and woman who
want to save for a future, be it for medical care for their golden
years or education for their children, or whatever— they are the
same people. It is just different stages of their lives.
We have got to stop this class warfare, Mr. Chairman — you have
been a champion of that— and I can't think of a better way than
passing the Kyi amendment and the Barton amendment in the
U.S. House today, April 15, 1996.
Thank you.
[The information of Mr. Kemp follows:]
♦ *♦**♦***♦
*♦**♦*♦**♦♦
Unleashing the American Spmrr
A**********************************
A GUIDE to Tax Freedom for Americans &
Spectacular Economic Growth for America!
Facts, Figures & Citizen Testimonies
How & why America MUST Throw Out the Current Tax Code
and Implement the Genuine Reform Proposed by
The National Commission on Economic Growth and Tax Reform,
Appointed by Senate Leader Bob Dole and
Speaker of the House Newt Gingrich
with Introduction by
Jack Kemp
Commission Chairman
Unleashing the American Spirit
The Tax Test
Six Points of Principle
■ Economic growth to expand opportunity and create jobs
■ Fairness for all taxpayers
■ Simplicity, so everyone can figure it out
■ Neutrality, so people — not government make choices
■ Visibility, so people know how much government costs
■ Stability, so people can plan for the future
Six Points of Policy
■ A single tax rate
■ A generous personal exemption to remove the burden on those
least able to pay
■ Lower tax rates for America's families
■ Payroll tax deductibility for working men and women
■ An end to biases against work, saving, and investing
■ A 2/3 super-msgority in Congress required to raise the rate
Introduction -^ifjL':}
Setting the Eagle Free
"An economy hampered with high tax rates will never produce enough revenue
to balance the budget, just as it will never produce enough output and enough jobs."
— John F. Kennedy
Like Kennedy, President Ronald Reagan grasped the "paradoxical truth" that only
lower tax rates could lead to higher growth. His leadership was my inspiration as we
launched the tax reform movement in the early 1980s with the Kemp-Roth tax cut, paving
the way for the greatest peacetime economic expansion the world has ever seen.
Never has this example had more urgency than today. America stands at the edge
of extraordinary possibilities. The passing of the Cold War offers an opportunity to lead
the world into an era of democratic capitalism, rising prosperity and technological
progress. We must embrace this future — but we are being weighed down by our past:
the built-up barnacles of counter-productive tax policies that punish risk-taking, penalize
investment, and destroy the link between effort and reward.
American taxpayers have had enough. In election after election voters have sent
the message that taxes are too high and government spends too much. The message of
this commission is: hang on, we hear you, help is on the way! Senator Dole and Speaker
Gingrich told us to begin with a blank slate and chart a totally new tax structure for
America's next century. We held cross-country public hearings to hear your concerns —
weighing the advice of ordinary taxpayers in reaching our final conclusions.
How do we make sure everyone pays their fair share? How do we ensure enough
revenue to balance the budget and meet basic needs? Most importantly, how do we double
the rate of economic growth, create opportunity, and get America growing again? This
synopsis of our report attempts to offer some answers by laying the groundwork for tax
reform that restores working Americans' control over their pocketbooks, their businesses,
their destinies, their lives.
John Gardner has said of the ingredients of great nations: "There occurs at
breathtaking moments in history an exhilarating burst of energy and motivation. ..and a
severing of the bonds that normally hold in check the full release of human possibilities.
A door is opened, and the caged eagle soars." That eagle, the symbol of our nation,
represents the infinite possibilities awaiting the American people. Our mission, the
intent of our recommendations, is to open that door and set the eagle free.
Jack Kemp
C/i airman
national Commission on Economic Growth and Tax Reform
Unleashing the American Spirit
Repeal the Tax Code:
Highlights of the Commission's Report
The Commission believes the current tax code is beyond repair... complex,
wasteful, economically destructive — enforced by a bureaucracy many see as too big,
too powerful, too intrusive.
The Commission recommends that the current Internal Revenue Code be
repealed in its entirety.
Replace the system with a single low rate , taxing income only once with
a generous personal exemption and full deductibility of the payroll tax
for America's working men and women .
This system will reduce the tax burden for all Americans. ..while removing it
entirely from the poor
The new system will be set in stone: with a 2/3 super-maioritv vote of the
Congress required to raise the tax rate .
These changes can help double the rate of economic growth — create jobs , raise
family incomes , expand ownership , entrepreneurship . and opportunity .
Only a system which promotes economic growth can produce the needed revenues to
balance the budget and reduce the burden of our national debt.
What's Wrong With the System?
3 Major Problems We Must Solve Now
1 . Economically Destructive — Steeply graduated rates on labor and capital destroy
jobs, penalize saving and investment, and punish personal efforts to get ahead.
2. Impossibly Complex — Mindboggling complexity places a huge burden on taxpayers
while draining precious resources from our economy. Tax rules are so confusing that
even IRS agents have trouble figuring them out.
3. Overly Intrusive — vast IRS enforcement powers are increasingly seen as
infringements on privacy and personal freedom. Too many Americans feel the IRS
says they are "guilty until proven innocent" — and resent being treated as criminals.
The Road to Tax Tyranny
"When men get in the habit of helping themselves to the property of others, they cannot
easily be cured of it. " — 1909, New York Times editorial protesting the first income tax.
■ The income tax was enacted in 1913 — and then, less than 2% of Americans were
required to file. Rates ranged from 1 to 7% — the highest rate applying to those who
made the equivalent of $7.7 million by today's standards.
10
Unleashing the American Spirit
'^:^
As America prepared to enter World War I the top rate soared to 67%. By World War
II, the top rate was 94%.
Throughout the 1950s the highest rate remained at more than 90%. John Kennedy
cut that rate to 70%-. Ronald Reagan cut it to 28%.
Both tax cuts triggered unprecedented economic growth, new businesses and new jobs.
Because of President Clinton's tax increases, today's rate is rising again — the top tax
rate now hovers higher than 40%.
Complex, Confusing, Costly and Coercive
"The current tax structure is way out of date with the real world, too complicated with too
many loopholes. [Vfe] say dump it!" — Citizen's letter to The Commission
■ The current tax code is seven million words (7,000,000). Lincoln's Gettysburg
Address is 269 words; and the Declaration of Independence, 1,337 words.
■ The IRS' "simplest" return, the EZForm 1040, has 33 pages of instructions.
The IRS' Form 1040 has 76 pages of instructions.
■ American business will spend 3.4 billion hours, and individuals will spend 1.7
billion hours, simply trying to comply with the tax code. That's equivalent to a "staff
of 3 million people working full time, year round, just on taxes.
■ This costs our economy $200 billion each year — that's like taking every new car,
van and truck General Motors builds in a year and dumping them into the ocean.
■ Twice as big as the C.I.A. and five times the size of the F.B.I., the I.R.S. controls
more information about individual Americans than any other agency.
■ Without a search warrant, the I.R.S. can search personal financial records;
without a trial, the I.R.S. can seize private property.
■ Harvard economists estimate that average incomes in the U.S. could be 15-20%
higher without the economic distortions caused by the tax code. That's as much as
$6,000 per year for middle income families.
TAX PREPARATION
ANNUAL COST:
$200 BILLION
11
Unleashing the American Spirit
The Tax Test — A Checklist for Real Reform
The principles and recommendations contained in the report comprise "The Tax Test" —
a blueprint that provides the foundations for legislative reform. We ask that Congress
not pass nor the President sign any legislation that fails to meet this test.
I. Economic Growth: Because expanding prosperity and opportunity
form the foundation of a free and healthy society.
■ None of the challenges facing America — from poverty to crime to the budget deficit —
can be solved without strong and continuing economic growth.
■ And yet last year our economy grew at an anemic 2.1%! America cannot afford to limp
into the 21st Century on such a feeble rate of economic growth.
■ No nation in history has ever taxed its way into prosperity. Throughout the
ages, lower taxes have meant higher economic growth, higher living standards
and more jobs.
■ Here at home we've had three periods of powerful economic growth:
1 . 1920s — After the Harding-Coolidge tax cuts, the economy grew at more
than 5% per year.
2. 1960s — After the Kennedy tax cuts, the economy grew at 59c while revenues
rose 29% in 4 years.
3. 1980s — Reagan tax cuts. From 1982-1989, 7 years of growth at nearly 4%
annually. 21.5 million new jobs and over 4 million new businesses created.
■ REMEMBER: Higher tax rates don't produce higher revenues — only higher
growth rates do.
Tax rates have gone up, gone down, gone up again — but tax revenue as a percentage of
national output has remained the same. Looking at the chart on the following page:
government historically collects about 19% of the GDP — no matter how high the tax rate
is pushed. Higher rates simply mean a smaller economy — and less income to tax. 19%
of a booming economy brings in more revenue than 19%^ of a weak one — another reason
why reform must spur economic growth.
II. Fairness: Because democracy is based on the principle of equality before
the law.
"...I do not mind paying my fair share. ..but I feel that many, many people and companies
are not paying their fair share because they have the money to hire smart accountants
and lawyers." — Christine W. Perkowski, PA., Letter to Commission
In order to restore fairness, a new system must:
Tax equally: One rate respects equality before the law.
■ Eliminate tax "loopholes" — the exemptions, deductions and credits that
traditionally benefit the rich.
12
Unleashing the American Spirit ; &Aij
■ Don't punish success — by slapping higher rates
on hard work, creativity and entrepreneurial
risk taking.
■ If a man earns ten times the income of another,
he should pay ten times as much taxes — no more,
no less.
Tax progressively: A compassionate system
must lighten the load on those least able to pay.
■ Americans must be able to feed, clothe and house
their families before they're asked to feed the
federal spending machine.
■ Today, the highest marginal tax rates in America
are paid by those who are trying to move from
welfare to work. When lost benefits are included,
this effective rate can reach 100%.
■ A generous exemption can provide individuals with
an "economic head start" — letting them start to climb
the ladder of opportunity before taxes take effect.
Top Tax Rate and Total Federal Revenues
1915 I960 19«S 1970 1975 1980 1915 1990 1994
Source IRS. 0MB. Tax Foundation
Lower tax rates: The rate must be low and kept low.
■ Taxpayers are unanimous: taxes are too high, and government spends too much.
■ By lowering taxes and restraining spending, we can restore the balance of power
between the federal government and the citizens who pay its bills.
III. Simplicity: Because life is too short and peace of mind too precious
to waste your time and lose your temper trying to figure your taxes.
■ The tax code grows in complexity every year — making it increasingly
impossible for average taxpayers to understand.
■ A simplified, single rate system will let taxpayers file their return on one sheet of
paper in less time than it takes to complete the morning crossword puzzle.
rV. Neutrality: Because the code shouldn't pick winners or losers, but let
people make decisions based on their own needs and dreams.
■ The purpose of taxes is to raise the revenue needed to run government — period.
■ This should be done in a way that does the least possible damage to the economy.
■ The most damaging aspect of today's code is the double and triple taxation of saving
and investment.
V. Visibility: Because those who pay for government have a right to see the bill.
■ Hidden taxes further the fantasy that government is free, leading many to "consume"
more government than they otherwise would.
13
Unleashing the American Spirit
■ A visible tax rate gives citizens an honest accounting of government's expense.
■ By keeping the tax rate in plain view — we can make it harder for politicians to
raise taxes without our consent.
VI. Stability: Because taxpayers should be able to plan for their future
without the rules getting changed mid-game.
■ Over the past 40 years, the tax code has had .31 "significant" reforms and more than
400 revisions through public law.
■ These changes have created a climate of confusion and uncertainty.
■ A stable tax code must let individuals start a business, buy a house or take out a
loan wdthout fear of constant changes in the tax code.
A New Tax Code For The 2 1 st Century
Key Recommendations
■ Adopt a single , low tax rate with a generous personal exemption
■ Lower the tax burden on America's working families and remove it from those least
able to pay
■ End biases against work, saving, and investment
■ Allow full deductibility of the payroll tax for working men and women
■ Require a two-thirds super-maiority vote in Congress to increase the tax rate
Discussion
One Rate
One t£ix rate, combined with a generous personal exemption, produces a progressive
average tax rate. Low-income taxpayers pay little or no tax — but above the threshold,
everyone faces the same rate on additional income.
Lower the Tax Burden for All
The single rate should be as tow as possible — and lowered over time as a growing
economy yields higher revenues. Any extra revenue should be seen as a "growth
dividend" to be paid out to the American people.
End Biases Against Work, Saving and Investment
Multiple taxation goes against the grain of basic American values — such as thrift, hard
work, and entrepreneurial risk-taking. These biases must end — including elimination
of the tax on capital gains.
14
Unleashing the American Spirit ^^t^
■ At 28% — America's capital gains tax rate is one of the highest of any developed
nation. It's not fair for America's workers and entrepreneurs to compete against
nations with lower rates; France, 16%; Japan, 1%; Germany, South Korea, Hong
Kong, 0%.
■ By punishing risk-taking and shrinking the pool of seed capital — the capital gains
tax destroys jobs and kills businesses before they have a chance to be bom. Those hit
hardest are not the wealthy, but those who have yet to realize their capital gains: the
poor, the young, and minorities.
Eliminate "Death Taxes"
It makes little sense and is patently unfair to impose extra taxes on people who choose to
pass their assets to their children or grandchildren. Families faced with these
confiscatory taxes often are forced to sell off farms or businesses, destroying jobs in the
process.
Full Deductibility of Payroll Taxes for All Working Americans
Many employees pay more in payroll taxes than in federal income teixes. When employer/
employee payroll taxes of 15.3% are taken into account, a worker in the 28% tax bracket
faces a brutal marginal rate of 43% on any additional income earned.
Making the payroll taix deductible means income taxes would be calculated on working
families' real net incomes.
Simplify International Taxation
The current international taxation system is one of the biggest headaches for American
businesses — damaging our competitiveness abroad, while encouraging businesses to
reinvest profits overseas rather than bringing them home.
A new system must be clearer and simpler. It must not work to discourage investment in
research and development in the U.S.
Strengthen Private Retirement Savings
Americans are not saving enough for their own retirement.
Even under a new tax system, there is no guarantee that all individuals or families will
save enough to be secure in their retirement. Without sufficient retirement saving, many
people v^ll become dependent upon government in their old age, necessitating either
sharp increases in taxes on future generations or a significantly diminished standard of
living.
Therefore, any new tax system should encourage people to save for their own retirement.
Two-Thirds Super-Majority Vote to Raise the Tax Rate
The roller-coaster ride of tax reform in past decades has fed citizens' cynicism about the
possibility of real, long-term reform. By safeguarding these changes with a two-thirds
super-majority vote, we can rebuild Americans' trust in the system.
15
Unleashing the American Spirit
Deductions and Exemptions
The home mortgage interest deduction has spurred home ownership in America; an
important goal of The Commission is to spread ownership to give more people a stake in
the system.
And, at a time when America needs a renaissance of private giving and commitment to
overcome those social problems which government programs have either failed to improve
or made worse — we need a system which encourages people to take more responsibility
for communities and neighbors in need.
America should debate the best way to protect these institutions and preserve the values
they represent within the context of the dynamic new tax system The Commission
envisions.
Conclusion
It is said that every breakthrough in human understanding has come in the form of a
simplification. The complex, bureaucratic tax code of the 20th century will not help us
keep pace with the challenges of the 21st.
The rewards of the 21st century tax code outlined in these pages go beyond the obvious
simplicity and freedom a single-rate would afford. The impact on the economy would be
immediate and profound: doubling our economic growth rate over the course of the next
decade. The moment the dead weight and distortions of the current system are lifted, the
explosion of new businesses and new jobs would transform the economic and social
landscape of the country.
By freeing citizens from the costly encumbrances of the current tax code, by strengthening
the link between effort and reward, by allowing individuals to keep more of what they
earn, and by freeing the pent-up power of our economy, this new system can lead to
Lincoln's "new birth of freedom" and launch us into the next American century.
16
The Commission Members
^m
Members of The National Commission
on Economic Growth and Tax Reform
Chairman: Jack Kemp, Co-Director of Empower America. Former Secretary,
The U.S. Department of Housing and Urban Development. Nine terms in U.S.
House of Representatives from Buffalo, NY area. Played professional football
for 13 years as quarterback for the San Diego Chargers and Buffalo Bills.
Vice Chairman: Edwin J. Feulner, Jr., president of The Heritage Foundation,
a Washington-based public policy group. Chairman of the Institute for Euro-
pean Defense and Strategic Studies in London.
Loretta H. Adams
President
Market Development, Inc.
J. Kenneth Blackwell
Treasurer
State of Ohio
Herman Cain
Chairman and CEO
Godfather's Pizza, Inc.
Carroll Campbell
President and CEO
American Council of Life Insurance
Former Governor of South Carolina
Pete du Pont
Policy Chairman
National Center of Policy Analysis
Former Governor of Delaware
Jack Paris
President
National Federation of
Independent Business
Matt Feng
Treasurer
State of California
Theodore J. Forstmann
Founding Partner
Forstmann Little & Co.
Dean R. Kleckner
President
American Farm Bureau Federation
Shirley Peterson
President, Hood College
Former Commissioner of the IRS
John Snow
Chairman, President, and CEO
CSX Corporation
John Wieland
President
John Wieland Homes, Inc.
WE WANT YOUR RESPONSE!
If you support the goals of this summary, you will want to read
the complete Report of The National Commission on
Economic Growth and Tax Reform.
Contact The Commission at:
The National Commission of Economic Growth and Tax Reform
U33 Connecticut Avenue, N.W. • Washington, D.C. 20036
17
Senator Brown. Thank you. Senator Simon wanted me to convey
his thanks along with mine for this distinguished panel coming to
testify today. He is en route, and I would ask unanimous consent
that the statement of Governor Wilson be entered in the record at
this point, without objection.
[The prepared statement of Governor Wilson follows:]
Prepared Statement of Hon. Pete Wilson, Governor of California
Mr. Chairman, thank you for the opportunity to provide testimony today in sup-
port of Senate Joint Resolution 49, commonly referred to as the Tax Limitation
Amendment.
I would like to commend the chairman for holding this hearing today on a very
important issue, as well as Senator Kyi, the sponsor of the amendment. I would ex-
tend similar recognition to the House of Representatives, where a vote on the
amendment will occur this afternoon.
From personal experience, I am convinced that requiring supermajorities to ap-
prove tax increases will be a useful and effective tool in reigning in government
spending. In the face of persistent budget deficits, this is the best nope for protect-
ing taxpayers from political leaders whose tax-and-spend propensities cannot other-
wise be checked.
The committee is scheduled to hear from a number of witnesses who will discuss
this amendment in its overall federal fiscal context. For this reason, I will direct
my initial comments toward comparing the amendment with a similar supermajor-
ity requirement in the California state Dudget process.
In California in the early 1990s, the state suffered by far the longest, deepest eco-
nomic recession since the Great Depression. Three quarters of a million Californians
lost their jobs, producing both a sharply increased demand for public assistance and
plunging state revenues. Over the first quarter of calendar '91, the state suffered
a chasmic revenue gap amounting to more than $14 billion, roughly one-third of the
state's General Fund.
To face this problem responsibly, I proposed a budget to bring spending in line
with expected revenues. But after agreeing to over $7 billion in spending cuts, heavy
Democratic majorities in both houses of the State Legislature balked at further cuts
and insisted the balance of the revenue gap be filled by temporary tax increases to
avoid even deeper reductions in many programs. After protracted negotiations,
agreement was eventually reached on a budget that both cut spending and raised
taxes. A half-cent sales tax increase and the addition of two top personal income
tax brackets were temporary and have since expired.
The tax increases were painful, and the wrong choice for a state already in great
need of making its business environment more competitive for investment and job
creation. But they were the price demanded by the Democratic majority for the
structural changes that allowed us to lock in guaranteed spending cuts — long over-
due changes and long over-due cuts in entitlement spending necessary to ensure the
state's long-term fiscal health. Over a 20-year period, California's automatic annual
cost-of-living adjustments in the cash grant paid to welfare recipients has increased
from twenty-sixth in the nation to second nighest. In May 1990, the Commission
on State Finance projected that the state's general fund budget would reach $64 bil-
lion in Fiscal Year 95-96. But because of tne cuts we've made, it is now only two-
thirds of that amount.
The state's requirement for a two-thirds vote to approve the budget and to in-
crease taxes was fundaimental to securing these essential spending cuts. Without
the two-thirds vote requirement, the Democratic majorities could and would have
balanced the budget with much greater tax increases, without making the deep
spending cuts I required of them, and a different governor might have signed such
a budget.
But as a result of California's 1991-92 budget agreement, the state has been used
by some as an example that even supermajority requirements cannot entirely fore-
close the possibility of tax increases. While that's true, the supermajority require-
ment makes it enormously more difficult to raise taxes. And I would underscore the
critical difference between the California and the federal budget process. In Califor-
nia, a two-thirds majority is required to pass the budget, as well as to pass a tax
increase. In contrast, the Tax Limitation Amendment requires a supermajority only
for a revenue increase. Thus, a majority can cut spending by passing a reconciliation
measure relying solely on spending controls, but a liberal majority could not pass
a tax increase with a simple majority. This would provide a significantly increased
incentive for Congress and the President to meet budget targets without turning to
18
tax increases. Given the current tax burden on Americans, such an incentive to con-
trol spending is exactly what the budget process needs.
Mr. Chairman, the Tax Reform Act of 1986 was an arduous undertaking pursued
by President Reagan and the Congress in hopes of making the tax code flatter and
fairer. No small amount of effort was expended in an attempt to lower tax rates and
broaden the tax base. Unfortunately, those successes have been gradually eroding.
The first slip came in 1990, when an additional tax bracket was added to the Inter-
nal Revenue Code as the Democrat's price for promises to cut federal spending —
promises that sadly never materialized. Then, in 1993, America was hit by Presi-
dent Clinton's $255 billion tax increase to supposedly balance the budget. That com-
mitment too was subsequently abandoned in 1995, and has since been resurrected
in a number of very questionable forms.
Weaving the promise of the Tax Limitation Amendment into the fabric on the
Constitution is an effort to restore the faith of the American people — who have good
reason to be jaded. In 1992, candidate Bill Clinton promised middle-class families
a tax cut. Instead, their taxes went up The President has now admitted of course
that his 1993 tax increase was a "mistake." But it is well worth noting that the
1993 budget was approved by a single vote in both the House and the Senate — and
then only through strenuous White House arm twisting. Had a supermajority been
required to approve tax increases at that time, the Congress could have well saved
the President from himself.
At the same time, the President's recent veto of the Balanced Budget Act shows
just how hard it can be to cut taxes, owing to the constitutional protections afforded
the status quo. The Republicans' $500-per-child tax credit alone would have bene-
fitted more that three million California families, and nearly one-half million mid-
dle-class taxpayers in my state would have seen their income taxes drop to zero.
But the President, preferring more federal spending over an honest, balanced budg-
et, decided Washington could better spend the $245 billion that Congress had ear-
marked for the people. It is very hard indeed to wrench money and power from
Washington. However, it should be even harder to raise taxes any higher than they
currently stand.
Americans are not undertaxed. In survey after survey respondents place the ideal
cumulative rate of federal, state, and local taxes at roughly 25 percent. Yet the
taxes of most middle-class taxpayers routinely exceed this rate, and many taxpayers
face marginal rates in excess of 50 percent. The Tax Limitation Amendment says
"enough is enough." By establishing a strong constitutional disincentive to pursuing
ever higher taxes, it can be ensured that the 1993 Clinton budget will be the high
water mark of American taxation.
As demonstrated in California, controlling spending is the only responsible path
to fiscal health, and the only sound way to wean the federal government from con-
tinued deficit spending. The line-item veto, finally passed thanks to the new Repub-
lican Congress, is a positive step in reforming the budget process to help produce
better budgets. But as Congressional Republicans have argued time and again, enti-
tlement programs must be reformed to close the structural budget deficit, and dis-
cretionary spending must be judiciously scrutinized. The Tax Limitation Amend-
ment provides an additional incentive in the budget process to do just these things,
rather than to repeatedly turn to new tax increases.
The Tax Limitation Amendment restores a fundamental tenet held by those who
framed the Constitution and the Bill of Rights. Namely, that in the face of serious
controversy or doubt, the government must ere on the side of freedom — in this case,
freedom from an ever-increasing tax burden.
History has clearly and repeatedly shown that as governments grow, they grow
more intrusive. The clearest and most painfully relevant example is provided by this
century's increase in the size and intrusiveness of the federal bureaucracy — as more
and more federal employees have required more and more revenue to mind the busi-
ness of American taxpayers.
The participants in the Boston Tea Party knew there was a relationship between
taxation and freedom. They, however, mistakenly assumed that elected representa-
tion would provide relief. We now know that at times we need to be protected from
our representatives.
A supermajority will go a very long way toward providing needed protection
against tax increases and the growth in government and government intrusiveness
which they finance.
I wholeheartedly endorse the Tax Limitation Amendment.
Thank you.
19
Senator Brown. Senator Kyi, this takes it a little out of order,
but since we are addressing your amendments, I would like you to
go ahead with our opening statement now, if you would be willing.
STATEMENT OF HON. JON KYL, A U.S. SENATOR FROM
THE STATE OF ARIZONA
Senator Kyl. Well, Mr. Chairman, I appreciate that. In view of
the fact that we have this distinguished panel before us, I will ask
unanimous consent to submit my statement for the record and sim-
ply extract a few thoughts from it, if I might.
I would also note that the case really was made by Secretary
Kemp. In fact, my sponsorship of this particular amendment was
a result of the recommendations of the so-called Kemp Commission.
The Commission noted that if we were successful in developing a
flat tax or single tax rate, whether it be on sales or on income, that
eliminating most of the deductions and exemptions and credits
would create a severe vulnerability for all taxpayers unless a
supermajority was required for Congress to raise that rate.
I would also note that the States that have a supermajority re-
quirement have enjoyed singular success both at keeping taxes
down. States that have a supermajority to raise taxes in their own
State constitutions have reduced taxes by 2 percent, while those
States that do not raise taxes by 2 percent, and spending is also
affected. As a matter of fact, spending in the States without this
supermajority requirement has gone up by 9 percent. It has only
gone up 2 percent in the States with the requirement.
I was asked this morning by a radio person what our Founding
Fathers would have said about a supermajority to raise taxes. Of
course, a supermajority exists in 10 different places in the Con-
stitution, in each of those places where the Founding Fathers
thought it was important to develop a strong consensus before ac-
tion were to be taken.
For example, to override a Presidential veto obviously should re-
quire more than a simple majority. That should really represent a
strong consensus, and I suspect — and I reflected on this this morn-
ing — that if our Founding Fathers were to look at the Federal Gov-
ernment today, the degree to which it burdens its citizens by over-
regulation and over-taxation and too much spending, it wouldn't
take them long at all to agree that this is another area in which
a supermajority requirement should exist; that is to say that it
should require a two-thirds vote to raise taxes.
If you look at a couple of the charts we have there — and if I could
ask one of my staff people to stand next to the chart — you note that
in the family budget, and that is what this all boils down to here,
that Federal, State, and local taxes consume more of the family
budget than food, shelter, and clothing combined. It illustrates the
fact that almost 40 percent of the personal income today is paid in
Federal, State, and local taxes, whereas — well, I don't know the
State number, but in the Federal tax number, in 1950, for example,
it was 3 percent of income and today it is 25 percent of income.
Clearly, it has been too easy to raise taxes.
Just a couple of other charts that I wanted to refer to, Mr. Chair-
man. This chart shows the Federal tax burden per capita. This is
the amount that individuals are being taxed, and you can see the
20
same dramatic increase in aggregate terms. You can see that it has
been too easy to raise taxes. That is why we need a two-thirds ma-
jority in the House and Senate to raise taxes so that it won't be
so easy.
This next chart — as the economists would call it — is the macro.
Since 1950, you can see how Federal taxes have dramatically risen
in gross numbers. It is obviously too easy to raise taxes — another
illustration of why we need the two-thirds vote.
Just two final points, Mr. Chairman. I can understand now why
T.S. Eliot called April the crudest month of all because this is the
month where we all have to focus on the impact of taxes. But there
is another side of this that we frequently forget and that is the
amount of time and effort and talent that it takes to complete our
tax paperwork.
One of the other recommendations of the Kemp Commission, of
course, was to simplify the tax code so that we didn't have this tre-
mendous loss. According to the IRS itself, individuals have spent
about 1.7 billion hours on tax-related paperwork for their filings
today. Businesses will have spent another 3.4 billion hours. The
Tax Foundation estimates that the cost of compliance will approach
$200 billion. So it is not just the cost of the taxes themselves, but
the waste to the economy as a result of this extraordinary burden.
Mr. Chairman, as I said, I will put my full statement in the
record. I think that Secretary Kemp has made the argument for
the two-thirds requirement and anything I add would be, to put it
charitably frosting on the cake.
[The prepared statement of Senator Kyi follows:]
Prepared Statement of Senator Jon Kyl
By midnight tonight, miUions of Americans will have filed their income tax re-
turns. According to estimates by the Internal Revenue Service, individuals will have
spent about 1.7 billion hours on tax-related paperwork. Businesses will have spent
another 3.4 billion hours. The Tax Foundation estimates that the cost of compliance
will approach $200 billion.
If that is not evidence that our Tax Code is one of the most inefficient and waste-
ful ever created, I do not know what is. Money and effort that could have been put
to productive use solving problems in our communities, putting Americans to work,
putting food on the table, or investing in the nation's future are instead devoted to
convoluted paperwork.
It is no wonder that the American people are frustrated and angry, and that they
are demanding radical change in the way their government taxes and spends.
There are a number of proposals for comprehensive tax reform that will be de-
bated during the next year. Senator Richard Shelby and House Majority Leader
Dick Armey have proposed a flat tax. Versions of the flat tax have also been sug-
gested by Steve Forbes and Senator Phil Gramm. The Chairman of the Ways and
Means Committee has recommended that the income tax be pulled out by its roots
and replaced with a national sales tax. Senator Richard Lugar has proposed a sales
tax, as well.
Today's hearing is intended to focus, though, on a change that should be made
whether we move to a flat tax or sales tax or some alternative. Indeed, it is a
change that should be made whether comprehensive tax reform succeeds or not. I
am talking about a change that would require a two-thirds majority vote of the
House and Senate to approve tax increases. The House of Representatives is sched-
uled to vote on the proposal, the Tax Limitation Amendment, later today.
The Tax Limitation Amendment, which I introduced in the Senate with the sup-
port of 20 other Senators, would require a two-thirds majority vote of each house
of Congress for the approval of tax increases. The two-thirds supermajority that
many of us believe should be added to the U.S. Constitution was recommended by
the National Commission on Economic Growth and Tax Reform, appointed by Sen-
ate Majority Leader Dole and Speaker Gingrich. The Commission, chaired by former
21
HUD Secretary Jack Kemp, who is scheduled to testify before our panel today, advo-
cated a supermajority requirement in its recent report on how to achieve a simpler,
single-rate tax to replace the existing maze of tax rates, deductions, exemptions, and
credits that makes up the federal income tax as we know it today.
Here are the words of the Commission:
The roller-coaster ride of tax policy in the past few decades has fed citi-
zens' C3aiicism about the possibility of real, long-term reform, while fueling
frustration with Washington. The initial optimism inspired by the low rates
of the 1986 Tax Reform Act soured into disillusionment and anger when
taxes subsequently were hiked two times in less than seven years. The com-
mission believes that a two thirds super-majority vote of Congress will earn
Americans' confidence in the longevity, predictability, and stability of any
new tax system.
In the 10 years since the last attempt at comprehensive tax reform. Congress and
the President have made some 4,000 amendments to the Tax Code. Four thousand
amendments. Without the protection of the Tax Limitation Amendment, taxpayers
would be particularly vulnerable to tax rate increases, particularly if tax reform
eliminates many of the tax deductions, exemptions, and credits in which they find
refuge today.
The Tax Limitation Amendment will make it more difficult for Congress to raise
taxes. It will also help restore confidence, stability, and predictability to the Tax
Code.
Ideally, the Tax Limitation Amendment should be put into place after comprehen-
sive tax reform is accomplished. That is because tax reform necessarily aims to
broaden the tax base — eliminating the maze of tax deductions, exemptions, and
credits that make up the income tax as we know it today — and then apply one low
tax rate to whatever amount of income is left. Because base-broadening would be
subject to a two-thirds majority vote under the amendment, some are concerned
that it could make comprehensive tax reform more difficult to achieve.
I would note that the Tax Reform Act of 1986 would have met the two-thirds test.
The tax reform bill passed the Senate by a vote of 74 to 23, well over the 67 votes
that would be required had the Tax Limitation Amendment been in place at that
time. The House passed the bill by a vote of 292 to 136, two votes more than would
have been required under the supermajority amendment.
So tax reform is not necessarily a reason to oppose the Tax Limitation Amend-
ment at this time. Moreover, it is important to begin the debate now on the pro-
posed constitutional amendment, because it takes a long time to build the necessary
support in Congress and to win ratification by the states.
Another criticism comes from those who believe that tax increases should remain
readily available to Congress as a tool of fiscal policy.
I want to make just a few points in response to that criticism. First, the Tax Limi-
tation Amendment itself cuts no taxes; it only raises the bar on future tax increases.
Many people, myself included, believe that taxes are already far too high. This
amendment, in effect, says, "enough is enough." It makes Congress find a way to
meet its obligations without taking more from the pockets of the American people.
Understand that the average family already pays more in taxes than it does on
food, clothing, and shelter combined. According to the Tax Foundation, federal taxes
amount to about 27 percent of the family's budget, and state and local taxes
consume another 12 percent — for a total of 39 percent. But spending on food, cloth-
ing, and shelter totals only about 28 percent of the family budget. And families still
have to find a way to pay for everything else they need — for example, medical care,
transportation, education, and an occasional vacation or dinner out — out of the mea-
ger amount that is left.
So what the Tax Limitation Amendment says is that government already takes
far too much from hard-working Americans and should take no more, unless there
is a very broad and bipartisan consensus in Congress and around the country.
A second point. There is no small irony in the fact that it will take a two-thirds
majority vote of the House and Senate to overcome President Clinton's veto and
enact the Balanced Budget Act with its tax relief provisions. By contrast, the Presi-
dent's record-setting tax increase in 1993 was enacted with only a simple majority —
and not even a majority of elected Senators, at that. Vice President Gore broke a
tie vote of 50 to 50 to secure passage of the tax-increase bill in the Senate.
The Tax Limitation Amendment is based upon a simple premise — that it ought
to be at least as hard to raise people's taxes as it is to cut them. What we are at-
tempting to do with this amendment is force members of Congress to think of tax
increases, not as a first resort, but as a last resort.
22
A third point. The amendment will make it harder to raise taxes, to be sure. But
perhaps even more important than that, it will force Congress to fundamentally re-
assess the way it goes about raising revenue. Remember, the amendment does not
limit revenue to the Treasury; it merely precludes tax rate increases without a two-
thirds majority vote.
Most of us would agree that lower tax rates stimulate the economy, resulting in
more taxable income, more taxable transactions, and more revenue to the Treasury.
The tax cuts of the early 1980s are a case in point. They spawned the longest peace-
time economic expansion in our nation's history. Revenues to the Treasury increased
as a result— from $599.3 billion in FY81 to $990.7 billion in FY89, up about 65 per-
cent.
High tax rates, on the other hand, discourage work, production, savings, and in-
vestment, so there is ultimately less economic activity to tax. That is precisely what
Martin Feldstein, the former chairman of the President's Council of Economic Advi-
sors, found when he looked at the effect of President Clinton's 1993 tax increase.
He found that taxpayers responded to the sharply higher marginal tax rates im-
posed by the Clinton tax bill by reducing their taxable incomes by nearly $25 billion.
They did that by saving less, investing less, and creating fewer jobs. "The economy
eventually paid the price in terms of slower growth.
It is interesting to note that revenues as a percentage of Gross Domestic Product
(GDP) have actually fluctuated around a relatively narrow band — 18 percent to 20
percent of GDP — for the last 40 years. Revenues amounted to about 19 percent of
GDP when the top marginal income tax rate was in the 90 percent range in the
1950s. They amounted to just under 19 percent when the top marginal rate was in
the 28 percent range in the 1980s. Why the consistency? Because tax rate changes
have a greater effect on how well or how poorly the economy performs than on the
amount of revenues that flows to the Treasury relative to GDP.
In other words, how Congress taxes is more important than how much it can tax.
The key is whether tax policy foster economic growth and opportunity, measured in
terms of GDP, or results in a smaller and weaker economy. Nineteen percent of a
larger GDP represents more revenue to the Treasury and is, therefore, preferable
to 19 percent of a smaller GDP.
Requiring a supermajority vote for tax increases is not a new idea. It is an idea
that has already been tested in a dozen states across the country. In 1992, an over-
whelming majority of voters in my home state of Arizona — 72 percent — approved an
amendment to the state's constitution requiring a two-thirds majority vote for tax
increases.
There is a reason that the idea has been so popular in Arizona and other states.
Tax limits work. According to a 1994 study by the Cato Institute, a family of four
in states with tax and expenditure limits faced a state tax burden that was $650
lower, on average, five years after implementation than it would have been if state
tax growth had not been slowed.
The Tax Limitation Amendment will force Congress to be smarter above how it
raises revenue. It will force Congress to look to economic growth to raise revenue,
instead of simply increasing tax rates. It will protect taxpayers from additional tax
increases.
I look forward to hearing from the witnesses who will come before the Subcommit-
tee today on this important initiative.
Senator Kyl. I would also like to submit for the record state-
ments in support of the Tax Limitation Amendment by the Gov-
ernor of the State of Virginia, the Hon. George Allen, who could not
be here today; the Governor of the State of Massachusetts, the
Hon. William Weld; Lowell Gallaway, Department of Economics of
Ohio State University; and a statement by Senator Rod Grams, of
Minnesota, who was planning to be here but could not be here
today as well.
Mr. Chairman, I thank you for the opportunity to make this brief
statement.
Senator Brown. Without objection, the statements will be en-
tered in the record.
[The prepared statements of Governor Allen, Governor Weld, Mr.
Gallaway, and Senator Grams follow:]
23
Prepared Statement of Governor George Allen, Governor of Virginlsi
Mr. Chairman and members of the Committee, good morning. While I regret that
I am unable to join you personally today, let me commend you for holding this im-
portant hearing on a measure I believe would help restore accountability and force
a much-needed discipline on the federal government; a constitutional amendment to
require a two-thirds vote to increase taxes.
Indeed, my good friend. Senator Jon Kyi of Arizona, and I worked hard to pass
a balanced budget constitutional amendment with a similar tax-limitation provision
dvudng the 102nd Congress when we were members of the U.S. House of Represent-
atives. Unfortunately, the guardians of the "big government" status quo prevailed.
Let's not allow that to happen this time.
Americans today are paying the highest percentage of their incomes in taxes in
the history of the United States. In 1948, the average American family with chil-
dren paid only 3% of its income to Uncle Sam. Today, the same family pays 24.5%.
In Virginia, average taxpayers will work this year until April 29th just to pay their
taxes.
Opponents of this measure proceed from the assumption that the taxpayers'
money first belongs to government; that the government should collect tnrough
taxes as much as the people will permit; and that it's the governments' job to redis-
tribute the taxpayers' money in ways politicians and bureaucrats think best. I be-
lieve taxpayers' money belongs to the people who earned and produced it. The
American people know better than any government official how tjest to use their
hard earned money.
Mr. Chairman, I hope that Congress will adopt this common sense initiative and
send it to the States and to the people for our ratification as quickly as possible.
If we are diligent and determined in our attempts to bring discipline and account-
ability back to government, we can begin to fulfill our duties as responsible public
servants. For a change, let's do not what is convenient for government. Let's do
what is right for the American taxpayers.
The Commonwealth of Massachusetts,
Boston, MA, April 15, 1996.
Hon. Jon Kyl,
U.S. Senate, Washington, DC.
Dear Seantor Kyl: I am writing to commend you for sponsoring a resolution that
proposes a constitutional amendment to require a two-thirds majority vote in each
house to approve tax rate increases.
The current federal, system is weighted in favor of higher and higher taxes. Spe-
cial interest groups and their lobbyists, who work hard to protect specific spending
programs, have tended to prevail over the American people's strong desire to keep
more of their own money. The result has been exponential growth in the size of the
federal government, higher and higher taxes, and deeper and deeper deficits. The
system is out of balance in a way never envisioned by the Founding Fathers. We
need to provide our citizens with a strong constitutional tool to protect them from
legislative bodies which have shown an insatiable desire to tax and spend in order
to perpetuate incumbency.
I want to give you my assurances that if Congress passes this resolution, I will
do everything in my power to see that the Massachusetts Legislature becomes one
of the first states to ratify it.
Sincerely,
William F. Weld.
Prepared Statement of Lowell Gallaway, Edwin L. and Ruth E. Kennedy
Distinguished Professor of Economics, Department of Economics,
Ohio University
WHY we need a supermajority
Whenever it is suggested that a super-majority be required in a vote to increase
taxes, the cry goes up that it is undemocratic, that a vote on taxes should be treated
just as any other legislative action, that a supermajority requirement violates the
principle of majority rule. How valid is such an argument? Should taxes be simply
one issue among many that our elected representatives must consider in carrying
out their duties? For a variety of reasons, I think that the undemocratic argument
is invalid and that taxes should be treated as something quite different.
24
First, it needs to be recognized that the taxing authority is a powerful one. Tax-
ation of all by means of a simple majority vote offers a strong temptation for a ty-
rannical majority to confiscate the income and wealth of a minority. This was recog-
nized rather early on in the life of the United States.
In 1819, Chief Justice of the Supreme Court, John Marshall, in McCulloch v.
Maryland, offered the view that "the power to tax involves the power to destroy."
Much has changed since 1819, mostly in the direction of confirming Marshall's worst
fears. Marshall was not unique. Well before McCulloch v. Maryland, the inherent
dangers of taxation were recognized. The Scottish historian Alexander Tyler re-
marked to the effect that democracy will only survive until a part of society discov-
ers it can vote itself largesse out of the public treasury.
These remarks suggest the basic nature of the problem of taxes. Tax revenues are
an invitation to government to spend the public monies. Richard Vedder, Chris-
topher Frenze, and I have demonstrated that the tendency for Federal Grovemment
spending to escalate in the wake of taxation has grown systematically since the
founding of the Republic until, in the post-World War II era, on average, an addi-
tional dollar of tax revenues has produced additional spending amounting to $1.59. ^
This phenomenon has led to the coining of a special term to describe it — tax-and-
spend!
The repercussions of the operation of the tax-and-spend process on the American
economy have been profound. Since 1948, it has led to almost a doubling of the pro-
portion of Gross Domestic product that is claimed by the Federal Government in
order to finance its activities. Recent research by Richard Vedder and myself reveals
that current federal spending is at a level that has negative effects on the volume
of goods and service produced in the American economy. This is reported in a series
of studies we are doing for the Joint Economic Committee of Congress describing
the effects of increasing spending in the private sector of the economy by $1.38. The
details of this analysis are described in the study appended to this statement, enti-
tled. The Impact of the Welfare State on the American Economy.
How is it that we have created that state of affairs? The answer is simple. "Grow-
ing" the Federal Government in the post- World War II period has been just too
easy, especially following the budget reforms of 1974. Moving to five-year budgeting
cycles opened the door to fiscal mischief, at first by making it terribly difficult in
the early 1980s to adjust downward spending baselines predicated on expected lev-
els of inflation that were at least twice what actually occurred and, then, in re-
sponse to the budget deficits this created, by affording the Congress an opportunity
to play the ultimate "bait-and-switch" game. Increase taxes now and promise spend-
ing cuts in the so-called "out years" of the budget, "out-years" that just never seem
to come.
I believe that if it had been more difficult to raise taxes, the parody that has be-
come the budgeting process would have been far less likely to occur, levels of Fed-
eral Government spending would have been significantly less than presently ob-
served, and we would not today be faced with the problem of dealing with an over-
sized Federal Government that is exerting a substantial "drag" on the American
economy. How substantial? The rates of economic growth we have now become ac-
customed to, 2.4—2.5 percent a yeeir as far as the eye can see, and significantly less
than the long-term historic rate of 3.6 percent a year that was characteristic of the
American economy for a quarter of a millennium prior to the growth slowdown than
began in the 1970s. The implications of this difference are profound for a young per-
son just beginning their income earnings years. Over the sixty year period that
might be a typical life-expectancy for such a person, the difference between current
growth rates and historic growth rates means a standard of Living one-half of what
it could have been at the end of their lifetime. We owe it to our children and grand-
children to arrest the economic cancer known as big government that eats at our
substance. An important step in this direction would be to modify our constitutional
arrangements to make it more difficult for our elected representatives to increase
taxes. In this way, we can limit the potential for the tax-and-spend mentality to con-
tribute to maintaining "big government" as we have come to know it.
1 Richard Vedder, Lowell Gallaway, and Christx)pher Frenze, Taxes and Deficits: New Evidence
("The $1.59 Study"), Joint Economic Committee, October 30, 1991.
25
The Impact of the Welfare State
on the
American Economy
Prepared at the request of
Representative Jim Saxton
VIce-Chairman
Joint Economic Committee
and
Representative Dicic Armey
Majority Leader
U.S. House of Representatives
by
Lowel] Gallaway and Richard Vedder
Ohio University
Athens, Ohio
45701
December 1995
26
The Impact of the Welfare State on the American Economy
Executive Summary
In recent decades many of the most important policy issues have revolved around the level
and composition of federal spending. There is broad agreement that up to a certain point
government functions enhance economic well-being, while after this point the burdens of
excessive government spending can reduce economic growth relative to what it would otherwise
be. Much of the debate over budget policy is over this question of where total government
spending, or the spending level of a particular program, becomes counterproductive.
This study by two distinguished economists. Professors Lowell Callaway and Richard
Vedder of Ohio University, examines the issue of the optimal size of the federal government,
expressed as a share of the economy, using econometric techniques. Tliese two academic
economists also estimate the net economic costs borne by the economy by the last dollar of
federal spending. These additional economic costs are often referred to as a deadweight loss, a
net reduction in output caused by excessive levels of federal spending.
Among the findings and implications of the Callaway and Vedder study are:
=> The optimal level of federal government spending is about 17.6 percent of GDP. Beyond
this point, the resources consumed by government impose more costs on the economy
than benefits.
=» The current level of federal outlays is about 4 percentage points of GDP higher than its
optimal level. Under the RepubUcan policy of restraining deficit spending, the reduction in
the GDP share of federal spending would substantially boost economic growth.
^ For every SI dollar of federal spending growth curtailed, the private sector of the
economy will expand $1,38 in the same year. In other words, every dollar of federal
spending growth restraint produces a net economic benefit of 38 cents. On the other
hand, the failure to constrain each $1 dollar increase in federal spending will cause a net
reduction in economic growth of 38 cents.
=^ Over seven years, economic output would be $2,45 larger for every dollar of spending
restraint enacted in the first year and sustained through the period.
:^ This study has important implications for the cxurent policy debate. la any given year, for
every $100 billion of projected federal spending growth curtailed, the economy would
grow by an additional $38 billion. This increase in economic output continues into
following years so long as this policy remains in effect, compounding the benefits over
time.
I am pleased to make this smdy available to the Congress and the public to demonstrate
the powerful economic benefits produced by restraining federal spendiog.
lim Saxton
Vtce-Chainnan
Joint Economic Committee
27
The Impact of the Welfare State on the American Ecoaomy
One of the most perplexing questions of the late twentieth century is how lar^c the Federal
government of the United States should be. At the beginning of the post-World War II era it
cornmandcd about one-seventh of the nation's Gross Domestic Product while, in recent years it has
surged toward a one-fourth share. The growth in the size of the Federal government in this time is
something of a contmuation of a trend that began somewhat earlier. For example, in 1929, Federal
government expenditures accounted for only slightly more than one-fortieth (2.6 percent) of Gross
Domestic Product. These data raise two issues: what has been the impact of growth in the Federal
government on the American economy, and why has the govennnent grown so much.
The Economic Impact of the Federal Government
Much of the increase in the size of the Federal government has been justified on the grounds
that it would lead to a more efficient economy. However, this is a questionable propositioa Not that
government has no role to play in an ecotiomic system. There are things it can do to enhance the
functioning of an economy, such as providing for the common defense, establishing a legal framework
for resolving disputes, constructing a basic infrastructure, and supervising some minimum safety net.
These are the positive benefits of government. However, they can be substantially negated if it expands
inordinately. Excessive taxation, over-regulation, profligate spending and special fevors for privileged
interest groups may have a negative eHect on the growth of the productive sector.
In the strictest ecooomic sense, the positive cfiects of government tend to reduce the costs of
producing goods and services, thereby raising output and lowering prices. This increases the sum total
of what economists call consumer and producer surplus. However, when government has a negative
impact on the economy, costs of production are increasas. prices rise, and the total volume of
consumer and producer surplus declines. This can be viewed as the "deadweight" loss to the economy
of government activities.
What is critical in evaluating the impact of the growth in the Federal government on the
American economy is the net eSect of its positive and negative contributions. When govonmcnt is
small, additions to it are likely to improve the society's economic performance. However, as it
becomes larger and larger, the gams it provides bexxnne smaller and smaOer until they disappear
entirely. Beyond that point, further increases in the magnitude of government actually harm the
economy. What this in^lies is a systematic relationship between the size of government and the
econotnic performance of a nation. At low levels of government activity, its net contributions are
positive, but at high levels, they become negative. Figure 1 shows a representative version of such a
relationship.
The availability of numerical data describing government expenditures and levels of income and
output make it possible to statistically evaluate the conceptual framework provided m Figure 1 . For
' Such a relationship is described in Dick Armey, The Freedom Revolution (Washington. D. C:
Rcgnery Publishing Company, 1995), pp. 91-93.
28
P»«e2
Impact of the WcLTatc Slate on the Amehcan Ecoaomy
this purpose, a standand measure of overall economic activity, Gro&s Domestic Product (adjusted for
the eflect of inflation), will be used to represent the level of output in the American econoiny. In
addition, the national income and product account estimates of government spending wiH be used to
measure the size of the Federal government. The specific estimate will be its spending expressed as a
percentage of Gross Domestic prtxiuct. The time period for which the data have been assembled is
1 947 through 1994.'
The major problem is one of describing a specific fiincrional relationsh^ between spending as a
piupurcion of Gross Domestic Product and the level of real Gross Domestic Product that is capable of
expressing the patterns shown in Figure I . A sinple way of doing this is to postulate a statistical
estimating equation tViat has the size of the Federal govanment as an independent variable and real
output as a depoident variable. In addition, the size of government variable must be introduced in a
quadratic fiuhion, as follows:
(1)
O = a + bG-cG'
where le pi f isf nt s t^ output in the ecooomy and indicates federal government spending as a
percentage of Gross E>omestic Piodun.
Figure 1
Hypothesized Relationship Between Real Gross Domestic
Product and Federal Spending as a Percent of GDP
11 13
Fadaral Standing n • Pa
' We do not use years earlier than 1947 because of serious problems that we feel exist in the data
for the World War 11 years and 1946. For a description of these difficulties, see our "The Great
Depression of 1946," Review of Austrian Economics, VoL V, No. 2, (1991).
29
December 199S Page 3
A few words of cxplanatua about expression (1). Notice that G appears twice on the right
hand side, first in a linear fashion and second as the square of itself. Also, the signs of the two tenns
are opposite. The positive sign on the linear form is designed to show the beneficial effects of
government spending on output, while the negative sign given to the squared term means that this
variable should measure any negative effects associated with increases in the size of government. Since
the squared term increases in value more rapidly than the linear term, the presence of negative effects
from government spending will eventually outweigh the positive impact, producing the downward
sloping portion of the relationsh^ shown in Figure 1 .
In addition, two other factors that might influence the befaavbr of real output over time need to
be taken into account. First is growth over time in real output. It is measured by including a simple
measure of the passage of time which takes the value one in 1947, two in 1948, and so on, through 48
in 1994. Second is the possibility of cychcal variations in real outpmt. To control for this, the
uncnploymcnt rate is included as an mdepecdent variable in the estimating equatioa Of course, it is
expected that time will be positively and unerr^toyment negatively related to changes in real output.
Thus, the final form of a statistical estimating equation designed to e^qslain variations m the level of real
Gross National Product over the period 1947 through 1994 is.
(2) O = a + b G - cG^ + d T - e U,
where T denotes the time variable and U the unetrqjioyment measure.
The results of statistically estimating expression (2) are reported in Table 1 .' All the
independent variables are statistically significant at the one percent level or beyond. The results shown
in Table 1 provide enough information to permit estimating an en^irical version of Figure 1 . Such a
curve peaks at a Federal govemmeal share of resources of 1 7.57 percent. In one sense this can be
thought of as the "optimal" size of the Federal government in the United States.' However, this is true
only if govennnent spending is not treated as a "cost" of producing output. This distinction is an
important one. If government spending is perceived to be a cost of pnaducing output, the optimal level
of spending wfl] occur where the additional output associated with an increase in government spending
is just equal to the additional cost of that spe ndin g.
' Expression (2) was estimated using ordinary least squares regression techniques. Cocfarane-
Orcutt adjustmems were made to resolve any potential problems of autocorrelation. The Cochrane-
Orcutt adjustment ternis are not reported here.
' Emphasizing taxes, rather than spending, Gerald Scully reaches similar conchosions. See his
What Is the Optimal Size of Government In the United States?. NCPA Report No 1 RR (Dallas.
Texas; National Center for Policy Analysis, 1 994). Scully focuses on all government activity, not just
federal
' Mathematically, the threshold point can be derived by differentiating expression (2) with respect
to G, setting the result equal to zero, and solving for G. The result is -b/2c.
' This is the economist's familiar notion of maxnTiizanon. In effect, this argument states that the
optimaJ size of the Federal government will be that at which the marginal benefit (in terms of .
30
Page 4
Impact of Ihe Welfare Slate on the American Economy
Taoie 1
Regression Analysis Deed to Exf^.ain Variations in Reel Groaa
Domestic Product. United States. 1947-1994
Regression Term
Regression Coefficient
t-Statistlc
Gonstauu
-836 (K
1 24
Federal Spending as a Percent
Of GDP
122 29
3 36
Sc^iare oJ Federal Sp^rtll^?^
i» a Pwo^ of GDP •' " *^
Time
122 28
9 39
UnampKfytnijnt '■*-'*'^
-?x..frC '. '"*^X«3Scs-^-;4'ii^
' Regression statistics are as follows: R'=0.9993; Adjusted R'=
Watson Statistical. 97; Arlma adiustment=(2,0); and F-statlst
0.9992: DurtjJn-
c=9703.76
Using the information reported in Table 1 , it is possible to calculate both the additional benefits
of govcmmait spending and the additional costs associated with it for all levels of such spending. This
requires assuming the vahies for the other variables in expression (2) that existed in 1 994. When these
calculations are made and the arli jitinnal benefit and additional cost schedules are graphed, the resuh is
as shown in Figure 2. Under this set of assumptions, the optimal level of Federal government spending
as a share of Gross National Product occurs where the two curves cross, which is somewhere between
10 and 1 1 percent, or less than half its present size.
Since treating all Federal government spending as a cost of producing output may ignore
certain positive sovices that are not directly related to making the process of production more efficient,
it was decided to work with the first of these concepts of optimality. Qearly, the information reported
in Table 1 confirms the idea that the American Federal government has become too large - by a &ctor
of about one-third • thereby creating significant economic inefficiencies. What this indicates is simple.
As the Federal govennnent grows, it rapidly exhausts the opportunities for contributing to the stability
that is necessary for rapid economic growth. Consequently, it must venture more and morE into the
realm of activities that have the net efFect of discouraging economic activity, things such as economic
regulation and the use of the govaxnnent's taxing and spending power to redistribute income. Some
standard statistics, which are summarized in Table 2, will demonstrate just how this transformation has
taken place in the United States. Go back to the immediate post- World War D era. after the military
stand-down following the war had been completed, say to fiscal year 1948. Feder^ government
spending totaled $29.8 billion, 1 2. 1 percent of Gross Domestic Product. Less than a third of it ($9. 1
additional real output) is just equal to the marginal cost cDcurred. A technical point: For this reasoning
to be valid, certain other conditions must be satisfied. As will be seen shortly, they are.
31
December 1995
Pages
billkni) was for national defense. Three broad categories of social spending - health, income security,
and social security - absorbed slightly more than ten percent of outlays, totaling about $3.3 billjon or
about 1 .3 percent of Gidss Domestic Product. We focus on these as being representative of the
modem welfare state. To be sure, they do not include all social spending, but they arc indicative of the
broad trends in the character of federal spending. TTie growth in the social spending category at this
time was modest. In the fiscal years from 1940 to 1948, only 8.4 cents of every additional dollar of
fedoal spending had gone for this purpose.
Figure 2
Marginal Benefits and Marginal Costs*
of Federal Government Spending
(BUIions of Dolara)
Marginal Costa
■<^unno I'M IWal OOP
F*d«ral Spending aa a Psrcant of ODP
That last statistic, and its behavior subsequod to 1948, is pohaps the key to understanding the
changing nature of the role of government in American life. In the twelve years from 1948 through
1960, it more than trqjles. Over a fourth (26.4 cents) of every new dollar of federal spending went to
this variant of social spending. This is just the beginning. Between fiscal years 1960 and 1970, over a
third of new spending is in this category and in the interval 1970 tfarou^ 1980, it is more than one~
half.'
There is a brief rcspwte in the 1980s. From 1980 to 1990, only 44.0 cents of each new dollar of
federal spending is for health, income security, and social security. However, this is just a temporary
departure from the long term trend. In the five years from fiscan990 through fiscal 1995, outlays on
these categories of spending rise by $1 .067 for every additional dollar of all federal spending. The
combinfid efibct for the period since 1980 is 61.7 cents of new social spending per dollar of fiirther
federal spending.
Beginning with 1 966. health spending includes outlays under the Medicare program.
32
Page 6
Impact of ihe Welfare Stale on the American Ecooomy
Table 2
Federal and Social* Spending Statistics, United States
Various Fiscal Years, 1940-1995
Federal Spending
(SBIIhons)
Social Spending
($ Billions)
Increase in Sodal
Spending per Dollar
Increase In Federal
Spending
1940
95
99
16
1 7
na
m
■- , -288
f21
33 '
13^ ,
..^:-.1fM^^'^
1960
92 2
183
198
39
264
.1*7*
ia»s
laa
m
65
O^t-ifM
1980
6S0 9
223
2604
98
513
'^W>
^'zu^izszx&i. ■
- Jr~'^223
mA<^^r.
^'r.,;r;r:.Wtl, ^
O^JR-I^W
199S
1S144
21 6
830 4
113
1 067
• Definad as the sum olhealtfi, income security, and soda) seojrityMpondlturos. Beginning wiih
1966, health spending includes outlays on the Medicare program.
Sourca: United States Treasury and Office of Management and Budget
The overall inpact of these changes is dramatic. As of fiscal 1995, 1 1.3 percent of Gross
Domestic Product goes to these three categories, conpared to 1 .3 percent in 1 948. Put another way,
in fiscal 1948, about one dollar in nine of federal spending was for these social purposes. By fiscal
1995, five dollars out of every nine were devoted to these pursuits.
The critical dimension of this shift in the nature of fisdcral spending is the preptonderance of
transfer payments in this r^idly growing sector The negative economic disincentive efifects associated
with income transfers have been well documented.' An increasing enphasis on income transfers exerts
a "drag" on the economy and goes far in explaining the statistical results reported earlier. The rapid
growth in the American welfare state has been depressing the level of national output for some time.
' For example, see Sheldon Danziger, Robert Havcinan, and Robert Plotnick, "How Income
Transfer Programs Affect Work, Savings, and Income Distribution; A Critical Review," Journal of
Economic Literature, September 1981 . They conchide that the cumulative effect of income transfer?
in the United States, at that time, had been to reduce the total supply of labor by 4.8 percent. Similar
effects were observed in Lowell Gallaway, Richard Vedder, and Robert Lawson, "Why People Work:
an Examination of Interstate Variations in Labor Force Participation," JoumaJ of Labor Research,
Winter 1991, pp. 47-59.
33
December 1995
Page?
Annual Estimates of
Lost OutpuC
Associated with an
Oversized
Govern meat
Specific estimates
of the a"""al losses in
real Gross Domestic
Pnxiuctthat
acconpany a Federal
government that is
eitho- smaller than or
larger than the 17.57
percent share that
marks the transitioQ
between government
being a positive force
and its pulling the
economy down can be
developed from the
eiiipuical findings
reported earUer. 1 965
is the year in which
government spending
was approximately
"optimaL" Since then,
it has exceeded the
17.57 percent
threshold level in every
year. The year by year
armiial losses of
output, bcgmnmg with
1963, are sbown In
1 able 3. both in
constant dollar terms
and as a percentage of
real Gross Domestic
Product. The
cumulative losses in
real output as the rcsuh of the Fodcral govcj uiiieal iipcuiiiu^ shiire of Gross Domesrlc PToduci being
too large amount to about 2.3 trillion dollars m the 1965-1995 perioti. The heh.Tvior of the
percentage loss in real output statistic over rime is shown in Figure 3.
Table 3
Annual Dollar and Percentage Losses of Gross Domestic Product
Due to Government Being Too Large, United States, 1965-1994
fA^yaar ■:;-;■:
l.o«iol<»»>($Ba>on8}
PiTKntaae LM& df :Gi)P
1965
09
1966
5.44
0^1 . i
1967
25 64
95
i <i968
23.89
0.85
1969
18 94
66
^ 1970
32.5
1,13
1971
28 66
97
- 1972
33I>4
T^ >->:-;.-
1973
20 97
064
1974
39.72
1-22 ,
1975
101 16
314
1976
74J
2.21
1977
56 42
1 6
' t?78
41 33,
1,12
1979
38 68
1 02
- two
89.34
2.37- -rrir-
1981
103 43
2 69
' 1^2
165.»1
-,4.41 -i'f., -
i9a3
175 23
4 49
:. 1864
127.82
308 -; --
1985
1444
3 37
: 1086
147,66
355 .fr-.v.:
1987
121 07
2 67
tS88
MiJI - - . .-'h
t«:c«-:3^ 1.*8
IQRQ
Bui 68
1 7E
1^0
104 86
2.14 ^-■'\ ' 1-
1991
121 13
2 49
r- iflaz
1141?
2.29 - --.,M
199"?
84 d£
1 65
,a*,;t.W. ^
SS19 - r -:
_- - - 1,27. ;, ■ ..
34
Pages
Impact of the Welfare State on the American Economy
The pattern bViowii in Figure 3 ic quite ooiuiitcat with iLc liialuriuU UlscUSSlOn Of IfiC fiac Ol
large gnvpTnmi-nt in the United Statoc. During the bulk oflLc caily post- World War U era, the Size of
the federal government is. reasonably close to optimal, q5 that term is being used bcrc. But, beginning
wilh the tnid- 1 960s it starts to depart substantially from that level and by the mid- 1 970s is draggmg the
economy down by two to two-and-onc half percent. There is a brief inprovcment, but then the bsses
begin to mount m 1980, 1981, and 1982, exceeding four percent in the last of these years. The next
seven year^, though, see a significant decline in the negative intact of the size of govemmeni on the
economy. It is in this interval that the federal government share of Gross Domestic Product declines by
nearly two full percentage poitns.
Figure 3
Percent Loss of GDP Resulting from
Excessive Federal Government Spending, 1965-1994
I I I — ( — I — I — ( — I — I — I — t I I — I — I — I — I — ( — I — I — I — I — I — I I I — I — (-
SSSEESSiS
S S i
Big Govemmeot in Perepective
The picture of how large government negatively iafiuences the level of economic activity in the
American econony is now clear. When government grows beyond the level that is optimal for the
economy, it intttxluces inefficiencies that increase the cost of producing goods aixl services. To put in .
perspective the magnitude of these inefficiencies, ask the question, "What would be the eficct of a SlOO
billion dollar reduction in Federal government spendingT' At 1994 levels of national output, that
would amoimt to about a 1 .5 percentage point reduction in spending as a percent of Gross Domestic
Product. Since Federal government spending stood at 22.0 percent of Gross Domestic Product in
1994, a SlOO billion reduction in spending would lower its percentage equivalent to 20.5. Substituting
20.5 percent for 22.0 percent would have the direct eSect of increasing Gross Domestic Product by
S3 8 billion. Put another way, a SlOO billion decrease in Federal spending would result m a canceling of
35
December 1995
Page 9
$38 billion of deadweight losses in the economy that are attributable to goveniment being larger than
desTTsble. Thus, the bottom line is that for every tloUar reduction in current levels of Federal
govtamnent speoding, other things remaining the same. Gross Domestic Product will increase by 38
cents during the year of the reduction.' On a per caprta basis, this amounts to about a $145 dollar
gain in real output.
If the reduction in
spending is a permanent
one, the longer term
gains in succeeding
years will be even
greater. Given the
eiT^hasis in current
budget debates on
balancing the budget
within seven years, wc
have estimated the
intact of a permanent
reduction in speixling
over such a period
The year-by-ycar
results are reported in
Table 4. Two estimates
are provided, a current
dollar one and another
that measures the
present vahic of the output gains discounted back to the initial year of the spending reduction. For the
first of these, five percent animal growth in Gross Domestic Product (2,5 percent growth in prices phis
2.5 percent real growth) is assumed. For the second, the basic assunption is that a six percent discount
rale is appropriate.
The current dollar effects of a permanent reductbn in spending "decay" over time because, as
Gross Domestic Product rises, a given reduction in spending represents a smaller percentage of
national output Nevertheless, over a seven year period, the cumulative current dollar eSect on output
of permanently reducing iederal spending is $2.45 for every dollar spending is decreased. The
discounted present vahie of these gains is $2.09 per dollar of spending reductioa Thus, assuming a
population of approxiiiiately 260 million, the discounted present vahie of a $100 billion decrease in
Table 4
Current Dollar Gain and Discounted Present Value of Current
Dollar Gain Associated With a Permanent One Dollar
Reduction in Federal Government Spending in the United States
^(•r is fisd^ PisB
Cnrreat Ddlar Gala
- ~1Htcoast«#rt«teat ,
Value of CarrcDtD^r
GsiB z-^'
1
38
38
is; .^x..,.
0.37 ,.%^?;
3
36
32
jf* t "-^ " ^^*« jif\>^ <^«
- . .. 0.35 -:r^";
l'^~:7 ..0.29 . .^'i.
5
34
27
m^^mmm)'-^
s^^mtm-^m
;:v-'-^:-t#.?5 :-£::; -^
7
32
023
SkvcrtYda- Total
2.45
2 ofl ~:t
' Interestingly, Ballard, Charles L., John B. Shoven, and John Whalley, "General Equihlrrium
Con^jutations of the Marginal- Welfare Costs of Taxes in the United States," American Economic
Review, March 1985, find that the marginal excess burden (deadweight loss) associated with taxation
could fell in the range of 20 to 50 cents per dollar of taxatioa Their methodology is that of a
computable general equiUbrrum nwdeL Such models arc capable of incorporating various dynamic
effects of increases in government taxation and spending. The correspondence between their estimates
of deadweight loss and ours is reassuring.
36
Page 1 Impaci of the Welfare Sine on the American Economy
federal spending would be the equivalent of an $800 himp sum payment to every person in the United
States in addition to the direct gains that would accrue to the private sector as the result of the
reduction in government spending freeing up private sector income. Clearly, the potentiaJ long-
term output gains from reducrions in federal spending are substantial
Some Additional Considerations
The estimates of the inefEciencies introduced by the pure size of the federal government that
have been presented are absolute minimum values. For one thing, much of the actual government
spending produces output whose true value is less than the cost of producing it. Yet, a portion of this
spending is counted on a cost of production basis as adding to Gross Domestic Product. Even n»rc
of a problem is the presence of government activity that impacts on the production of goods and
services but is not reflected in the government spending statistics. For exanple, any regulation that
requires private citizens to incur cotain costs or outlays is the exact equivalent of government taxing
that tncome away from citizens and sp)eading it for them. In recent years this new form of "sQenl"
taxation Vi*" become more popular with elected officials. As an example, consido' the cost to the
private sector of simply doing the paperwork required to satisfy various govemmenl regulations. In
addition, there are such mandates as nrinimum wage rates, expenses necessary to meet environmental
regulatkins, and the costs to business of meeting certain requirements concerning access for the
handicapped. AD of these represent some form of government control over the economy's resources
and should be included in any measure of the proportion of the couatrys resources thai arc in the hands
of the government.
More of these programs that constitute sflent government taxation and spending have been
suggested. The beauty of them for the legislator is their silent quality. Using this technique, it is
possible to levy taxes in a for less obtrusive feshion than actually voting up or down for additional
levies on the public. The favorite target for these exactions is the business sector of the economy.
Business is widely perceived to have "deep pockets" and thus able to bear the cost of these various
programs, all of which are justified by the usual rhetoric claiming that they are vital and essential to the
well-being of the natioa However, there is no such thing as a "free hinch." The costs of these silent
taxes are uhimaiely borne by resource owners, including individual workers.
'° The portion of government spending that is categorized as government purchases of goods and
services is inchided in the calculation of the statistic Gross National Product.
' ' An example of this phenomenon is ilhjstratcd in Richaid Vedder and Lowell Gallaway, Laws,
Litigation and Labor Markets: Some New Evidence in The Economic Effects of Employment
Law in California: The Unintended Consequences of Good Intentions, introduction by Steven
Hayward (San Francisco: Pacific Research Institute, 1 995). This Study analyzes the negative wage and
en^kjymcnt effects of the change from a legal doctrine of "employment at will" to one that permits
en^jtoyees to claim "wrongflil terminfltiDn."
37
December 1995 Page 1 1
A Brief History of the Growth in the Size of the Federal Government
How did we get to the present level of government spending? Why has the country moved
away finom David Thoreau's principle, "That government is best which governs least." First were
structural changes in the nature of the American govanmental system, particularly those associated
with the year 1913, when the income tax amendment to the Constitution was ratified and the Federal
Reserve system went into operatiotL The first of these ultimately would provide a large part of the
wherewithal to finance the expansion of government and the second would be both an instrument of
contTol and a mechanism to facilitate the creation of govemmcnt debt, also used to pay the bills for an
ever growing national govemmem.
Second, the experiences associated with managing the American economy during the first of
the two World Wars served to whet the appetite of those with an urge to get their handx on the Icvcts
of power in American society. The planning atmosphere of the years 1917-1918 was infectious and
would have a lasting efiect on many people of influence in the years to come."
ThirdL there were the events of the Great Depression of the 1930s, a crisis created in oo small
way by the activities of the Federal Reserve and the economic policies of a control minded President,
Herbert Hoover." The traumatic events of that era provided an oppwrtunity and a rationale for a
substantial expansion of the role of the Federal government. By 1939, the share of Gross Domestic
Product absorbed by Federal oqsenditurcs had risen to 9.9 percent.
The final links in the chain of circumstances that would justify greater intrusbns of government
into the American economy came fitsm the intellectual community. On the technical side was John
Maynard Keynes's The G«nersl Theory of Employineot, Interest and Money, published m 1 936,
which argued that public spending was a perfect substitute for (jrivate spending in terms of its effect on
the overall economy." From a bitiader perspective, Keynes's economic prescr^tions were given
greater pertinence by the "stagnationist" notions that dominated much of the American inteDoctual
oommunity at the close of the decade of the 1930s. Perhaps the leading proponent of the
"stagnatianist" idea was Alvin Hansea In his Presidentiai address to the American Economic
Association in 1938, he maintained that a combination of the closing of the American fiontier and a
'^ For a discussion of the impact of World War I on the attitudes of influential business and political
leaders, especially during the Great Depression years, sec William E. Leucfalenberg, "The New Deal
and the Analogue of War," in John Braeman, Robert E. Bremner, and Everett Walters, eds.. Change
and Continuity in Twentieth Century America (Cohimbus, Ohio: Ohio State University Press,
1964), pp. 81-143.
" For a detafled description of the sequence of events which triggered the Great Depression, see
Richard Vedder and Lowell Gallaway, Out of Work: Unemployment and Government In
Twentieth Century America (New York; Holmes and Meier, 1992), Chapter 5.
'^ Keynes, John Maynard, The General Theory of Employment, Interest and Money (New
York; Harcourt Brace. 1936).
38
Psge 12 Impact of the Welfare Stale on the American Economy
stowing in the rate of population growth meant an absence of the private investment opportunities that
had been the driving force in earlier economic expansion in the United States."
The "stagnationist" argument integrated quite closely with the Keynesian framework. If private
investment was doomed to be inadequate to provide further sustained economic growth, a la Hansen,
the single solution would be to supplement it with Keynes's perfect substitute, public spending. The
vindication of this argument seemed to arrive with the onset of World War II. Even before American
cotry into that conflict, there had been a large increase in public spending at the national level In
calendar year 1 94 1 , Federal government c;^coditurcs amounted lo 1 6.4 percent of GiOSS Domestic
Product. It did not go unnoticed thai the econocrty seemed to thrive. The unenptoyment rate in 1 94 1
is estimated to have been 9.9 percent, the lowest since 1930. What foUowed seemed to be a
testimonial to the cScacy of the Keynes-Hansen analysis. With all-out mobilization, government
spending surged and the unemployment rate plummeted, falling to as low as 1 .2 percent in 1944.
The intact of World War D on the American econoiny was widely interpreted as a vindication
of Keynesian economic princ i p les. This suggested that it was possible to manage the overall ecoooiny
through a judicious use of public spending. It also strongly impb'ed that problems might lie ahead as
the war reached its climax. In particular, what would happen to the American econoniy when the
massive military e3q)enditiires of the war years woe no longer necessary. As early as 1943, Hansen
was expressing Keynesiaa-like concerns, remarking, "When the war is over. Government cannot just
disband the Army, ctose down munitions factories, stop building ships, and remove all economic
controls.""
Peace did come and with it all the worries inched by the Hansen stateinent. By now, a
substantial technical apparatus had been constructed to supplement Keynes's initial work and the
economics profession had been overwhelmed by a tidal wave of Keynesian sentiment, especially among
its younger members.'^ Within that framework, disaster kxsmed, unless the government took strong
action. More than just professional economists shared this concertL President Harry Truman,
speaking to Congress a few days af^er the Japanese surreitder closed the door on World War D, when
talking about the post-war reconversion said, "Obviously, during the process there will be a great deal
of inevitable unenqiloyment."" In the media, Buslnes Week, on September 1, predicted that Gross
National product in 1946 woukl be twenty percent less than it was in 1944 and that unemptoyment
' Alvin H. Hansen, "Economic Progress and Declining Population Growth, " American Economic
Review, vol 29, March 1939.
'* This comment is included in a publication for the National Resources Planning Board, as quoted
by Hugh S. Norton, The Employment Act and the Council of Economic Advisers;, 1946-1976
(Cohimbia, S. C: Univer^ of South Carolina Press, 1977).
" For an intriguing reflection on the changes in the thmV-ing of economists wrought by Keynes, see
Paul A. Samuelson, "The General Theory." in Seymour Harris, ed.. The New Economics (New York;
A. A. Knopf, 1947).
" New York Times, September 7, 1945. p. 16, coL 3.
39
December 1995 Page 13
%voukl peak at nearly tmie miUioD or roughly at 14 percent of the expected civiliaa labor force."
With rare exceptions, doom and gloom were in the air.^° TTie need for some form of
government intervention seemed obvious to many. But what? How should the Federal government
intervene? In the spirit of the times. Keynesianism. whatever government did should irrqjact on what
was now known as aggregate demand, that curious combination of private and pubUc spending that in
a reversal of Say's Law, would supposedly create its own supply. Yet, there seemed to be some
uncertainty in jTolitical circles about what to do. At times. President Truman apparently was enamored
of aggregate demand ootiocis, calling for an increase in the inininium wage on the grounds that, "...the
existence of substandard wage levels sharply curtails the national purchasing power and narrows the
markets for the products of our firms and factories."^' Al other times, though, his primary conccms
were the non-Keynesian notion of balancing the budget or, better yet, running a budget surplus to
reduce the national debt.'^ Elsewhere, arguments were being made for some form of govemmeat
interventioa in the ccooomy. In late August, Paul G. HofBnan, ChairmaQ of the Studebaker
Corporation and head of the Committee for Economic Devebpnrtent, recommended federal aid to
assist the newly created jobless to move to areas where jobs existed.'' And, within the Federal
government there was a caD by the ranking Republican member of the House Ways and Means
Committee. Harold Knutson, fox a 20 percent reduction in income taxes and Truman's request for the
passage of a Full Employment Act that woukl mandate counter-cyclical fiscal pobcy - public speoding -
in case of an emergency.'* Nothing came of the first of these, but the latter led to the passage of the
Empbyment Act of 1946, which established the Council of Economic Advisers and the Joint
Ecoixsmic Cominittce of Congress.
In many ways, the Federal government seemed to be drifting into the post- World War D era.
This was largely the resuh of ecorwmic indecision on the part of Harry Truman. What this ultimately
translated into in terms of a national economic policy was a determination to maintain the statu! quo.
" Business Week, September 1 , p. 9
" For detailed discussions of the nature of the etxinomic forecasts of this period, see Martin
Bronfenbrenncx, "The Consumption Function Controversy," Southern Ecoaomic Journal, January
1948, pp. 304-20, and Michael Sapir, "Review of Economic Forecasts for the Transition Period," in
VoL XI. Studies In Income and Wealth (New York: National Bureau of Econoinic Research. 1949).
" New York Tlnies. September I, p. 16, coL 3.
" See Alonzo Hamby, Man of the People (New York; Oxford Univeretty Press, 1995), p. 385.
" New Yoric Times. August 28, 1 945, p. 38, col. 4. . . '
" New York Times, August 28, 1945. p. 1 , coL 2. Knutson repeated his call for a 20 percent
reduction in the individual income tax phis an end to the corporate excess profits tax in late September.
Both suggestions were ignored. Truman's request for a Full Employment Act is reported in New York
Times, September 7. 1945, p. 16, col I.
40
^^' '^ Impact of ihe Welfare Siaie on Ihe American Economy
thai is to keep the wartime economic contnals in place as long as possible. No lax cuts, though, despite
a rapid dccKne in Federal government spending, la the single year 1946 expenditures fell by n»rE than
fifty percent over the previous year. Not unexpectedly, the prevalence of Keynesian ideas led a number
of major economists to forecast a severe post-war economic decline. However, surprisingly, to the
Keynesians, that is, the economy made the transformation to peacetime conditions in a surprisingly
smooth feshioa Disaster did not occur as the FederBl government did exatrtly what Alvin Hansen had
said il could not do: It disbanded the army, cbsed the munitions factories, and stopped building ships.
All that was left of Hansen's economic recommendations were the wartime controls. And they went by
the board in rrrid-1946 simply because Truman would not accept any watering down of them and the
Congress was unahle to override his veto of legislation that would have done just that. Suddenly, on
July 1, 1946, al] of Hansen's worst fears had b^ realized.
In the aftermath of the absence of substantial government intervention in the cconon^, there
was a marked iturease in pjrice leveb and a rise b unempbyment. However, the unempkiyment rate
increased only to 3.9 percent for 1946, stayed at the level in 1947, and averaged 3.8 percent in 1948.
The feared immediate post- World War n depressbn had not materialized, despite federal gov anngot
expenditures in 1948 being le&s than one-third as large as they were in 1944 and despite the
disappearance of the wartime controls. None of the Keynesian predictkjns had been validated- Yet, by
now the commitment to Keynesianism was so strong that an ad hoc explanation ibr the relatively easy
transition from war to peace that could be used to reconcile actual events with Keynesian theory was
devebped. It err^hasized the role of "pent-up" consumer demand resulting from the lack of availability
of goods and services during World War 11. To be sure, people wanted more consumer goods (dont
they ahvays?) but the enpirical evidence simply does not support the idea that there was some dramatic
shift in consumption that c^qjlained the absence of a serious economic downturn fbUowing the war.^'
Wrth the passage of the Eirployment Act of 1 946, in February of that year, the last element in
the system designed to manage the American economy was set in place. After a prolonged debate
about the definition of terms such as "full ouployment" and what the character of the institutional
arrangements for implementing it should be, the legislation was agreed upoiL It committed the Federal
government to assuming responsibility for the provision of en^loyment opportunities to those "able,
wining, and seeking to vrark." In addition to establishing the Council of Economic Advisers and the
Joint Economic Committee of Congress, it mandated the submission of the Economic Report of the
President to Congress. From this moment on. Federal involvement in the direction of the American
economy was a legislative requirement, although the degree of intervention was a matter of choice on
the part of a President and his Administration.
" In an amazingly rapid turnaround, the process of reconversion was largely con^lete in early
1946. Nearly seven million people had left the armed forces, and government spending had fallen well
over 90 perctmt of the way from the wartime peak to what would be the postwar low in 1947. In
oiJdiLkiQ, uuociury growth also contracicd sharply. For example, bauk leacrvcs tiaU UccLined try atx}Ul
sixty percent. As to unemployment, it was slightly in excess of four percent. Yet, at this time,
consumer spending was stiU well below normal peacetime levels. For a detailed discussion of the
"pent-up" demand thesis, sec Vodder and Gallaway. Out of Work, op. cit. Chapter 8.
41
December 1995 Pase IS
The stage was now set for the emergence of what Herbert Stein calls a "consensus" with
respect to the use of fiscal policy. ' Remarkably, that consensus ignored the primary lesson of the
immediate post- World War D transition to peace, the lack of a need for an infusion of government
speodmg m order to sustain the Aiiicritan economy. Instead, what emerged contained the seeds of a
future explosion in the size of the Federal government. At its heart was the abandonment of the norion
of balancing the Federal budget, either in the immediate term or over some longer period of time.
Now, fhe emphasis would be on halancins the budget only in times of pinspciHy, iflhexL In the 25
years subsequent to 1949, there are twenty years of budget deficits, for the most part small, with
outlays usually being within ten percent of recess. However, there were exceptions, such as 1959,
1 968, 1 97 1 , and 1 972. In these four years expenditures were more than ten percent greater that
rece^rts. The justification for this new consensus was that it provided a greater government capability
to manage the economy and pitxluce couditiDas of prosfxrity. Amazingly, the evidence that the
manipulation of government expenditures was important to maintaining pTosp>aity w^s almost dod-
existaa at the time the consensus emerged. As already described, in the years immediately prior to
1 949, there is the most dramatic fiscal shiA in history. Federal government expenditures go from being
more than twice receipts to being about seveoty percent of receipts. The total fiscal shifi in this
period represented about one-fourth of the typical year's Gross E>omestic Product. In today's terms,
this would mean a fiscal shiil of approximately one-and-a-half trillion dollars. The resuh of this
Draconian slashing of federal expenditures? The previously indicated unemployment rales that did
not, on average, exceed four percent during the three years that folbwed the onset of this change.
Still, the fascination with goverammt spending as a source of prosperity was there. In many
ways, the wish seemed to be father of the thought. Later, the recaveries from the relatively mild
business cycle downturns of 1949, 1954, and 1958 would be regarded as something of a iCeynesian
tour de force, even though the evidence indicates that "discretionary" fiscal policy changes typicaDy
amounted to about one-tenth of one percent of Gross Domestic Product.' The reality was that these
business cycle recoveries were a testimonial to the natural recuperative powers of the private
economy. '
There was still one more genie to be let out of the bottle. Through the 1 950s the phenomenon
of inflation still was widely regarded with distrust. However, toward the end of that decade the
intellectual community weighed in with an argument that inflation mig^ not be all that bad. Perhaps
the quimessentia] statoiteiit of the Keynesian, or by now neo-Kcynesian. theory is the relationship
" Herbert Stein, The Fiscal Revolution in America (Chicago, IDL; University of Chicago Press,
1969), Chapter 9.
'^ Sec Wilfred Lewis, Jr., Federal Fiscal Policy in the Postwar Recessions (Washington, D. C:
The Brtxjkings Institution, 1962).
" For a more detaflcd discussion of this point, see Vedder and GaDaway, Out of Work, op. dt.
Chapter 9.
42
^*^ ' ^ Impact of the Welfare Stale on ihe American EcoDomy
known as the PhiDqjs curve." The implication of the Phillqjs curve m its original form was that some
exlra output and err^byment could be bought by simply accepting some degree of price inflation. This
was simply too attractive a posstljility to ignore. From the mid- 1 960s on, the rate of price inflation
escalated inexorably until the early 1980s. Over the twelve years 1953-1964 pnces rose by 1 .3 percent
a year. From 1965 to 1969, the annual increase was 3.4 percent; from 1970 to 1974, 6.1 percent; and
1975tol979, 8.1 percent.
Accompanying the increase in the rate of inflation was a steady growth in the size of the
Federal government. This was i» accident. Given the progressive nature of the American income tax
system and the lack of indexing for changes in the price level durmg this period, inflation was
systesnatically operating to increase Federal government revenues as a share of Gross Domestic
Product. This is the familiar notion of "bracket creep." Of course, this translated into additional
government spending. Whereas the Federal share of Gross Domestic Product was 1 8.7 percent in the
interval 1 953- 1 964, it rose to 1 9.3 percent fiom 1 965 to 1 969; 1 9.7 percent from 1 970 to 1 974; and
21.5 percent over the ycar^ 1975 to 1979.
Towards the end of the p)eriod of rising rates of price inflation, budget deficits also began to
rise. Excesses ofexpenditures over receipts of more than 10 percent had occurred four times in the 25
year period 195M 974. After 1974, there is only one year when this is not true. At this point, the
revenue restraints that limited the growth in the size of the Federal govermnent in earlier years were
non-operative. Predictably, the average share of Gross Domeshc Product absorbed by Federal
government expenditures in the 1 6 years following 1 979 increased to 22.9 pereeat.
What to do About the Size of Government
What can we say in closing? Qearly, the historic growth in the relative size of the Federal
government has long since reached a critical stage. It has become oversized, at times by more than a
third, and currently by n»re than a fourth. In the process, it has become the source of substantial
deadweight losses for the American economy. The message from all this is quite obvious. The time
has come to rein in the spending activities of the Federal government. If this is done, the overall
economy will benefit and there wiD be an infiision of income into the private sector of the economy.
Our findings indicate that for every dollar govennnent spending is reduced and a dollars worth of
resources is Speed up to be ^ is^ by the private sector, an additional 38 cents of output and income will
be created in the initial year of the reduction and, over a seven year period, the total increase in income
win be $2.45. This constitutes a powerful argument for reducing levels of Feder^ government
spending.
" The nest influential argument in this respect is contained in Paul Samuelson and Robert Solow,
"The Analytics of Anti-Inflationary Policy," Amerioin Economic Review, May 1960, pp. 177-194.
43
Prepared Statement of Hon. Rod Grams, a U.S. Senator From
THE State of Minnesota
Mr. Chairman, distinguished members of the Senate Judiciary Committee, I
thank you for allowing me to appear before your Committee today to discuss the
"Taxpayer Protection" Balanced Budget Amendment (S.J. Res 22). Having intro-
duced this legislation last January in advance of floor debate on the Balanced Budg-
et Amendment, I am pleased to have this opportunity to testify on the merits of this
bill.
As the members of the Committee may recall, this legislation calls for a balanced
budget amendment to the Constitution. And I am pleased to have the support and
cosponsorship of the distinguished Assistant Majority Leader, Senator Lott, and my
colleagues, Senators Smith, Mack, Frist, Inhofe and Thomas.
Senate Joint Resolution 22 is the legislation the American people are calling for.
It balances the budget * * * but ensures that it is not balanced on the backs of
the American taxpayers.
I believe this hearing is quite timely, because by tonight at midnight, taxpayers
across this nation will be filing their federal income tax returns ana realizing ex-
actly how much they are being asked to pay for their government. And it will be
this realization, that will solidify their support behind the "taxpayer protection" bal-
anced budget amendment.
There is no question that Congress must pass a balanced budget amendment and
send it to the states for ratification. For years, Washington has been racking up
deficits. In the process, we've racked up a four and a half trillion national debt. And
sadly, we've got very little to show for it.
Without the balanced budget amendment. Congress will continue its deficit-
digging, debt-building ways. That's bad news for the taxpayers and worse news for
our children.
Yes, we need the balanced budget amendment * * * but not if Congress is al-
lowed to use it as an excuse to raise taxes to mask its continued penchant for spend-
ing.
If you look at every so-called "deficit reduction" package Congress has passed in
the last decade, you'll find that each one follows a consistent formula. Raise taxes
now. Cut spending later. That was of course, until Congress passed the Balanced
Budget Act of 1995. Tragically, that plan was vetoed by the President.
Once again, Congress is gearing up to consider a budget resolution. And there is
talk of another vote on a badanced budget constitutional amendment. Therefore, this
body has the opportunity to put an end to the madness that continues to drain the
American Taxpayers.
That's why I introduced the "taxpayer protection" balanced budget amendment in
the Senate last year. My amendment would require a three-fifths supermajority vote
in both houses of Congress to raise taxes.
A supermajority requirement is the best way to show the American taxpayers that
Congress is serious about balancing the budget through spending cuts * * * and
not through higher taxes.
That's what I promised the taxpayers of Minnesota during my campaign for the
U.S. Senate. That's what they elected me to do. That's what my bill delivers.
Is there enough support in Congress to pass it? If we listen to the folks back
home, there sure ought to be.
And today, the House of Representatives will be taking the first step towards that
goal — by voting on virtually identical legislation authored by Representative Joe
Barton (R-TX).
A balanced budget has got to be achieved through cuts in government spending,
taxpayers have told the ACU — even it means cuts in essential government pro-
grams.
Americans are willing to do that * * * but they aren't willing to be patsies for
a big-spending government that just hasn't learned when to say "no."
The supermajority requirement is simply good government, and Americans sup-
port it just as they support the $500 per-child tax credit. They're tired of watching
their paychecks grow smaller while Washington grows bigger.
They voted for change in 1994, and it's our job to see that they get it.
That's what's best for the taxpayers * ♦ * that's what's best for our
children * * * that's what's best for Minnesota * * * that's what's best for Amer-
ica.
As members of the U.S. Senate, we should all be closely watching today's vote in
the House. We must be prepared to tell our constituents how we will vote on such
a measure later this year. And as the sponsor of S.J. Res. 22, I fully support the
44
House action and will continue to advocate adoption of this amendment by the Sen-
ate — I hope my colleagues on this Committee will pledge to do the same.
Again, I thank the Chairman and the Committee for holding this hearing on is-
sues critical to the economic welfare of the American taxpayers. It is truly an his-
toric day for the Congress and even more so for the taxpayers.
Thank you.
Senator Brown. Our next witness has a very distinguished
record of public service, including being counselor to the President,
always thought to be a source of wise advice and a frequent wit-
ness before this committee.
Lloyd Cutler, why don't you go ahead?
STATEMENT OF LLOYD N. CUTLER
Mr. Cutler. Thank you very much, Mr. Chairman. Let me say
at the beginning that I have no substantial quarrels with the tax
policies that are being outlined by Secretary Kemp and Senator
Kyi. My quarrel is with the sheer unworkability of this kind of an
amendment and the fact that it would put us into a straightjacket
that would prevent us from raising or modifying a tax at a time
when the majority of the legislators and the public clearly believe
such a tax is needed; for example, a new threat from the Soviets
or whatever else it might be, short of armed conflict, that makes
it necessary to incur additional expenses and necessary because of
the budget deficit not to simply borrow the money to incur those
expenditures.
I also am a co-founder and secretary of the Concord Coalition,
which shares many of the tax policy objectives that Secretary
Kemp and Senator Kyi have outlined. As you may know, co-chair-
men Warren Rudman and Paul Tsongas have written to each mem-
ber of the House of Representatives urging a vote against the par-
allel amendment which is scheduled for a floor vote in the House
today.
The gist of the amendment is to reform the existing constitu-
tional procedure for voting on a tax bill or any other bill on the
floor of the Senate or the House. It is characterized as a reform,
but it reminds me of the 19th century reform bills that were pre-
sented to the British Parliament for the purpose of making the
election of members more representative and democratic, and a
conservative critic was supposed to have said, "Reform, why do we
want reform? Things are bad enough as they are."
What is bad enough under the present system, in my opinion, is
the growing tendency toward gridlock, especially when the White
House is held by one party and a majority of one or both Houses
of Congress is held by the other party. This proposed reform em-
bodies a measure that would make the gridlock considerably worse.
It would require that any bill to levy a new tax, not just an income
tax, a new tax, or to increase the rate or base of any tax may pass
only by a two-thirds number of the whole number of each House
of Congress, the whole number being 100 in the case of the Senate
and 435 in the case of the House.
Now, of course, the present constitutional requirements, after
long debate in the Convention, require only that the presence of a
majority of the whole number is sufficient for a quorum and that
a majority of those present, a simple majority of those present, is
enough to pass a bill.
45
The proposed amendment would change all of that by providing
that for tax bills, even though the simple majority needed for the
quorum is present, a vote of two-thirds of the whole number is
needed to pass the bill. This would mean. Senator Kyi, that if 34
of you simply absented yourselves from the floor and never even
cast a vote, a tax bill could not pass even though 66 members voted
66 to nothing in favor of that bill. If you talk about gridlock, that
is certainly the way to ensure it, and the absent members don't
even need to recall themselves.
Let me give you two examples of how this present tendency to
gridlock would be made even worse. First, as you know, the law
that created the airline ticket tax expired by its own terms on De-
cember 31, 1995, and because of the present budget gridlock and
the shutting down of the Government, Congress did not renew the
tax before it expired and it has not been collected since the begin-
ning of January 1996. We have probably lost $1 billion a year not
collecting that tax, or more.
Allowing this tax to expire was not a deliberate policy judgment
of the Congress of the United States. It was a mere happenstance
of governmental gridlock. Today, a simple majority of the Senate
and House could restore the ticket tax if it felt that the lost reve-
nue was needed, if we are going to be serious about our efforts to
reduce the budget deficit. But under the proposed amendment, it
would take 67 of the 100 Senators and 290 of the 435 Congressmen
to restore this tax which, since it has already expired, would
clearly be a "new tax" under the wording of this amendment.
Second, virtually any tax bill, even if it lowers some rates, in-
creases other rates or adds some new tax in order to keep the en-
tire measure either revenue-neutral or to minimize the net loss of
revenue that is involved. For example, the present House, as you
know, has adopted by mere procedural rule a 60-percent require-
ment — I think it is 60 percent of those present — in order to pass
a bill raising any income tax rate. But the House has had to waive
that requirement on at least three major occasions to date. Con-
gressman Skaggs has led a constitutional attack on the validity of
that measure, which is clearly constitutionally suspect even though
it may be an issue which the courts would decline to adjudicate.
A waiver would also be needed, I think, for almost any version
of the flat tax which Secretary Kemp and others have been advo-
cating. I think the lowest rate today is 15 percent. Secretary Kemp,
although he hasn't given precise numbers, has said he thought the
ideal flat tax would be in the range of 19 percent, or something like
that, and a two-thirds vote would be required under this bill, two-
thirds of the whole number of members.
Moreover, the exceptions that are provided in section 2 are
wholly inadequate. They are limited to cases of actual armed con-
flict. They do not cover other national security crises such as the
one I mentioned earlier. Let us suppose, because of something the
Chinese do or some development in Russia, we really do need an-
other extensive and costly rearmament program, although armed
conflict has not yet broken out. Are we going to finance that en-
tirely by new debt? Is that a serious way to go about balancing the
budget?
46
The same thing would be true of responding to a recession or a
budget impasse. Moreover, with respect to really addressing the
budget problems, this amendment would limit the solution of any
budget problem to cuts in expenditures. Increases in taxes, even
minor adjustments in taxes, would be entirely off the table.
The present Constitution requires supermajority votes in a very
limited number of cases, such as the Chair has already observed,
and Senator Kyi, where the Framers thought that a high degree of
consensus was more important than the gridlock resulting from a
failure to obtain the required supermajority, and these supermajor-
ity requirements under the present Constitution are limited to such
matters as the override of Presidential veto, as has been men-
tioned; the adoption of new constitutional amendments; the expul-
sion of a Member; or a conviction by the Senate in the case of an
impeachment trial.
If the necessary supermajority is not achieved, the worst that can
happen is we are stuck with the status quo, something that the
country in those cases can usually survive. But if a constitutional
supermajority is required even to pass a tax bill, the Nation itself
can be paralyzed, as in the situations I described to you, because
once you establish a supermajority, especially this rigorous super-
majority of two-thirds of the whole number of both Houses, it is en-
tirely conceivable that while a simple majority of those present and
voting could be found to compromise the issue and achieve a result
one way or the other, a supermajority cannot be found for that
compromise or any other compromise, and the result is sheer im-
passe. The country is in a straightjacket and can do nothing.
The only thing I can conceive of that would be worse than this
requirement would be if you proposed a constitutional amendment
requiring a two-thirds popular vote or a two-thirds vote of the Elec-
toral College to elect the President. It might literally be true, and
history has proven this, that with such a requirement we would be
unable to have a President, and that is the kind of straightjacket
you are about to jump into and try on for size.
Madison — of course, this has been quoted very often by
Senator Brown. Let me ask you if I could — we are going to try
and limit ourselves to 5 minutes.
Mr. Cutler. Well, I will stop right there because everybody
knows this Madison quote. Instead of having the majority decide
what the country could do, subject only to the Bill of Rights and
similar protections against even a willful majority, it would put the
minority in power. The minority could block any kind of revision
of the tax laws.
Senator Brown. Thank you, Mr. Cutler. We will come back, I am
sure, in questions. You have raised some important points. What
we are trying to do is run the lights so that testimony is limited
to about 5 minutes with it, and I have obviously not stuck with
that, but we will try to do a little better as we go forward.
Senator Brown. Now we will hear from a former colleague from
Congress, a Member of the House of Representatives, a former
Governor, Pete du Pont. We are pleased to have you here this
morning.
47
STATEMENT OF PETE DU PONT
Mr. DU Pont. Mr. Chairman, thank you, and if I may have my
entire statement submitted for the record, I will summarize my
thoughts.
Senator Brown. Without objection, the entire statement will be
included in the record.
Mr. DU Pont. First of all, Mr. Chairman, it is the 15th of April
and that reminds us of the language in the Declaration of Inde-
pendence. One of the complaints that the American colonists had
against King George was that "he has sent forth swarms of officers
to harass our people and eat out their substance." The substance
of every American family is being eaten out today by an over-bear-
ing and over-reaching national Government that is taking far too
much of their earnings in taxes.
I want to focus my testimony this morning on the experience in
Delaware with a supermajority, an experience that I helped create
and have watched for 16 years now. As a postscript, every one of
Mr. Cutler's nightmares has, in fact, not come to pass in Delaware.
There is no gridlock, as I will testify to in a moment.
First, though, three points. In 1909, a New York Times editorial
said, and I quote, "When men get in the habit of helping them-
selves to the property of others, they cannot easily be cured of it."
I would observe, exempting, of course, the people in this room on
the distinguished panel, that the disease has only gotten worse, not
better.
Ninety-eight percent of the families in the country didn't even
pay the income tax when it began. On the other hand, it got to 90
percent under President Kennedy, and in 1990 President Bush and
the Congress even agreed that it would require a supermajority of
60 Senators to cut taxes — an amendment, I am sure, much more
favorable to Mr. Cutler's viewpoint — and a simple majority to raise
them. I would say that the disease is progressing forthwith here in
the U.S. Capitol.
In 1950, the average family was paying 3 percent of its income
in Federal taxes. Today, the family is paying 25 percent. Our
friend. Secretary of Labor Robert Reich, is fond of pointing out that
over 20 years, from 1973 to 1993, the take-home pay of the lower
two quintiles of the American economy, families in the lowest 40
percent income-earners in our country, did not see their incomes
rise. In roughly that same 20-year period, the inflation-adjusted in-
come of the Federal Government — that is, tax receipts — rose 58
percent. I would simply observe that there is fairness for you —
working people, nothing; Government, plus 58.
But let me turn my attention to the States. One-third of all
Americans, as Mr. Kemp said, live in States with tax limitations
in their constitutions. Those with tax limitations saw slower reve-
nue increases and slower spending increases than those without.
In our State of Delaware, the 1960's and 1970's exhibited all the
problems that the Federal Government has here in Washington.
On a bipartisan basis. Governors overspent State revenues. They
were mostly thrown out of office by the voters for doing so. The
first serious problem hit in the spring of 1969. Little after-shocks
continued through 1975 and by the time I became Governor a year
later, Republicans and Democrats agreed that it was time for both
48
a constitutional spending restraint and a second constitutional
amendment limiting the ability of the legislature to increase taxes
without a supermajority vote. I have attached the text of those two
amendments to my testimony.
Since the constitutional amendments took effect in 1980, there
have been 37 tax cuts enacted in Delaware and 23 tax increases.
The taxpayers have won by a 3-to-2 margin. Most of the tax cuts
were in personal income tax rates and gross receipts taxes. Most
of the tax increases were in motor fuel taxes.
The personal income tax top rate started at 19.8 percent. It has
now been reduced to 7.1 percent, a child care tax credit added, per-
sonal exemptions increased. Gross receipts taxes for businesses
have been reduced every other year from 1985 to 1995. On the in-
crease side, motor fuel taxes were raised in 1981, 1987, 1991, 1993,
and 1995, and various other turnpike tolls, corporate franchise
taxes and sin taxes raised as well. I should add that Delaware has
no general sales tax.
So, what has been the experience in the Delaware economy over
16 years since 1980? Employment is up 39 percent, compared to 29
percent in the entire Nation. The unemployment rate has fallen by
49 percent; that is twice the drop in the national economy. AFDC
caseloads are down 19 percent, compared to a 31-percent increase
nationally. These two constitutional amendments led to a surge in
economic growth. Personal income receipts have risen 26 percent,
and so let me put that in perspective one more time. Top income
tax rates have been cut 64 percent and income tax revenues are
up 26 percent.
Mr. Chairman, in conclusion, I think a supermajority amend-
ment is the only way that we are going to curb the spending and
tax-increasing appetite of the Congress, and I have only one
tongue-in-cheek suggestion to shortcut this process and get your
amendment adopted more quickly, and that is to pass a simple
statute today moving tax payment day from April 15 to October 15
so we would pay our taxes just before we vote. I think your amend-
ment would sail through without any difficulty.
Thank you, Mr. Chairman.
Senator Kyl. Mr. Chairman, might I comment? I have introduced
a bill which would establish a commission to study whether moving
tax day to the second Tuesday in November would be a good idea,
and I would invite any of my colleagues to join in the cosponsorship
of that legislation, a wonderful idea.
Senator BROWN. That is an excellent idea, but not known for a
soft touch.
[The prepared statement of Mr. du Pont follows:]
Prepared Statement of Pete du Pont
delaware's successful supermajority vote
Mr. Chairman and Members of the Committee: I am pleased to testify today in
support of a constitutional amendment to require a supermajority vote in order to
raise taxes, or increase or broaden the base or rate of existing taxes.
I bring to this question the perspective of a former state legislator, Member of
Congress, and Governor of Delaware. In that last capacity, I supported and assisted
the Delaware General Assembly (in Delaware the General Assembly has the exclu-
sive power to amend the Constitution) in enacting an amendment to the Delaware
49
constitution requiring just such a super-majority vote. I want to focus my testimony
on the success of that amendment in the 16 years of its operation.
First, however, I would Uke to state for the record, my beUef that such a super-
majority requirement is the only way that the revenue-raising impulses of the Con-
gress will be controlled.
In 1909, a New York Times editorial opposing the income tax noted "when men
get in the habit of helping themselves to the property of others, they cannot be eas-
ily cured of it." It is clear that they not only haven't been cured, their disease has
gotten worse. The income tax that started so innocentlv in 1913 did not even apply
to 98% of American families. By 1916, the top marginal rate had increased from 7%
to 16%. By the '50s, it had risen to the confiscatory rate of 90%. Presidents Kennedy
and Reagan each cut the top rate so that by the time Reagan left office, it stood
at 33%, but it has inched up to over 40% again. By 1990, President Bush and the
Congress would agree that a super-majority of 60 Senators be required to cut taxes,
whereas a simple majority of 51 could increase them.
As Senator Roth, the Chairman of the Senate Finance Committee, has often
fiointed out, in the last few decades, every time Congress has raised taxes one dol-
ar, it has raised spending $1.59, thus increasing pressure for further tax increases.
The problem has persisted since the end of the second World War. In 1950, the
average family in America was pa3dng 3% of its income in federal taxes. Today, that
family is pajdng 25%. The value of the dependent deduction to median income fami-
lies has been reduced by 75% since its enactment in 1946 by the failure of Congress
to raise it to keep pace with inflation.
Secretary of Labor Robert Reich is fond of pointing out that from 1973 to 1993
the take-home pay of the lowest income 40% of American working men and women
has in inflation-adjusted dollars remained flat. During roughly that same period, the
inflation-adjusted income of the federal government has increased 58%. So the pro-
pensity to raise taxes has been a serious problem for working men and women for
half a century.
Now let me turn to the experience of the states. One-third of all Americans live
in a state with a tax limitation in their Constitution: Arizona, Arkansas, California,
Colorado, Delaware, Florida, Louisiana, Mississippi, Oklahoma, and South Dakota.
These provisions seem to have been effective, for as Congressman Joe Barton (R-
TX) recently testified before the House Judiciary Committee Subcommittee on the
Constitution:
In the previous decade, taxes in nonsuper-majority states went up 104%. In
super-majority requirement states, tax revenues went up only 87%. Tax limitation
also slows growth in spending. In the same time period, spending in nonsuper-
majority states went up 102%. In states with tne super-majority protection,
spending increased only 95%. So there has been both considerable experience and
success at the state level in constitutionally limiting spending and taxation.
Turning to our experience in Delaware, during the 1960s and 1970s, the State of
Delaware faced serious fiscal problems similar to those of the Congress in Washing-
ton. Our state government chronically overspent. Deficits became common. Tax in-
creases the norm. Incidentally, this was a bipartisan problem; Democratic and Re-
publican Governors both overspent the state's income. The first serious crisis hit in
the spring of 1969 and its aftershocks continued through 1975.
Finally, in the late 1970s, Democrats and Republicans agreed it was time for both
a constitutional spending restraint and a second constitutional amendment limiting
the ability of the legislature to increase taxes without a super-majority vote. I have
attached the texts of both amendments to my testimony and would like to submit
them for the record.
Both amendments have been strongly supported by the general public and have
operated successfully over 16 years, through three administrations of two political
parties. They are not controversial, and I would venture the opinion that if anyone
attempted to change them today, it would be met by solid public opposition.
The tax limitation is contained in two sections of Article VIII of the Delaware
Constitution. Let me quote the operative sentences of Sections 10(a) and 11(a):
Section 10(a) — The effective rate of any tax levied or license fee imposed by the
state may not be increased except pursuant to an act of the General Assembly
adopted with the concurrence of three-fifths of all members of each House.
Section 11(a) — No tax or license fee may be imposed or levied except pursuant
to an act of the General Assembly adopted with the concurrence of three-fifths of
all members of each House.
Let me touch now on Delaware's experience with these two constitutional sections.
First, since the effective dates of the amendments in 1980, there have been 37 tax
50
cuts and 23 tax increases; the taxpayers have won by a 3-2 margin. Most of the
tax cuts were in personal income tax rates and gross receipts taxes. Most of the tax
increases were motor fuel tax increases.
In Delaware, personal income tax rates in the 1970s were the highest in the na-
tion, with a top rate of 19.8%. In 1980, 1985, 1986, 1987, and 1996, those rates were
reduced. The top rate now stands at 7.1%. That is a 64% reduction in rates. In addi-
tion, various personal exemptions and pension deductions were increased and a
child care tax credit added. Gross receipts taxes for businesses were reduced ap-
proximately every other year from 1985 to 1995.
On the increase side, motor fuel taxes were raised in 1981, 1987, 1991, 1993, and
1995. Turnpike tolls, corporate franchise taxes and alcoholic beverage and cigarette
taxes were also increased from time to time.
I should add also for the record that Delaware has no general sales tax.
This pair of constitutional amendments has resulted in the adoption of fiscal poli-
cies that have benefited the individual taxpayer and produced surplus budgets for
sixteen consecutive years. They have not throttled spending in Delaware. Indeed,
spending increases in the General Fund have outpaced inflation in most of the years
since 1985. But the climate of fiscal stability that these constitutional changes have
brought to our state ushered in an era of unprecedented prosperity.
Since 1980, employment is up 39%, compared to 29% in the entire nation.
The unemployment rate has fallen by 49%, twice the national drop in unemploy-
ment.
AFDC caseloads are down approximately 19%, compared to a 31% increase na-
tionally.
And as a result of this surge in economic growth, inflation-adjusted personal in-
come tax receipts have increased 26%. Let me say that again: top income tax rates
have been cut 64%, and income tax revenues are up 26%.
Unfortunately, like all states, Delaware suffers from rising federal income tax
rates. Referring again to Secretary Reich's data, while inflation adjusted earnings
in Delaware were falling 5% between 1975 and 1995, inflation adjusted federal in-
come tax payments of the average Delaware family rose 17%.
In conclusion, super-majority constitutional amendments have corrected the recur-
ring fiscal problems that Delaware was experiencing. They have created an eco-
nomic climate of unprecedented prosperity. The rising tide of opportunity has lifted
all boats. Now it is time for similar super-majority amendments to correct the un-
successful fiscal policies the federal government has been following for the last half
century.
51
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53
Senator BROWN. We are joined by the House sponsor of this con-
stitutional amendment, Congressman Joe Barton. Joe, you are wel-
come to join us up here, if you would like. Certainly, we would like
to have Congressman Skaggs join us after he testifies, if he has
time.
We are joined now at the witness table by a very distinguished
Member of the House Appropriations Committee, Congressman
David Skaggs from the great State of Colorado.
STATEMENT OF DAVID E. SKAGGS
Mr. Skaggs. Good morning, Mr. Chairman. Let me thank you
and the committee for the privilege of testifying today. I appreciate
it greatly.
This proposed amendment, in my view, is a bad idea and bad
constitutional law. Even worse, it will be considered today in the
House of Representatives under a process that insults Members' in-
telligence and responsibility, contradicts any suggestion that the
House might be a thoughtful body and, in fact, demeans and de-
bases the very constitutional amendment process itself.
Second only perhaps to an act of Congress declaring war, an
amendment to the Constitution ought to command the most serious
and deliberate sort of legislative review, examination and analysis
we are capable of. It deserves better treatment in the House than
a rush job to meet a politically sexy vote deadline that the majority
admits is a matter of symbolism. The Constitution should not be
used to make political statements.
Each version of this proposed amendment has its own particular
infirmities and I will address my remarks primarily to the proposal
being considered in the House today. I oppose it on a number of
grounds. It violates what Madison called the fundamental principle
of free government, the principle of majority rule. The Constitution
makes very few exceptions to that principle, none having to do with
the core, ongoing responsibilities of Government.
I believe we should be extremely wary of any further exceptions,
especially if it would complicate the essential responsibilities and
competency of the Government. We have to be mindful that the log-
ical corollary of supermajority rule is minority control, and under
this proposed amendment 34 Senators, conceivably representing
less than 10 percent of the American people, would have the power
to control the Government's revenue and tax policy.
I also oppose this amendment because of its almost absurdly im-
practical consequences, both intended and unintended. One such
consequence would be for all practical purposes to lock into law
whatever was the then current tax structure at the time of this
amendment's ratification. If you like the tax system the way it is
now or if you have supreme confidence that some future Congress
will have gotten it fixed just right before ratification, you should
love this proposal. Another related consequence of this proposal
would be to complicate efforts to balance the budget, particularly
as they entail reducing the growth of entitlement programs. Fi-
nally, I am opposed to the amendment because, like the current
House three-fifths rule, it is vague and will generate confusion and
litigation.
54
Mr. Chairman, wiser lawmakers than we have considered the
question of whether to require a supermajority for passage of cer-
tain kinds of legislation. At the Constitutional Convention, the
Framers specifically considered and rejected proposals to require a
supermajority to pass legislation concerning particular subjects,
such as navigation and commerce. They rejected various legislative
supermajority proposals largely because of their experience under
the Articles of Confederation and the paralysis caused by the Arti-
cles' requirement of a supermajority to raise and spend money.
In other words, we have a Constitution because it was impossible
for the country to function under a constitutional law such as is
being proposed here. The Framers' judgment on this matter, in-
cluding whether to retain the Articles' supermajority to raise reve-
nues, should give us all cause to reflect on the wisdom of the pro-
posals before the committee today.
In sum, this proposal would go far beyond any existing constitu-
tional precedent. It would effectively paralyze the ability of future
Congresses to deal with one of the most nuanced of all legislative
issues — revenues and taxes — allowing a small minority to control
national policy.
The Presidential primary election season brought forward a num-
ber of innovative ideas regarding the Federal tax system. Were it
now in the Constitution, this amendment would likely serve to
thwart these ideas or other reforms. Many want to end corporate
welfare by closing tax loopholes, and that, of course, would likely
bring in additional tax revenue from affected corporations and so
require a two-thirds vote.
What about a capital gains tax cut? Its advocates usually argue
that the effect will be to raise revenues. Does that mean the two-
thirds requirement would kick in? If now in the Constitution, this
proposed amendment would certainly make the current efforts to
balance the budget a lot more difficult. Whether adjusting the
Consumer Price Index or reducing business and tax subsidies, tax-
ing the income of expatriates, limiting the use of section 936 credits
in Puerto Rico, narrowing the EITC, means-testing Medicare Part
B premiums, or limiting the amount of profits companies can shift
to overseas subsidiaries, all would have to be passed by two-thirds.
So once you consider how this amendment might be interpreted,
many absurd consequences come to mind.
The short history accumulated on the application of the new
House three-fifths rule is also instructive about the problems that
would likely arise under this proposed amendment. In the 14
months that the three-fifths rule has been in effect, it has been
waived 4 times. The amendments you are considering here, Mr.
Chairman, are far more problematic because the Constitution can't
be waived for convenience sake when questions arise.
One thing we can be sure of — we don't know the future. Why
would we wish to deprive our successors in Congress of the tools
and ability to deal with the problems they will face? To our succes-
sors, we are, in effect, saying we don't care what the particular cir-
cumstances may be in 10 or 50 years; we don't trust you and you
are stuck with our expectations of your incompetence.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Skaggs follows:]
55
Prepared Statement of David E. Skaggs
I want to thank the Chairman and the members of the Committee for the oppor-
tunity to testify today regarding a proposed amendment to the Constitution to re-
quire the vote of two-thirds of both houses of Congress to approve certain changes
to federal revenue laws.
This proposed amendment is a bad idea and bad constitutional law. Even worse,
it will today be considered in the House of Representatives under a process that in-
sults Members' intelligence and responsibility, that contradicts any suggestion that
the House is a thoughtful body, and that demeans and debases the very amendment
process itself
Mr. Chairman, let me say a word about the process that has brought this measure
to the House today. The original proposal put forward by Representative Barton and
Senator Kyi, H.J. Res. 159 and S.J. Res. 49, received one hearing in the House Com-
mittee on the Judiciary on March 6, 1996. It then was removed from that committee
and scheduled for a vote on the floor. It was not marked up or approved by the Judi-
ciary Committee. H.J. Res. 159 was then replaced by a second proposal, H.J. Res.
169, which is being considered today by the full House of Representatives. This ver-
sion of the amendment was introduced on March 28, 1996, considered by the Rules
Committee on March 29, 1996, and reported to the House. It has had no hearing
at all in the committee of jurisdiction .
Second only, perhaps, to an act of Congress declaring war, an amendment to the
Constitution ought to command the most serious and deliberate sort of legislative
review, examination, and analysis we are capable of It deserves better treatment
than a rush job to meet a politically sexy vote deadline that the majority admits
is a matter of symbolism. The Constitution shouldn't be used to make political state-
ments.
I would, however, like to commend the sponsors of this bill on one point. They
recognize that a change in the U.S. Constitution is necessary in order to require a
super-majority to pass legislation on this subject. In effect, they concede that the
attempt by the House in January, 1995 to simply pass a rule requiring a super-ma-
jority is not the proper procedure.
While each version of this proposed constitutional amendment has its own par-
ticular infirmities, I will address my remarks primarily to the proposal being consid-
ered by the House today (H.J. Res. 169).
I oppose this proposed constitutional amendment on a number of grounds. It vio-
lates what Madison called the fundamental principle of free government, the prin-
ciple of majority rule. The Constitution makes very few exceptions to that principle,
none having to do with the core, on-going responsibilities of government. We should
be extremely wary of any further exceptions, especially if it would complicate the
essential responsibilities and competency of the government.
We have to be mindful that the logical corollary of super-majority rule is minority
control. And under this proposed amendment, 34 Senators representing less than
10% of the American people would have the power to control the government's reve-
nue and tax policy.
I also oppose this proposed amendment because of its almost absurdly impractical
consequences — intended and unintended.
One such consequence would be for all practical purposes to lock into law what-
ever was the then current tax structure at the time of this amendment's ratification.
If you like the tax system the way it is now, or if you have supreme confidence that
some future Congress will have gotten it fixed just right before ratification, you
ought to love this proposal.
Another related consequence of this proposal would be to complicate efforts to bal-
ance the budget, particularly as they entail reducing the growth of entitlement pro-
grams.
Finally, I'm opposed to this proposed amendment because, like the current House
three-fifths rule, it is vague and will generate confusion and litigation.
I know the authors of this proposal feel strongly about taxes. But simply having
strong feelings about an issue is not sufficient reason to cede power over all future
changes to an important area of national law to a small minority. In addition to
the tax issue. Members of Congress will typically have very strong feelings on a
number of issues — civil rights or trade or the deployment of U.S. troops abroad. In
none of these areas does it serve the long-term national interest to undermine the
principle of majority rule. In short, my opposition to this proposal is primarily
grounded in the fundamental principle that is at stake, the principle of majority
rule — the fundamental principle of free government.
Wiser lawmakers than we have considered the question of whether to require a
super-majority for passage of certain kinds of legislation. At the Constitutional Con-
56
vention, the Framers of the Constitution specifically considered — and rejected — pro-
posals to require a super-majority to pass legislation concerning particular subjects
such as navigation and commerce. They rejected various legislative super-majority
proposals largely because of their experience under the Articles of Confederation
and the paralysis caused by the Articles' requirement of a super-majority to raise
and spend money. In other words, we have a Constitution because it was impossible
for the country to function under a constitutional law such as is being proposed
here.
The Framers' judgment on this matter, including whether to retain the Articles'
super-majority to raise revenues, should give us all cause to reflect on the wisdom
of the proposals before the Committee today.
In those cases in which the Framers did impose super-majority requirements,
none deals with topics of regular legislative business central to the on-going oper-
ation and management of federal government, such as taxes and revenues.
In those cases in which the Framers did impose super-majority requirements, only
two require action by both bodies, namely, tne override of a presidential veto and
the referral of a proposed amendment to the states. Both are extraordinary matters.
In sum, this proposal would go far beyond any existing constitutional precedent.
It would effectively paralyze the ability of future Congresses to deal with one of the
most nuanced of all legislative issues — revenues and taxes, allowing a small minor-
ity to control national policy.
The presidential primary election season brought forward a number of innovative
ideas regarding the federal tax system. Were it now in the Constitution, this new
amendment would likely serve to thwart these ideas or other reforms. This amend-
ment would certainly apply to flat tax proposals which proponents claim would in-
crease economic growth and, therefore, federal revenues. This proposed amendment
would likely require a two-thirds vote on legislation implementing the consumption
tax or Value Added Tax (VAT) proposed by some, which again proponents believe
would increase economic activity and federal revenues. There's been a lot of talk on
both sides of the aisle about getting rid of corporate welfare. Many want to end cor-
porate welfare by closing tax loopholes — and that, of course, would likely bring in
additional tax revenue from affected corporations and so would require a two-thirds
vote under this proposal. And what about capital gains tax cut? Its advocates usu-
ally argue the effect will be to raise revenue. Does that mean the two-thirds require-
ment would kick in?
But let's say we tried one of these ideas out before the amendment took effect.
Is anyone certain enough that one of them is the correct solution to the tax reform
problem that you wish to make repeal or revision next to impossible?
And if this proposed amendment were part of the Constitution, it would probably
make it more difficult to reduce taxes. If at some point in the future, Congress
judges the budget and economy healthy enough to reduce taxes, how likely is it that
a responsible Congress would go ahead and do so knowing that it would be almost
impossible to raise rates again in the event circumstance required it?
If now in the Constitution, this proposed amendment would certainly make the
current efforts to balance the budget a lot more difficult. Whether adjusting the
Consumer Price Index (CPI), or reducing business' and tax subsidies, or taxing the
income of expatriates, or limiting the use of section 936 tax credits for business ac-
tivities in Puerto Rico, or narrowing the EITC, or means testing Medicare Part B
premiums, or limiting the amount of profits companies can shift to overseas subsidi-
aries — all would have to be passed by two-thirds.
It is important to realize that the proposal being considered by the House today
is not a really a tax amendment at all. The word 'tax' does not appear in the text,
nor does 'income tax,' 'tax rate,' or 'new tax.' It is a "revenue" amendment. The only
legislation requiring a two-thirds vote under this proposal is that which has the ef-
fect of increasing "internal revenues."
There is no technical definition of "internal revenues" except perhaps as distin-
guished from revenues from "external" sources, such as import duties. All other
sources of federal revenue are presumably included under this proposed amend-
ment. So any legislation to increase any federal fee or charge or fine would be sub-
ject to a two-thirds vote if it results in more than a "de minimis" increase in reve-
nues. So would any proposal to sell federal assets — another frequent component of
budget-balancing and privatization plans. And according to the proposed amend-
ment, "de minimis" is to be defined by Congress at some later time. Or quite con-
ceivable, at each time a revenue bill is considered, inviting an exercise in manipula-
tive definition whenever the prospect of winning two-thirds approval was dim.
On the other hand, it's arguable that this proposal would not necessarily require
approval of two-thirds for a tax increase. Some tax increases can actually reduce or,
at least, not increase revenues. For example, the luxury tax on certain boats and
57
cars that was repealed in 1993 is said to have actually reduced sales so dramatically
that associated revenues actually declined. Some even argue that most tax increases
on business activity actually reduce federal revenues by depressing economic
growth. What economic theory, interpreted by which expert, will therefore deter-
mine the application and effect of this amendment if it were adopted?
So, once you consider how this amendment might be interpreted, many absurd
consequences come to mind.
In the context of deficit reduction, we should also consider the fairness and equity
implications of this amendment. Most federal benefits to lower and middle income
Americans come from programs that depend on direct expenditures. The benefits of
upper income Americans and corporations often come through various kinds of tax
breaks, since this amendment would require a simple majority to cut programs ben-
efiting lower and middle income Americans, but a super-majority to reduce tax ben-
efits to wealthy Americans and corporations, it would unfairly bias deficit reduction
and create a path of least resistance that would disproportionately hurt middle and
lower income citizens.
Of course, it is to examine and understand exactly these sorts of things that we
usually refer legislation, especially amendments to the Constitution, to committee.
There, these and other questions can be asked and answered and necessary refine-
ments and revisions to a proposal can be crafted. Sadly, no, shamefully none of this
regular order has been followed in the House.
In evaluating this proposed amendment, it's also helpful to examine some recent
experience in the House. In the 104th Congress, the House pretended to operate
under a new rule requiring a three-fifths vote to pass any increase in a Federal in-
come tax rate. Obviously, the amendments before the Committee today would go
much further.
The short history accumulated on the application of the new House rule is in-
structive about the problems that would likely arise under this proposed constitu-
tional amendment. In the 14 months that the three-fifths rule has been in effect,
it has been waived during consideration of the majority party's Budget Reconcili-
ation bill (H.R. 2491), the Contract with American tax bill (H.R. 1215), the major-
ity's Medicare bill (H.R. 2425), and, recently, the House version of the Kennedy/
Kassebaum health care bill (H.R. 3103). These waivers have been accompanied by
dispute and confusion as to the meaning of the rule.
The amendments you are considering, Mr. Chairman, are far more problematic
because the Constitution can't be waived for convenience sake when questions arise.
And you can be certain that similar questions about the meaning of this amendment
will arise in great number. The net effect would probably be for almost any future
tax bill that passed by less than two-thirds under some claimed exemption from this
amendment to be subject to protracted litigation, creating an outcome we ought to
avoid in tax law — uncertainty and confusion.
Much of the criticism I've offered about the amendment being voted on today in
the House (H.J. Res. 169) can also be made of the original version (S.J. Res. 49-
H.J. Res. 159), which addresses any "new tax or increase in a tax rate or base," as
opposed to an increase in "internal revenues." While the original version directly ad-
dresses the issue of taxes, instead of the vague concept of "internal revenue," it
would also obstruct many proposed approaches to tax reform and interfere with ef-
forts to balance the budget. It would require a two-thirds vote on flat tax proposals
which would increase the tax base as they reduce the tax rate, on legislation imple-
menting the new consumption tax or value added tax (VAT) proposed by some mem-
bers of Congress, and on closing tax loopholes that also necessarily increase the tax
base. Instructively, if the original version of the proposed amendment were already
a part of the Constitution, the new majority in this Congress could not have passed
its budget bill, which effectively increased taxes on Americans eligible for the
Earned Income Tax Credit.
In those cases in which the Framers did impose super-majority requirements, or
any voting requirement, none is based on the full membership of the body, as op-
posed to those present and voting. The original version of this proposal requires two-
thirds of the membership of both houses of Congress. By requiring two-thirds of the
membership, this proposal would make it more difficult to close corporate tax loop-
holes than to remove the President of the United States from office under Article
I, sec. 3, cl. 6 of the U.S. Constitution.
One thing we can be sure of We don't know the future. Why would we wish to
deprive our successors in Congress of the tools and ability to deal with the problems
they will face? To our successors we are in effect saying, "We don't care what the
particular circumstances may be in 10 or 50 years; we don't trust you, and you're
stuck with our expectations of your incompetence." What arrogance!
58
Mr. Chairman. I urge you and the members of the Committee to take a close look
at this proposed constitutional amendment in the light of the wisdom and experi-
ence of the Framers, its stifling and absurd effects, and the history of the House
of Representatives' 3/5ths rule. Treat it for what it is, a political statement — and
one better made on the floor of the Senate or House than put into the U.S. Constitu-
tion.
Senator Brown. Thank you. You have raised some important
points. I know we will want to cover them with questions after-
wards.
Congressman Barton, you have been kind enough to join us. Do
you have a statement you would like to add to our deliberations?
STATEMENT OF JOE BARTON
Mr. Barton. I will do it in less than 5 minutes, Mr. Chairman.
First, let me thank you for allowing me to testify with this distin-
guished panel. When you have counselors to the President, former
Cabinet Secretaries, former Congressmen and Governors and, of
course, my colleague, David Skaggs, who is known as one of the
most intelligent, intellectual Members of the House, it truly is a
privilege.
I want to comment very quickly on some of the points that Con-
gressman Skaggs raised. In 1787 when we adopted the current
Constitution, I am not aware that there was an income tax being
levied anywhere in the world and the reason there was not is that
at that point in time, most of the world's economy was still agrar-
ian and based on barter and so there weren't large incomes to be
taxed.
Even then, the Founding Fathers realized that raising taxes was
a proposition that should be done carefully and they gave to the
House of Representatives that we elected by the people directly —
the only Federal office-holders directly elected by the people — the
power to introduce the tax laws, and they felt that was sufficient
protection.
In the original Constitution, there were a number of instances,
though, that the Founding Fathers required supermajorities to rat-
ify treaties, to amend the Constitution, to expel a Member, to im-
peach a sitting Federal judge, and so on. The reason that you have
supermajorities is because you want consensus. You don't want a
slim majority acting in the heat of the moment to pass things that
fundamentally alter future generations.
I am very confident that had we had income taxes being levied
in the 1780's and if income taxation was the fundamental way that
the Federal Government was going to raise revenue, it would have
required a supermajority vote in 1787. Having said that, in 1913
we passed the Sixteenth Amendment to the Constitution that said
the Federal Government directly had the authority to levy an in-
come tax. The first income tax was 1 percent on income up to
$20,000. That was called the normal tax, and then you paid an ad-
ditional 1 percent on up until finally you paid 6 percent on income
over, I beheve, $800,000.
Since 1913, the marginal tax rate on the average American tax-
payer has risen 4,000 percent, 4,000; that is a four and three ze-
roes, 4,000, since 1913. At some point in time, the American people
are going to say enough is enough, and all of the Washington-in-
59
sider arguments about being pragmatic and all of that simply is
not going to wash.
There are 10 States that have some form of supermajority re-
quirement to raise taxes on their books right now. Not one State
that has implemented it has repealed it, not one, and the reason
is it works. Taxes are lower and they go up slower in States that
have some form of tax limitation amendment. In States that don't,
taxes are higher and the taxpayer's pocketbook is left drier. So it
boils down to are you for lower and slower or higher and drier, and
I am for lower and slower — lower taxes going up more slowly.
So when we vote on the House floor this evening about 9 p.m.,
the Congressmen that are here today and voting have got a clear
choice. They can vote for tax limitation that has been proven to
work in the States that have it or they can vote against it, and if
they vote against it, then they can go to their constituents in the
election next fall and explain why they voted not to require the
supermajority and they may be able to explain it and they may be
able to get their constituents to agree with them.
But in Texas, in my district, in the last year when I have been
talking about this, I have not had one constituent tell me to vote
against tax limitation because as we speak today, Mr. Chairman,
there are people in my district and your State that are literally
working second jobs, part-time jobs, so that they have enough
money in the bank when they write the check tonight before mid-
night to send to the IRS that they know that check won't bounce.
This tax limitation amendment is not for you and it is not for me
and it is not for the people at this table. It is for the average Amer-
ican taxpayer who is simply trying to make ends meet and do for
their families so that the Government does not have to. So if we
don't pass it tonight, it is going to come back. We are like Freddie
in "Friday the 13th" movies. If we don't get it tonight, we are going
to come back every April 15 that the Republicans are in control of
the House of Representatives and we will keep voting on this
amendment until we do get the two-thirds vote, and hopefully the
Senate the same, and send it to the States for ratification.
Thank you, Mr. Chairman.
Senator Brown. Thank you.
Senator Kyi, do you have questions?
Senator Kyl. Yes, I do. First of all, let me thank all of the wit-
nesses for very fme statements. I am going to start with Mr. Cutler
because I think that the technical arguments that you raised
against the amendment are the appropriate technical arguments. I
would suggest that they are technical and that they don't establish
a strong enough case against the amendment, considering the ra-
tionale for it as expressed by Governor du Pont and Secretary
Kemp. That is my own personal view, but I would like to break
your points down into four specific categories which I think rep-
resent the essence of your argument, Mr. Cutler.
Your first point was that this amendment would create a
straightjacket; that even if a majority of the people believe that we
should have tax increases, it would make it harder to enact them.
Of course, it would make it harder to raise taxes, and you cited an
example of a military conflict which didn't rise to the level of a
60
war, but clearly would be a situation in which we may need to
raise revenue.
Now, first, I would ask — you may be aware that there are several
polls, including a Reader's Digest poll, which point out that be-
tween 68 and 70 percent of the American people think they are
taxed too much and oppose the latest tax increase. I am talking
about the 1993 tax increase. So it is hard to believe that a majority
of Americans agreed with that tax increase in 1993.
Do you have any evidence that the tax increases that have been
most recently passed are supported by a majority of the American
people?
Mr. Cutler. Well, we live in a representative form of Govern-
ment. We elect Members of the House and the Senate. We now
have substantial Republican majorities in both the House and the
Senate. If you think taxes are too high and that the public thinks
taxes are too high, why don't you pass bills lowering them?
The gist of this amendment appears to be you are going to have
your majority for such a short period of time, you must protect
yourself against the majority that will come along in the future and
feel it necessary, because of some emergency, to raise a tax.
Senator Kyl. I would just like to respond that I think the elec-
tions of 1994 were the result of the American people's disgust at
the 1993 tax increase
Mr. Cutler. Then why don't you pass a bill?
Senator Kyl [continuing]. Where they threw out the democratic
majority that was responsible for passing it and for the first time
in 40 years elected a Republican House of Representatives and a
Republican Senate. The change in leadership was largely in re-
sponse to that tax increase. It hasn't yet gotten the tax increase
wiped off the books and that is a problem.
Mr. Cutler. But you have the majorities that can do it.
Senator Kyl. Well, unfortunately, we have a President that ve-
toed our Balanced Budget Act.
Mr. Cutler. Then why don't you introduce a constitutional
amendment saying that a veto can be overridden by a simple ma-
jority? That makes more sense than what you are actually propos-
ing here.
Senator Kyl. I don't favor that.
Secretary Kemp.
Mr. Kemp. The Congress, Lloyd, has cut taxes several times and
in each case, both for families, for moderate-income people and
workers, and on capital gains — every time, the President has ve-
toed it.
Mr. Cutler. Then elect a President, for God's sake.
Mr. Kemp. The President is frustrating the will of the majority.
Mr. Cutler. Elect a President.
Mr. Kemp. This is not the issue, this is not the issue. This
amendment that has been alluded to by both Jon Kyl of Arizona
and Joe Barton of Texas is aimed not at the next Congress. It is
aimed at our posterity. It is aimed at the next century. It is aimed
at once we get in place a new tax system that there be a fun-
damental respect for the system that is not changed at midnight
and not changed by circuitous and surreptitious means to try to
take the substance, as Joe Barton put it, from the American people.
61
Excuse me, Jon. I appreciate your letting me make that com-
ment, but you had another question.
Senator Kyl. We are under the 5-minute rule, right, Mr. Chair-
man?
The Chairman. I think we are trying to do 7 minutes. If we have
new members come, we may need to shorten it.
Senator Kyl. As long as the witnesses understand we are under
a 5-minute rule, I won't filibuster if you won't. Thank you.
The second point that you made, Mr. Cutler, was that the ticket
tax on airline tickets expired not by intent but as a result of budget
gridlock. I am not sure that is an accurate characterization, but I
know what you mean and I guess what I would suggest is that if
it was a mistake, if we really didn't mean for it to expire, it
shouldn't be too hard to get two-thirds to agree to reinstate it. I
wouldn't think.
Mr. Cutler. You can get a majority to do it right now. Why
aren't you doing it? The President is not going to veto that.
Senator Kyl. Well, that is a very good question. Maybe it wasn't
by mistake, then.
Third, Members could just absent themselves. That is correct,
but now that I have been a Member of both the House and the Sen-
ate, one of the things I've learned is that one of the last things
Members want to do is not be recorded on a vote. I mean, voting
for or against, you can at least take your stand, but being a chicken
and not voting at all is probably the worst of all.
In my entire 10 years in the U.S. Congress, there has only been
one incident where Members decided to withhold their votes and
they voted "present" rather than voting for or against, and they
certainly never absented themselves. I doubt that that is a serious
objection. Any of the House Members may want to comment on
that, but I really don't think it is that serious.
Mr. Barton. Well, in a constitutional amendment, if you vote
"present," it basically counts as a no vote.
Senator Kyl. As Mr. Cutler pointed out.
Mr. Cutler. Well, I just wanted to point out that the House bill
does not do what your bill does. Senator Kyl. The House bill is two-
thirds of those present and voting.
Senator Kyl. That is correct, and we are talking specifically here
about the Senate bill, but next time I have an opportunity to ask
questions, I probably will ask some of you the difference between
the House and the Senate bill.
Mr. Cutler. I would just make one other comment.
Senator Kyl. Yes.
Mr. Cutler. Secretary Kemp was talking about the aim of this
amendment. The aim of the amendment, as I see it, is no matter
whom a majority of American citizens elect as their President and
no matter whom they elect to Congress, a majority cannot be
trusted and the President cannot be trusted on the issue of tax
cuts.
Senator Kyl. Well, Mr. Cutler, if you want to characterize it that
way, then the Framers were of the opinion that a majority couldn't
be trusted to amend the Constitution because it requires a two-
thirds vote of both the House and Senate and three-fourths of all
the States. Were they saying that the majority couldn't be trusted?
62
No. That is a facetious argument. What they were saying is there
are some things that are so important that a consensus more than
the mere majority is required.
James Madison was one of the people who was quoted here. Let
me tell you what James Madison said. I think Representative
Skaggs quoted Madison. I am not sure I have it right here at my
fingertips, but he talked about the need to control a runaway ma-
jority, and that is one of the reasons why we have several provi-
sions both in our Constitution and also in the rules of the House
and Senate that require us sometimes to slow down, think it over,
and develop a consensus because the issue is so important. To rat-
ify a treaty, for example — that shouldn't be done just lightly. It is
not that we don't trust the majority. It is that it is too important
just to have a majority vote.
Mr. Cutler. That is the issue. It is whether you want to embody
in the Constitution a requirement of this rigorous two-thirds major-
ity which you may need to change some time and you cannot form
the necessary two-thirds majority, plus three-quarters of the States
to change it. That is what I meant by the straightjacket.
Senator Kyl. That is a fair way to state the issue.
Mr. Kemp. Even the President, if I may interject, said in Houston
not so long ago that he raised taxes by mistake. He said he was
tired and it was late at night, and he apologized to a Houston fund-
raiser of the Democratic Party for raising taxes and he got into all
sorts of problems.
Now, maybe, had there been a two-thirds majority, he might not
have made such a mistake. He is trying to do it again. He is saying
that capital gains are too low; we should raise them again. We
have the only unindexed capital gains tax that I tnow of in the in-
dustrial world and it is the confiscation of the wealth of the people
of this country, as Congressman Barton talked about, that was not
envisioned by the Founders.
We have heard from James Madison here both implicitly and ex-
plicitly. My favorite Madison quote is when he said at the ratifica-
tion of the American Constitution, we have staked the whole future
of American civilization not upon the capacity of government, but
upon the capacity of people. The future of America is based, he
said, upon the future of people to be able to sustain themselves
under the Ten Commandments of God.
I would make a case that Barton and du Pont and you, Mr.
Chairman, and you have made several times. Senator Kyl, that we
are making it impossible for the American family to sustain them-
selves in a free society by confiscating their property, their earn-
ings, their salaries, their savings, their investment, and it has to
be changed. In my opinion, I was somewhat trepidatious about ap-
pearing here today on behalf of an amendment until we had passed
comprehensive tax reform such as envisioned by the commission
appointed by Bob Dole and Newt Gingrich. But after listening to
Mr. Cutler, counselor Cutler, and my friend, Dave Skaggs, I am ab-
solutely convinced that this is a necessity going into the eve of the
21st century.
Thank you, Mr. Chairman.
Mr. Barton. Mr. Chairman, could I just read the quote that Sen-
ator Kyl
63
Senator Kyl. Federalist 51?
Mr. Barton. Yes.
Senator Kyl. Yes.
Mr. Barton. If you want to read it, I have got it.
Senator Kyl. Well, thank you. Mr. Chairman, just for the record,
in Federalist 51 Madison said, "It is of great importance in a re-
public not only to guard the society against the oppression of its
rulers, but to guard one part of the society against the injustice of
the other part." He didn't specifically speak in terms of majority
rule, but it was in the context that he made the statement.
Senator Brown. Thank you. Mr. Cutler, you are known to be
very thoughtful and wise, and your review of the motives of the
people involved here, I fear, may well be correct. It is one of those
things that sometimes we hope the witnesses aren't always wise or
always right.
One of the things you raised, though, that I thought was a very
important point was the suggestion that this could result in
gridlock; literally, to put it a different way, that we would not be
able to pass a tax increase when perhaps it was appropriate, albeit
the various parties have different views as to when it is appro-
priate, some of us much less often than others, but fair enough.
I look back, though, through the tax increases since 1980 and, as
you know, there have been a number of them, but of the ones that
would be major — that is an arbitrary description, but of the ones
that are major — of those 13, 7 of them did have a two-thirds major-
ity of both Houses and 6 of them did not. Does that change your
thinking? I mean, is your thought that perhaps the people who had
voted for it if they had had a chance to defeat it would not have
voted for it?
Mr. Cutler. No, it doesn't change my thinking, especially if it
comes out seven to six, as you have said, because it is in the case
of the six that you need to do something and you are blocked from
doing it, except by an amendment process which takes — even for
successful amendments, usually takes about 7 years. That is the
problem.
Senator I am not an opponent of lowering taxes, eliminating the
capital gains tax or any of those things. I do have the view of the
Concord Coalition that budget deficit reduction is so important it
cannot be accomplished, or may not be accomplishable solely by re-
ducing expenditures. There may be times when we cannot reduce
expenditures, such as the new military threat that I referred to
which has not yet resulted in any kind of armed conflict.
Senator Brown. I understand.
Mr. Cutler. You just don't have enough outs. You don't have
enough escapes in this. Even in the balance-the-budget amend-
ment, when it had a limit on tax increases, there were outs. Con-
gress could excuse itself in some sort of emergency. This is a no ifs,
ands, or buts amendment.
Mr. Barton. That is not true, Mr. Chairman.
Senator Brown. Let me go ahead. We are down to 7 minutes and
I want to try and get through a couple additional questions.
Governor du Pont, for most of my political lifetime I have always
heard tax increases described as a tax on someone else — a tax on
the very wealthy, a tax on a different part of the country. New
64
taxes have been sold oftentimes as taxes that won't hit your voters,
but someone else's voters.
We are now at a point where about 40 percent of the GDP goes
to government taxes. We are committed as a society to exempting
about a third of our citizens from taxes, certainly from income
taxes. The exemption runs a little higher than that in terms of any
subsidy of taxes. Who is going to pay tax increases from this point
forward, the wealthy or the average working person?
Mr. DU Pont. Well, of course, Mr. Chairman, the current tax
code is well publicized as a tax on the wealthy, but it has quickly
eaten out the substance of the middle class, and as Secretary Kemp
testified a few moments ago, the wealthy always manage to pay
about the same share regardless of rates. It didn't seem to matter
whether the rate was 91 or 26. The share of GNP in the economy
going to taxes remains approximately the same.
But I would like to respond to Mr. Cutler that he makes it sound
as if, with a two-thirds margin, supermajority, no one will ever
pass a tax increase again. I happen to think that is a wonderful
outcome, but I don't think that that is true. Twenty-three times,
the Delaware Legislature managed to pass tax increases in 16
years, most of them broad-based — cigarette taxes, gasoline taxes,
turnpike tolls, and so forth. They achieved a supermajority without
difficulty.
If a military threat from China came, I imagine you would see
the entire conservative contingent in the House voting for a tax in-
crease to meet that threat. It just seems to me it makes it a little
more difficult, but he makes it sound that we are never going to
pass a tax increase again, and that is certainly not the experience
of these 10 States who have adopted constitutional amendments.
Senator Brown. Thank you. Congressman Skaggs, you raised a
very important point about the extent of the language and how the
amendment, the way it is drafted, could even require a two-thirds
majority to reduce taxes. I think your specific example was capital
gains.
In looking at the language of the Kyi amendment, it says, "Any
bill to levy a new tax" — obviously, a reduction in capital gains
would not be a new tax — "or increase the rate" — and that wouldn't
apply to a reduction in capital gains — "or base" — and I don't think
that would apply, but perhaps you have a different interpretation
of those words.
Mr. Skaggs. Mr. Chairman, my remark was addressed to the
language of the House proposal which we will vote on today, which
speaks in terms of raising internal revenue. So if, as is argued by
many proponents of the capital gains tax cut, it will ultimately
raise revenue, then we are in the ironic situation under the House
proposal in which it might take two-thirds to cut a tax rate because
it would have the effect — according to the advocates of a capital
gains tax cut, it would have the effect of raising revenue. I believe
Mr. Kemp is a particularly strong supporter of that school of eco-
nomics.
Senator Brown. You are going to make us live with that rhetoric
about lower taxes resulting in greater revenue.
65
Mr. Skaggs. Joe's colleague and mine, Dave Dreier, had some
very serious reservations about this expressed when the Rules
Committee rushed this matter to judgment a couple of weeks ago.
Mr. Barton. Could I respond to that?
Senator Brown. Surely.
Mr. Barton. Well, quickly, first of all, under current scoring
rules of the House and the Senate capital gains are revenue losers,
so you don't have the problem that Congressman Skaggs talked
about. But in the real world, I agree with him. If you cut capital
gains, you probably would raise revenue and I am willing to live
with that.
Under our rules, what it would mean is we would have to cut an-
other tax rate. What is wrong with that? I mean, you can't get
around it. If you want to cut capital gains, either way under cur-
rent scoring it loses revenue, so there is not a two-thirds require-
ment. You can do that by majority. But if you assume dynamic
scoring and it is going to raise revenues, fine. Let's cut another tax
rate at the same time so that the overall effect of revenue neutral-
ity and you get the best of both worlds.
Mr. Skaggs. Mr. Chairman, just one further observation. I think
Mr. Barton's response underscores another very problematic aspect
of this proposal, and that is subjecting the interpretation of the
Constitution, were this to be in the Constitution, to particular eco-
nomic theories or schools of thought or definitional manipulations.
Is that really the sort of question we wish to beg in amending the
Constitution of the United States?
Mr. Barton. Everything that is in the Constitution, whether in
the original or amended, is subject to implementation language by
legislation.
Senator Brown. Let me thank the panel. Let me thank particu-
larly the two Congressmen that have joined us, and I would extend
an invitation that if they would like to join us up here for the delib-
erations, we would love to have them.
Senator Kyl. Mr. Chairman, as a point of personal privilege,
might I ask Mr. Cutler one final question? I have used the
quotation, "Reform? Sir, don't talk of reform. Things are bad
enough already." I thought it was in A Tale of Two Cities, by Dick-
ens — not there, and I have sought in vain for years to find the
source. You appear to have the source of that statement. Would
you tell me what that is again?
Mr. Cutler. I think I recently read it in Roy Jenkins' biography
of Gladstone, but I will find it for you.
Senator Kyl. Would you please do that? I would love to be able
to — it is a wonderful quotation which fits many occasions.
Mr. Cutler. Mr. Chairman, I didn't answer Governor du Font's
point which he made twice about how all these prophecies of doom
did not occur in the State of Delaware. I just want to say the State
of Delaware is not responsible for the national defense. It is not re-
sponsible for budget deficit management at the Federal level and
it is not responsible for broad economic policy and economic growth
at the Federal level.
I have no doubt myself, knowing Governor du Font's abilities,
that if he didn't have that two-thirds requirement in the State of
66
Delaware, his personal appeal would have gotten through almost
everything he accomplished.
Mr. DU Pont. You know, Mr. Chairman, this hearing has gone
too long. [Laughter.]
Senator Brown. Thank you all.
Mr. Kemp. Thank you. Thank you, Mr. Chairman.
Senator Brown. Our second panel will come forward. It includes
John McGinnis, who is a professor of law at Cardozo Law School
in New York, and David Strauss, a professor of law at the Univer-
sity of Chicago School of Law. Gentlemen, thank you for joining us.
Professor McGinnis, perhaps you might start us off.
PANEL CONSISTING OF JOHN O. McGINNIS, PROFESSOR OF
LAW, BENJAMIN N. CARDOZO SCHOOL OF LAW, NEW YORK,
NY; AND DAVID STRAUSS, PROFESSOR OF LAW, UNIVERSITY
OF CHICAGO SCHOOL OF LAW, CHICAGO, IL
STATEMENT OF JOHN O. McGINNIS
Mr. McGinnis. Yes. Thank you very much, Senator. I am de-
lighted to be here and I would ask that my written remarks be put
in the record. I will testify here orally about the concept of why we
need a supermajority for raising taxes. I am not going to go into
the details of either Senator Kyi's amendment, which I have gone
into in my written testimony, or of Congressman Barton's, but I
would be happy to answer questions about that and I would be
happy to work with your staff about that.
There are two reasons, I think, that the concept of a supermajor-
ity amendment to raise taxes is really crucial and why we need to
seize this historic opportunity^ at the moment. The first is that such
an amendment will reduce the disproportionate power of con-
centrated interest groups in our republic, and the second is that it
will restore the Framers' protections which have been weakened
over the years for the rights of property and enterprise.
Let me begin with the problem of concentrated interest groups.
The Framers well understood that a legislative majority was not
necessarily a popular majority, and that is even clearer in modem
democratic theory. Public choice theory shows why concentrated in-
terest groups have more power than diffuse interest groups, diffuse
interest groups here meaning the average citizen, concentrated in-
terest groups meaning some group that has some ability to lobby
the legislature because they can gain specific benefits from it.
Because of the disproportionate power of concentrated interest
groups, legislatures often have an agenda of giving entitlements or
specific benefits to those groups, while diffusing the costs on the
average citizen in the form of taxes. In many ways, our current
budget deficit and our current very high tax rates are an instance
of that repeated dynamic of an agreement to give benefits to con-
centrated interest groups while diffusing the costs and therefore
making it harder for legislatures to be held accountable for their
actions. So, that is the first reason that it would be very important
to pass a supermajority requirement.
The second reason is that it protects human liberty. It is wrong
to think that the Framers instituted a pure democracy or pure
majoritarian rule. They were very specific. They instituted a repub-
67
lie to protect certain liberties. Indeed, James Madison, who has
been quoted here, said the first object of the republic is to protect
the different abilities to acquire property. The rights of property
and enterprise were central to our original Constitution and they
were protected in a variety of ways, including property rights — the
Takings Clause or the Contract Clause.
Throughout the whole structure of the Constitution was an idea
of protecting property. The right of federalism was intimately con-
nected to property rights. The idea there was that you allowed a
great power, a substantial power to the States because a national
citizenry had the ability to move away from an oppressive state.
Federalism was a protection against leviathan.
Finally, the separation of powers was a protection of individual
liberty. Indeed, the purpose of it in some sense was to ensure a bit
of gridlock in Government. It would make it harder to impose regu-
lations and other burdens on citizens.
The difficulty is that, for a variety of reasons in the past 50
vears, these protections for the rights of enterprise and property
have been substantially weakened. We should not think, therefore,
of this amendment as some radical innovation, but really as a way
of restoring the Framers' vision of the Constitution which had as
its core the protection of these rights of property and enterprise.
Those, I think, are the two reasons that we should be supporting
this amendment.
First, contrary to the opponents of the amendment, it actually
helps popular majority by reducing the power of concentrated inter-
est groups and giving power back to the average citizen who pays
taxes but isn't really very good at lobbying the legislature; second,
by restoring the essential republican right, one of the many impor-
tant rights of the republic, but probably the most essential to the
Framers, the rights of property and enterprise.
Thank you. Senator.
Senator Brown. Thank you, professor.
[The prepared statement of Mr. McGinnis follows:]
Prepared Statement of John O. McGinnis
Thank you very much for the opportunity to testify today in support of the concept
of a constitutional amendment that would require a supermajonty to raise taxes.
We will offer two major arguments in favor of a supermajority tsixation amendment
in the abstract and then oner some brief thoughts about the S.J. Res. 49, the draft
of such a constitutional amendment that is before us. We stress that our primary
focus here is to support the concept of a supermajority requirement for raising
taxes. It would be a great mistake to allow arguments about details to make us miss
this historic opportunity. We would be very pleased, however, to work with your
committee's stan as this amendment moves through the legislative process. It would
be a pleasure to participate in such an important enterprise.
A constitutional amendment to require a supermajority to raise taxes will help
correct the major problem of contemporary politics — the ability of concentrated in-
terest groups to obtain programs that benefit themselves at the expense of a diffuse
and relatively helpless public. Second, such an amendment would also help restore
the original Constitution's delicate balance between structures that protect individ-
ual rights and ensure economic growth and those that promote democratic govern-
ance. Thus we beUeve that a supermajority taxation amendment should be seen as
an attempt to revive the original values of the Constitution rather than as a radical
innovation.
The objective of the original Constitution was to establish a well functioning re-
public — a concept which is not necessarily synonymous with government by a simple
legislative majority on all issues. The Framers well understood that a legislative
68
majority only imperfectly reflected the majoritarian will of the people as a whole. ^
Moreover, the Constitution was designed to optimize the protection of the people's
individual rights as well their political rights. In our republic deliberative democ-
racy is not the entire end of government but is also a means for advancing human
liberties. 2 The Constitution's limitations on legislative and even popular majorities
are apparent not only from the Bill of Rights but also from the entire structure of
government. Bicameralism and the separation of powers make it difficult for mere
majorities to pass legislation. By dividing powers between the federal government
and the states, the original Constitution further restrained the powers of a majority
of the national legislature. We believe that a constitutional amendment requiring
a supermajority to raise taxes is completely in accord with the overall objectives of
the original Constitution, because a supermajority rule will both advance the inter-
ests of popular as opposed to legislative majorities and protect the individual rights
of property and enterprise.
One of the fundamental problems of modern democratic politics is that con-
centrated interest groups have more influence with legislators than diffuse groups,
even if the diffuse groups are a numerical majority. ^ Public choice theory suggests,
and observations confirm, that political entrepreneurs will therefore tend to favor
a legislative agenda that provides benefits to cohesive and organized interest groups
while imposing costs on the electorate as a whole."* Our present budget crisis is in
large measure a reflection of repeated instances of this dynamic. Legislators will
trade votes to provide entitlements and other expenditure programs to numerous
concentrated interest groups.*^ The taxes (or debt) required to pay for expenditures
do not impose a very substantial constraint on such activity because the incidence
of the taxes (or debt) can be diffused over the entire population (and future genera-
tions if possible). Thus, a constitutional rule that requires a supermajority to raise
taxes can be understood as a rough attempt to restore a more rather than less
'democratic balance between those adversely affected by taxes and those advantaged
by expenditures.^ It functions as a precommitment by the society not to go down
a road that will make everyone worse off in the end as concentrated interest groups
demand expenditures that beggar the nation as a whole. '^
Moreover, because taxes encroach on the right of each individual to enjoy the
fruits of his labor, the amendment also attempts directly to facilitate the protection
of liberty. The Framers themselves were intensely concerned to protect property
rights of citizens. They believed that these rights were natural rights that inhere
in each one of us and that respect for such rights would lead to economic growth
and the progress of civilization. Therefore, the original Constitution provided sub-
stantial direct protection to property and enterprise through such provisions as the
^See, e.g., Akhil R. Amar, The Bill of Rights as a Constitution, 100 Yale L.J. 1131, 1147-
52 (1991) (suggesting that the original purpose of the First Amendment was to permit popular
majorities to bring pressure to bear on potentially unrepresentative national legislative majori-
ties).
2See John O. McGinnis, The Partial Republican, 35 Wm. & Mary L. Rev. 1751, 1760 (1994)
(outlining manner in which Constitution is designed to protect individual rights).
3 Michael T. Hayes, Lobbyists and Legislators: A Theory of Political Markets 91 (sug-
gesting that concentrated interests and costs are more likely to generate political and lobbying
activity by organized groups).
"See E. Donald Elliott, Constitutional Conventions and the Deficit, 1985 Duke L.J. 1077, 1090
(noting that government spending programs provide concentrated benefits while spreading the
costs of programs over large and difiuse groups).
^ The scenario is thus a specific example of the well-known paradox of vote trading. See Wil-
liam H. Riker & Steven J. Brams, The Paradox of Vote Trading, 67 Am. Pol. Sci. Rev. 1235,
1236 (1973) (stating that "[t]his paradox [of vote trading] has the property, that, while each
trade is individually advantageous to the traders, the sum of the trades is disadvantageous to
everybody, including the traders themselves.")
^ It might be argued that the supermajority rule would actually give special interest greater
power because special interests would need only two-fifths of a house to block legislation. The
effects of supermajority rules on special interests will depend on the circumstances. While super-
majority rules in some areas could give special interests even greater power, this is not true
of a supermajority taxation rule. It has been our argument, which public choice theory supports,
that special interests have generally exercised their power to secure benefits that have required
increases in government spending and taxes. Because the supermajority taxation rule makes it
more difficult for special interests to increase spending and taxes, it thus impedes the power
of special interests.
''The Constitution is itself a societal precommitment to limit the range of future choices, be-
cause it is thought that choices prohibited by the Constitution will be generally socially disad-
vantageous. See Donald J". Boucireaux & A.C. Pritchard, Rewriting the Constitution: An Eco-
nomic Analysis of the Constitutional Amendment Process, 62 Fordham L. Rev. Ill, 123 (1993).
69
Contracts Clause and the Takings Clause.^ Moreover, it provided indirect protection
by establishing structures that would make it more difficult for government to ex-
propriate the people's wealth. For instance, federalism encouraged regulatory com-
petition between different regimes thus restraining the power of factions: if the re-
gimes became too oppressive or too inefficient individuals could always leave. ^ The
separation of powers and bicameralism raised the costs to factions of getting control
of the entire government. i°
Unfortunately, the constitutional protections for the rights of individual enterprise
have largely disappeared in the last fifty years. The protections for property have
been substantially curtailed. With the demise of any restraints on Congress' power
under the Commerce Clause, federalism has been gravely weakened. ^^ With the rise
of the administrative state, the separation of powers is a shadow of its former self ^^
Therefore there is a pressing need for structural amendments, like the supermajor-
ity taxation amendment, which would revive protections for the rights of individual
enterprise. A society that constitutionally protects such rights is much more likely
to enjoy long-term economic growth and prosperity.
Now let us turn to some specific concerns about the actual drafting of the amend-
ment. First and most important, we believe that the amendment would be improved
by provisions requiring a balanced budget. An amendment that restricts tax in-
creases without limiting debt might increase debt as political entrepreneurs move
to meet the demands of concentrated interest groups bv increasing debt — subject to
a simple majority rule — rather than increasing taxes. An even more effective meth-
od of limiting the power of concentrated interest groups would be simply to require
a supermajority for all new spending programs, other than those strictly necessary
for national security. Nevertheless, even in the absence of provisions requiring a
balanced budget or subjecting spending provisions to a supermajority vote, a super-
majority taxation amendment would be beneficial, because restrictions on tax in-
creases function, especially in the long run, to limit wasteful spending on behalf of
concentrated interest groups.
While it might be argued that any reduced taxes will merely be replaced with in-
creased debt, this is not true. There are checks on Congress' ability to run large
deficits; otherwise. Congress would lower taxes and run much larger deficits. Both
taxes and debt are generally opposed by voters, but to different degrees and by dif-
ferent groups. Public choice theory suggests that if Congress is not otherwise con-
strained, it will finance spending with that combination of taxes and debt that mini-
mizes the opposition to the program it passes. Any rule, such as a supermajority
taxation amendment, that forces Congress to alter this combination should thereby
increase the opposition to Congress' financing and spending program and therefore
lead to less spending. In other words, if the amendment forces Congress to finance
spending with larger deficits that are even more unpopular than higher taxes, this
will induce Congress to spend less than it otherwise would have.
This theoretical argument is confirmed by political observation. Large deficits are
now cited particularly by the new Republican majority as the primary reason to cut
spending. 13 Indeed, both supporters and critics of the Reagan tax cuts of the early
1980s have respectively celebrated and deplored the curtailment of government ex-
penditure that the resulting deficits appeared to cause, i'*
Second, we believe that Congress should carefully consider the role of the Presi-
dent in the le^slative process resulting in tax increases. As the draft of H.J. Res.
49 stands, it is unclear what, if any, role the President has in the process. The
Framers had strong reasons for giving the President a veto in the legislative proc-
ess, including the process that leads to taxes increases: the President is uniquely
^See Jonathan R. Macey, Competing Economic Views of the Constitution, 56 Geo. Wash. L.
Rev. 50, 57 (1987) (suggesting that the purpose of the Constitution was to guide transactions
from public to private markets because private markets are better at creating wealth).
^Richard A. Epstein, Exit Rights for Federalism, 55 J. Law & Conte.mp. Prob. 147, 149 (Au-
tumn 1992) (arguing that federalism is a check on the monopoly of government power because
individuals can leave.
1° Macey, supra note 8, at 76.
11 For a discussion of the collapse of federalism of powers, see Richard Epstein, The Proper
Scope of the Commerce Power, 73 Va. L. Rev. 1387 (1987).
i*For a discussion of the collapse of the separation of powers, see Gary Lawson, The Rise and
Rise of the Administrative State 107 Harv. L. Rev. 1231 (1994).
13 See Kenneth J. Cooper, House Panel Softens Defense Measure, Wash. Post, Feb. 1, 1995
at A-1 (noting that Republicans had to reduce their own planned defense expenditures because
of pressure to reduce the deficit).
I'* See Daniel Patrick Moynihan, Sick of Stockman and LaRouche, The New Republic, May
26, 1986 at 16 (observing that both Friederich Hayek and Moynihan believed that the deficits
were "deliberately created to force a great reduction in the size and activities of the federal gov-
ernment: Hayek approved of the strategy while Moynihan did not).
70
the representative of the nation as a whole and his participation makes it harder
for any single transient faction or coalition of factions to work their will in a mo-
ment of political passion. Moreover, his participation brings the opportunity for
more deliberation. This is obviously true when he exercises a veto because then Con-
gress must vote again to pass the legislation. But the mere potential of a veto forces
Congress to take another powerful and sophisticated viewpoint into account
throughout the process. ^^
Therefore we strongly recommend that the President be expressly provided with
a veto in the process leading to tax increases. While we do not recommend a particu-
lar numerical supermajority for a supermajority tax amendment, it would Tbe wise
to require an even greater supermajority majority to pass a tax increase over a pres-
idential veto. For instance, ii the congressional supermajority stayed at two thirds,
the veto override majority might be three quarters.
Finally, we note that term "tax" is undefined in S.J. Res. 49. We believe it would
be prudent to have a definition. Without a definition crafted with the purposes of
this amendment in mind, courts might construe the term tax as it is construed else-
where in the Constitution to possibly unfortunate effect. Second, the poUtical proc-
ess will lead to pressure to attempt to characterize a tax as something other than
a tax in order to avoid the supermajority requirement. A definition would serve as
a barrier to these pressures. We would be pleased to work with your staff to shape
an appropriate definition.
Senator BROWN. Mr. Strauss.
STATEMENT OF DAVID A. STRAUSS
Mr. Strauss. Mr. Chairman, thank you for asking me to appear
before you. I have submitted a written statement for the record. In
these remarks, I would just Uke to highUght four points, and I
should say these points go not to questions of tax policy, which is
not my academic subject, but rather to the wisdom and practicality
of amending the Constitution to accomplish whatever tax objectives
we want to accomplish. It seems to me, Mr. Chairman, these pro-
posed amendments are an effort to provide really a quick fix to a
complex problem and the Constitution is not the place for a quick
fix.
First, it seems to me this amendment is really at odds with any
serious effort to undertake tax reform. As we speak, Mr. Chairman,
there are bleary-eyed tax lawyers at work poring over the Internal
Revenue Code digging out loopholes for their clients for tax year
1996, loopholes that the Congress might not have expected when
the laws were passed, loopholes that you only discover by spending
many hours of well-financed work, work financed not by the mid-
dle-class people of whom Secretary Kemp spoke so eloquently, but
by taxpayers who can afford these lawyer's fees.
Any loopholes they find once this amendment is in effect will, in
effect, be frozen into law. They can be rooted out only by a two-
thirds vote of both Houses, which means if there is any significant
amount of support for the loophole, it stays in place.
I don't know of anyone who thinks that it is now too easy to
adopt tax reform even to get rid of the most egregious loopholes or
over-complexities. I don't know of anyone who thinks it is too easy.
I think there is no question that this proposed constitutional
amendment will make it much harder still.
My second point is that it seems to me this amendment is at
odds with the objective of cutting the budget deficit, and here I
think the point is a pretty simple, indeed mechanical one. If you
*^For a discussion of the President's veto power, see Steven R. Calabresi, Some Normative Ar-
guments for the Unitary Executive, 48 Ark. L. Rev. 23 (1995); Michael B. Rappaport, The Presi-
dent's Veto and the Constitution, 87 Nw. L. Rev. 735 (1993).
71
pass an amendment that makes it more difficult to raise taxes
without making it any more difficult to spend more, you will in-
crease the budget deficit.
Senator Kyi pointed very effectively, I thought, to the
unpopularity of raising taxes. Of course, raising taxes is unpopular.
Spending more, however, is not unpopular and that is how we got
into our current fix. If you make it even more difficult to raise
taxes, it won't be any less popular to increase spending or maintain
spending at the same level. That is a formula for an even greater
budget deficit. The balanced budget amendment nearly passed the
Senate about a year ago. I have a difficult time understanding how
someone can be in favor of both this amendment and the balanced
budget amendment.
My third point is actually one that I haven't seen featured in the
debates over this amendment, but I think it is an important one,
and it is that the effect of this amendment might very well be, yes,
to lower the tax burden on American citizens, but greatly to in-
crease the regulatory burden. There is more than one way to fund
a government program. You can do it by raising taxes or you can
do it by simply insisting that private individuals fund it themselves
out of their own pockets. Then the money won't ever pass through
the Treasury and it won't look like a tax increase.
If you want to fund government health care and you can't raise
taxes, what do you do? Well, you insist that employers provide
health care for their employees. That is not a tax increase and
won't be subject to this amendment, but it will hit employers every
bit as hard as a tax increase. If you want public housing and you
can't raise taxes to pay for it, what do you do? You require devel-
opers to provide public housing as a condition of building their own
housing. That will hit them just as hard as a tax increase, but it
won't be subject to this amendment.
I think the passage of this amendment will simply create more
circumvention of that kind. The Government will accomplish its ob-
jectives in a way that will be just as burdensome and potentially
much more intrusive and much more wasteful than a straight-
forward, visible tax increase that people can debate. Then they can
decide whether these Government programs are worth it or not.
Secretary Kemp spoke about the need to avoid — I think his words
were a circuitous and surreptitious means of funding Government
programs. This simply puts a premium on finding surreptitious
means of avoiding something that is nominally a tax increase.
My final point, Mr. Chairman, is to try to focus not, as my friend,
Professor McGinnis, said, on the concept of a constitutional amend-
ment, but on the fact that when you add an amendment to the
Constitution, you are adding specific language, and in our system
that means language the courts are going to interpret. If this provi-
sion becomes part of the Constitution, it will be the courts who will
decide, if you tax Social Security benefits, is that an increase in
taxes or is that just a reduction in entitlement spending.
If you increase charges for using Federal waterways, is that just
a user fee and therefore not a tax or is that a tax? If you increase
taxes in one respect but cut them in the other and they purport to
be offsetting so as not to trigger the amendment, does that trigger
the amendment or doesn't it? It will be the courts who will be de-
72
ciding these questions of fiscal policy, really, and deciding them
over and over again.
In our system, if you add an amendment to the Constitution and
the amendment's terms are controversial, as these terms will be,
and adds some bite, as these certainly will, what that means is in-
creasing the power of the courts, and the separation of powers im-
plications of that, I think, are an important reason to hesitate and
think long and hard before adopting amendments such as this.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Strauss follows:]
Prepared Statement of David A. Strauss
Mr. Chairman, thank you for the opportunity to appear before you to testify on
S.J. Res. 49 and H.J. Res. 169. These proposed constitutional amendments would
require supermajorities of Congress before legislation could be enacted to raise
taxes. For a variety of reasons, both of these proposed amendments seem to me ill-
advised.
S.J. RES. 49
Section 1 of S.J. Res. 49 provides that "[a]ny bill to levy a new tax or increase
the rate or base of any tax may pass only by a two thirds majority of the whole
number of each House of Congress." It would, in my view, be a serious mistake to
adopt any constitutional amendment of this form, for a number of reasons:
• The amendment would be the death knell for tax reform.
• The amendment would be almost certain to lead to increased budget deficits.
• The amendment would be likely to bring about an increase in wasteful and inef-
ficient regulation, as a substitute for taxation.
• The amendment, if it is to be more than symbolic, would undermine the separa-
tion of powers by effectively granting unaccustomed new powers to the courts.
I will address these points in turn.
1. The amendment would he the death knell for tax reform. Any serious effort to
reform the Internal Revenue Code would, under this proposed amendment, require
a two-thirds vote of each House and would therefore be extremely difficult to enact.
This would not just be true of largescale, "structural" reform of the tax laws; it
would also be nearly impossible to remove what most of us would consider to be
loopholes.
Loopholes in the tax laws can arise because of well-organized lobbying efforts.
They can also arise just because of inadvertence; in drafting something as com-
pUcated as the tax laws, it is impossible to foresee every contingency. And of course
the tax bar is endlessly creative in trying to find loopholes that might benefit cli-
ents.
S.J. Res. 49, and any constitutional amendment like it, would apply to any legisla-
tion that closed a tax loophole. Eliminating a loophole, almost by definition,
"increase[s] the rate or base of a tax." Any interest group that has obtained favor-
able treatment in the tax laws can, under S.J. Res. 49, rest easy. Groups that bene-
fit from favorable tax treatment fight vigorously to maintain their advantage and
often prevail even when only a majority vote is required to defeat them. If S.J. Res.
49 became part of the Constitution, such a group could be sure that, so long as it
can obtain support from one-third of the members, plus one, of a single House of
Congress, its loophole will remain intact. By the same token, every slip in the draft-
ing of the tax laws will now become much more difficult to repair. If the slip creates
a windfall for someone, the recipient of that unintended benefit will, under a provi-
sion like S.J. Res. 49, have a much easier time blocking any corrective legislation.
Larger-scale tax reform will also be, for all practical purposes, impossible. Vir-
tually any reform of tax rates will require some increase in the tax base or in some
individuals' tax rates, or both. This is conspicuously true, for example, of the much-
mooted flat tax. As I understand it, the flat tax (and other tax simplification efforts)
have as a centerpiece the elimination of some deductions. But eliminating deduc-
tions increases the tax base. And tax reform is also frequently concerned with rates.
The flat tax in particular, unless it were to reduce revenue dramatically, will nec-
essarily have to raise some tax rates while lowering others.
Dealing with unexpected loopholes ought to be part of the day-to-day business of
administering the tax laws. It should not require an extraordinary, supermajority
vote in both Houses of Congress. Beyond that, few people, I believe, would deny that
73
the tax laws could usefully be reformed in a broader way. And few would deny that
tax reform is difficult to enact now. Indeed I know of no one who thinks that, even
now, it is easy — much less too easy — to remove loopholes from the tax code. It is
difficult to see any justification for amending the Constitution to make tax reform
even more difficult.
2. The amendment would be almost certain to lead to increased budget deficits.
S.J. Res. 49 creates high barriers to tax increases but no barriers to spending in-
creases. It does not take much economic sophistication to see that the almost certain
effect of doing this — making it much harder to tax but not much harder to spend —
will be to increase the budget deficit.
Proponents of S.J. Res. 49 and similar proposals argue, I believe, that making tax
increases all but impossible will effectively put pressure on Congress to limit spend-
ing increases too. That may be true. But it is hard to believe that Congress will
limit spending increases to the same extent — in practical terms, nearly zero — to
which S.J. Res. 49 limits tax increases. If a constitutional amendment is needed to
keep Congress from raising taxes — keeping in mind that raising taxes is politically
very unpopular — then surely one cannot expect Congress voluntarily, without any
constraint comparable to a constitutional amendment, to impose similar limits on
politically popular spending increases.
Opinions differ, of course, on what should be done about the budget deficit. But
a proposed balanced budget amendment to the Constitution received the support of
nearly two-thirds of the Senate. It seems to me nearly impossible to reconcile a be-
lief in a balanced budget with support for an amendment, like S.J. Res. 49, that
is virtually certain to precipitate greatly increased budget deficits.
3. The amendment would be likely to bring about an increase in wasteful and inef-
ficient regulation, as a substitute for taxation. If teix increases become much more
difficult to enact, we can expect legislators to find other ways to accomplish the ob-
jectives they would otherwise pursue by raising taxes. Suppose that the government
wanted to mnd a new program to supply (for example) health care or job training.
Without a constitutional amendment like S.J. Res. 49, Congress might simply enact
a tax increase to pay for those services. The cost of the program would be visible,
and citizens could consider whether the potential gains were worth it.
A constitutional amendment like S.J. Res. 49 would not prevent the government
from enacting, and funding, the same kind of program. How would the supermajor-
ity requirement be avoided? Simply by requiring private employers to furnish the
services and to pay for them out of their own pockets. The effect on the private em-
ployers would be the same as the effect of a tax; the only difference is that instead
of pajring the money to the government, employers will be spending the money in
the way the government directs. Such legislation, by the way, could not plausibly
be treated as "raising taxes" within the meaning of S.J. Res. 49; if it were, then
almost any regulatory requirement imposed on a private firm could be regarded as
a tax increase subject to a supermajority requirement.
Sometimes employer mandates are better policy than a direct tax; sometimes they
are not. But the decision between those options should be made on the basis of the
relevant policy considerations. If it is dictated instead by the need to avoid a super-
majority requirement, then the likely result will be economically unwarranted regu-
lation and a wasteful distortion in the market in situations where an increase in
taxes is the preferable course. The net effect on individuals of an amendment like
S.J. Res. 49 could, therefore, easily be not less but more government-imposed bur-
dens, and more inefficiency.
4. The amendment, if it is to be more than symbolic, would undermine the separa-
tion of powers by effectively granting unaccustomed new powers to the courts. It is
often said that many nations have constitutions that are better than ours — on
paper. Our Constitution is distinctive because it does not just exist on paper. It is
enforced, generally by the courts. But this means that in considering amendments
to the Constitution, it is not enough to decide that the amendment expresses a gen-
erally good idea. It is important to consider also how the amendment will be en-
forced in practice.
Any constitutional amendment that resembles S.J. Res. 49 would raise an enor-
mous number of very dif^cult interpretive questions. And were a measure like S.J.
Res. 49 added to the Constitution, it would not be long before the courts were asked
to enforce it. Someone would claim that legislation enacted by a simple majority in
fact "lev[ied] a new tax" or "increase[d] the rate or base of aD tax" and was there-
fore unconstitutional. At this point the courts would have two choices. They could
decide that Congress, not the courts, was to make the determination whether a bill
required a supermajority vote. That approach would essentially make the new
amendment symbolic — a statement of principle that Congress could evade at will.
74
Alternatively, the courts might decide to treat the new amendment as they treat
most of the rest of the Constitution — to interpret and enforce its terms themselves.
This would immediately require the courts to answer any number of difficult ques-
tions. Is a user fee — for example, a charge for the use of federally maintained water-
ways — a "tax" that requires a supermajority? Suppose all the proceeds from a cer-
tain exaction are paid into a trust fund, and the sums in that trust fund are used
only for a specific purpose. Is that a "tax"?
Or suppose a law is adopted that increases taxes on some government benefits,
such as social security. Is that a tax increase or just a reduction in the amount of
the benefits? If the former, then why wouldn't any reduction in benefits count as
a tax increase (thus effectively dooming any effort to reduce government spending)?
If the latter, then couldn't Congress avoid the supermajority requirement just by de-
scribing an apparent tax increase as a reduction in the value of government bene-
fits, since nearly everyone receives government benefits in some form?
Perhaps the courts could work out sensible and practicable answers to these ques-
tions. But the effects on the separation of powers would be profound. Judicial deci-
sions would play a more central role in determining economic policy than they have
ever before in our history. The fate of statute after statute would be uncertain until
the courts had spoken. Legislation would have to be carefully tailored to the latest
judicial pronouncements. There would be a premium on carefully structuring legisla-
tion — not to achieve the desired purposes in the most efficient way possible, but to
work around the relevant Supreme Court precedents.
Alternatively the courts might decide that these difficult interpretive questions
are for Congress to resolve; the courts might say that they will simply defer to
Congress's declaration that a particular measure is or is not a tax increase. But
then the new constitutional amendment would become, in essence, just an abstract
statement of principle — something that Congress could effectively disregard when-
ever it chose to do so. One of the glories of our Constitution is that it is not filled
with such abstract declarations of principle. It is, for the most part, an enforceable
legal document. If we are to break with that tradition, we should be clear that we
are doing so, and clear that it is worthwhile to do so.
H.J. RES. 169
Section 1 of H.J. Res. 169 provides as follows:
Any bill, resolution, or other legislative measure changing the internal
revenue laws shall require for final adoption in either House the concur-
rence of two-thirds the members present, unless that bill, resolution, or
measure is determined at the time of adoption, in a reasonable manner pre-
scribed by law, not to increase the internal revenue by more than a de
minimis amount.
One difficulty with H.J. Res. 169 should be noted at the outset. H.J. Res. 169 re-
fers only to "measure[s] changing the internal revenue laws." If the phrase "internal
revenue laws" is taken to refer simply to Title 16 of the United States Code, then
H.J. Res. 169 itself contains a loophole large enough to render the entire proposal
almost useless. Congress can evade any requirements simply by raising funds
through some other part of the U.S. Code. On the other hand, if that phase is inter-
preted more generally to mean "tax measures," then all the questions I mentioned
earlier — what kind of measures count as tax laws? — return with a vengeance.
Even if this problem could be solved, however, H.J. Res. 169, or a measure like
it, would, if taken at its word, have effects that no one — especially the most vigorous
proponents of tax cuts — should endorse. One popular theory — sometimes called the
'supply side" approach — holds that certain tax cuts stimulate economic activity and
thereby increase revenues. There is, of course, great disagreement over how often
tax cuts have this effect, and how great the effect is. But nearly everyone, I suspect,
would agree that sometimes at least tax cuts can have that effect, and that at least
if economic stimulus is desirable such tax cuts are useful.
But this kind of tax cut is exactly the sort of measure that would be difficult to
enact under H.J. Res. 169, at least if the language of that provision is taken lit-
erally. That form of tax cut does "increase the internal revenue by more than a de
minimis amount" — that is the putative attraction of such tax cuts. Therefore it ap-
pears that, if H.J. Res. 169 were to be added to the Constitution and implemented
in the way its language suggests, one of the most popular and attractive form of
tax cuts would be a thing of the past.
H.J. Res. 169 also presents many of the other difficulties that I mentioned in con-
nection with S.J. Res. 49. While tax cuts that stimulate the economy and increase
revenues would be barred, tax cuts that reduce revenues — and thereby increase the
75
budget deficit — would be encouraged. Also, like S.J. Res. 49, H.J. Res. 169 will en-
courage Congress to substitute regulation for taxation. Rather than receiving money
from taxpayers and then spending it on a program, Congress could simply require
the taxpayers to spend the money directly on the program. Individuals and firms
could be required to clean up the environment, to build public housing, and so on.
No money would pass through the treasury and the terms of H.J. Res. 169 would
not be implicated. It is difficult to see why Congress should be encoviraged to take
steps in this direction, which will only conceal the costs of government programs
and lead to market distortions.
Perhaps the most conspicuously problematic feature of H.J. Res. 169, however, is
that as a constitutional amendment it seems to accomplish literally nothing. All of
the difficult questions are postponed. H.J. Res. 169 envisions that Congress will
enact legislation specifying how the "determin[ation]" that a measure has not
"increase[d] the internal revenue" is to be made. The amendment itself does not ex-
plain how that determination is made.
But everything hinges on that determination. How are the economic effects of a
change in the tax laws to be estimated? How far will those making that judgment
go in trying to estimate the effects on behavior? How far into the future will the
projections be made? H.J. Res. 169 provides no guidance at all on how these judg-
ments are to be made. It in effect defers such judgments to a mechanism that is
to be established by implementing legislation.
Since these judgments are made pursuant to legislation — rather than pursuant to
the language of the amendment itself — the amendment itself, is an important sense,
accomplishes nothing. Congress already has the power to enact statutes (or to adopt
internal rules) requiring that legislation have certain revenue effects. Congress does
not need H.J. Res. 169 or a similar constitutional amendment to empower itself to
adopt such measures. Moreover, anything that is accomplished by legislation can be
undone by legislation. A law increasing taxes need only contain a clause specifying
that the implementing legislation, envisioned by H.J. Res. 169, does not apply to
this particular tax increase. Congress might of course try to make the implementing
legislation difficult to amend. But it can try to do that now.
S.J. Res. 49 and H.J. Res. 169 are powerful symbolic statements of antipathy to
increased taxation. As symbolic statements they have much appeal. Few of us like
taxes, especially on April 15. But these two resolutions are not offered just as sjmi-
bolic statements — they are offered as amendments to the Constitution of the United
States. As constitutional amendment they seem to me to be not as well conceived
or as well thought through as they should be, and they should not be adopted.
Senator Brown. Thank you.
Senator Kyi.
Senator Kyl. Thank you. Both of you made excellent statements
and let me begin by saying that, Professor McGinnis, I agree with
what you said and I think you add significantly to the debate by
framing it the way you did. Of course, Professor Strauss, I have
some quarrel with what you said, but I also think you made some
very valid points and I would like to explore those.
First of all, it will be harder and courts will have to answer some
questions and there could be a move to require others to pay. I
think all of those things are true and I think they are legitimate
issues to raise. You also said you thought if the objective were one
agreed to here that we could better achieve it by limiting spending.
I also agree with that. That is why I am the sponsor of a constitu-
tional amendment which would limit spending. I prefer that to a
limitation on taxes, but failing the ability to get that passed, I have
signed on to this proposition.
Let's go down through the list of things you talked about. No. 1,
you said that this is a quick fix. I can assure you that amending
the Constitution is never quick. As you point out, it is going to take
two-thirds of both Houses — we won't get that passed this year —
and then three-fourths of the States. This is going to take a long
time. This is not a quick fix.
76
The quick fix when we have a deficit problem is to quick pass
a tax increase, so this is designed to get away fi'om quick fixes and
to take a long, laborious time to get a constitutional amendment
approved.
You said that it is not too easy today to make changes in the tax
code. Well, there have been 4,000 changes just in the last 10
years — 4,000 changes to the income tax code. As a matter of fact,
the average that the tax code stays intact is 1.3 years, so it is very
easy today to make changes in the tax code.
I think you are right that a lot of them deal with the special-in-
terest benefits. Someone called them loopholes and used that term
very broadly, and I think it covers a lot of what has occurred. I do
agree with you that it would be harder to get rid of tax loopholes.
That is one reason I think it would be preferable to have this
amendment take effect after fundamental tax reform rather than
before.
You also asked how one could be for this and the balanced
budget amendment. I would say easy, since I am in favor of both.
You should achieve a balanced budget under today's circumstances
by reducing costs, not by raising taxes. Indeed, as Jack Kemp and
Pete du Pont both testified, reducing tax rates is a surer way to
increase revenues than raising tax rates.
Finally, and this is the one I would like to have you make a com-
ment on, this could result in Congress requiring others to pay the
bills — a very important point. I think that would raise profound
constitutional issues. I want you to reflect on that for a minute, if
you would, particularly in view of some of the more recent deci-
sions coming down from the Supreme Court, and also with respect
to the protection of property rights.
There is a point at which, is there not, that the Court would
have to confront the question of whether Congress had the author-
ity to, in effect, take from businesses or from families by mandat-
ing that they pay for something that heretofore has been a Govern-
ment obligation? Would you reflect on that for a moment, and then
I would ask Professor McGinnis to reflect on that as well?
Mr. Strauss. Well, I think that is right. Senator Kyi, that you
would put the courts in the position of deciding is this really just
a hidden tax increase or is it legitimate regulation, but that ques-
tion will be an extremely difficult one and will put the courts in
the position of confronting the following dilemma.
Either they can basically go along with what Congress has done,
and if Congress calls it a tax increase, it is a tax increase. If Con-
gress calls it something else, we won't gainsay Congress' judgment,
which I think will actually be the reflex courts will have. That just
leaves the door open for, as you put it really better than I did, re-
quiring someone else to pay the bills.
Alternatively, the courts might actually get into the nitty-gritty
and try to say is this regulation or is this taxation, and then what
you are doing is turning over an enormous chunk of power to the
courts. Suppose the courts say stop dumping pollutants into the
neighboring stream. Is that making you pay for the cost of environ-
mental protection when, in fact, the Government should be paying
for that, or is that legitimate regulation? That question could be ar-
gued both ways and you can proceed from there. Paying the mini-
77
mum wage — is that making you pay what should be a wage sub-
sidy funded through the Government or is that legitimate regula-
tion?
You can go down through the list of regulatory policies, some of
which some of us might like, some of which some of us might not
like and, about each one of them, characterize them as a hidden
tax increase. If you put the courts in the business of drawing that
line, what you are really doing is opening the door for a whole new
realm of judicial activism in the area, really, of overseeing govern-
mental policy under the guise of enforcing this amendment.
As I say, I think is the less likely, although possible scenario.
The more likely scenario is there will simply be a large door left
open for, in Senator Kyi's terms, requiring someone else to pay the
bill even in circumstances where that would really be a very waste-
ful, inefficient, and undemocratic way to structure policy because
if the Government wants to pay for something, it should forth-
rightly raise the taxes and pay for it.
Senator Kyl. Professor McGinnis.
Mr. McGinnis. Yes. Well, I can't entirely agree with that because
I think this would still — regulation would still be the second best
alternative from the point of view of a rational legislature because
if they would have preferred regulation in the first place, they
would have done that rather than taxation. So I think this will still
likely reduce the — if you look at the sort of total level of regulation
and taxation, would reduce it.
We should think of ways to have effective regulation, if that be-
comes a problem, through either regulatory reform measures or
through even constitutional reform measures. I quite agree with
you. Senator, that the best kind of measure at all would be some
kind of constitutional amendment that would require a two-thirds
majority for increases in spending, and I would include under that
regulatory spending which is a different form of spending. In fact,
you really have to consider regulation as a kind of on-budget item
in itself. So that would be, I think, my response to that.
On the question of judicial activism, I think we have to be a little
wary of simply taking the judiciary out of this. The problem with
the judiciary in the past 20, 30 years has not, I think, been simply
that it has been activist in the sense of making decisions protecting
constitutional liberties. That is what we want the judiciary to do,
and if one of the purposes of this amendment is to prevent regula-
tion from coming in and being a form of taxation, we would like
the judiciary to protect against that.
What we need to have, though, is to structure a kind of Constitu-
tion which the judiciary is likely to enforce well, and I think this
might actually — a fiscal Constitution may likely be a Constitution
which the judiciary may be more faithful to because I think we
have had great success in some areas of sort of technical law where
the judiciary seems occasionally to become activist, and to be incor-
rect is to be in some areas of constitutional rights where there is
the applause of the crowd and I am not sure that this kind of tough
fiscal law would be that area of law. So I might be a little more
willing to trust the judiciary in this area.
Senator Kyl. Thank you. Both of those are very informed an-
swers. I do want to make one thing clear, and that is that this
78
issue underscores the rationale for a spending limit as the ultimate
better way to deal with the issue than a tax limitation. I still be-
lieve a tax limitation, though imperfect, is appropriate under these
circumstances because as Mr. Strauss pointed out, there are two
ways that one can get around this if one really wants to.
One is to increase the public debt in order to spend more money.
The other is to load the obligation on the private sector somehow.
A spending limit, however, precludes that. My constitutional
amendment limits spending to 19 percent of the gross national
product, the historical level of revenue collected by the Federal
Government for 40 years. Revenues have been at 19 percent. But
spending escalated to almost 25 percent. It is now back down in the
22-percent range, as I recall, but the economy has always adjusted
very quickly to allow the Federal Government to collect 19 percent
of the gross national product, period, varying just a percentage or
two. If you had a spending limit, then it wouldn't avail the Govern-
ment to either raise taxes or go into debt or unload the costs on
the private sector. It simply couldn't spend more money.
Mr. Strauss. Well, Senator, if I may, I think the loading on the
private sector — ^you would still have to face the same problem.
When I spend money to clean up the effluent coming from my
plant, does that count against the Government spending ceiling, on
the theory that I am doing the Government's work, or doesn't it?
Senator Kyl. Depending upon how the Government foisted the
obligation, it is possible. We get too many things now where, for
example, the Forest Service says, I would love to do that environ-
mental impact statement, but we don't have time; if you will pay
for it, we will do it. We are getting too much of that going on right
now, but I do see your point and again appreciate the testimony
that both of you have given today.
Senator Brown. Let me ask both of you to think about this in
a little different framework. We have been through a dramatic shift
in this Nation. As I referred to in my opening remarks, for almost
our entire history, with the exception of 2 separate years prior to
1930, all levels of government combined never exceeded 10 percent
of our GDP. Since 1930, they have never been below it. Currently,
we are approaching 40 percent of our GDP spent by government.
It is money taken away from people who earn it and spent by all
levels of government. It is a shift of power, in effect.
Obviously, some think that it is not near enough, that you need
to do more in redividing the wealth of the Nation and redistribut-
ing it. Some think you should do less, but it strikes me that the
Kyl proposed constitutional amendment is a very direct effort to
address this problem, or opportunity, I guess, depending on your
point of view.
The real impact is one that says there is an upper limit as to
how much government, in this case the Federal Government, is
going to take away from the citizens and redistribute it. I would
be interested in your reaction to that. Are we at a point where we
have taken too much from people? When we democratically elect
our Members of Congress and the President, is it necessary to have
a constitutional limitation on how extensive, how large, how great
Government will grow? What is the reaction of each of you in that
regard?
79
Mr. Strauss. Well, Mr. Chairman, I think I have a couple of
thoughts on that. I think if you look at — well, two thoughts, really.
I think what most students of the political process will tell you is
that this isn't a matter of a gigantic shift, of a gigantic leviathan,
so to speak, taking things over. It is rather a problem of interest
group politics; that there are powerful interest groups that want
their share. Each share alone isn't enough to push the Government
past the breaking point, but each one of these groups is irresistible
and when you sum them all together and when you add them all
up, then you have got a problem that we have. That is the nature
of the problem, is concentrated interest group power. Then the
question becomes how to handle that, and that is the intractable
problem.
My second thought related to that is that if you look at the way
our system has handled the great shift — this is a great shift that
has happened in the last generation or two, but it is not the first
great shift in our history. There was an enormous expansion of the
power of the national Government under the aegis of Chief Justice
Marshall in the first decades of the republic and then a swing back
toward the States, and then, of course, an expansion of the nation-
wide economy in the year after the Civil War, and then the pro-
gressive era with its effects on the political system.
All of these changes, except for one, we have handled not
through passing a constitutional amendment or a series of constitu-
tional amendments, but rather evolutionarily through the political
process gradually. Whatever you think about the current state of
the Government, we came upon it originally.
The beginnings of the origins of the welfare state go back at least
to the beginning of this century, possibly much earlier than that.
The New Deal is given credit or blame for this, but the New Deal
really was just kind of a bigger step in a series of steps that led
to this system. The one exception to that is, of course, the eradi-
cation of slavery, and that is not an example we want to replicate,
where we really did go through a national trauma to change some-
thing.
So I think my advice to those who think — and I am not one who
thinks, but my advice to those who think that the Government has
simply gotten too big would be, OK, start scaling it back the way
it was built up; do it step by step. That is the way our constitu-
tional tradition has handled things. That is the way mature con-
stitutional traditions handle things. They don't have these sudden
changes where one party leaves power and another party takes
over and everything is up for grabs. They do things gradually.
This took several generations to buildup. It is going to take at
least a generation or two to dismantle it. If you want to dismantle
it, do it that way rather than going for the sudden, unpredictable,
possibly counterproductive break.
Senator Brown. To that point, isn't this more properly described
as a limitation on further increasing the share of the GDP that
goes to government? At least that is my sense of it. This is not an
effort to cut it back. This is simply an effort to limit the levels of
increase. I don't know if you see it that way.
Mr. Strauss. Well, in part, that depends on how the calculation
is done. If this, for example, protects against indexing, then the in-
80
flation rate will have the effect of scaling back. But I am really ad-
dressing now — sort of more the concept of — do we need a constitu-
tional amendment to change the direction of the Government.
My concern about this amendment is more that it is just, as
phrased, not the right way to go about the task it assigns itself be-
cause of the questions I raised. I was really addressing in my an-
swer to you, Mr. Chairman, more the question, are we at a point
where we really need to do some fundamental constitutional re-
shaping. I don't think so, but if someone does, then my advice
would be to reshape the way the Federalists reshaped, the way the
Jacksonian States-righters reshaped, the way the progressives re-
shaped, and the way the advocates of the welfare state that you
now criticize reshaped.
Senator Brown. You know, there is a wonderful landmark case
on interstate commerce that comes to mind as you describe "re-
shaping." It strikes me that we have changed the Constitution; but
probably the way we have changed it is through changing the way
we interpret it.
I think of that 1940 case because it was the ultimate, I thought,
in creative legal reasoning where the farmer who had grown wheat
on his own farm and fed it to his family and consumed that wheat
on his own farm, was held to have been engaged in interstate com-
merce. I thought the case showed that the judges and the attorneys
in that case has attended very creative law schools and had a re-
markable ability to reason beyond the realm of reason.
Mr. McGiNNls. I might just disagree a bit with my good friend.
Professor Strauss, that we have had some important amendments
in the Constitution that have changed the power of Government
vis-a-vis the citizen. The income tax is a very important amend-
ment in that respect, and so it has not only been a gradual change,
but it has been a change through amendments as well, and so I
don't think this would be a radical break with tradition in that
sense.
Second, I think the two problems I described — the interest group
dynamic of the power of concentrated interest groups really only
can be broken through a change in the constitutive system. The dif-
ficulty is once you go down that road with interest groups having
greater and greater power and having entitlements and being wed-
ded to those entitlements, one does need a sharp break. One does
need, to use the words of a law professor at Yale, a kind of con-
stitutional moment to restructure the Government.
It is very interesting to note that often the times countries get
their fastest growth is after some crisis, sometimes a very dramatic
crisis, because they are able to reinvent their constitution in a way
that will protect property rights and the rights of enterprise. There
has been a good deal written on this and I think we don't want —
I think what you are trying to do. Senator Kyi, with your proposals
for your amendments and, in general, what the Contract With
America is trying to do is to try to take Americans' inchoate dis-
satisfaction with Government and create a Constitution out of it
because one realizes that it is only by doing that that one is going
to break the power of these interest groups and create a new stage
of the kind that we see when new governments come into being.
It is not quite as radical as that, surely, but it needs to be a con-
81
stitutive moment precisely because of the interest group problem
that I think both Professor Strauss and I agree is a serious impedi-
ment to real change in Government.
Senator BROWN. Thank you. I want to thank this panel. I am re-
minded that changes in Federal power have come about in signifi-
cant ways through constitutional amendments. The income tax, ob-
viously avoiding the admonitions and restrictions on taxes in the
Constitution, was a dramatic shift in power. Direct election of Sen-
ators turned out to be much more significant than I think most of
the people at the time thought. The Federal power over the States
in the 14th amendment obviously had a huge impact here. So my
guess is there is some precedent for this kind of change, albeit in
the opposite direction.
I will thank this panel and ask the next one to come forward,
and I would ask — also, I think Congressman John Shadegg is here,
the other prime sponsor of the Barton-Shadegg bill. Congressman,
if you are willing, I would like you to join this panel.
Congressman you are with a distinguished panel of tax experts,
so I warn you, you may be in trouble with this panel, but having
warned you, will you start us off?
PANEL CONSISTING OF HON. JOHN SHADEGG, A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF ARIZONA; GROVER
G. NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM,
WASHINGTON, DC; ROBERT GREENSTEIN, EXECUTIVE DI-
RECTOR, CENTER ON BUDGET AND POLICY PRIORITIES,
WASHINGTON, DC; AND WILLIAM A. NISKANEN, CHAIRMAN,
CATO INSTITUTE, WASHINGTON, DC
STATEMENT OF JOHN B. SHADEGG
Mr. Shadegg. I would be pleased to start off. I appreciate this
opportunity to testify before the subcommittee. I do have a written
statement which I will insert for the record.
Senator Brown. Without objection, the entire statement will be
included in the record.
Mr. Shadegg. Let me just begin by stating, while I may have a
panel of tax experts here, I think I have some degree of expertise
in this particular arena. In 1992, my State, the State of Arizona,
put into its constitution, with the support of 72 percent of the vot-
ing electorate, a constitutional two-thirds supermajority require-
ment. We did that following a long history of repeatedly raising our
taxes and we faced all of the arguments that you are hearing
today — those, and indeed more.
Let me simply say I am an unabashed supporter of this idea and
I believe its time has come. We did this through an initiative proc-
ess. We gathered signatures from people throughout Arizona,
placed the matter on the ballot and, as I said, it received the sup-
port of 72 percent of those voting in that election.
There really is a very simple premise behind this, and you in
your last questioning of the last witness commented about the de-
gree of precedent there is. Eleven other States have supermajority
requirements in their constitutions. I believe it will go on the ballot
in 4 to 5 additional States this coming year. In those States that
already have it, they represent one-third of all Americans, if you
82
add up the population in those States with supermajority require-
ments already in their constitutions.
The simple premise is simply that if we as a Congress and as a
Nation make it somewhat harder to extract additional tax dollars
from the people of the Nation, this Congress and this Federal Gov-
ernment will be forced to spend the money it has more judiciously.
To date, this Congress has, and prior Congresses in the recent past
have a rather miserable record of restraining Federal spending.
Therefore, I believe it is time that we deal with that issue and that
we deal with it by placing a restriction in the Constitution.
The premise is a straightforward one of fiscal responsibility.
Should Congress be more responsible about spending the money it
has, and if you believe it should, then this amendment will force
Congress to make it harder to spend money because it is harder
to raise taxes.
There are those who fret about placing this kind of a restriction
in the Constitution. You have probably already heard today there
are 10 other supermajority requirements in the Constitution, and
it seems that those who make that argument lose a simple
premise. The premise is that constitutions exist precisely for the
purpose of restricting a legislation majority that runs amuck; that
is, they exist for the precise purpose of protecting a minority.
Let me cite just one example. In the Omnibus Budget Reconcili-
ation Act of 1990, a legislative majority of this Congress enacted
legislation which destroyed the livelihoods of a small minority of
Americans. I am referring to the so-called luxury tax. While some
would argue and did argue when it was enacted that it would deal
with a simple additional tax burden on the wealthiest of Americans
who buy luxury items, the hard, cruel reality of that tax was that
it destroyed the yacht and boat-building industry in this Nation,
one in which we led the world.
Now, who paid the consequences? Did wealthy Americans who
purchase yachts pay the consequences of that tax? They did not.
They had the opportunity to buy the same goods, expensive yachts
and other materials that were taxed, overseas from other nations.
But the people whose jobs were destroyed by that unrestrained ma-
jority were the skilled and semi-skilled laborers in the carpentry
fields, in the fiberglass fields, whose jobs were destroyed by the un-
restrained will of a majority.
I suggest that this is indeed, as George Will has proposed, a rea-
sonable restraint, and that in view of the Supreme Court's expan-
sive construction of the Constitution's Commerce Clause which has
given this Congress powers not envisioned by the Framers of the
Constitution — and I might remind those who argue that this issue
was debated when the Constitution was adopted that, in fact, we
did not have an income tax until the sixteenth amendment — this
is, in fact, a rather reasonable proposal which would restore many
of the values that the Framers had in mind. Had they envisioned
a Government with the expansive authority which this Government
now has, I think they would have been before you supporting this
premise and suggesting that a constitutional supermajority re-
quirement is indeed a proper restraint and to be worried about as
much as the popular press would have you believe.
Thank you very much.
83
Senator Brown. Thank you, Congressman. You are welcome to
join us up here, if you would like to, later on.
Mr. Shadegg. I would be happy to remain and answer questions
if you have them.
[The prepared statement of Mr. Shadegg follows:]
Prepared Statement of Representative John B. Shadegg
Mr. Chairman, as one of the four chief sponsors of the Tax Limitation Amendment
(H.J. Res. 159) in the House, I want to thank you and the members of the Sub-
committee for holding this important hearing on Tax Day — the same day the House
will vote on H.J. Res. 159. I would also like to thank you for the honor to appear
before you today.
John Randolph, who served as a Member of this House and as a Member of the
Senate between 1773 and 1833, contemplating the power of government once ob-
served:
"It has been said that one of the most delicious of privileges is that of spending
other peoples' money."
Regrettably this privilege has been abused.
In 1992, I chaired Proposition 108, a state-wide initiative in Arizona, which was
adopted by a vote of 72%, imposing a constitutional two-thirds requirement for fur-
ther tax increases. Arizona is one of eleven states which has enacted a two-thirds
supermajority approval of a tax increase. Let me briefly explain why I fought for
the Arizona initiative.
Former United States Supreme Court Chief Justice Johnathon Marshall once
wrote: "The power to tax is the power to destroy." He wrote those words before the
Civil War at a time when the role of government was radically different than it is
today. Given the size of government today. Justice Marshall's words ring true now
more than ever.
The government's power to tax has become, quite literally, the power to destroy.
The credit which is essential for American businesses has all but dried up as the
government commands seventy-five percent of available credit to finance its spend-
thrift ways. Small businesses all across America — the lifeblood of our economy —
have gone bankrupt in record numbers under the weight of excessive government
taxation.
S.J. Res. 49, requiring a two-thirds majority to approve tax increases, is a reason-
able and necessary reform. Given the radical change which has occurred in the role
of government, it will provide discipline against the ever-increasing pressure to tax
and spend.
Since 1981, the House has passed five tax increases. Four out of the last five
major tax increases — totaling $666 billion — failed to obtain the support of sixty per-
cent in both Houses. Under a supermajority, the 1993 Clinton tax increases — the
largest in American history — would not have passed.
I was sent to Congress by the fourth congressional district of Arizona to balance
the federal budget by shrinking the size ana scope of government, not raising taxes.
I have watched Congress go down this same road before. Each time Congress has
promised to cut spending, what has happened instead is that taxes have increased.
The chronic budget deficit is because Congress spends too much, not because it
taxes too little.
The effects Arizona's Tax Limitation Amendment cannot be overstated. Prior to
passage of Proposition 108 Arizona had raised taxes for eight out of nine successive
years. Since passage of this Tax Limitation Amendment, taxes have not been raised
and our economy, which had grown sluggish under a series of tax increases, is now
booming.
Mr. Chairman, Arizona's example is proof that the Tax Limitation Amendment
works while it protects taxpayers.
Senator Brown. Grover Norquist, Americans for Tax Reform.
STATEMENT OF GROVER G. NORQUIST
Mr. NORQUIST. Thank you. I also have a prepared statement
with some exhibits I would like to share.
Senator Brown. They will be in the record.
Mr. NORQUIST. This a rather simple constitutional amendment to
require a two-thirds supermajority to raise taxes, and those people
84
commenting on it fall into one of two categories, those people who
think it would be a good idea to make it more difficult for Washing-
ton to raise taxes and reach into the pockets of the American peo-
ple and those who think it would be a bad idea for it to be more
difficult.
As a result, a lot of the discussion sort of obfuscates this distinc-
tion, but I think the American people understand perfectly well
that we are going to go in one direction or the other. It will become
more difficult to raise taxes or it will continue to be easy to raise
taxes.
I would suggest that in listening to this debate today, tomorrow,
and over the next several years, as this amendment will not pass
next week or next month, but all constitutional amendments take
time, listen to when people talk aoout, well, what about an emer-
gency? Oddly enough, the opponents of this amendment always
think of Washington's needs, Washington's emergencies, the Gov-
ernment's budget.
When they talk about your tax dollars, are they talking about
money that you pay or are they thinking of it as revenue and in-
flow? So the division in politics on this amendment is very clear-
cut. Some people want bigger and more Government and they are
opposed to it. Those of us who want the Government not to grow
and, in fact, hopefully to reduce in size as a percentage of the econ-
omy will support it.
Second, this is an amendment that comes from the States, just
as the balanced budget amendment in the constitution in 49 States
has finally begun to come to Washington. The House has passed it.
The Senate is two votes and one election away from passing a bal-
anced budget amendment. The line item veto in law in 43 States
has also finally come, at least in part, to Washington.
Now, 10 States with supermajority requirements also speak to
Washington to point out that California did not fall off the edge of
the earth, that all of the objections that have been raised to this
constitutional amendment might have been raised to California's or
other States' and none of the dire consequences — judicial fiat,
underfunding of State budgets or whatever — have taken place.
A third thought, and that is that those people who raise the
question of national defense as a problem — national defense is less
than a third of the Federal budget. If there were national defense
needs, it is possible to reduce other spending if there really is an
emergency. Of course, if there really is an emergency, it would be
easy to get a two-thirds vote. Oddly, those people who raise na-
tional defense were opposed to spending money on national defense
back when the Soviet Union existed, so I don't know how serious
that concern is when raised.
Fourth, tax reform is coming. I believe, as some of the previous
panelists have talked about, that we will be moving toward a flat
tax, perhaps even toward a consumption tax. But if we end up with
a President who is in favor of taxpayers over the next 4 to 5 years,
we are going to have tax reform passed in the next 2 years that
will look at a broader base, a flatter rate, and maybe even moving
toward a national sales tax. This amendment is not going to get
in the way of those reforms.
85
In fact, Americans for Tax Reform has commissioned a poll which
shows strong support for the idea of a supermajority — over 70-per-
cent support for a supermajority to raise taxes, regardless of how
you ask the question, but 68 percent point out that they would be
more likely to support fundamental tax reform, going to a flat tax,
if they knew that this constitutional amendment protected them
against having rates increase.
If we are going to take the rates down to 17, but Washington can
start taking that up to 18, 19, and 20, that reduces people's inter-
est in fundamental tax reform. So as somebody who supports mov-
ing toward a Forbes or an Armey flat tax, I think this amendment
is necessary and needs to be moving before we look at such a
project.
Last, for those comments that, gee, how could we do all the little
changes that we do every year if you required two-thirds, the an-
swer to that is you won't be able to. One of the goals of this amend-
ment is to get some stability, and I know it will make it more dif-
ficult for some people to raise money if they can't threaten or prom-
ise tax hikes or tax reductions every few months, but I think that
this measure will do more to reform campaign finances than any
of the campaign finance reforms that are being put forward.
So at Americans for Tax Reform, we are strongly supportive of
this amendment and we look forward to working every April 15
with the House and Senate until it passes.
Senator Brown. Thank you.
[The prepared statement of Mr. Norquist follows:]
Prepared Statement of Grover G. Norquist
Thank you for inviting me to testify before your committee this morning on the
important issue of a constitutional amendment requiring a two-thirds vote of both
houses of Congress for any new taxes or increases in existing taxes. Americans for
Tax Reform has been actively involved with state taxpayer groups around the coun-
try which are attempting to secure similar amendments in state constitutions, intro-
ducing similar legislation to state legislatures, and placing voter initiatives for con-
stitutional tax limitation on state ballots. Introducing the concept of constitutional
tax limitation at the federal level is a positive development in protecting American
taixpayers from an ever increasing tax burden. I welcome this effort and applaud
those Senators who have proposed constitutional tax limitation at the federal level,
in particular Senator Jon Kyi (R-AZ), for their leadership in this debate.
Today, I wish to make the following five points in support of the Tax Limitation
Amendment:
• Requiring a two-thirds majority of Congress for all tax increases is the best
method for limiting the tax burden on United States taxpayers.
• Without constitutional tax limitation, it will be easier to raise taxes than to cut
spending.
• Tax limitation promotes economic growth.
• Tax limitation is good government policy.
I. REQUIRING A TWO THIRDS MAJORITY OF CONGRESS FOR ALL TAX INCREASES IS THE
BEST METHOD FOR LIMITING TAX INCREASES
Under the current rules, previous Congresses have been incapable of restraining
their taxing and spending. The empirical evidence is compelling. The United States
runs a chronic budget deficit because Congress spends too much, not because it
taxes too little. During the post-war era, while total government revenues as a share
of Gross Domestic Product deviated little from approximately 19 percent, spending
has risen continuously, averaging 18 percent in the 1950s, 19 percent in the 1960s,
21 percent in the 1970s, to a range of 22% to 25% over the last ten years.
Congress has historically managed to avoid spending cuts and enact tax increases
by some maneuver to provide political cover. For instance, in both 1990 and 1993
Congress voted to raise taxes in the guise of omnibus budget laws that were de-
86
scribed as deficit reduction acts. In the 1970s the government grew rapidly as infla-
tion pushed workers into higher tax brackets and Congress did little to interfere.
Because Congress is unable to make small spending cuts it is forced to raise reve-
nue by enacting targeted tax increases. Often, these piecemeal tax increases are the
most damaging. Examples are numerous of their damaging effects. The eroding
value of the dependent child exemption hurt families. Increases in the capital gains
tax and lengthening of the depreciation of structures in the Tax Reform Act of 1986
destroyed real estate values and substantially contributed to the severity of the sav-
ings and loan collapse in the late 1980s. The luxury tax implemented under the Om-
nibus Budget Reconciliation Act of 1990 destroyed the yacht building industry in the
U.S.
A. Two-Thirds is superior to other percentages
Requiring an affirmative vote of two-thirds of all Members of Congress is superior
to other proportions.
1. Two-Thirds is the Percentage Used Throughout the Constitution
A requirement of two-thirds is consistent with constitutional supermajority voting
requirements. In ten instances the Constitution mandates supermajority voting re-
quirements. Each of these requirements reflects the thoughtful deliberation by the
Framers and Amenders of the Constitution. Each serves a purpose and each illus-
trates the capacity of the Constitution's architects to impose such requirements on
Congress where they were deemed necessary or useful. When it was appropriate in
the political environment of the 1780s to prescribe a specific numerical voting re-
quirement, the Constitution supplied one. The Constitution is a living document,
adaptable to modern problems. It is clear that if the Framers of the Constitution
had been faced with runaway deficits and massive government in the absence of a
compelling national emergency, they would have required a supermajority for tax
increases. In the present environment of high taxes and the need for either sharp
cuts in government spending or increases in revenue, politicians in Washington, DC,
cannot be trusted to protect the pocketbooks of Americans without a requirement
that there be broad support for any tax increase.
2. Many States Mandate A Supermajority Vote of at Least Two Thirds For an
Increase in Taxes
States around the country have been forced to reform their budgeting and tax
policies due to their own deficit spending. Many states have been successful in trim-
ming their deficits without raising taxes. The method used by the most successful
states has been supermajority tax limitation laws and spending limitation laws. One
third of all Americans live in a state with supermajority constitutional tax limita-
tion. In most of the states with supermajority requirements the idea of requiring
a greater than fifty percent vote of the legislature to increase taxes grew out of the
tax revolt movement and the initiative process. These states offer a successful model
for the Federal Government's budget and tax reform efforts.
• Two-thirds is the percentage used in most of the states requiring supermajority
approval of tax increases.
• Two-thirds is the percentage used in most of the supermajority initiatives now
working their way through the states for the November 1996 and 1998 ballots.
• Twenty-one states in 1995 and 1996 introduced legislation that proposed super-
majority requirements for tax increases.
3. Two-Thirds is a Higher Standard
Two-thirds is a much higher standard which affords superior protection. It would
require 290 votes in the House and 67 in the Senate. Four of the last five tax in-
creases were passed with less than a two-thirds supermajority. These new taxes
added $666 billion to the tax bill of the American taxpayer. Consequently, any tax
measure that musters the required two-thirds vote will obviously enjoy wide-support
from all political parties, and among the people generally.
II. WITHOUT SUPER-MAJORITY TAX LIMITATION POLITICIANS ARE BIASED IN FAVOR OF
TAX INCREASES
Presidents for years have stated that one of their preeminent goals was to balance
the federal budget. Unfortunately, this noble sentiment ran into one Congress after
another that was addicted to deficit spending in order to appease their constitu-
encies and effectively buy their way to re-election. Most responsible politicians now
agree that the U.S. must balance its budget. However, there are countless plans for
doing so. Many plans put forward by those "formerly" addicted to deficit spending
propose increased federal revenues. In their view, the simplest way to increase fed-
87
eral revenues is to increase taxes. Whether it is an upward revision of the brackets,
user fees, eUmination of deductions or increased "investments," the bottom line is
that many in Congress beheve they cannot balance the federal budget without re-
sorting to tax increases. In fact, while a member of Congress in 1992, White House
Chief of Staff Leon Panetta testified in favor of a balanced budget act which man-
dated automatic tax increases!
There is no correlation between increased taxes and lower deficits. The fiscal his-
toid of the U.S. illustrates this point. In fact, data suggests that an increase in taxes
of $1.00 actually leads to $1.59 of new spending. Throughout the history of the U.S.
the tendency oi Congress to spend additional taxes instead of using them to reduce
deficits has continually increased. In the first decades of the nation, tax increases
were associated with declines in the federal deficit. In the Twentieth Century, in-
creases in taxes have resulted in higher deficits. Much of this increase in deficits
and tax increases can be associated with the political advantages associated with
new spending.
When politicians allocate government resources, they seek the highest political re-
turn. There is a bias in favor of tax increases to pay for government-delivered bene-
fits that go to relatively few people. These people come together as special interests
to effectively lobby Congress. Taxes, on the other hand, are spread among many mil-
lions of people across the country who find it very difficult to band together as an
effective interest group. Without constitutional tax limitation, methods such as Leon
Panetta's automatic tax increases would likely gain widespread support from special
interest groups.
Many politicians opposed to the Tax Limitation Amendment maintain that the so-
lution to runaway spending is not to amend the Constitution, but to simply enact
balanced budget legislation. This is impractical. Using this approach to deficit re-
duction many of these same lawmakers voted for record tax increases in 1990 and
1993, effectively eliminating any tax relief enjoyed in the 1986 tax reform legisla-
tion. The result: the deficit, which was $152 billion and falling when President Ron-
ald Reagan left office in 1989, is now almost $200 billion and projected to rise every
year into the foreseeable futiire.
With a balanced budget law or amendment without a supermajority requirement
there will be a bias towards increasing taxes as a means of complying with the law.
Raising taxes presently only requires a simple majority vote. Weak amendments
which require a supermajority to run a deficit, but only a simple majority to raise
taxes make it easier to raise tax rates than to borrow. In effect they create a tax
trap. If you require a supermajority vote for borrowing money and increasing the
debt ceiling you must require the same mechanism for increasing taxes. You can
hear the politicians now saying how they didn't want to do it, but the Constitution
made them raise your taxes. Instead of reflexively raising taxes to comply with the
law. Congress should be compelled to reduce spending as a means of balancing the
budget.
III. TAX LIMITATION PROMOTES GROWTH
Available data show that the concept of requiring supermajority vote helps in the
battle to lower taxes. Ten states presently have some form of supermajority require-
ment for tax increases. Eight of those ten states require a supermajority of at least
two-thirds. In those ten states, taxes as a proportion of personal income have actu-
ally declined two percent. In states without a supermajority requirement taxes as
a proportion of personal income have risen two percent. Thus, there is a difference
of four percent in tax burdens in those states with supermajority tax limitation re-
quirements. What has happened in supermajority states is that lawmakers are re-
quired to reach broad consensus before enacting tax increases. The supermajority
forces state lawmakers to seriously consider spending priorities and makes them
more accountable to their taxpajdng constituents.
Not only do supermajority requirements lead to lower tax burdens at the state
level, they have resulted in a reduction in overall state government spending. In
states that require supermajority approval of tax increases, spending has increased
by two percent versus an increase of nine percent in states without the requirement.
A differential of seven percent equals significant reductions in government spending
and taxation. A seven percent reduction in federal spending would go a long way
toward balancing the federal budget.
IV. TAX LIMITATION IS GOOD GOVERNMENT POLICY
For over fifty years, concentrated and vocal interest groups have been able to se-
cure costly benefits for themselves that are paid for by the widely-scattered majority
of taxpayers. Due to its far-flung nature, the taxpaying majority is legislatively inef-
88
fective in stopping the grants of federal government largess. A Constitutional
amendment mandating a two-thirds affirmative vote of Congress to increase taxes
or eliminate deductions will improve the legislative process by making the passage
of these expensive benefits harder to support. Requiring an affirmative Congres-
sional vote for the increase of the tax burden will provide a "bright-line" test that
all federal legislators must take before they can raise the tax burden of the U.S.
people. When specialized interest groups seek a government benefit they will have
to persuade a much larger group of legislators to support their handout. Legislators
who represent the taxpayers who will pay the bill will have an easier time defend-
ing their positions and stopping the continued excess taxation of the American peo-
ple. No longer will they be able to go home to their states and districts and say that
they were compelled to raise taxes because the increase was attached to some monu-
mentally important bill which required passage. Nor will they be able to claim that
the Constitution mandated a tax increase. The excuse that "my hands were tied"
will no longer be acceptable. All members of Congress will have to live, govern, and
run for reelection on their voting record regarding tax increases, voting records for
all to see and to compare.
89
Appendix A
Supermajority Requirements in the U.S. Constitution
Article
1 Applies To:
Article I, section 3,
clause 6
j Conviction in impeachment trials
Article I, section 5,
clause 2
\ Expulsion of a Member of Congress
Article I, section 7,
clause 2
\ Override a presidential veto
Article II, section 1
, clause 3
1 Quorum of two-thirds of the states to elect
\ the President
Article II, section 2
, clause 2
i Consent to a treaty
Article V
i Proposing constitutional amendments
Article VII
i State ratification of the original Constitution
Amendment XII
i Quorum of two-thirds of the states to elect
\ the President and the Vice President.
Amendment XIV
i To remove disability of those who have
j engaged in insurrection
Amendment XXV section 4
1 Presidential disability
10
90
Appendix B
Supermajority Requirements at the State Level
State
Requirement
Year Enacted
Applies To
Arizona
2/3 elected
1992
All taxes
Arkansas
3/4 elected
1934
All taxes since 1934
except sales tax.
California
2/3 elected
1978
Property taxes
Colorado
3/4 elected
1992
All taxes
Delaware
3/5 elected
1980
Revenue increases
Florida
3/5 elected
1971
Changes in the
corporate income tax
rate
Louisiana
2/3 elected
1953
All taxes
Mississippi
3/5 elected
All taxes
Oklahoma
3/4 elected
1992
All taxes
South Dakota
2/3 elected
1978
For increased tax
base and existing tax
rates
11
91
Appendix C
State Supermajority Initiatives
State
1 Requirement
I Applies To
Arizona
\ 2/3 of
1 voting
1 election
those
in an
1 Existing state taxes or fees or creation of
\ any new state taxes or fees that arise from
1 the initiative process
California
12/3
i All taxes
Florida
12/3
j Voter approval of new taxes and fees
Maine
j2/3
; Legislative and/or voter approval of
1 changes in state tax laws.
Michigan
|2/3
\ Voter approval of tax increases and
! legislative pay raises
Nevada
12/3
1 All taxes
New York
12/3
1 All taxes over $50 million
Ohio
i2/3
I All taxes
Oregon
j Supermajority
; All revenue bills
12
92
Appendix D
Supermajority Legislation Introduced at the State
Level in 1995 and 1996
State \ Requirement
Florida ; Constitutional amendment requiring two-thirds of both
1 houses of the legislature to raise taxes.
Georgia 1 Constitutional amendment requiring approval of two-
i thirds of both houses of the legislature for increasing any
j tax, fee, assessment or charge imposed by the state.
Hawaii | Proposed amendment to the state constitution to require
1 approval of two-thirds of both houses of the legislature to
1 increase taxes or to repeal a tax exemption or credit.
Illinois
Requires three-fifths approval of both houses of the
legislature for the imposition of new taxes, license fees or
an increase of the effective rate of taxation.
Idaho
Supermajority of both houses of the legislature for any
bill intended to generate revenue for the state or any
political subdivision.
Indiana
Approval by the voters of new taxes or increases in
existing taxes.
Maryland
Supermajority for any increase in income or sales taxes or
any broadening of the income or sales tax base.
Massachusetts
Constitutional amendment restricting an increase in taxes
without supermajority approval.
Minnesota
Two-thirds supermajority of both houses of the
legislature, or approval by a majority of voters actually
voting on the question, to create new taxes or increase the
rate of existing taxes.
Michigan
Supermajority in each legislative chamber to approve an
increase in income, sales, use, and single business taxes.
New Mexico
Three-fifths vote of the members of each house of the
legislature present for new taxes or fees or increases in the
rate or base of existing taxes or fees.
New York " \ There are seven bills pending that require a two-third |
13
93
supermajority approval of both houses of the legislature to
increase taxes.
North Carolina I Requires a 2/3 vote of each house of the legislature to
I levy or increase taxes.
Ohio
Increases in State taxes must be approved by a
supermajority of each house of the General Assembly.
Rhode Island i Supermajority required to increase sales, use or income
\ tax.
South Carolina i Two-thirds supermajority required for property tax
i increases and retroactive taxes.
West Virginia I Requires a 2/3 vote for all bills imposing a tax or license
! fee, or increasing the effective rate of tax.
Wisconsin | 2/3 supermajority in both houses of the legislature to
I create, expand, or raise taxes.
' See W. Kurt Hauser, The Tax and Spend Equation, Wall. St. J., March 25, 1993.
^ Not surprisingly, these higher taxes were not used to trim the deficit. Instead, they fueled increased
government spending. See Richard Vedder, Lowell Gallaway, and Christopher Frenze. Taxes and Deficits:
New Evidence, Joint Economic Committee Study, 1991; Gerald W. Scully, What is the Optimal Size of
Government in the United States, National Center for Policy Analysis, 1994.
' Due to the luxury tax on yachts, 9,400 Americans lost their jobs. The effect of luxury taxes when the cost
to the Federal Government of increased unemployment is taken into account is to spend $2.40 for every $1
raised. For the yacht tax the direct cost to the government for each dollar raised was $3. Deals, Deficits and
Dynamic Forecasts, Republican Views of the 1992 Joint Economic Annual Report, April 1992, p.7.
* See appendix A for a list of constitutional supermajority requirements.
^ In fiscal year 1986 the states had an aggregate surplus of $60 billion, while the federal govenunent had a
deficit of $221 billion. See W. Mark Crain and James C. Miller III, Budget Process and Spending Growth,
3 1 Wm. & Mary L. Rev. 1 02 1 ( 1 990).
' Only in Delaware was the measure sent to the voters by the legislature. See, Tax Limitation Amendment:
Hearings on H.J. Res. 159 Before the Subcomm. On the Constitution of the House Comm. On the
Judiciary, 104th Cong., 2nd Sess. (1996) (statement of J. Kenneth Blackwell, Ohio State Treasurer).
' See infra , appendix B for a full list of present state supermajority requirements.
' See infra , appendix C for a full list of present state supermajority initiatives.
14
94
' See infra , appendix D for a full list of recent state supermajority legislation.
'° See Tax Equity and Fiscal Responsibility Act of 1982 (House vote 226-207, Senate 52-47, $214 billion
in new and higher taxes); Omnibus Budget Reconciliation Act of 1987 (House 237-181, Senate 61-28, $40
billion in new and higher taxes); Omnibus Reconciliation Act of 1990 (House 228-200, Senate 54-45, $137
billion in new and higher taxes); Omnibus Budget Reconciliation Act of 1993 (House 218-216, Senate 51-
49, ($275 billion in new and higher taxes).
" The 1993 tax increase was the largest in U.S. history during peacetime. It did not even achieve the
support of a majority of elected Senators. It only passed when vice-president Al Gore cast a tie-breaking
vote in the Senate.
'^ David E. Rosenbaum, The 1992 Campaign: Candidates on the Issues: Where They Stand on the Deficit,
N.Y. Times, October 5, 1992, at A 17; Paul Blustein, Nominees ' Economic Goals Seen as Lacking Realism,
Wash. Post, October 20, 1988, at Al; Carter Embraces Austerity - - For Now, Econ., July 26, 1980, p. 1 9.
" Balanced Budget: Hearings on H.R. 5676 Before the Subcomm. on the Legislative Process of the House
Comm. on Rules, 102nd Cong., 2nd Sess. (1992) (Testimony of Leon E. Panetta, Chauman, Committee on
the Budget).
''' Richard Vedder, Lowell Gallaway, and Christopher Frenze, Taxes and Deficits: New Evidence, Joint
Economic Committee Study, 1991.
''Jd.
'^ Gerald W. Scully, What is the Optimal Size of Government in the United States, National Center for
Policy Analysis, (1994), p.5. See . Jonathan R. Macey, Public Choice: The Theory of the Firm and the
Theory of Market Exchange, 74 Cornell L. Rev. 43, 51 (1988).
" One needs to look no farther than the few thousand subsidized peanut farmers who easily overpower the
millions of taxpayers who would do away with their subsidy. For an illustration of this phenomenon See
Guy Gugliotta, House, 270-155, Passes $46 Billion Farm Bill, Wash. Post., March 1, 1996, at A6; Eric
Schmitt, House Vote Keeps Peanut and Sugar Price Supports, N.Y. Times, February 29, 1 996, at A 1 9. The
peanut subsidy survived by a vote of 212-209 in the House of Representatives.
'* The Omnibus Budget Reconciliation Act of 1990 raised taxes by $137 billion. The Omnibus Budget
Reconciliation Act of 1993 raised taxes by $275 billion and was the largest tax increase in world history.
" Daniel J. Mitchell, Why a Balanced Budget Amendment Must Include True Tax Limitation, Heritage
Foundation, Backgrounder No. 237, Jan. 24, 1995, Update to Heritage Foundation Backgrounder No. 899,
June 4, 1992.
^° Such a scenario was a very real possibility under the Schaefer-Stenholm Balanced Budget Act of 1995
which required a supermajority to run a deficit but only a simple majority to raise taxes. Representative
Stenholm claimed that his balanced budget amendment included tax limitation by requiring a majority of
the whole membership, as opposed to a majority of those actually voting, to approve tax hikes. This would
offer little protection to the taxpayer. Of the nearly fifty tax increases since 1962 only three failed to reach
the supposed supermajority threshold of the Schaefer-Stenholm Amendment. Even those three increases,
the Interest Equalization Tax Act of 1964, The Investment Credit Suspension Act of 1966, and The Surface
Transportation Assistance Act of 1982 passed by lopsided margins of 45-28 in the Senate, 161-76 in the
House, and 180-87 in the House respectively.
15
95
' See infra appendix B.
" Arkansas, Colorado and Oklahoma require a three-fourths percentage. See infra , appendix B for a chart
on the percentages required by each state.
Daniel J. Mitchell, The McCain/Saxton Proposal: A Supermajority Antidote to Washington's Pro-Tax
Virus, Heritage Foundation, June, 1991. States with supermajorities saw their per capita tax collections
jump by 87.35%. States without supermajorities saw their per capita tax collections rise by 104.41%. This
translates to an increase that is 20% faster in states without a supermajority. Id. See . "State Revenue and
Expenditure Report" (Washington D.C.: American Legislative Exchange Council, July 1990). See also. Joe
Barton, The Balanced Budget Amendment: Ending the Federal Spending Binge, Remarks of Congressman
Joe Barton, (R-TX) to the Heritage Foundation, January 5, 1995.
^* See . Tax Limitation Amendment: Hearings on H.J. Res. 159 Before the Subcomm. On the Constitution of
the House Comm. On the Judiciary, 104th Cong., 2nd Sess. (1996) (statement of J. Kenneth Blackwell,
Ohio State Treasurer).
" The seven year balanced budget plan put forward in Congress by the Republicans in 1995 would have
resulted in a balanced budget by the year 2002 by reducing the growth of government spending by 6-7%.
^^ This will put a stop to the practice of "logrolling" or the floating coalition where interest groups combine
to pass packages of spending provisions that would never pass individually on their own merits.
16
96
Senator Brown. Mr. Greenstein, Center for Budget and Policy
Priorities.
STATEMENT OF ROBERT GREENSTEIN
Mr. Greenstein. Thank you very much, Mr. Chairman. I think
I am the lonely member of this panel who thinks that this is not
a wise idea, and I view a lot of this in the context of some of the
issues that came up before the Kerrey-Danforth Entitlement Com-
mission in 1994, on which I had the privilege of serving.
As you may know, the commission forecast that under current
tax and entitlement laws, the deficit would exceed 15 percent of the
gross domestic product by the year 2030 if policies aren't changed.
Many experts believe that to deal with this, we are going to need
very strong measures that include combinations of both spending
cuts and some revenue increases in the decades ahead.
One of my principal concerns is I believe this amendment would
make it extremely difficult, if not impossible, to put packages of
that kind together because of the two-thirds barrier. I am also con-
cerned it would make it harder to put together balanced packages
to address the serious financing problems in Social Security and
Medicare that we face in the years ahead and that a two-thirds re-
quirement would make it more difficult to deal in a deficit reduc-
tion context with some of the special interest tax expenditures
which I think ought to be considered along with spending that is
not needed or beyond what we can afford.
I note that even President Clinton's new budget, to go back into
the details, forecasts a deficit equaling 12 percent of GDP in 2030
and about 25 percent of GDP by 2050. This means that deficit re-
duction measures far beyond those that Congress and the Adminis-
tration are fighting over now are ultimately going to be needed,
and I am very concerned in that context to have the two-thirds bar-
rier.
When we were at the Entitlement Commission, one of the most
interesting pieces of testimony we got was from Bob Reischauer,
then the Director of CBO, and Reischauer said that when you look
at this long-term fiscal forecast, what you would have to do to get
all of the needed deficit reduction either just from programs or just
from revenues — either scenario would very likely be unacceptable
to the American public.
If you have to get all of it from programs, and we are not that
far from the point where Social Security and Medicare are 50 per-
cent of the Federal budget, then you would be talking about
changes in Social Security and Medicare, among other programs,
that are probably well beyond what the public would be willing to
accept.
I note that at the beginning of the Entitlement Commission's de-
liberations, Senator Danforth, a very thoughtful member, as you
know, a colleague of yours, said that revenues were off the table.
We wanted to get there entirely by spending, but by the time the
commission had deliberated for 5 or 6 months. Senator Danforth
concurred that the kind of changes one would need by the year
2030 were so great that they ought to include some revenue in-
creases, as well as spending cuts, with the majority being spending
cuts. The package he put together did that, but it would be vir-
97
tually impossible to move on something like that with a two-thirds
requirement.
All the major deficit reduction measures enacted between 1982
and 1993, all four of them, three of them signed by a Republican
President, did not get a two-thirds margin. The 1983 Social Secu-
rity rescue plan, strongly supported by President Reagan, did not
get a two-thirds margin on the House floor. A proposal that I think
makes a lot of sense that a number of Members of both parties are
now talking about, scaling back cost of living adjustments tied to
the Consumer Price Index — because that affects spending and reve-
nues, that would require two-thirds. It is hard enough to get a ma-
jority for it. I don't see it ever happening if we need two-thirds, but
those are the kinds of steps I think we will need in the decades
ahead.
I am also concerned about corporate subsidies in the tax code,
some of which make sense and some of which are the result of spe-
cial interest pressure. Before the Entitlement Commission, Chair-
man Greenspan referred to some of those provisions as tax entitle-
ments and urged the commission to look at those as well as spend-
ing entitlements in seeking to reduce the deficit.
But, in fact, if we have a two-thirds constitutional limitation, we
could get to the situation where Congress passed a series of tax
changes it thought were deficit-neutral, clever lawyers and ac-
countants working for people who can afford them found ways to
convert some of them into tax shelters and the Treasury lost
money, and it would take a two-thirds vote just to get those provi-
sions of the code back to the deficit-neutral situation they were in-
tended to have.
The final point I wanted to make is about Social Security and
Medicare. Some of the changes that we need here would run afoul
of the two-thirds limitation. For example, both of you voted for a
reconciliation bill last year that has a provision I also think is wise
to increase Medicare premiums for people at higher income levels
who can afford to pay more.
Because the higher premium would be tied to income, the House
parliamentarian advised when the measure was about to come to
the House floor in November of last year that it could be viewed
as a tax increase. That would probably require two-thirds. There,
again, we haven't been able to get it into law yet. I don't see some-
thing like that ever happening if you need two-thirds.
Similarly, Republicans in both Houses and some Democrats have
for a number of years supported wise measures to make all State
and local employees subject to Social Security and Medicare. Vir-
tually all of them end up getting Social Security and Medicare
when they retire, but some pay in less than their fair share during
their working years.
I believe that it was due to people such as former Chairman Ros-
tenkowski that that measure in Senate Republican reconciliation
bills of the early 1980's didn't fully become law. Yet, because it
would increase payroll tax revenues, it would be subject to two-
thirds as well and would probably never occur.
A final point I would just Uke to make is that if we effectively
cannot do things like means-test Medicare benefits, close unproduc-
tive special interest loopholes and the like, that will drive us both,
98
I think, to higher deficits than we would otherwise have over time
and to having to go more deeply into things like Medicare across
the board, student lunches, student loans, other programs that ben-
efit the middle class and the poor, and that the relative balance of
sacrifice in the decades ahead as we balance the budget will be too
heavily tilted toward the middle class and the poor if we take off
of the table both some of the subsidies that go through the tax code
to people at higher income levels and the ability to restrain some
spending entitlements by adding means-tested elements into them
that would be classified as revenue increases because they are tied
to income.
Thank you.
Senator BROWN. Thank you. You have brought some excellent
items for discussion to our attention.
[The prepared statement of Mr. Greenstein follows:]
Prepared Statement of Robert Greenstein
I appreciate the opportunity to testify before the Subcommittee today. I am Robert
Greenstein, executive director of the Center on Budget and Policy Priorities. The
Center is a non-profit policy institute that specializes on fiscal policy issues at both
federal and state levels.
Mr. Chairman, I would like to discuss why I believe a constitutional amendment
requiring a two-thirds vote by the House and Senate for any bill raising revenues
is unwise. Such an amendment would be ill-advised for several reasons.
• The nation will face very large deficits in coming decades if we maintain cur-
rent entitlement and tax policies. In 1994, the Bipartisan Commission on Entitle-
ment and Tax Reform forecast that due largely to pressures resulting from the re-
tirement of the baby boom generation, the budget deficit is expected to exceed 15
percent of the Gross Domestic Product (the basic measure of the size of the U.S.
economy) by 2030 if current policies are not changed. Many experts believe we will
need to consider strong deficit reduction measures that include both spending cuts
and revenue increases in the decades ahead.
• The proposed constitutional amendment, however, would effectively preclude
such action. The amendment would make it virtually impossible to amass the two-
thirds majority required to pass deficit reduction packages that include both reduc-
tions in federal programs and measures to raise revenue. The amendment would
erect serious new barriers to deficit reduction.
• Furthermore, the amendment would skew fiscal policy in ways that inequitably
benefit the wealthiest and most powerful at the expense of the rest of the U.S. popu-
lation. A two-thirds majority would be required to curb special interest tax expendi-
tures, which disproportionately benefit those at high income levels. By contrast, a
simple majority vote would be required to cut federal programs, which primarily
benefit the middle class and the poor. Decisions as to how to shrink the deficit and
apportion the sacrifice would not be made on a level playing field.
• Finally, the amendment undermines the basic principles of majority rule that
are at the heart of American democracy.
I. THE CONSTITUTIONAL AMENDMENT AND THE LONG-TERM FISCAL FORECAST
The federal deficit now has been reduced to two percent of the Gross Domestic
Product (the basic measure of the size of the U.S. economy), a level that many
economists believe does not cause significant damage even if maintained over a sub-
stantial period of time. But as the Bipartisan Commission on Entitlement and Tax
Reform warned in 1994, if no action is taken to raise revenue or restrain Medicare,
Social Security, Medicaid, and some lesser entitlements — and other federal spending
remains constant as a share of GDP — the deficit will rise sharply when the baby
boom generation retires. The Entitlement Commission forecast the deficit will ex-
ceed 15 percent of GDP by 2030 if no such action is taken. Based on a recent slow-
down in the rate of growth of health care costs, current forecasts are a bit less pessi-
mistic, but not by much. President Clinton's new budget forecasts the deficit will
equal 12 percent of GDP in 2030 under current tax and entitlement laws and rise
further to 26 percent of GDP by 2050. In short, any reasonable long-term forecast
will show projected deficits in the next century to be extremely large and of a mag-
nitude unhealthy for the U.S. economy. To avoid such a development, major deficit
99
reduction that extends far beyond the steps Congress and the Administration are
currently considering will ultimately be needed.
Testifing before the Entitlement Commission in 1994, Robert Reischauer, then the
director of the Congressional Budget Office, observed that the public would be un-
likely to accept the steps that would be required either to extract all of the needed
deficit reduction in the decades ahead just from government programs or to extract
all of the needed deficit reduction just from revenues. In the long run, Reischauer
predicted, policjonakers will agree on some mix of program cuts and revenue in-
creases to prevent deficits of a magnitude that would do substantial damage to the
economy.
The proposed constitutional amendment is designed to ensure that virtually none
of those future deficit reduction measures come from the revenue side and virtually
all come from cutting programs. ^ That the amendment would bar virtually all reve-
nue increases can be seen by examining House votes for the four principal deficit
reduction measures enacted between 1982 and 1993 that raised federal revenue. Al-
though three of these four measures were signed by Republican presidents and all
four enjoyed the support of Democratic Congressional leaders, none received two-
thirds support on the House floor. A fifth measure — the 1983 Social Security rescue
plan, which increased Social Security payroll tax collections — also failed to secure
a two-thirds vote despite strong support from President Reagan and Congressional
leaders.
VOTES FOR RECENT LEGISLATION THAT RAISED TAXES
Between 1982 and 1993, five pieces of legislation that raised significant revenue
were enacted. Presidents Reagan signed three of these measures, while President
Bush and President Clinton each signed one. All five failed to secure a two-thirds
vote on the House floor.
In passing the Tax Equity and Fiscal Responsibility Act of 1982, a measure
crafted in substantial part by Senator Bob Dole, the House vote was 226-207. When
the House considered its version of the 1983 Social Security rescue plan the follow-
ing year, the vote was 282-148. The vote for the 1987 budget reconciliation bill, a
product of bipartisan negotiations that contained both spending cuts and revenue
increases, was 237-181, while the 1990 budget agreement passed by only 228 to
220. The 1993 budget agreement passed by a slender 218-216 vote.
During this period only one measure that raised revenue secured a two-thirds
vote, the 1989 reconciliation bill. The 1989 bill was a minor measure. It did rel-
atively little to reduce the deficit and contained only very small revenue increases.
The revenue increases in all five of the pieces of legislation that failed to secure a
two-thirds vote exceeded the level of revenue increases in the 1989 bill.
The constitutional amendment thus would likely lead to one of several outcomes:
(1) larger deficits over time; (2) a greatly shrunken federal government that is un-
able to do much beyond running Social Security and Medicare, maintaining national
defense, making federal pension and veterans payments, and paying interest pay-
ments on the national debt; and (3) steep reductions in Social Security and Medicare
that significantly reduce the living standards of millions of elderly people who are
not well off. Such stark outcomes are not necessary if a balance of spending cuts
and revenue-raises ultimately can be considered over the next three decades. Such
balance is what the amendment is designed to prevent.
That the statements in the previous paragraph are not hjT)erbole can be seen by
examining a chart the Entitlement Commission published in 1994 showing the fiscal
forecast through 2030 under current tax and entitlement law. When the baby boom
generation reaches retirement and an unprecedented proportion of the population
is elderly, some increases in revenues are likely to be needed, in addition to actions
to restrain Social Security and Medicare costs and actions of the type the President
and Congress are proposing for the years between now and 2002.
1 The constitutional amendment would require a two-thirds vote in each House to enact legis-
lation that, in net, increases "internal revenue." While that phrase is ambiguous, it should be
noted that the Internal Revenue Code covers individual and corporate income taxes; Social Secu-
rity, Medicare, and other social insurance taxes; most excise taxes such as those on gasoline,
alcohol, and tobacco; and gift and estate taxes.
100
40%
35%
30%
25%
20%
15%
10%
5%
CURRENT TRENDS ARE NOT SUSTAINABLE
Federal Outlays as a Percentage of
Gross Domestic Product
1970
Entdement
Spending
1980
Net Interest
1990
2000
2010
2020
I Discretiorary Spending (eg,
Defense, Educabon. Infrastructure
2030
.Total
Revenues
Source: Bipartisan Commission on Entitlements and Tax Reform; the projected
deficit is the amount by which the vertical bar showing federal outlays exceeds
the horizontal line showing federal revenues.
II. THE AMENDMENT EFFECTIVELY BARS MEASURES TO CLOSE TAX LOOPHOLES
The requirement for a two-thirds majority would apply not only to measures to
raise tax rates but also to measures to cut unproductive tax expenditures that grant
subsidies to powerful special interests. A recent Congressional Budget Office study
found that over half of the corporate subsidies the federal government provides are
delivered through the tax code. Curbing corporate welfare provided through the tax
code is one way to help reduce the deficit, but it would require a two-thirds vote
under the proposed amendment. This would essentially rule out closing corporate
loopholes as a way to help shrink the deficit.
In fact, a substantial share of the federal budget would effectively be placed off
limits for deficit reduction by the constitutional amendment. Provisions of the tax
code that the Joint Committee on Taxation classifies as "tax expenditures" — spend-
ing programs that operate through the tax code by selectively reducing the tax li-
ability of particular individuals or businesses — now cost more than $400 billion a
year. (The corporate subsidy provisions that operate through the tax code are a part
of this total.) This is more than the government spends on Social Security or de-
fense.
In testimony before the Entitlement Commission in 1994, Federal Reserve Board
chairman Alan Greenspan referred to these provisions of the tax code as "tax enti-
tlements" because they entitle those who qualify for them to government subsidies
provided in the form of a tax reduction, Greenspan testified that the tax entitle-
ments should be looked at, along with the spending entitlements, in developing
measures to address the nation's long-term deficit problem.
MOST STATES DO NOT HAVE SUPERMAJORITY REQUIREMENTS
Only six states require the approval of at least two-thirds of their legislatures for
any tax increase. Five other states either require such approval for some taxes but
not others, require a three-fifths rather than a two-thirds vote, or both. Other states
generally require simple majority approval for revenue increases of all sorts.
Furthermore, a 1993 General Accounting Office study of state budget trends found
that a majority of states surveyed had used both spending cuts and revenue in-
101
creases to balance their budgets in recent years. Revenue increases accounted for
about one-third of the deficit reduction these states instituted to balance their budg-
ets during the period studied.
If anything, the proposed constitutional amendment would encourage the spread
of more tax expenditures over time, since such measures would take only a majority
vote to enact but a two-thirds vote to remove. In addition, if Congress passed a se-
ries of tax changes that were thought to be deficit-neutral, but clever, high-priced
tax lawyers and accountants then found ways to convert some of the measures into
tax shelters at greater-than-anticipated cost to the Treasury, it would take a two-
thirds vote to scale the shelters back so the original measure did not produce a net
revenue loss.
Even measures that raised revenue by shutting down opportunities for tax fraud-
would require a two-thirds vote. So would measures to tighten tax procedures so bil-
lionaires who made their fortunes in the United States did not move abroad and
become expatriates to avoid paying their fair share of taxes. So also would measure
to prevent companies from gaining tax advantages by moving plants — and jobs —
overseas.
III. AMENDMENT TILTS TOWARD THE WEALTHY AND THE POWERFUL AT THE EXPENSE
OF AVERAGE FAMILIES AND THE POOR
Most government benefits that low- and middle-income Americans receive come
from government programs, such as Social Security, Medicare, Medicaid, student
loans and grants, unemployment insurance, school lunches, and food stamps. By
contrast, most government subsidies that wealthy individuals and large corporations
receive come through tax subsidies. As a result, a constitutional amendment that
makes it extremely difficult to scale back tax subsidies when decades of deficit re-
duction lie ahead tilts the playing field in favor of the wealthy and powerful over
Americans of average or lesser means.
In addition, such a constitutional amendment would place off-limits even meas-
ures asking program beneficiaries who have high incomes to pay more for the gov-
ernment benefits they receive. For example, measures to "means test" Medicare pre-
miums by raising the premium charges for those at high income levels must rely
on the tax code to collect the increased premiums, since Social Security offices
(which administer Medicare) have no information on beneficiaries' current incomes.
Indeed, when the Republican budget bill reached the House floor last fall, the House
Earliamentarian advised that its provision raising Medicare premiums for those at
igher income levels could constitute a tax increase. Under the constitutional
amendment, measures of this nature would require a two-thirds vote, rendering
them extremely difficult to pass. This makes it more likely that when steps are
taken to restrain Medicare costs, low-income and middle-income beneficiaries will
have to bear a heavier share of the load.
LAW SCHOOL DEAN WARNS OF PERVERSE EFFECTS
In testimony before the Subcommittee on the Constitution of the House Judiciary
Committee on March 6, Samuel C. Thompson, Jr., Dean of the University of Miami
Law School, warned of potential perverse effects from the proposed amendment.
Thompson wrote:
* * * adoption of this proposed amendment would significantly penalize the
American public for mistakes made in the tax legislative process. For exam-
ple, assume that after adoption of this Constitutional amendment. Congress
adopts a flat tax. Assume that it is estimated that the flat tax will reduce
revenues by $100 billion. It turns out, however, that tax lawyers discover
a gaping hole in this legislation and that as a result the revenue loss is
$200 billion, not $100 billion. The Treasury immediately proposes a base-
broadening amendment to close the loophole and to restore fiscal respon-
sibility. The amendment is opposed by powerful special interests who will
prevail if they can convince just 33 Va percent of the members of either the
House or the Senate to vote against the amendment.
The amendment also would be likely to injure the middle class and the poor for
another reason. If the federal government is unable to raise revenue when needs
for public expenditures rise, one likely result will be to shift more of the burden of
raising revenue and meeting public needs to state and local governments. Most state
102
tax codes are regressive (i.e., the taxes they impose consume a larger percentage of
the income of lower-income households than of higher-income households). State and
local governments extract a larger proportion of the revenues they raise from the
middle class and the poor, and a smaller proportion from the affluent, than the fed-
eral government does. If revenue-raising burdens are shifted from the federal to
state and local levels, the share of the overall tax burden borne by the middle class
and the poor is likely to rise.
IV. AMENDMENT COULD LEAD TO OVERLY LARGE CUTS IN SOCIAL SECURITY AND
MEDICARE BENEFITS
Social Security and Medicare benefits need to be restrained in the years ahead.
Both programs are out of long-term actuarial balance, and both contribute signifi-
cantly to the projected increase in the long-term deficit.
But the constitutional amendment would almost certainly lead to larger reduc-
tions in Social Security and Medicare benefits than otherwise would be needed, re-
ductions that could adversely affect the living standards of modest-income or poor
retirees. This would be true for several reasons.
First, by effectively preventing revenues from contributing to deficit reduction de-
spite the need for large-scale deficit reduction in the decades ahead, the amendment
would place a greater deficit reduction load on Medicare and Social Security. These
two programs are projected eventually to constitute half or more of the federal budg-
et, exclusive of interest payments on the debt. If there is no revenue contribution
to deficit reduction, there will have to be a greater contribution from Medicare and/
or Social Security than would otherwise be the case.
Second, the amendment would effectively rule out measures to raise Medicare pre-
miums for those at higher income levels. As noted above, last year's budget rec-
onciliation bill contained such a measure. When it was about to come to the House
floor, the House parliamentarian advised that it could constitute a tax increase. A
House rule that the new Congress adopted in January 1995 requires a three-fifths
majority for measures raising tax rates, so the parliamentarian's advice meant the
budget bill would need a three-fifths vote unless this rule was waived. The House
leadership promptly arranged for a waiver of the rule. But once a supermajority re-
quirement is in the Constitution, no waivers are possible.
Third, the constitutional amendment effectively rules out even small adjustments
in Medicare and Social Security pajToll taxes as part of the effort to bring these
programs into long-term actuarial balance and also help reduce the deficit. Modest
increases of a fraction of a percentage point in the payroll tax would require a two-
thirds vote, thereby making them virtually impossible to achieve. Yet Medicare in
{)articular is so far out of actuarial balance that it is difficult to see how to restore
ong-term balance to the program without some increase in payroll tax contributions
along with other changes, unless the health insurance that Medicare provides is
scaled back substantially.
In a symposium last September, Henry Aaron, Director of Economic Studies at
the Brookings Institution and a well-known expert in this area, observed that the
full $270 billion that Republican Congressional leaders were seeking in Medicare
savings over seven years could be achieved if one combined Republican Medicare
proposals that represent sound policy and yield about half of the $270 billion in sav-
ings with an increase of one-quarter of one percentage point in the employer and
the employee shares of the Medicare payroll tax. This would slightly reduce workers'
wages. (Most economists believe that both the employee and the employer shares
of payroll taxes are effectively borne by employees in the form of wages lower than
they otherwise would be paid. As a result, claims that small increases in payroll
taxes would heavily burden employers and cause substantial job loss have little
merit.) In return, employees would get a Medicare system that had the resources
to provide continually improving health care to their parents and ultimately to
themselves as it took advantage of emerging medical technologies that improve
health and prolong life.
Furthermore, one of several reasons that Medicare and Social Security face long-
term deficits is that over time, a steadily increasing share of employee compensation
is being provided in the form of fringe benefits not subject to the payroll tax, while
a steadily smaller share is provided in wages that are subject to the tax. Modest
measures to shore up Social Security and Medicare by slowing the erosion in the
share of employee compensation subject to the payroll tax would, however, also re-
quire a two-thirds majority.
Even measures to bring all state and local government employees into the Social
Security system — a step nearly all budget analysts favor regardless of whether they
are conservative or liberal, and which would strengthen the Social Security system
103
and reduce the deficit — would require a two-thirds vote, because such measures
would increase federal revenue. Such measures would become virtually impossible
to pass. (For a further discussion of these issues, see an accompanying Center on
Budget and Policy Priorities analysis, "Proposed Constitutional Amendment Would
Make It More Difficult to Address the Long-Term Social Security and Medicare Cri-
ses.")
V. WEAKENING OUR SYSTEM OF DEMOCRACY
Finally, the amendment would gravely weaken the principle of majority rule that
has been at the heart of our system of representative democracy for more than 200
years. As Rep. James Moran has observed, it would partially restore the system we
had in the 1780s under the Articles of Confederation, a system that functioned poor-
ly and was soon scrapped.
The Articles of Confederation required the vote of nine of the 13 states to raise
revenue. At the Constitutional Convention in 1787, the Founding Fathers recog-
nized this was an insurmountable defect and fashioned a national government that
can impose and enforce laws and collect revenue through simple majority rule.
The proposed constitutional amendment would end the ability of a majority of the
American people, acting through their duly elected representatives, to decide wheth-
er they would like to raise more revenues so the federal government can address
needs the majority finds legitimate. The amendment would deny the majority this
right both now and in future generations.
JAMES MADISON ON MAJORITY RULE
The Constitutional Convention rejected requiring supermajority approval for basic
functions such as raising taxes. Supermajority rules had applied in the Continental
Congress. The framers of the constitution had experience with these rules and un-
derstood what they were rejecting.
In the Federalist Papers No. 58, James Madison, one of the key figures in drafting
the Constitution, explained why the Constitution rejected supermajority rule:
It has been said that more than a majority ought to have been required for a
quorum, and in particular cases, if not in all, more than a majority of a quorum
for a decision. * * * [But that would mean] * * * [i]n all cases where justice or
the general good might require new laws to be passed, or active measures to be
pursued, the fundamental principle of free government would be reversed. It
would be no longer the majority that would rule; the power would be transferred
to the minority. Were the defense privilege limited to particular cases, an inter-
ested minority might take advantage of it to screen themselves from equitable
sacrifices to tne general weal, or in particular emergencies to extort unreasonable
indulgences."
Madison equated majority rule with "free government." In his view, freedom con-
sisted not just in protecting individuals from unreasonable intrusion by government,
but also in the right of citizens to have an equal voice in the affairs of government.
According to Madison, a person whose vote is diluted by supermajority rules is not
an equal citizen and so does not fully enjoy the fruits of freedom.
At its core, the amendment is rooted in deep distrust of the ability of the majority
of the American people to make decisions that the authors of the amendment be-
lieve to be ideologically correct. Hence, the amendment seeks permanently to deny
the majority that right. Powerful, well-connected minorities would gain great power
at the expense of the majority. In short, the amendment fundamentally is anti-
democratic.
CENTER ON BUDGET AND POLICY PRIORITIES
April 5, 1996
PROPOSED CONSTITUTIONAL AMENDMENT WOULD MAKE IT MORE DIFFICULT TO
ADDRESS THE LONG-TERM SOCLVL SECURITY AND MEDICARE CRISES
The proposed constitutional amendment requiring two-thirds approval by the
House and Senate to pass any bill that increases federal revenues would make it
more difficult to address the long-term financing problems of Social Security and
Medicare. Those financing problems are serious:
104
• The 1995 report of the Social Security trustees projects the Social Security trust
fund will start running deficits by 2011 and exhaust all of its reserves — that is, be-
come insolvent — by 2030.
• The trustees also project that the Medicare Hospital Insurance trust fund will
become insolvent in just six years, in 2002.
The resulting trust fund imbalances will be so great that there is a strong possi-
bility they cannot be addressed by benefit cuts alone. To do so would likely require
Social Security and Medicare benefit reductions so severe that they go beyond what
the American public would accept. In 1994, a panel of Social Security experts — two
Republicans and two Democrats — testified before the Kerrey-Danforth Entitlement
Commission. The experts unanimously agreed that both benefit restraint and addi-
tional trust fund revenues would be needed.
Some Members of both parties believe that one way to help address the looming
shortfalls in Medicare and Social Security is to scale back benefits for those at high
income levels. For example, the budget reconciliation bill that Congress passed in
November 1995 (and that President Clinton subsequently vetoed) would have in-
creased the premium charged for Medicare Part B (physicians' services) to those at
higher income levels. But measures such as this entail raising revenues. Social Se-
curity offices, which administer Social Security and Medicare, have no information
on beneficiaries' current incomes. The only practical and efficient way to scale back
benefits for high-income beneficiaries is to use the tax system to recover a portion
of the benefits. To attempt to do so without using the tax system would require hir-
ing a legion of new bureaucrats to staff Social Security offices and collect informa-
tion on beneficiaries' incomes.
Indeed, when the Republican budget bill reached the House floor last fall, the
House parliamentarian advised that its increase in Medicare premiums for those at
higher income levels could constitute a tax increase. Since House rules adopted in
January 1995 require a three-fifths vote on the House floor for measures raising tax
rates, the parliamentarian's advice meant the budget bill needed a three-fifths ma-
jority, unless the three-fifths rule was waived. The House Rules Committee provided
a waiver of the three-fifths rule; the bill passed by majority vote but did not receive
a three-fifths vote. If a supermajority requirement is enshrined in the Constitution,
however, no such waivers will be possible. Measures to means-test the Medicare
premium to strengthen Medicare's finances and simultaneously reduce the deficit
will become far more difficult to pass.
Still another example of the problems the constitutional amendment would cause
can be seen by examining a measure recommended unanimously by the Social Secu-
rity experts panel that appeared before the Entitlement Commission. The panel
called for covering all state and local government employees under the Social Secu-
rity system. State and local government employees in certain states are the only
substantial group of workers not now covered by Social Security. Expanding cov-
erage to this group would likely benefit many workers who spend only part of their
careers in the government sector and would improve the balance in the Social Secu-
rity trust fund. But expanding coverage is a revenue increase because the newly
covered employees and their state and local employers would become subject to the
Social Security pa5Toll tax.
Requiring a two-thirds vote for measures such as these would make it far harder
to address long-term Social Security and Medicare financing problems without im-
posing deep benefit cuts on low- and middle-income beneficiaries.
The experience of the Entitlement Commission is instructive in another way as
well. Mostly because of the trust fund imbalances and the growth of other federal
health care entitlements, the Commission projected that by 2030, the deficit would
exceed 15 percent of the Gross Domestic Product (GDP). In a more recent projection,
the Office of Management and Budget has estimated the deficit will be 12 percent
of GDP in 2030 and rise further to 26 percent by 2050. By contrast, the current defi-
cit is two percent of GDP.
To erase deficits of this magnitude, extraordinary actions will be needed in future
decades. Doing the entire job by cutting government programs is likely to require
draconian changes deemeci unacceptable by the public. Indeed, although Senators
Kerrey and Danforth explicitly ruled out revenue increases at the first meeting of
the Entitlement Commission, by the last meeting their view had changed. Their rec-
ommendations contained a number of proposals that would increase revenues to
help tame the long-term deficit, along with very tough reductions in entitlement
benefits. Their revenue proposals included: covering state and local employees in the
Social Security system; capping the tax deduction for employer-paid health insur-
ance; limiting the marginal tax rate against which itemized deductions may be
taken to 28 percent; and adjusting the indexing of tax brackets, the standard deduc-
105
tion, and other elements of the tax code for inflation based on an index other than
the current CPI.
ENDLESS LITIGATION
Finally, the proposal raises difficult issues that would probably need to be re-
solved by the Supreme Court. For example:
• Is a bill that increases revenues in some years but decreases them in others
(and decreases them over a mvilti-year period) unconstitutional if it does not secure
a two-thirds vote?
• What if a bill is thought to reduce revenues but turns out actually to raise
them? Is that law unconstitutional? Are refunds due?
• What if certain "supply side" arguments are right, so that in some cases a cut
in tax rates will increase revenues. Does that render the measure unconstitutional
unless it gets a two-thirds vote?
Senator Brown. Dr. Niskanen with the Cato Institute, one of the
best-known and well thought of think tanks in Washington. We ap-
preciate your coming,
STATEMENT OF WILLIAM A. NISKANEN
Mr. Niskanen. Thank you, Senator Brown. I am privileged to
testify in support of an amendment that would require a super-
majority to increase Federal taxes, and I am honored that Senator
Kyi has chosen to adopt the language and the voting rule that I
have long proposed as part of a balanced budget tax limitation
amendment.
My written remarks address four or five different issues. I want
to focus my oral remarks, really, on two issues. No 1, is the lan-
guage of the amendment. My suggested wording of the tax limit
amendment as section 1 of the proposed amendment is designed to
serve two objectives. No. 2, is the limit is expressed in terms of the
explicit provisions of a tax bill rather than on some analyst's nec-
essarily controversial forecast of whether the bill would increase
total tax revenues.
It is much too much of a burden for an employee of Congress to
have to tell his or her superiors that a specific bill would require
a supermajority vote to pass. Just from an administrative reason,
I think that a limit expressed in terms of revenues is less likely
to be enforceable.
More important, the wording would also provide considerable
stability to the details of the tax code, an objective that is not
achievable by a revenue limit. This wording, one should recognize,
would require a broader coalition to make both good changes and
bad changes in the tax code. For that reason, some advocates of tax
reform may prefer deferring a tax limit amendment until a pre-
ferred tax reform has been approved. I suggest that this would be
a mistake. Broad bipartisan support is a necessary condition of en-
during tax reform and the proposed wording would weed out those
proposals least likely to survive.
Now, from a timing point of view, it will take several years,
maybe half a dozen years or so for final approval of a constitutional
amendment, and I think putting a constitutional amendment in the
start of that process is likely to increase or accelerate the process
of getting tax reform. So I don't regard tax reform and an effective
amendment to be in competition.
Second, on the question of the voting rule, my very strong pref-
erence is to package a tax limit amendment with a balanced budget
106
amendment, and the same voting rule should be required to in-
crease taxes and to increase the debt. If you have a two-thirds rule
on taxes and a three-fifths rule on the debt, for example, you
strongly bias fiscal decisions in favor of increased borrowing rather
than increased taxes. This consideration by itself leads me to prefer
the three-fifths rule that is included in the balanced budget amend-
ment already approved by the House and within a vote or two of
being approved by the Senate.
Third, from a more general point of view, the voting rule on fiscal
totals should be higher, the larger is the difference between the
mean and the median tax burden per household. It is that dif-
ference between the average or the mean and the median tax bur-
den that is the primary origin of the bias in fiscal decisions in a
democratic government.
My recent study of the fiscal choices in a democratic government
lead me to conclude that a three-fifths voting rule would be suffi-
cient to offset the bias resulting from the progressivity of our cur-
rent tax code. Now, in detail, what that means is that a three-fifths
voting rule looks like it would achieve roughly the same outcomes
as if we had a strictly proportional tax system, in which case the
mean and the median tax rates would be the same. So I think that
going beyond a three-fifths rule is not necessary to offset that bias.
In summary, I have changed my mind since I first supported a
two-thirds rule on taxes. I now conclude that a three-fifths rule is
better than a two-thirds rule, as well as I think being more accept-
able politically. Again, I encourage you to consider a tax limitation
amendment as part of a broader balanced budget tax limitation
amendment in which the same supermajority irule should be ap-
plied to both the decisions to borrow and a aecision to increase
taxes. '
Thank you.
[The prepared statement of Mr. Niskanen follows:]
Prepared Statement of William A. Niskansen
Mr. Chairman and members of the subcommittee: I am privileged to testify in
support of an amendment to the Constitution that would increase the congressional
majority necessary to increase federal taxes. And I am honored that the sponsors
have chosen to adopt the language and voting rule that I have long proposed as part
of a balanced budget/tax limitation amendment.
My testimony today briefly addresses four issues:
1. The case for a tax limit amendment should now be obvious. The original design
of our Constitution was to limit the powers of the federal government to those enu-
merated in Article 1, Section 8. Although there was some breach of these limits from
the earliest years, they were remarkably effective for 140 years; in 1929, for exam-
ple, the federal budget was 2.6 percent of GDP, most of which was spent for the
military and the deferred costs of prior wars. Any limits on the spending powers
of the federal government, however, effectively disappeared during the New Deal,
a constitutional revolution that was ratified by a compliant Court. Since then, the
federal budget has grown to nearly 23 percent of GDP, without one amendment that
would authorize the many additional new spending programs. In some abstract
sense, it may be better to limit the spending powers than to limit the total taxing
and borrowing authority, but that genie is already out of the bottle. A balanced
budgetytax limitation amendment may be a second best approach but one that is
now necessary to counter the erosion of the constitutional limits on the spending
powers.
2. My suggested wording of a tax limit amendment, incorporated as Section 1 of
the proposed amendment, is designed to serve two objectives:
107
• The limit is expressed in terms of the explicit provisions of a tax bill, rather
than on some analyst's controversial forecast of whether the bill would increase total
tax revenues.
• This wording would also provide considerable stability to the details of the tax
code, an objective not achievable by a revenue limit.
This wording, one should recognize, would require a broader coalition to make
both good and bad changes in the tax code. For that reason, some tax reform advo-
cates may prefer deferring a tax limit amendment until their preferred tax reform
has been approved. I suggest that this would be a mistake. Broad bipartisan support
is a necessary condition of an enduring tax reform, and the proposed voting rule
would weed out those reform proposals least likely to survive.
3. Two considerations bear on the choice of a voting rule:
• My strong preference is to package a tax limit amendment with a balanced
budget amendment, and the same voting rule should be required to increase taxes
and to increase the debt. This consideration leads me to prefer the three-fifths rule
included in the balanced budget amendment approved by the House.
• In general, the voting rule on the fiscal totals should be higher the larger is
the difference between the mean and the median tax burden per household. My re-
cent study of the fiscal choices of a democratic government leads me to conclude
that a three-fifths voting rule would be sufficient to offset the bias resulting from
the progressivity of our current tax code.
In short, I have changed my mind since my first support of a two-thirds rule on
taxes. I now conclude that a three-fifths rule is better than a two-thirds rule, as
well as being more acceptable politically.
4. The other language of the proposed amendment seems unduly wordy and inele-
gant. My strong preference is to permit Congress to waive the tax rule only upon
a declaration of war. Our government should not engage "in military conflict which
cause an imminent and serious threat to national security" without a declaration
of war. And Section 3 could be replaced by adding the few words "by a roll call vote"
to the end of Section 1. But these are minor issues.
My thanks for your attention. I have been studying, drafting, and promoting tax
limit amendments at both the state and federal level for over 20 years, and I am
pleased to see the interest and increasing support for an effective federal tax limit.
Senator Brown. Thank you.
Senator Kyi.
Senator Kyl. Thank you, and I thank all of the panelists here
for their comments. I especially want to compliment Grover
Norquist. By the way, I will pronounce that name again for the
record. My colleague from Wyoming has on occasion mispronounced
it, but Grover Norquist heads up a group called Americans for Tax
Reform which has put out an incredibly informative and thorough
report called "Growth, Prosperity and Honest Government: The
Case of Constitutional Tax Limitation."
This particular document has a great deal of information about
the impact of taxes on our lives, and the case for an amendment
like this. I really suggest that anyone interested in this subject
needs to read this. My staff has written on the front of this, "This
is the bible on this subject," and I think that my staff is correct
with regard to that.
I also want to compliment my colleague from Arizona, my succes-
sor in the House of Representatives, John Shadegg, who noted at
the beginning of his comments that he was very much involved in
the drafting of the language requiring a two-thirds supermajority
to raise taxes in the State of Arizona. He and his colleagues were
very careful to consider all of the various technical objections, and
in the end I think he agreed with Grover Norquist that it boils
down to whether you are going to focus on the things that make
it hard or you are going to focus upon the need for it. In the end,
as he said, over 70 percent of Arizona voters said, we are not so
108
concerned about the details; it is time to stop raising taxes as much
as you do; let's make it harder to raise taxes.
With regard to the debate about three-fifths or two-thirds, I
guess I would argue that we ought to make both debt-raising and
tax-raising two-thirds rather than three-fifths, but let's leave that
issue aside. The question that I would really like to ask Dr.
Niskanen and Grover Norquist has to do with the difference be-
tween the version of the legislation introduced here in the Senate
and that which the House will be voting on, and then I do also
have a question for Mr. Greenstein at the end.
The Senate language is really very simple and straightforward.
"Any bill to levy a new tax or increase the rate or base of any tax
requires a two-thirds majority." Then there are exceptions for dec-
larations of war, and so on. In the House version that will be voted
on, in an effort to gain wider appeal, the language was watered
down significantly and now focuses on a different concept, the con-
cept of revenue neutrality, a concept which in my mind begins to
permit the worst of all worlds, which is as long as we collect the
same amount of revenue we can redistribute the burden among
those who pay.
In addition to that, of course, are the arguments that three of
you have made that it is going to be pretty difficult to figure out
what is tax-neutral. I think Mr. Greenstein pointed that out as
well. Moreover, sometimes tax cuts provide more revenue. In fact,
frequently that is the case, so trying to figure out whether a pro-
posal is going to be revenue-neutral or not seems to me to be a
pretty difficult task. ;
I wonder if you could all speak to the issue, particularly Dr.
Niskanen and Grover Norquist. Which of^ these two provisions, the
House or Senate provision, is likely to result in greater difficulty
to raise taxes and whether there are difficulties in interpretation,
or relative difficulty of interpretation between the two different
proposals.
Mr. Niskanen. Senator Kyi, I very strongly prefer your version.
It is the same language that I have recommended as part of the
balanced budget tax limitation amendment now for some years. It
does two things. First, is that I think it is very much easier to ad-
minister than a revenue limit. The second is that it does provide
some stability to the details of the tax code. It reduces the oppor-
tunity for redistribution of the tax burden within a given amount
of revenue.
I think both of those objectives are desirable, as the revenue
limit itself puts the head of the Joint Tax Committee or the head
of CBO or somebody in an extraordinary position of having to tell
her boss, I am sorry you have to have a two-thirds vote on this
issue rather than a majority.
Senator Kyl. An extraordinarily powerful position, really.
Mr. Niskanen. What?
Senator Kyl. An extraordinarily powerful position, as well.
Mr. Niskanen. An extraordinarily powerful two-thirds, and I
think that is too much of a burden to place on an employee of Con-
gress. I think it is very much more straightforward to express the
limit in terms of the detailed content of the bill without requiring
a revenue forecast. Second, I think it is desirable in and of itself
109
to provide some stability to the details of the tax code, for the fact
that I recognize that there is an awful lot of junk in the tax code.
There is a very strong case for major tax reform. I think that some
stability in the tax code is desirable in and of itself.
Senator Kyl. Grover Norquist.
Mr. Norquist. I concur. The language that the Senate is propos-
ing that you have proposed is superior to the final version that the
House is talking about. The good news is that this amendment is
not passing today, tomorrow, or next week. Many of the people in
the House of Representatives who will be cheerfully voting for the
Barton-Shadegg-Geren-Hall amendment also share the view that
the original language and language closer to your version in the
Senate is preferable.
I think this is an educational campaign both on Capitol Hill and
around the country, and so I am not as troubled by the less good
language in the House as I might be if I thought this was all going
to be wrapped up next week. We have time to educate the public,
the House and the Senators, and I think it may take us another
election to have in the House and the Senate two-thirds of both
bodies that, when they talk about budgets, think about the family
budget rather than the Federal budget and when they talk about
taxes think of it as an outgo and a cost rather than a revenue and
income.
Senator Kyl. Thank you. Mr. Chairman, I see my time is ex-
pired. May I just make two quick comments? No. 1, I know that
Representative Shadegg shares the view that if we could it would
be better to go with the Senate version, but in order to bring this
matter to attention and get it to a vote was willing to make some
concessions at least for now. But at the point in time when we be-
lieve this is really going to be the final language, I hope we get
much closer to the Senate version.
Mr. Chairman, I just wanted to make a point, and Mr. Green-
stein certainly could respond to this if he wishes, but I would like
to make one point with respect to his comments. His very begin-
ning comment was that in order to ensure fiscal soundness of our
budget, there should be a combination of spending cuts and reve-
nue increases.
I know that it is almost impossible for people to say "tax in-
creases." Tax increases, of course, are not the same as revenue in-
creases. In fact, by reducing taxes, we can frequently increase reve-
nues, as Governor du Pont pointed out. I think that the primary
point, though, and the issue that you raised regarding revenue
neutrality does argue more for the Senate version as opposed to the
current House version of language if one wanted to achieve this ob-
jective by constitutional amendment. Would you agree with that?
Mr. Greenstein. Actually, I would not.
Senator Kyl. You prefer the revenue neutrality that
Mr. Greenstein. I share the concerns that Grover Norquist and
particularly Bill Niskanen made, and you also, about the revenue
neutrality and the scoring issues, and I think I mentioned some of
that in my testimony. I must say I am even more troubled by the
Senate language, and this is not on deficit reduction grounds but
on tax policy grounds.
110
What I don't understand, for example, is why would one want to
have a two-thirds limitation for something like the 1986 Tax Re-
form Act. I happen to think the 1986 Tax Reform Act, while far
from perfect
Senator Kyl. Now, that passed with a two-thirds majority in
both the House and Senate, the 1986 Tax Reform Act, but go
ahead.
Senator BROWN. To that point, it was 92.6 percent in the Senate
and 74.5 percent in the House.
Mr. Greenstein. But 1986 was an unusual constellation; every-
thing came together. It would be harder in the future to pass other
revisions in the tax code that are deficit-neutral and that make im-
provements in the
Senator Kyl. But it doesn't have to be deficit-neutral. That is
really the point I was getting at. Under the Senate language, there
is no deficit neutrality concept. See, that is the problem with the
current House version.
Mr. Greenstein [continuing]. Let me restate my point.
Senator Kyl. All right.
Mr. Greenstein. The 1986 Tax Reform Act or other things like
that — I am a big fan of broadening bases, reducing the number of
special treatments of this or that and then you set the rates where
you want to set the rates. The 1986 Act broadened the base and
lowered the rates. I think that was the right way to go. I am not
a flat tax fan, but I like the idea of broader bases and lower rates.
Whenever you broaden the base, you gore somebody's ox.
In 1986, we did have an unusual constellation of events with
both parties aligning on that. I don't know how many times that
will happen again in the future and I just have concerns about re-
quiring two-thirds, a much higher hurdle, to do improvements of
that nature in the tax code where the bottom line — in the way that,
you know, you and others here at the table look at it, the bottom
line is that one is not increasing the tax take from the public. One
is trying to make the tax code fairer and more efficient, and I have
difficulty in requiring a supermajority rather than a majority for
proposals to make the tax code more efficient and fairer.
Senator Brown. Dr. Niskanen.
Mr. Niskanen. I think you should recognize that there is a very
strong complementarity between tax reform and a supermajority.
Tax reform unfortunately has become a bit of a bait-and-switch op-
eration. The reformers come along and say let's broaden the base
in order to get rates down, and then people like Mr. Bush and Mr.
Clinton come along and say, what a great temptation, we have
broadened that base, let's just tweak the rates a little bit.
Senator Kyl. Upward.
Mr. Niskanen. And that has made people skeptical, if not cyni-
cal, of tax reform. Both Mr. Armey and Mr. Gephardt have rec-
ommended that special voting rules accompany their tax reform
proposals. Armey has proposed a supermajority of Congress. Gep-
hardt has recommended a national referendum as necessary to
override it. So I think that a supermajority is necessary to lock in
tax reform so that it is not eroded away within a matter of a few
years after the reform.
Ill
The top marginal rate in 1986 tax law was 28 percent. It is now
about 42 percent. We have increased the top marginal rate 50 per-
cent in 10 years. That kind of increase would not have been pos-
sible if a supermajority had been in place. The Clinton tax bill
passed with one vote, not two-thirds, and we would still have some-
thing much closer to the 1986 tax law if we had a supermajority
requirement in place.
Senator Brown. Thank you. I am just going to take one question.
Mr. Greenstein raised a very important point when he talked about
the budget crisis that is out in front of us, not just present, but out
in front of us, and what I thought was a plea for flexibility in de-
veloping an answer to it.
It used to be that we lived in a world where the very wealthy
in this country had servants and mansions, where there were huge
concentrations of wealth. Obviously, you still have people like Bill
Gates and a variety of families that are very wealthy, but my im-
pression is that we are in a different world. The style of concentra-
tion of wealth that existed around the turn of the century clearly
doesn't exist today.
We have a tax code that used to have over half the Federal in-
come tax come from the top 10 percent income category and the
bottom half in terms of income paid something under 10 percent.
Actually, that has changed. As Dr. Niskanen has implied, with the
change in rates, now the top 10 percent pays significantly more
than 50 percent of the Federal income tax and the bottom 50 per-
cent pays significantly under 10 percent.
My impression is the 42-percent rate that you talked about, doc-
tor, is accurate, but does not include Social Security, which would
raise that.
Mr. Niskanen. The top marginal income tax rate is 39.6 and the
Medicare tax rate applies to all earnings at any level, and that is
another 2.9. So we are in the 42-percent range, including the in-
come tax and the Medicare.
Senator Brown. In addition, of course, you would have State
taxes.
Mr. Niskanen. That is right. Federal alone is in the 42-percent
range.
Senator Brown. So when you add them together, you are prob-
ably at least 50 percent, depending on the State. We are now in
a world market that includes not just goods and services, but peo-
ple as well. I give you that background because you may want to
object to the premises from which I approach this. How much more
can you get out of the upper-income groups in this country? What
is our ability to shift tax burden further, or are further tax in-
creases simply going to come out of the hide of the middle class?
Mr. Greenstein. I think the unfortunate reality, looking at the
long-term fiscal forecast, is that both on the benefit and the reve-
nue side I think everybody at all income levels is going to have to
sacrifice a bit more. In terms of the income distribution, you are
right that it is not as skewed as at the turn of the century. It is
more skewed than it was 15 or 20 years ago.
The latest CBO figures that CBO compiled last year showed that
in 1992 about the top 20 percent of the population had about 50
percent of the income and that was up from where it had been 20
112
years before. I should hasten to say this doesn't have anything to
do with Ronald Reagan or any policies here. It is basically trends
in the international economy.
Senator Brown. Well, on that point, let me raise a question be-
cause you maybe can answer it. My impression is that those num-
bers are phony as hell.
Mr. Greenstein. No.
Senator Brown. Let me tell you why. They specifically do not in-
clude noncash benefits. Now, if you have a society that provides a
wide range of welfare assistance to people and they do a significant
portion of it in noncash benefits so that a big portion of the income
from the poor is not counted, you are going to have a change in fig-
ures because you are not calculating or counting the majority of the
income that the poor get in this country.
Mr. Greenstein. There are subsequent analyses that do adjust
for non-cash benefits and there are changes, but they are relatively
modest. But let me not get into a quibble on that.
Senator Brown. But when you count the non-cash benefits,
doesn't it change the numbers you just gave us?
Mr. Greenstein. Not as much as you would think, but let me
not get into a quibble on that and get really to the point you are
addressing. Do I favor significantly higher marginal tax rates on
people at high income levels? No, but I do think that we need to
take a look both in the individual and in the corporate income tax
and in other parts of the code at areas where the base can be
broadened. I think there are areas that probably disproportionately
affect higher-income people more than middle-income people where
the base can be broadened.
Having said that, I think that in the middle-income area we also
need to look at things like Medicare premiums. I happen to favor
the kinds of changes in Medicare premiums that were in the legis-
lation that you all put through last year. I think we have to do all
of those things. We have to look at the programs for the poor as
well, but let me give you an example that illustrates my concern.
Under the constitutional amendment, if we were to say we think
that one of the Government spending programs that provides child
care assistance to lower middle-income families, people at $10,000,
$20,000, $30,000, somewhere in that range, have too much money
and we want to cut them back, a majority vote. If we said we don't
think that we need to subsidize the child care of people at $200,000
a year and we are going to phaseout the dependent care tax credit,
which is a child care subsidy delivered through the tax code for
people at that income level, something Senator Grassley has pro-
posed in the past that I am in favor of, that would require two-
thirds.
Both of those are reductions in Government child care subsidies.
One subsidy is delivered .through the tax code, one subsidy is deliv-
ered through a spending program. I think they both should require
the same number of votes. That is the kind of point I am trying
to make.
Senator Brown. A very helpful point.
We will take a brief recess now and when we reconvene at 1
o'clock, Senator Kyi will Chair the hearing. We appreciate this pan-
el's comments very much.
113
Senator Kyl. Mr. Chairman, do we have just 2 minutes?
Senator Brown. Yes, we do have 2 minutes and you have the
Chair.
Senator Kyl [presiding]. Thank you. I really would appreciate
that. First of all, I just wanted to make the point that I — oh, I see.
I have the Chair if we have 2 minutes. I understand.
Senator Brown. You may have much more.
Senator Kyl. Let me take a quick pause then to converse with
you, but I would like to get back to the panel for one thing.
[Pause.]
Senator Kyl. The next panel starts at 1 o'clock and it relates to
a somewhat different subject and therefore I did want to conclude
with this. I have just always found it difficult to categorize letting
people keep more of the money that they earned as a Government
subsidy. I understand when you collect money and distribute it to
somebody else — let's say that you collect money from Mr. Green-
stein and then give it to a farmer not to grow a crop. That is a sub-
sidy.
If the Congress decides that Mr. Greenstein and his family would
be better off spending their own money rather than the Govern-
ment taking it, I fmd it an astonishing view that that is a subsidy.
So, I think, here we need to be very, very careful about the lan-
guage here. I don't know whether you would disagree with that,
but you did, both in the report and in your testimony, refer to that
as a subsidy.
Mr. Greenstein. I would disagree with that. I think many econo-
mists would, and I think actually people like Alan Greenspan, who
referred to some of these as tax entitlements before the Entitle-
ment Commission, would. Let me very succinctly try to explain
why.
I understand your point, but let's suppose a particular group of
individuals comes to Washington and wants a subsidy. Everybody
in its group is supposed to get $1,000 and it can write a law one
way that the Government sets up a program and it gives them
$1,000 — call it a farm subsidy, a poverty program, whatever it may
be, a student loan — or it can write its program, its legislation, an-
other way and everybody still gets the $1,000 subsidy for the same
purpose to be used in the same way, but instead of the Government
giving you a check, you subtract $1,000 from the taxes that would
otherwise be owed by everybody else in your circumstance.
Most economists would view both of those as being a $1,000 Gov-
ernment subsidy. One way it is written into the tax code and in
another way it is written into a tax program, but it is the same
effect. That is the point I am trying to make.
Senator Kyl. I submit that conclusion, that attitude, that defini-
tional approach is precisely what is wrong with the Federal Gov-
ernment today. Bureaucrats and economists and politicians have
gotten into the habit of thinking that they are doing you a favor
when they let you keep more of the money that you earned, and
even categorize that definitionally as the same thing as — well, you
did; you said it is the same either way, whether you let people keep
more of their own money by not taxing it or you take it from some-
one else and give it to them.
Mr. Greenstein. No, no.
114
Senator Kyl. You said both of those are subsidies.
Mr. Greenstein. Let me clarify.
Senator Kyl. Please do.
Mr. Greenstein. Is any reduction in taxes a tax subsidy? Of
course not. The Joint Tax Committee and the Congressional
Budget Office have long had a specific definition of a tax subsidy.
When you lower the rate, you don't give somebody a tax subsidy.
What we are talking about here is special treatment to particular
categories of people so that they pay less than they otherwise
would. I can get, if you would like, for the record the specific
Senator Kyl. Well, no. I understand the point that economists
have to have a definition, but I still argue with the premise that
when you allow families with children to keep more of their income
that that is a subsidy. This is just a definitional argument that you
and I have.
Mr. Greenstein. I am not saying all subsidies are bad, but I just
would make the point that under its new director, June O'Neill, the
Congressional Budget Office issued a study last summer on busi-
ness subsidies and it classified as business subsidies both a number
of direct spending programs, like the market promotion program
and others, and a series of tax expenditures. That is what I am
talking about. I am not talking about raising or lowering the cor-
porate tax rate. I am just following
Senator Kyl. You are talking about the $500 child tax credit, for
example.
Mr. Greenstein. Following the definition of people like June
O'Neill at the Congressional Budget Office.
Senator Kyl. Which includes the $500 child tax credit.
Mr. Greenstein. Not as a business subsidy.
Senator Kyl. No, but it is defined as a subsidy under that defini-
tion.
Mr. Norquist.
Mr. Norquist. This is an important debate that goes back a
number of years. I remember in the late 1970's Teddy Kennedy
started explaining that tax expenditures where over time the Gov-
ernment didn't take your money — that if a mugger didn't notice
that you had $10 in your other pocket, he had just given you the
$10 somehow when he took ever5rthing else. That is, again, the dif-
ference between people who stand in Washington and look at ev-
erybody out in the provinces as targets to be looted and people who
live in the country who want to keep and maintain their own in-
come.
The argument that if we don't take it from you, we gave it to
you, is exactly what is wrong with this city and why there is such
a huge distinction between the Government saying we are not
going to take 80 percent of your income — that is not a gift of 80;
that is a taking of 20. This is a procedural and a technical and a
definitional debate, but it is a debate that comes up, constantly
thrown up by those who argue against tax cuts and who think that
tax increases and spending restraint are the same because they
have the same effect on Washington, but not the same effect on
people.
Mr. Greenstein. I don't recognize that as a characterization of
what I am saying at all.
115
Mr. NORQUIST. Of course, he doesn't.
Senator Kyl. I appreciate the difference in viewpoint here.
I am going to conclude this hearing by reading something from
the report that the Americans for Tax Reform put out which I
think expresses the philosophy of many of the supporters of this
amendment that raising taxes is not a way to ensure greater wel-
fare. This goes directly — and this will be another disagreement that
you and I have, Mr. Greenstein, that it is not necessary or even de-
sirable to raise taxes to deal with the problems that we have; that,
as a matter of fact, there is an optimum level of taxes which we
have far exceeded and that at the optimum level we would have
all been far better off.
So to your point that we are all going to have to suffer a bit
more, there is probably nothing in your comments that I disagree
with more than that. Americans don't have to suffer in order for
us to get our budget deficit problem under control. As a matter of
fact, we have a wonderful win/win opportunity here to both cut
taxes, tax rates, and also achieve greater prosperity, including Gov-
ernment fiscal responsibility.
I am just going to read a bit from this report.
Socisd welfare and economic growth would be maximized if Government revenue
was one-quarter or less of the gross domestic product, in contrast with its present
level of more than one-third of GDP. Beyond this point, any resources consumed by
the Government impose more costs on the economy than benefits. Researchers have
found that slow-downs in the rate of economic growth correlate with the growth in
the Government's share of the gross national product. Estimates from this research
show that Government maximizes economic growth when it is between 15 and 25
percent of GNP. Currently, total government taxation in the U.S. is 31 percent of
GDP, while total government spending is 34 percent of GDP. For every dollar of
Federal spending growth curtailed, the private sector will expand by $1.38 in the
same year. Over 7 years, economic output would be $2.45 larger for each dollar of
Federal spending restraint. If the tax burden had been at the optimal rate since
World War 11" — that is to say 25 percent instead of 31 or 34 percent — "economic
growth would have averaged about 2 percent higher per year and the average Amer-
ican family would have about twice as much in real income as it actually has today.
Then skipping down to the final two sentences:
If the U.S. had been spending at its optimal rate, between 15 and 25 percent of
GNP, since World War II, real GNP in 1989 would have been $13.6 trillion instead
of $6.2 trillion. The average American family would have twice as much real income
as it has today.
I think this is an extraordinarily powerful argument for the prop-
osition that the Government, the economy and American families,
all three, would be better off with lower taxes, and that is one of
the reasons why we want to make it harder to raise taxes through
this constitutional amendment.
I very much appreciate the testimony of all four of the panelists.
Mr. Greenstein, you were outnumbered here, but we appreciate
your testimony, and we certainly appreciate the support of John
Shadegg, one of the cosponsors of the amendment in the House.
Good luck with your vote later on this afternoon.
Now, this hearing will recess, to be reconvened at 1 p.m. this
afternoon.
[Whereupon, at 12:37 p.m., the hearing was adjourned to recon-
vene at 1 p.m., this same day.l
[The subcommittee reconvened at 1:24 p.m., Hon. Jon Kyl presid-
ing.!
116
Senator Kyl. The hearing of this subcommittee of the Senate Ju-
diciary Committee will begin now with the statement of Senator
Paul Coverdell of Georgia regarding the subject of Senate Joint
Resolution 8, a proposed amendment to the Constitution to prohibit
retroactive increases in taxes.
Senator Coverdell, if you are ready, proceed.
STATEMENT OF HON. PAUL D. COVERDELL, A U.S. SENATOR
FROM THE STATE OF GEORGL\
Senator Coverdell. Mr. Chairman, I appreciate the opportunity
to appear before the committee, and the committee and its staff for
facilitating this hearing. In advance, I want to thank the panelists
that are prepared to testify on it; in particular, Joseph Schmitz of
Patton Boggs; Dr. Roger Pilon, director of the Center for Constitu-
tional Studies, of Cato; Ms. Joanne Dixon of Jirard, GA, a constitu-
ent and friend; and also Mortimer Caplin of Caplin and Drysdale,
Washington, DC.
As the Chairman knows, we have just returned from a presen-
tation on the floor of the U.S. Senate where for the better part of
the morning we have been talking about the unbelievable accumu-
lation of burden that has come to fall on the average working fam-
ily in America and the average business in America. We had Sen-
ator after Senator talk in various forms about the scope of this bur-
den.
I, Mr. Chairman, outlined an average family in my State which
earns about $40,000. You can argue it a couple thousand one way
or the other, but it is about $40,000 a year and they have two chil-
dren and both spouses work. By the time they have paid their Fed-
eral taxes, their State taxes, their share of the national debt, inter-
est payments that are pushed up, FICA, and their share of the reg-
ulatory burdens, it is about 50 percent. I think Thomas Jefferson
would be rolling in his grave at the concept that 50 percent of the
fruits of labor are being confiscated by one government or govern-
ment policy, leaving the fundamental instrument of American soci-
ety on which we depend so much to raise, house, feed, educate, pro-
vide for the health of our country so marginalized, so pushed to the
wall, so barely able to carry out the duties upon which we depend
so much as a Nation.
Mr. Chairman, in my judgment, the Government has had a more
profound effect on the behavior of the American family than any
other device or instrument, including Hollywood. I believe anything
that could remove half the resources of a working family has to be
pointed to as the No. 1 behavioral culprit. I think it has unalter-
ably changed the way the family unit functions.
In the course of our discussion this morning, Mr. Chairman, we
talked about the most recent addition to this burden, which was
the tax increase imposed by the Clinton administration in August
1993. It is the largest in history, $250 billion-some-odd, but as I
closed my remarks, I mentioned that we were having this hearing
here today and that I thought the most egregious piece of that tax
increase was the retroactive nature of it.
For the first time in history, Mr. Chairman, the tax increase
which occurred in August 1993 reached all the way back to the
first day of the current administration and then went beyond and
117
reached into a former administration. I mentioned that not even
the Russian constitution now would allow that.
Mr. Chairman, it is just fundamentally and morally bankrupt, in
my judgment, for an American family or an American business on
the first day of the year not to understand what the rules of the
road are. I think our Government, not only in the area of taxation,
but throughout its behavior has increasingly and with more fre-
quency been willing to change the rules of the road midstream, and
in this case after the fact, leaving it most difficult for anyone to
sensibly plan about this most important aspect of their lives; i.e.,
their financial resources.
Now, throughout the course of this debate, we always hear con-
siderable intellectualizing about the burden it would place on the
Congress if it lost the flexibility to correct a mistake or to otherwise
alter the behavior retroactively. To be candid, Mr. Chairman, I
think the American family and citizen is a higher device to predict,
their family, than the foibles of the Congress.
I think to argue that we must have this device and capacity to
protect from error or misuse by citizens because we didn't see a
loophole this egregious, that they have a higher standing than we,
and that once we set the rules, their welfare should come first and
ours second, not the reverse.
Mr. Chairman, I won't dwell on this long, but I would ask con-
sent of the Chair that my formal remarks be put into the record
and I will only close with one point, and that is that without citing
all the reasons of ex post facto and other conditions in the Constitu-
tion, I believe the Forefathers never meant for there to be retro-
active taxation. I know Jefferson would not have sanctioned it.
They say ex post facto doesn't apply to civil circumstances, but, of
course, if you don't pay your taxes, it is criminal.
I believe the Constitution is replete, at least in three separate oc-
casions and instances, with direction that would suggest very
strongly that the concept of retroactive behavior, particularly in the
form of taxation, is wrong and should never have been a piece of
our law, and that is what this constitutional amendment is meant
to clarify, since we in our courts have seemed to develop so much
difficulty in understanding what the direction of the document was.
I appreciate the opportunity to be with you today and I look for-
ward to joining you, if I may, in listening to the testimony.
Senator Kyl. Thank you. Senator Coverdell, may I ask you just
a couple of questions?
Senator Coverdell. You sure may.
Senator Kyl. Were there not more than one feature of the 1993
tax code that were retroactive? There were 2 or 3 provisions that
were made retroactive, were there not?
Senator COVERDELL. That is correct. I was referring, Mr. Chair-
man, to the general procedure. It affected several elements of the
tax code, but, in essence, it was a process by which you reached
back, as I said, even beyond the sitting administration or elected
government into a former government.
Senator Kyl. This amendment is about the simplest that I have
ever seen. As a matter of fact, it is less than 2 lines long, "No Fed-
eral tax shall be imposed for the period before the date of enact-
ment of the tax."
118
Senator COVERDELL. That is correct.
Senator Kyl. It is hard to find fault with that, and I can't imag-
ine that the Founding Fathers would have found fault with it, nor
would they have had any trouble putting it in themselves if they
could have foreseen what later Congresses have done.
I very much appreciate your statement, and please join me up
here so that you may have an opportunity to visit with the remain-
ing panel.
Senator Coverdell. Mr. Chairman, I would be glad to do it. I
see you are wearing a rather unique button relating to an earlier
portion of the hearing, and I want to commend the Chairman for
the extensive work in the arena of taxation and for the proposal
you have put forth requiring an extra burden on the implementa-
tion of taxation.
I believe when you look at the types of procedures which require
a higher burden, I can't think of one that is more appropriately
placed on that pedestal, particularly in this day and time, than the
taxing of the American citizen and family. I commend you for your
work.
Senator Kyl. Thank you. Senator Coverdell. Please join me here.
[The prepared statement of Senator Coverdell follows:]
Prepared Statement of Senator Paul D. Coverdell
Mr. Chairman, I want to thank you and your staff for faciUtating this hearing to
discuss S.J. Res. 8, a proposed constitutional amendment to prohibit retroactive tax-
ation by the federal government. I know how difficult it is to assemble this portion
of the legislative process and how busy you have been with all the matters you are
addressing in the 104th Congress.
I also want to thank the witnesses who have agreed to testify on S.J. Res. 8. They
are "citizens at large" who have taken time from their routine and regular schedules
and business to come and help our government work. I am particularly grateful for
their presence.
I believe the American people in overwhelming numbers understand that retro-
active taxation or, in other words, changing the rules midstream — after the fact —
is wrong. I just do not believe you can intellectually defend the idea that a govern-
ment such as ours or any government can arbitrarily step forward and change the
rules under which our citizens have planned their lives. I do not believe you can
find an audience in any area of the country, unless it is an intellectual exercise in
an academic setting, that would find any agreement in such an idea.
When we put it in the context of a citizen, a family, or a business trying to put
their lives in order, they have a right, in my judgement, to expect that what we
have told them about the rules they are expected to follow and to expect we are
not going to change them. I take the argument beyond taxation to many other con-
gressional actions. With increasing frequency, we are destabilizing our communities,
our families, and our businesses because of our tendency to change the process for
which they are unable to prepare.
We all know the Constitution is the ultimate document governing us. Changes to
it should not be attempted capriciously. I believe it already speaks to the question
of retroactive taxation. There has been an erosion that has occurred within our judi-
cial system. Over the years, it has diluted considerable constitutional language deal-
ing with the question of retroactive taxation. In my judgement, there are at least
three different statements made in the Constitution dealing with retroactive tax-
ation. The drafters of the Constitution stated in Article I, Section 9, that no ex post
facto law shall be passed.
It was not until the case of Calder v. Bull in 1798 that it was decided this provi-
sion was of limited application and only dealt with criminal law, not civil law. I am
not sure that our forefathers really meant it in that way. I think ex post facto means
ex post facto, and they were speaking to the idea that any law should not be
changed after the fact.
Of the Supreme Court decision in Calder, Thomas Jefferson — I think we can con-
sider him a preeminent authority — wrote, "ex post facto laws are against natural
119
right * * * [and] are equally unjust in civil as in criminal cases." I think our fore-
fathers did not intend for this cleavage to occur.
The Founders provided a second protection against retroactive taxation in the Due
Process Clause of the Fifth amendment to the Constitution. The clause prohibits the
general government from taking property without providing due process of law. I
consider the financial wealth of a family or a business as "property," and I do not
believe, nor do I believe the Founders intended for due process to be set aside in
the case of taxation. Common sense would suggest that it should not have been.
Most recently, in U.S. v. Carlton, the Supreme Court confirmed it will not prohibit
the enactment of retroactive tax legislation under a due process analysis. So, again,
we have an ongoing erosion by the Courts of the principle I believe is established
firmly. This concept has been eroded to the point where it needs reinforcement, and
clarity needs to be re-established in the Constitution.
A final Constitutional argument against last year's retroactive tax, not all of them
but certainly last year's, is that it constituted a Bill of Attainder within the meaning
of Article 1, Section 9. It is an act of the legislature punishing specific individuals.
If you go back to the debate of the retroactive tax, it is absolutely without question
that the law was driven at a specific sector of our society, that they could be set
aside for unequal application of the law. I find to be inexcusable and inappropriate.
So what I hope to address here are two points. First, the Constitution already has
embraced the idea of retroactive taxing. In three different provisions of the Con-
stitution, it comes up to the idea that these changes retroactively are not right and
should not occur in our country. Second, the other point I make, in light of the fact
that it is already dealing with the subject, the question of whether or not this Con-
stitutional amendment has standing is answered in the Constitution itself, because
the Constitution already moves to the subject. It is not silent on the subject. It rec-
ognizes the importance of the subject and, in my judgement, tried to deal with it,
not foreseeing the erosion that would occur because of our court system.
Again, Mr. Chairman, I want to thank you for calling the hearing and the oppor-
tunity to present testimony.
Senator Kyl. We will next go to panel No. 5 of today's hearings —
Joseph Schmitz, of Patton Boggs, a law firm in Washington, DC;
Dr. Roger Pilon, director, Center for Constitutional Studies at the
Cato Institute here in Washington, DC; Joanne Dixon, a home-
maker from Jirard, GA; and Mortimer Caplin, of Caplin and
Drysdale of Washington, DC. We welcome all of you to this hearing
today. We are missing Mr. Caplin. Well, when Mortimer Caplin ar-
rives, we will have him join us at the table.
Mr. Schmitz, would you like to begin and give your testimony,
please, first?
PANEL CONSISTING OF JOSEPH E. SCHMITZ, PATTON BOGGS,
WASHINGTON, DC; ROGER PILON, SENIOR FELLOW, AND DI-
RECTOR, CENTER FOR CONSTITUTIONAL STUDIES, CATO IN-
STITUTE, WASHINGTON, DC; MORTIMER CAPLIN, CAPLIN
AND DRYSDALE, WASHINGTON, DC; AND JOANNE DIXON, RE-
TIRED FARMER, JIRARD, GA
STATEMENT OF JOSEPH E. SCHMITZ
Mr. Schmitz. Thank you. Senator Kyl. First of all, I would like
to thank Chairman Brown for inviting me to testify today.
Three years ago, I represented the Washington Legal Founda-
tion, Chairman Hatch, Speaker Gingrich, and 40 other Members of
Congress in an amicus curiae brief in the retroactive tax case
called United States v. Carlton. For those who suggest today that
it would not be wise to amend the Constitution or otherwise to
adopt legislation that would prohibit retroactive application of a
tax increase, my response is not only that our Founding Fathers
would favor such a prohibition, but that they included such a pro-
120
hibition in the Ex Post Facto and the Due Process Clauses of the
Constitution.
I dare say the most revolutionary of our Founding Fathers might
have even tried to lynch anyone for suggesting the need for debate
over the issue of retroactive taxation. The Boston Tea Party, don't
forget, was about taxation. Of course, before penalizing or taxing
anyone for suggesting such a debate, the revolutionaries who
drafted our Constitution and Bill of Rights would have provided
the guilty party at least advanced notice and an opportunity for a
hearing.
The Supreme Court in its 1994 Carlton decision ignores both the
ex post facto and the procedural due process arguments raised by
42 Members of Congress in their amicus brief, instead dwelling on
a substantive due process claim which the lower court in California
had actually sustained. During oral argument, when asked by Jus-
tice Stevens whether his client's due process claim was procedural
or substantive, counsel for Carlton responded, "To be perfectly hon-
est, Your Honor, I have never been able to figure out the dif-
ference." The Supreme Court ruled against Carlton 9 to 0.
While rummaging through a pre-New Deal legal lexicon earlier
this month, I discovered what some might regard as a novel defini-
tion of "due process of law," as explained by the U.S. Supreme
Court in 1913. The case arose out of a retroactive change in the
amount of time required in Puerto Rico before a fraudulent occu-
pier of private property could claim title to the property he was oc-
cupying.
The Supreme Court in that case explained, "Whatever else may
be uncertain about the definition of the term 'due process of law,'
all authorities agree that it inhibits taking of one man's property
and giving it to another contrary to settled usages and modes of
procedure and without notice or an opportunity for a hearing."
By the way, the Supreme Court decided Ochoa, which is the
name of this case, 4 months after ratification of the Sixteenth
Amendment which authorized Congress, "to lay and collect taxes
on incomes without apportionment among the States."
On tax day 1996, 83 years after the States ratified the Sixteenth
Amendment, and after the Supreme Court decided the Ochoa case,
whatever else may be uncertain about the definition of the term
"taxation," all authorities would have to admit that Federal tax-
ation today involves wealth transfer. Simply stated, modern Fed-
eral taxation involves taking money from certain citizens and giv-
ing that money to others. In 1913, the Supreme Court concluded
that engaging in that process retroactively violates "fundamental
principles known wherever the American flag flies." Today, these
fundamental principles are still at the heart of the debate over ret-
roactive taxation.
Before discussing how the Supreme Court addressed retroactivity
in Ochoa and then retroactive taxation in Carlton, I would like to
delve a bit deeper into the history of due process to a time when
a certain Roman emperor was having problems with, among other
things, raising revenues.
Two thousand years ago, Emperor Caligula was having difficulty
balancing the budget of the Roman Empire. When his coffers were
nearly empty, Caligula would raise additional revenues by writing
121
new laws in small characters and posting them upon high pillars.
When the wealthy citizens of Rome failed to heed these new laws,
Caligula reportedly imprisoned them, killed them and, of course,
confiscated their wealth. By the way, Caligula was assassinated in
the year 41 A.D., in his fourth year as emperor and at the ripe old
age of 29.
Shortly before the American Revolution, Sir William Blackstone
published in England a comprehensive treatise on English law
known as Blackstone's Commentaries, in which Blackstone cites Ca-
ligula's method of raising revenues as an example of how not to no-
tify the people of a new law, such notification, according to Black-
stone, being an essential element of any new law.
Immediately after disparaging Caligula for ensnaring his own
people through illegible laws, Blackstone writes, "There is still a
more unreasonable method of notification than this, which is called
making the laws ex post facto." All laws, according to Blackstone,
"should be therefore made to commence in futuro and be notified
before their commencement."
The drafters of the Constitution apparently read Blackstone well
and were not fans of Caligula. They included in Article I of the
Constitution two explicit prohibitions against ex post facto laws,
one for Congress and one for the States. Whatever else may be un-
certain today about the drafters' definition of the term "ex post
facto" we do know that retroactive legislation generally was ab-
horred not only by Blackstone, but by most, if not all, English-
speaking proponents of the rule of law in the 18th century.
For instance, James Iredell, later a Justice of the U.S. Supreme
Court, argued in 1787 during the constitutional debates that, "Ex
post facto laws have been the instrument of some of the grossest
acts of tyranny that were ever exercised."
In 1798, however, the Supreme Court construed the constitu-
tional prohibitions against State, as opposed to Federal ex post
facto laws as applying only to criminal type laws. That decision,
Calder v. Bull, involved a probate dispute in Connecticut and
turned on the historical fact that the Connecticut Legislature, like
parliament and unlike Congress, was authorized to reverse judicial
decisions.
Almost 200 years later, the Federal Ex Post Facto Clause has
never been independently construed by the Supreme Court or by
any other court, to my knowledge. The Federal Ex Post Facto
Clause has always been lumped together with the State prohibition
and accordingly limited to criminal laws in accordance with the Su-
preme Court's 1798 decision regarding Connecticut probate law.
But failure to pay Federal taxes in the 20th century, as Senator
Coverdell aptly pointed out, is a crime. Section 7203 of the Internal
Revenue Code, for instance, makes it a misdemeanor to willfully
fail to pay a Federal tax, the penalty for which is up to $25,000
for individuals, $100,000 for corporations, and/or imprisonment for
up to a year. I dare say had I or anyone else willfully failed to pay
retroactively increased income taxes in 1993, I and whoever else
might have done that could have gone to prison for a year. Accord-
ingly, the constitutional prohibition against ex post facto laws, even
if restricted to criminal type laws, should apply to retroactive Fed-
eral tax laws.
122
I see my red light is on.
Senator Kyl. Yes. We have a 7-minute rule today and if you
could please try to summarize, of course, all of your statement will
be included in the record and we will have some questions which
might draw out additional aspects of your testimony. Thank you.
Mr. SCHMITZ. Let me just try to summarize quickly. Carlton, the
Supreme Court's case in 1994, completely ignored both the ex post
facto and the procedural due process arguments raised by the 42
Members of Congress. They only addressed the substantive due
process claim raised by Carlton. So, theoretically, another case
might actually come out differently and restrict Congress' power.
But Carlton, in my opinion, was a democratic call to arms. They
could have addressed these issues. Instead, what they did, in effect,
was say this issue is really too hot for us.
So the critical question which remains for this committee and ul-
timately for the American people — well, there are two questions;
No. 1, whether this Congress is willing to do a little bit better than
Caligula and restrain itself from enacting retroactive tax laws, and
No. 2, if so, how should such restraint be crafted. Enactment and
ratification of Senator Coverdell's proposed amendment would re-
solve these questions once and for all, thus ensuring Emperor Ca-
ligula's singular place in history as the paradigm of how not to
raise revenues.
Senator Kyl. Thank you very much.
[The prepared statement of Mr. Schmitz follows:]
Prepared Statement of Joseph E. Schmitz
ARTICLE —
"Section 1. No Federal tax shall be imposed for the period before the date of en-
actment of the tax."
"Section 2. This article shall take effect the date of its ratification."
First of all, I would like to thank Chairman Brown for inviting me to testify
today. My name is Joseph Schmitz. I am a partner at the law firm of Patton Boggs.
I am also an Adjunct Professor of Law at Georgetown University Law Center, where
I teach an advanced Constitutional Law seminar.
Three years ago I represented the Washington Legal Foundation, Chairman
Hatch, Speaker Gingrich, and 40 other members of Congress in an amici curiae
brief to the United States Supreme Court in the retroactive federal tax case, United
States V. Carlton.
Retroactive taxation is already prohibited by at least two constitutional provi-
sions. The first is the federal ex post facto clause, which states: "No * * * ex post
facto law shall be passed." (Art. I, §9) The second is the federal due process clause,
which states: "No person shall be * * * deprived of life, liberty, or property, without
due process of law." (Amend. V) Regarding ex post facto, if a citizen does not pay
a retroactive tax, he can be criminally prosecuted. That sounds like an ex post facto
law to me. Regarding due process, retroactively taking money from private citizen
and businesses is fundamentally antithetical to procedural due process, which in-
cludes among its essential attributes "prescription" and notice. The Supreme Court
avoided both these issues in deciding Carlton, instead dwelling on a substantive due
process claim, which the lower court in California had actually sustained. During
oral arguments before the Supreme Court, when asked by Justice Stevens whether
his due process claim was procedural or substantive. Counsel for Carlton responded,
"To be perfectly honest, your honor, I have never been able to tell the difference."
The Supreme Court ruleci against Carlton 9-0.
While rummaging through a pre-New Deal legal dictionary earlier this month, I
discovered a novel definition of "due process of law": "While the exact definition of
'due process of law' may be uncertain, it is certain that it inhibits the taking of one
man's property and giving it to another, contrary to settled usages and modes of
procedure, and without notice or an opportunity to be heard." [citing Ochoa v. Her-
nandez, 230 U.S. 139, 140 (1913)] Before discussing how the Supreme Court ad-
123
dressed retroactive taxation in Carlton, I would like to delve a bit deeper into the
history of due process, to a time when a certain roman emperor was having prob-
lems with, among other things, raising revenues.
Two thousand yeau-s ago, Emperor Caligula reportedly had difficulty balancing the
budget of the Roman Empire. When his coffers were nearly empty, Caligula would
raise additional revenues by writing new laws in small characters and posting them
upon high pillars. When wealthy citizens of Rome failed to heed these laws, Caligula
reportedly imprisoned them, killed them, and, of course, confiscated their wealth.
By the way, Caligula was assassinated in the year 41 A.D., in his fourth year as
Emperor and at the ripe old age of 29.
Shortly before the Ainerican Revolution, Sir William Blackstone published in Eng-
land a comprehensive treatise on English law known as Blackstone's Commentaries
on the Laws of England. In his Commentaries, Blackstone cites Cahgula's method
of raising revenues as an example of how not to notify the people of a new law —
such notification, according to Blackstone, being an essential element of any civil
law. Immediately after disparaging Caligula for "ensnaring" his own people through
illegible laws, Blackstone writes: "There is still a more unreasonable method [of no-
tification] than this, which is called making of laws ex post facto." "All laws," accord-
ing to Blackstone, "should be therefore made to commence in futuro, and be notified
before their commencement."
The drafters of the Constitution apparently read Blackstone well — and were no
fans of Caligula. They included in Article 1 of the Constitution two explicit prohibi-
tions against ex post facto laws, one for Congress and one for the States. Despite
the clarity of Blackstone's Commentaries, most modern scholars agree that it is not
clear what the term "ex post facto" was understood by the drafters to entail.
We do know, however, that retroactive legislation generally was abhorred not only
by Sir William Blackstone, but by most if not all other prominent English-speaking
proponents of the rule of law in the Eighteenth Century. For instance, James Iredell
(later a Justice of the United States Supreme Court Iredell) argued during the con-
stitutional debates in 1787 that "Ex post facto laws ♦ * * have been the instru-
ment of some of the grossest acts of tyranny that were ever exercised."
In 1798, however, the Supreme Court construed the constitutional prohibition
against state — as opposed to federal — ex post facto laws as applying only to criminal-
type laws. That decision, involving a probate dispute in Connecticut, turned on the
historical fact that the Connecticut legislature — like Parliament and unlike Con-
gress — was authorized to reverse judicial decisions. [See Colder v. Bull, 3 U.S. (3
Dall.) 386 (1798).] Almost two hundred years later, the federal ex post facto clause
has never been independently construed by the Supreme Court — or by any other
court to my knowledge. The federal ex post facto clause has always been lumped to-
gether with the state prohibition, and accordingly limited to criminal laws in accord-
ance with the U.S. Supreme Court's 1798 decision regarding Connecticut.
But failure to pay federal taxes in the Twentieth Century is a crime. Section 7203
of the Internal Revenue Code, for instance, m.akes it a misdemeanor willfully to fail
to pay a federal tax, the penalty for which is up to $25,000 for individuals ($100,000
for corporations) and/or imprisonment up to one year. And I dare say, had I willfully
failed to pay my retroactively increased income taxes for 1993, I could have gone
to prison for a year.
The Supreme Court's 1991 decision in Cheek v. United States, 498 U.S. 192
(1991), illustrates that there is no "bright line" between civil and criminal tax cases,
and that one who protests retroactive taxes by not paying them is subject to crimi-
nal penalties. Accordingly, the constitutional prohibition against ex post facto laws,
even if restricted to criminal-type laws, should apply to retroactive federal tax laws.
The Supreme Court's decision in Carlton, however, suggests that the Court is un-
willing to impose any meaningful restraints on Congress, ability to enact retroactive
tax increases. Carlton was a constitutional disappointment because, among other
reasons, the Court completely ignored a compelling ex post facto argument raised
by 42 Members of Congress. The court in Carlton addressed only the substantive
due process challenge raised by Mr. Carlton in that case. Theoretically, therefore,
another retroactive tax case might come up to the Court under a different provision
of the Constitution, perhaps even under the federal ex post facto clause, which, as
I have said, has never been independently and definitively adjudicated by the Su-
preme Court.
Carlton was also a democratic call to arms because by ignoring the ex post factor
argument of 42 Members of Congress, the Justices of the United States Supreme
Court, in three separate opinions, in effect, said: This issue is too hot for us to han-
dle — it's up to the political branches or to the people to impose any restraints on
retroactive federal taxes.
124
The critical questions which remain for this Committee and iiltimately for the
American people are: (1) whether this Congress is willing to do better than Caligula
and restrain itself from enacting retroactive tax laws; and, if so, (2) how should such
restraint best be formalized? Senator Coverdell's proposed constitutional amend-
ment is an excellent vehicle for addressing both questions.
Enactment of this proposed constitutional amendment, with ratification by the
States, would resolve the issue once and for all; thus ensuring Caligula's singular
place in history as the paradigm of how not to raise revenues.
Senator Kyl. Dr. Pilon.
STATEMENT OF ROGER PILON
Mr. PiLON. Thank you very much, Senator Kyl, and I want to
thank Senator Brown and Senator Coverdell for their kind invita-
tions to be here to testify today. I would ask that my prepared
statement be included in the record. I will just summarize a few
points from it here this afternoon.
In a way, this issue that is before us, retroactive taxation, should
never be before us, as Mr. Schmitz has just demonstrated convinc-
ingly, to my judgment. The Constitution addresses this issue plain-
ly. The courts have ignored or rewritten the Constitution and the
relevant provisions. That is why we are here, and now it falls to
the Congress to take up the slack and see to it that this issue of
retroactive taxation is buried once and for all and I urge you very
much to do that and will do so at the conclusion of my remarks
here.
The issue of retroactive taxation is in many ways so elementary
that it is almost embarrassing to have to speak to it. It is the kind
of thing that any child understands on the playground under the
simple admonition you don't change the rules after the game has
begun. In fact, this is even worse than changing the rules after the
game has begun and changing the rules in the middle of the game.
You are actually changing the rules back to the beginning of the
game, and we all understand that so elementary a move as that
is just simply — ^you wouldn't get away with it in a Monopoly game,
you wouldn't get away with it in a basketball game. You shouldn't
get away with it in the Congress of the United States, but you do.
You do because the courts have not been doing their job.
Now, I am not a tax lawyer or an expert on taxation. My field
is the philosophy of law, so I am not burdened by the details of tax
law. I can step back and look at some of the larger issues, and that
is what I want to do here and address some of these deeper issues,
some of which Senator Coverdell touched upon in his opening re-
marks, because the issues take us to some very fundamental ques-
tions of political philosophy and, in particular, to the foundations
of political obligation, including the obligation to pay taxes.
If this Nation is founded indeed upon the idea of individual lib-
erty and individual autonomy, then there are two considerations at
common law that we refer to as sources of obligation. They are, on
the one hand, consent, and on the other hand a breach of some nat-
ural duty. In other words, we are not rooted as a Nation in some
organic conception of political obligation of the kind that President
Clinton invoked in his inaugural address by implication when he
said we are all in this together. We are not all in this together. We
are individuals and we come together only for those issues that are
properly in the public domain, the rest being in the private domain.
125
as the tenth amendment and other parts of the Constitution make
expHcitly clear.
If we are rooted in consent out of a deep respect for individual
autonomy, then the question arises how is it that we have gotten
where we are today where constitutional restraints that are meant
to secure that autonomy have been so atrophied over the course es-
pecially of the 20th century. They have been abandoned by the
courts at the urging of the political branches and been replaced by
the kinds of benefits and burdens talk that we find in Justice
Stone's opinion in Welch v. Henry, which is the locus classicus in
1938 of the modem doctrine that justifies or purports to justify ret-
roactive taxation.
The result of that is to leave individuals and firms out of court.
I mean, they essentially have no longer any legal appeal. They
have only a political appeal in these matters and when that is the
case, when they have no legal remedy for those who are unjustly
burdened as they are taxed to provide benefits for those who are
unjustly enriched, we have the modern redistributive state. We
have substantive and procedural unfairness in this.
Substantively, you have great partiality and inequality. Proce-
durally, pertaining to questions like retroactivity, you have due
process effectively denied. In both cases, the victims are out of
court. Ironically, therefore, we have to turn to the political
branches for what should be addressed by the judicial branch.
When judicial review is essentially unavailable, tyranny is invited.
It is just that simple. What is retroactivity, the changing of the
rules after the fact, if not the very essence of tyranny?
But look at some of the substantive and procedural issues at
stake. Substantively, if individual autonomy is indeed the premise,
then government should have only that power that is necessary to
secure our autonomy. In that context, the power to tax is an instru-
mental power, but it must be exercised consistent with the basic
premise from which it flows. Hence, it must be limited and equal.
The more government expands, the more taxation does, and the
less consent for that taxation can be found, which is presumably
the bedrock principle of this Nation. Look at it procedurally. Retro-
activity raises conspicuously the issue of notice. What you have got
is you have no notice and that relates to fairness. How can people
arrange their affairs if the rules for doing so are going to be
changed retroactively? You simply can't penalize people for behav-
ior they had no reason to believe was subject to penalty. That is,
again, the essential principle that is involved in retroactive tax-
ation. So the Ex Post Facto Clause, as Mr. Schmitz has said, as
well as the Due Process Clause should more than address this.
Let me say, finally, a few things about a couple of the practical
issues that arose last time this committee held hearings on this
issue and should be addressed, it seems to me. Some have argued,
for example, that by focusing on date of enactment, as this amend-
ment does, that we risk ignoring those adversely affected by legis-
lation that is nominally prospective because all changes will affect
somebody who has arranged their affairs according to them. Even
you make those changes prospective, you may have diminution in
value of assets, and so on and so forth.
126
Well, the argument is perfectly generalizable. Every time you
have a change, there are retroactive effects. So, in effect, the argu-
ment argues too much. That really is counsel for doing nothing at
all about anything at all. Of course, that is hardly a position we
want to bootstrap ourselves into in the name of arguing against an
amendment that would prohibit retroactivity. What you need to do,
rather, is recognize that this is indeed the case and address those
particular cases on a case-by-case basis, maybe with some provi-
sions for compensation among those who are adversely affected by
that.
Now, the second objection that is sometimes raised is one that
argues from a perception of fairness which is lost when Congress
makes mistakes or individuals find loopholes in tax law. Well,
there it seems to me Senator Coverdell addressed that very briefly
in his opening remarks, and that is that the fairness may require
retroactive correction, so the argument goes. In other words, the
opponents argue that substantive unfairness should trump proce-
dural unfairness. That, of course, taken to its logical conclusion, is
a prescription for anarchy.
In addition to that, when Congress tries to correct its mistakes
by shifting responsibility from itself to the victim of its mistakes,
you have compounded the error, and that is indeed exactly what
happened in the Carlton case that the Court decided in 1994 when
the executor of the estate, who was duty-bound to maximize the es-
tate, was penalized for exercising the diligence he is required to ex-
ercise as executor of the estate. I mean, this is a fine state of af-
fairs we have put the executor into. He is damned if he does, he
is damned if he doesn't. Yet, that is exactly what you get into with
the kind of retroactivity that we see too often coming out of the
Congress.
So when we recognize, let me say in conclusion, that the sub-
stantive unfairness is usually widely spread and small when you
are dealing with mistakes that Congress has made, whereas the
procedural unfairness of retroactive taxation is usually con-
centrated and large in any given case, it seems to me the argu-
ments for retroactivity are overwhelming and beyond doubt, and I
would urge you therefore to go forward with this because it is the
kind of thing that rings true with the American people and I think
you would find wide receptivity and I think you would find this
amendment sailing through three-quarters of the legislatures it
must sail through.
Thank you.
Senator Kyl. Thank you. Dr. Pilon.
[The prepared statement of Mr. Pilon follows:]
Prepared Statement of Roger Pilon
Mr. Chairman, distingmshed members of the subcommittee, My name is Roger
Pilon. I am a senior fellow at the Cato Institute and the director of Cato's Center
for Constitutional Studies.
I want to begin by thanking Senators Brown and Coverdell for inviting me to
speak before this subcommittee in support of S.J. Res. 8, proposing an amendment
to the Constitution to prohibit retroactive increases in taxes.
When hearings on retroactive taxation were proposed in the Senate in October of
1993, following the retroactive tax increase that President Clinton signed into law
that year. Senator Richard Shelby, then of the President's party, asked rhetorically
of the Senate President, "Why do we need hearings to consider the retroactivity of
127
taxes * * ♦ when we basically and the American people believe it is wrong?" In
thus representing the beliefs of the American people, Senator Shelby got it exactly
right, of course. At bottom, in fact, the issue of retroactive taxation is no more com-
plicated than the sports analogy every child learns on the playground — it's wrong
to change the rules after the game begins.
Unfortunately, that simple rule, to say nothing of the beliefs of the American peo-
ple, has been little regarded over the course of this century as legislatures have
grown increasingly fond of their powers to tax, including their power to tax retro-
actively. And the courts, for their part, have grown increasingly deferential to those
legislatures. Given those facts, extraordinary measures — and a constitutional
amendment is extraordinary — are in order.
Unlike my fellow panelists today, Mr. Chairman, I am not a tax lawyer or an ex-
pert on taxation. I don't even do my own taxes. Rather, my field is the philosophy
of law, which means that I try, if at all possible, not to look too closely at the trees
so that I can keep my eye on the forest.
Unfortunately, tax law today is almost all trees and no forest. Despite occasional
efforts at "simplification," our tax law is the chaotic product of all but unbridled po-
litical will, nominally enacted to raise revenue, but interlarded throughout with
public policy — with social policy undertaken through the tax code. (Those on my side
of the political divide who oppose government planning through redistribution and
regulation, but support every "tax break" that comes along, are too often prone to
forget that "tax policy," thus understood, is just a poor man's (rich man's?) way to
try to manage an economy.)
When I say that our tax law today is a product of all but unbridled political will,
I mean, among other things, that in perhaps no other area of our law are the courts
so deferential to the political branches. Well before the Supreme Court set forth its
general theory of deference in 1938 in famous footnote four of Carotene Products^ —
wherein the Court distinguished two kinds of rights, fundamental and nonfun-
damental, and two levels of judicial review, strict and minimal, relegating "ordinary
commercial transactions" to the latter category — the Court was deferring to the po-
litical branches on issues of taxation.
Yet it was Justice Stone, the same Justice Stone who wrote the opinion in
Carotene Products, who that very year set forth what, for lack of a better argument,
has come to be the modern rationale for taxation generally and retroactive taxation
in particular:
Taxation is neither a penalty imposed on the taxpayer nor a liability
which he assumes by contract. It is but a way of apportioning the cost of
government among those who in some measure are privileged to enjoy its
benefits and must bear its burdens. Since no citizen enjoys immunity from
that burden, its retroactive imposition does not necessarily infringe due
process. * * *2
Indeed, notwithstanding the classic non sequitur in Justice Stone's final sentence,
the Court without a blush set forth that very rationale less than two years ago
when it upheld the retroactive imposition of an estate tax change in the Cartton
case. 3
No one could disagree, of course, that taxation is "a way of apportioning the cost
of government." But the contention that those who enjoy government's benefits
"must bear its burdens" — an argument as old as Plato's Crito — is as circular as it
is destructive of our founding principles.
At common law, one could incur obligations, or burdens toward others, in only two
basic ways: either by contract, through consent, or by breach of some natural duty,
leading to a penalty through the law of torts — the exact rationales Justice Stone re-
jected out of hand. Yet the first of those rationales, consent, constitutes the very
foundation of our political order — and, by implication, of our tax policy. As both the
Declaration of Independence and the Constitution make clear, we constituted our-
selves politically through consent. In so doing we explicitly rejected older organic
conceptions of political obligation, with their benefits-and-burdens rationales, be-
cause our fundamental moral principle was individual autonomy. Individuals aire
and ought to be free, we declared, except insofar as they bind themselves through
their promises or their torts. (Doubtless, one often ought to reciprocate for the gra-
tuitous receipt of benefits, but that is not the stuff of moral or legal obligation.)
^United States v. Carotene Products Co., 303 U.S. 144 (1938). I have criticized that opinion
in Pilon, "On the Foundations of Economic Liberty," 38 The Freeman 338 (1988).
2Wetch V. Henry, 305 U.S. 134, 146-47 (1938).
^United States v. Carlton, 513 U.S.— (1994); 62 U.S.L.W. 4472, 4475 (U.S. June 13, 1994).
128
In recognizing consent as our bedrock political principle, however, we also recog-
nized the practical limits of that rationale, especially as it operates over succeeding
generations. Thus, as a further protection for individual autonomy — beyond that af-
forded by original ratification and subsequent periodic elections — we limited the
scope of government. Indeed, the Constitution is properly read not simply as insti-
tuting poUtical power through the consent of the founding generation but as se-
verely restraining power as well — for the benefit of succeeding generations — through
such familiar devices as the separation and division of powers, the enumeration of
federal powers, the addition of a bill of rights, and, of particular importance for the
issue at hand, the institution of judicial review.'* Notwithstanding those further re-
straints, however, consent remained the basic rationale for political obligation, even
as its practical limits were recognized.
This inherent tension between our avowed foundation in consent — best captured,
perhaps, by the colonial cry, "No taxation without representation" — and its practical
limits is exacerbated, of course, as the scope of government grows, as the claim that
"we" consented to, say, all the government we're getting today becomes increasingly
implausible. Faced with that implausibility, one either abandons the consent ration-
ale, as Justice Stone did, or complains about growing illegitimacy, as many of us
have been doing since modem expansive government oegan during the Progressive
Era. To abandon the consent rationale, however, is to abandon the premise of indi-
vidual autonomy on which it rests, and to bring us face-to-face with our first presi-
dent's insight that government is neither reason nor eloquence but force — and its
corollary, the more government, the more force in our lives.
Those are the brute moral facts of the modern political dilemma, which no talk
of "democratic decisionmaking," much less benefits and burdens, can argue away.
And nowhere are those facts more starkly borne out, perhaps, than in the realm of
taxation, where Justice Stone's vaunted rationale translates all too quickly into ben-
efits for some and burdens for others — hardly a result to command universal con-
sent. But the reality of the matter is starker still, for rarely if ever is that result
underwritten by majoritarian consent either— quite apart from whether majority
rule can justify anything. Rather, as the Public Choice school of political economy
has repeatedly demonstrated, modem tax policy constitutes perhaps the paradig-
matic example of special-interest politics at work. That politics is so far from being
rooted in consent as to make a mockery of our founding doctrine.
In resorting to an older organic rationale, then, the benefits-and-burdens people
have ignored both our origins in consent and the constitutional barriers we erected
in Ught of the practical limits of consent, both of which are rooted in our concern
for individual autonomy. Thus disparaging individual autonomy, they cUng instead
to visions of grand democratic undertakings, as stated succinctly by President Clin-
ton in his inaugural address: "We're all in this together."
The problems with that view are many, of course, but chief among them are two:
(a) we are not all in this together — many of us never wanted in, want out now, want
simply to plan and live our own lives, not have them planned for us through the
taxing and spending powers of Congress; and (b) the effort to force us to be part
of the common undertaking, despite the lack of consent, is fraught with constitu-
tional peril, both substantive and procedural. To put the point otherwise, America
was not constituted as a parliamentary democracy, our fate to be determined in
principle by transient majorities, in practice by those with access to political power.
We are, rather, a constitutional repuolic, where political power is bounded by a con-
stitutional rule of law.
Yet it is precisely that rule of law that the benefits-and-burdens Court, a Court
that has lost touch with our founding principles,^ has refused to secure. The prac-
tical effect of the Court's deference is to leave the determination and distribution
of benefits and burdens to the political branches — which means, again, to the special
interests that have learned so well how to work the sj^stem. What that means in
turn is that the individual or firm that is adversely affected by the outcome of the
f)rocess in which it is thus forced to participate is essentially out of court, with no
egal remedy.
On the substantive side, great partiality and inequality are too often the result —
with "soak the rich" being only one variation of this. On the procedural side, where
the retroactivity issue arises here too the adversely affected individual or firm is,
in effect, out of court. When judicial review is essentially unavailable, tyranny is in-
■•I have discussed those issues more fully in Pilon, "A Government of Limited Powers," ch.
3, Cato Handbook for Congress 17-34 (1995).
^I discuss this point more fully in Pilon, "A Court Without a Compass," 40 New York Law
Review (1996) (forthcoming) (symposium on James F. Simon's The Center Holds: The Power
Struggle Inside the Rehnquist Court (1995)).
129
vited. And what is retroactivity — changing the rules after the fact — if not the very
essence of tyranny?
Because the Supreme Court has demonstrated over the years — and as recently as
two years ago — that it will not address this tyranny by applying the constitutional
remedies that are readily available, we must turn, ironically, to the political
branches to protect us from the political branches, which is what the amendment
before us is aimed at doing. Because I am, with the Founders, of the individual au-
tonomy school, not the grand undertaking school, I support the amendment. To
elaborate further upon my reasons, however, and to address some of the concerns
of the other side, I believe it would be useful to at least sketch both the substantive
and the procedural issues at stake, first with respect to taxation generally, then
with respect to retroactivity in particular.
If individual autonomy is indeed our basic moral principle, then government
should have available to it only those powers that are consistent with securing that
end. (Today, of course, thanks to the demise of the enumerated powers doctrine and
all but boundless interpretations of the Constitution's General Welfare and Com-
merce Clauses, the powers of the federal government are restrained for the most
part only by varying interpretations of the document's amendments.^) In that con-
text, the power to tax is instnmiental: it is a means to the exercise of other powers,
themselves aimed at securing liberty. Like those other powers, however, the power
to tax must be exercised consistent with liberty.
We come, then, to the nub of the substantive matter. For if the power to tax must
be exercised consistent with liberty, it can be thus exercised only insofar as it is
consented to. (The colonists had it right.) But universal consent, again, is impossible
to obtain practically, which means that we have to look for conditions that at least
move us in that direction. Two such conditions suggest themselves: (a) limited tax-
ation, such that most people beUeve that the small cost of government is worth the
limited benefits government provides; and (b) equal taxation, to ensure fairness
among individuals, with no one burdened more than anyone else.
With respect to the first of those conditions, clearly, the more government decides
to do, the more it needs to tax; and the more it taxes, the less universal the consent
will be. The tax revolt of the past several years in this country is about nothing if
not that. That revolt will dissipate only when our governments return to their natu-
ral and original limits~as governments around the world, which have much further
to go, are today beginning to do.
With respect to the second condition, the basic question could not be simpler: Why
should one person be burdened more than another by the costs of public services?
Apart from user fees, which address the benefits-and-burdens question on an indi-
vidualized basis, there is simply no credible reason why ability to pay should play
any role at all in determining the distribution of the burden, not if we take equality
seriously.
The impetus for unequal treatment in the area of taxation — which we would coun-
tenance for not even a moment with other burdens, such as criminal penalties or
military service — was especially intense during the Progressive Era, of course, an
era noted for its zeal for collective undertakings "in the public interest" and its ani-
mus toward trusts and other sources of wealth. How else to explain the ratification,
however uncertain that process, of an income tax amendment, no less, except that
it was to be limited to a rate of 1 or 2 percent and applied only against the wealthy.
But that historical impetus in no way justifies our using some for the benefit of oth-
ers, which is precisely what unequal taxation amounts to.
Notwithstanding the Constitution's enumerated-powers and equal-protection guar-
antees, both of which could have been read by the Court as restraining the political
forces that have produced the expansive and unequal tax arrangements we have
today, the Court has declined to secure those substantive protections. But the Court
has done no better with procedural protections, not even in the case of retroactive
taxation, which is so glaring an abuse of legal process as to require little argument
against it.
Among the arguments against retroactivity is the argument from notice. Tax law
today is so far removed from natural law and natural law principles that no one
could possibly know its content from reason alone — as one can know, say, that mur-
der, rape, and robbery are wrong. Those subject to taxation, therefore, must be
given notice of the particulars so that they can adjust their behavior accordingly.
^I have discussed that history and its implications in Pilon, "Freedom, Responsibility, and the
Constitution: On Recovering Our Founding Principles," 68 Notre Dame Law Review 507 (1993);
and Pilon, "On the Folly and Illegitimacy of Industrial Policy," Stanford Law & Policy Review
103 (1993).
130
To do otherwise is to penalize people for behavior they could not possibly have
known was subject to penalty. It is the very antithesis of the rule of law.
As was argued by my fellow panelist, Mr. Schmitz, when we last testified before
this subcommittee on this issue in August of 1994, the Constitution's ex post facto
clauses, properly interpreted and applied, should alone suffice to preclude this kind
of abuse of legal process — broadly understood to include the legislative process as
it affects individuals not directly a part of it. But the Due Process of Law Clause,
under which the 1994 Carlton case was decided, should suffice as well. Here again,
however, one despairs of finding relief from a Court whose reasoning throughout is
simply conclusory. When retroactivity longer than a year preceding the legislative
session in which it is enacted raises "serious constitutional questions" whereas
retroactivity short of that does nof — a line between unconstitutional and constitu-
tional that is nowhere remotely to be found in the document — we know we have to
look somewhere other than to the Court for the protection of our liberties.
Now it is argued by some who oppose this amendment, such as Mr. Ronald A.
Pearlman, who appeared with Mr. Schmitz and me on that 1994 panel, that by fo-
cusing on '"date of enactment,' * * * we risk ignoring a large group of taxpayers
that will be adversely affected by legislation that is nominally prospective,"^ for
even prospective changes often have retroactive implications. Indeed, Mr. Pearlman
continues, "[ejvery time Congress changes tax rates, whether the rates are increased
or decreased, certain previously committed economic activity is affected."^ Just so.
Far from being an argument against this amendment, however, that observation
makes the case for circumspection generally, especially since so much economic ac-
tivity today is tax driven.
But the problem to which Mr. Pearlman points is broader than he seems to have
appreciated, and perfectly generalizable. In a nutshell, through our tax law today,
and not our tax law alone, we have brought about and encouraged a set of public
and private arrangements upon which people have come to rely and a set of expecta-
tions about the future — not unlike those in the more socialized countries, except in
degree. What we face, accordingly, is the same problem that people in the socialist
countries are facing as they try to undo the past, namely, that it is terribly easy
to get into those arrangements but terribly difficult, because people have come to
rely upon them, to get out. We have created, in short, our own retroactivity problem.
None of that argues against this amendment, however, for if taxation is seen not
as a zero-sum game — where one person's tax abatement is another person's tax as-
sessment, a view Mr. Pearlman suggests when he speaks of threats "to the income
tax base" ^o — but as a method of raising revenue fairly, then the question is not how
we preserve (or enlarge) the current tax flow but how we move toward limited and
equal taxation, mindful that some have arranged their affairs, in light of current
law, in such a way as to be disadvantaged, at least for a time, by any such move.
Let me suggest that we address that problem, as best we can, on a case-by-case
basis, even as we move in the right direction more generally. Since it was we who
originally created the incentives that have encouraged people to make investments
that may now be sunk when we change the rules again, albeit in the right direction,
we should bear the costs of our change in direction rather than let those costs fall
on innocent individuals. This is not like compensating slaveholders after Emanci-
pation — people who relied on positive law that, by natural law principles, was con-
spicuously wrong from the start. Rather, tax law today is, again, sufficiently re-
moved from natural law to make it all but arbitrary; yet it is a body of law upon
which prudent people do and must rely as they arrange their affairs. Given that,
we need to address the retroactivity costs to individuals and firms that arise even
in the case of nominally prospective changes.
But if the difficulty today of discovering purely prospective tax law changes does
not militate against this amendment, neither do the arguments from fairness that
Mr. Pearlman nas adduced. Thus he speaks of "the perception of fairness" as
one of the principal reasons that President Reagan supported changes in the tax
law that were designed to limit abusive tax shelters m 1984 and, thereafter, as
part of the Tax Reform Act of 1986. * * *
Fairness also must influence the adoption of effective dates for tax legisla-
tion. * * * Fairness requires, on occasion, explicitly retroactive tax legislation,
such as in the case of tne 1984 tax-exempt entity leasing provisions. I am con-
fident that the American people would not want perceived abusers to be able to
''Carlton, 62 U.S.L.W. 4472, at 4476 (Justice O'Connor concurring).
s Statement of Ronald A. Pearlman, made available at hearings on S.J. Res. 104 (retroactive
taxation amendment) held before this subcommittee on August 4, 1994, at 2-3.
8/d. at 3.
^°Id. at 7. See also the text at n. 11, infra
131
take undue advantage of identified tax loopholes, thereby further increasing the
deficit or requiring honest, taxpaying citizens to pay higher taxes in order to make
up for advantages accruing to a few.^i
Notice that in claiming that, on occasion, fairness may require "explicitly retro-
active tax legislation" — which this amendment would preclude — Mr. Pearlman is
claiming, by implication, that substantive unfairness should trump procedural un-
fairness — that we are permitted to engage in procedurad unfairness in the name of
correcting substantive unfairness. As a general principle, of course, that is a pre-
scription for anarchy, and for the demise of the rule of law. But in the tax area,
driven as it is by positive law, it is an invitation to congressional irresponsibility
of the rankest kind.
Indeed, nowhere is that irresponsibility better presaged than in the very charac-
terizations Mr. Pearlman invokes. He speaks, for example, of "abusive" tax shelters,
tax shelters that by definition are legal — as is evidenced by the need for a change
of law to "correct" them — but not quite what Congress had in mind when it drafted
the law under which they arose. He then speaks of "perceived" abusers — as seen
through the eyes of the American people — and of their taking "undue" advantage
of "identified tax loopholes." We can never be sure, of course, just what advantage
is "undue," especially since the law permits the advantage. We can be sure, how-
ever, about Mr. Pearlman's view of those who avail themselves of such advantages,
for he contrasts them with "honest, taxpaying citizens," who must now pay higher
taxes to make up for the shortfall caused by the "abusers."
Plainly, this substantive unfairness to other taxpayers is what exercises Mr.
Pearlman, as well it should, particularly if one is concerned about threats to the in-
come tax base, as he is. But in the end, his fire is misdirected, for it is not the
"abusers" who wrote the law under which the alleged abuse takes place but the
United States Congress. When Congress later tries, however, to correct substantive
unfairness by being procedurally unfair to others — by changing the rules after the
fact — not only does it compound the error but it does so deliberately. In the process,
moreover. Congress often shifts responsibility from where it belongs — with itself —
to where it does not belong — with others — ridiculing those individuals by holding
them up to public obloquy as "abusers" of the system, even when their actions were,
admittedly, legal. And it does so even in cases in which the individual, such as the
executor in Carlton, was duty-bound to make the most he could of the estate he was
charged with executing. For having complied with that duty, the executor in Carlton
suffered a loss of $600,000 to the estate (not counting the tax itself plus interest),
all due to a retroactive change in the law at the hands of Congress.
Thus, substantive unfairness, which is usually widely spread and small in any
given case, is no justification for procedural unfairness, which is usually con-
centrated and large in individual cases. Nor will the effort to limit retroactivity to
"closing loopholes" withstand scrutiny. Even those who generally oppose retro-
activity are sometimes found trying to justify the practice in this limited way by dis-
tinguishing between "unfair" retroactive taxes — such as President Clinton's 1993
retroactive tax increase-and "fair" retroactive taxes — "technical corrections," often
made a short time after the original "mistake" and often couched in the language
of "closing loopholes."
The problems generally with retroactivity do not go away, of course, if its use is
limited to this small area. What you have with this so-called fair retroactivity is
really quite simple, in either of its forms. On one hand. Congress has made a mere
technical mistake, which is not uncommon, but which individuals then rely upon as
they order their affairs. In this case, we cannot ask individuals to try to ferret out
Congress's "real" intent, which not even courts do well. Rather, we have to take the
law as it is, and ask others to do the same. Indeed, in ordinary contract law we
decide any ambiguity or drafting mistake against the drafting party on the grounds
that it, not the other party, is responsible for the mistake and is in a better position
to have avoided it. Those same grounds apply at least as strongly here.
On the other hand, the "mistake" Congress might make is one of carelessness in
drafting such that shrewd individuals, accountants, and lawyers are able to "out-
smart" the drafters, finding "loopholes" that hadn't occurred to Congress at the time
of drafting. Here too, however, the issues remain the same. As Judge Learned Hand
put it nearly 60 years ago, no one is obligated to arrange his affairs in a way that
"will best pay the Treasury; there is not even a patriotic duty to increase one's
taxes." 12
n/d. at 8.
^^Helvering v. Gregory, 69 F. 2d 809. 810 (CA2 1934).
132
The deeper problem, of course, is Congress's use of the tax system for social plan-
ning. Just as the law of unintended consequences undermines direct attempts at so-
cial planning, so too it undermines indirect planning through the tax system. Man
was Dom to De free. Try as governments might to plan a person's life through redis-
tribution or regulation — or even through the tax code — he will find ways to regain
control, to regain his freedom. That is a lesson that is being learned around the
world, even if it is slow to come to the nation that should never have forgotten it.
Thus, I urge this subcommittee, Mr. Chairman, to erect an impenetrable barrier
to retroactive taxation in all of its forms, which only a constitutional amendment
will do. If the current draft of the new Russian Constitution can prohibit such tax-
ation, as Article 57 of that draft does, we should be able to do no less.
Senator Kyl. I am going to skip over Ms. Dixon now since Mr.
Caplin is here. Mr. Caplin, we welcome you to the hearing as well.
We have been going under a 7-minute rule which the Chair has not
rigorously enforced, but I would make the point again that all writ-
ten statements will be made a part of the record so you are free
to summarize them if you would like to.
STATEMENT OF MORTIMER M. CAPLIN
Mr. Caplin. Thank you, Mr. Chairman. I first would like to
apologize for my lateness here. I ran into an emergency that just
held me up a few minutes.
Senator Kyl. We appreciate your ability to be here.
Mr. Caplin. Thank you, Mr. Chairman. As you know, my name
is Mortimer Caplin. I am with the Washington law firm of Caplin
and Drysdale, and I had the privilege of serving as Commissioner
of Internal Revenue during the 1961 to 1964 period under Presi-
dents Kennedy and Johnson and I have been a tax practitioner for
some 40 years.
I certainly sympathize with the vexation of constituents and
Members of Congress over what they often perceive to be inappro-
priate retroactive legislation, but I don't think it wise to place a
blanket constitutional prohibition, regardless of the circumstances,
on Congress' ability to adopt retroactive legislation.
I would continue the existing flexibility in the normal legislative
process so as to meet the needs and exigencies that may arise in
our dynamic society, which include possible economic crises and
threats to our national security, and also to preserve the integrity
and administerability of the tax system.
The Supreme Court has allowed Congress the broadest of discre-
tion in deciding when retroactivity is appropriate, and in exercising
this discretion Congress, as well as the Treasury, have shown con-
sistent sensitivity to the reasonable expectations of taxpayers and
to fundamental concepts of fairness. Typically, they strive for legis-
lation that is prospective. That is the norm in its most commonly
understood sense; that is, applicable only to post-enactment trans-
actions and events.
When a retroactive effective date is used, Congress has repeat-
edly followed the practice of. No. 1, alerting the public to its inten-
tion to adopt a particular provision of tax law and then tying retro-
activity to that announced date. The date may take many forms —
a Presidential budget message, a committee announcement, a press
release, introduction of a specific bill, release of a committee report,
or the date a bill is passed by both Houses.
On balance. Congress has demonstrated impressive self-restraint
and concern for the man on the street's views. It has responded
133
regularly by providing grandfathering, exempting from adverse tax
consequences transactions completed before the effective date, and
even exempting non-completed transactions when a binding com-
mitment is in place, and also by providing liberal, delayed, and
phased-in effective dates, as well as other transition devices. The
aim is to avoid hardship and claims of unfairness whenever prac-
ticable.
Now, Congress has been very generous in this regard. In fact, it
is sometimes sharply criticized for excessive use of these transition
rules. This is so when it is said to be done to buy votes for support
of a particular piece of legislation. The targeted abuse here is the
rifle-shot transition rule narrowly drawn to grant relief for a very
specific taxpayer.
For the 1986 Tax Reform Act, a monumental piece of legislation,
the Senate Finance Committee reported that it contained 650 rifle-
shot transitional rules. According to the conservative estimate
given by its then chairman, the cost was $10.6 billion in lost reve-
nue, but it was nevertheless considered crucial to the passage of
the Act and, in fact, other estimates run 2 or 3 times that size.
Some wise commentator once said it is in the design of a transi-
tional rule that the act of lobbying achieves its grandest moments,
and we have certainly seen that.
I would like to say a few words about retroactivity. It is com-
monly regarded as applying new tax rules to already completed
transactions, but economists and taix experts, including the Treas-
ury, point out that all effective dates, including these nominally
prospective dates, are indeed inherently retroactive.
Take legislation with a nominally prospective date, the effective
date of the enactment, set at the beginning of the calendar year
next following the date of enactment; let's say the following Janu-
ary 1, after some November legislation. Take, then, the owner of
tax-free municipal bonds whose interest will become taxable pro-
spectively only after the new effective date, or the owner of the
home whose mortgage interest for the first time will be non-deduct-
ible prospectively after the new effective date, or the corporate ex-
ecutive whose long-accumulated deferred compensation will become
payable or whose long-held appreciated asset is now planned for
sale and who will be taxed prospectively after the new effective
date of a rate increase. Realistically, it would have to be acknowl-
edged that this nominally prospective effective date is in a very
large sense retroactive in all these situations.
Despite this broad appraisal of retroactivity, tax laws must still
strive to meet the American public's perception of fundamental
fairness, honoring taxpayers' good-faith reliance on existing law
and their abhorrence to changing the rules of the game midstream.
These are important precepts. They are very important for the re-
spect of our self-assessment system. I recognize that. Clearly, tax
legislation, wherever possible, should have as a basic goal dates
prospective in nature.
Having said this, however, and I close on this, I strongly urge
that it would be unwise tax policy to simply tie the hands of Con-
gress to flatly deny it the flexibility needed in a variety of cir-
cumstances to meet special fiscal demands of the Nation, and I can
recall situations like that during the Vietnam War, or to counter
134
unanticipated abuses by taxpayers, and think of the horrible shel-
ter period we had when billions and billions of dollars were lost,
and to correct its own drafting errors or oversights.
In sum. Congress must have in hand all the necessary tools, in-
cluding the option to use retroactive effective dates, not only to
meet its own legislative responsibilities, but also to enable our ad-
ministrators and courts to fulfill their assigned roles.
I have great faith in Congress. I think that most of the time they
want to be fair and decent and they do make their legislation pro-
spective in application. To the extent that congressional misuse of
power or disregard of public expectation is perceived, fortunately in
our democracy there is always the effective monitoring mechanism
of the ballot box.
With that, I close and thank you.
Senator Kyl. Thank you, Mr. Caplin.
[The prepared statement of Mr. Caplin follows:]
Prepared Statement of Mortimer M. Caplin
My name is Mortimer Caplin, a member of the Washington law firm of Caplin
& Drysdale. I served as U.S. Commissioner of Internal Revenue from early 1961 to
the Fall of 1964, during the Kennedy and Johnson years, and have specialized in
tax law for over 40 years. It is a privilege to accept your invitation to testify at these
hearings.
I sympathize with the vexation of constituents and members of Congress over
what they often perceive to be inappropriate retroactive changes in the tax law. But
I do not think it wise to place a blanket constitutional prohibition on Congress' abil-
ity to adopt tax legislation retroactive in some of its impact. I would continue the
existing flexibility in the normal legislative process so as, first, to meet the needs
and exigencies that may arise in our dynamic society — which include possible eco-
nomic crises and threats to our national security — and, also, to preserve the integ-
rity and administrability of our tax system.
For at least the past 50 years, Congress has made every effort to exercise its
retroactivity power in a decent and reasonable manner; and, throughout, its actions
have consistently been upheld by the Supreme Court. In fact, in no case in its his-
tory has the Supreme Court struck down an income tax provision on the grounds
of retroactivity.
In decisions dating back to the 1920s, the court did deny retroactive application
of an estate tax provision under the Revenue Act of 1918 and retroactive application
of the first gift tax under the Revenue Act of 1924 — although it is now almost uni-
versally agreed that the modem Supreme Court would not find unconstitutionality
even in these cases. Indeed, in its most recent decisions, the court has given sweep-
ing approval to retroactive amendments to three very different sections of the Inter-
nal Revenue Code — upholding the retroactive elimination of an estate tax deduction
in United States v. Carlton (1994), the retroactive denial of a lifetime gift tax ex-
emption in United States v. Hemme (1986), and the retroactive application of the
amended minimum tax to a pre-enactment sale of real estate in United States v.
Darusmont (1981).
Each of these decisions had its footing in the belief that Congress had acted rea-
sonably and that the retroactivity was neither "harsh and oppressive" nor "arbitrary
and irrational." Today, all the Court asks is that the retroactive application of the
tax provision be "rationally related to a legitimate legislative purpose." And in the
eyes of Justice O'Connor, at least, "it is sufficient for due process analysis if there
exists some legitimate purpose underlying the retroactive provision". Raising reve-
nue in an informed and balanced fashion certainly falls within this standard.*
In exercising this discretion. Congress as well as the Treasury have shown con-
sistent sensitivity to the reasonable expectations of taxpayers and fundamental con-
cepts of fairness. Typically, they strive for legislation that is prospective in its most
^_ * In Tate & Lyle. Inc. v. Comm'r, 103 TC 656, 679 (1965), the plurality opinion found excessive
("violates the Due Process Clause") a 9-year retroactive reach oi a legislative income tax regula-
tion. Contrast this with the 14-month retroactivity period upheld in U.S. v. Carlton, 114 S. Ct.
2018(1994).
135
commonly understood sense — that is, applicable only to post-enactment transactions
and events.
RETROACTIVITY IN ACTION
On the eve of the adoption of the sweeping Tax Reform Act of 1986, House Ways
and Means Chairman Dan Rostenkowski (D-IL) promised that the pending tax leg-
islation would avoid "abrupt and arbitrary changes," observing that "no person
should be penalized tomorrow for doing something that's perfectly permissible
today." Shortly thereafter, he joined Senate Finance Committee Chairman Bob
Packwood (R-OR) in stating, "we believe that the effective date of [the change]
should not be inconsistent with the reasonable expectations [of taxpayers] based on
law * * * in effect at the time the [asset] was purchased."
An interesting example of carefully balanced self-restraint is found in the 1950
revision of the formula for taxing life insurance companies which had paid little or
no income taxes for 1947 through 1949. In 1949, a Joint Resolution was passed by
both houses to impose taxes for all these years, but in the final 1950 Act the new
rules were applied only to 1949 and 1950. As the Senate Finance Committee Report
explained:
Your committee does not believe it advisable to apply the formula retro-
actively to the years 1947 and 1948. The returns for those years were filed
some time ago; the books of the companies have been closed; and in some
cases no reserves were established to cover the Federal tax liability ♦ ♦ *
[S]ome companies had made commitments in those years relying on the fact
that no Federal income tax was payable under existing law. Hence, the pay-
ment of the tax now could impose a hardship upon the policyholders.
This is consistent with a common congressional practice of alerting the public to
its intention to adopt a particular provision of tax law, and then tying any retro-
activity to the date of the announcement. The date may take many forms — a presi-
dential budget message, a committee announcement or press release, the introduc-
tion of a specific bill, the release of a committee report, or the date a bill is passed
by both houses.
Patterns of retroactivity employed by Congress have previously been analyzed in
great detail: **
1. Legislation is commonly made retroactive to the beginning of the year of enact-
ment. At times, too, there are provisions enacted shortly after the end of the first
year to which they are retroactively made applicable.
2. Provisions which are nominally prospective only will frequently have future ap-
pUcation to transactions irrevocably entered into years previously. In contrast. Con-
gress will at times exempt situations entirely when before the date of enactment,
transactions had been completely culminated or even where only binding contracts
or other commitments had been made.
3. Retroactivity may be employed to eliminate a "loophole" or "unintended bene-
fit," although even here — depending upon the egregiousness or the revenue loss at
stake — Congress leans towards post-enactment application.
4. Retroactivity is at times adopted to correct technical errors in prior legisla-
tion — "technical," "clerical," "typographical," or "grammatical" errors. Related to this
is the so-called "clarifying" amendment, made to "reflect" a supposed "Congressional
intent," which is usually made retroactive but may be made prospective when doubt
exists about the meaning of the prior law.
5. Mention should also be made of legislation which confers a benefit on taxpayers
or corrects hardships inadvertently created in previously enacted legislation. Here
retroactivity is generally considered unobjectionable, although recognition must be
given to the cost-shifting effect of the overall burden on other taxpayers.
On balance. Congress has demonstrated impressive self-restraint and concern for
the man-in-the-street's views on what is regarded as retroactivity, and what is fair
and reasonable under existing circumstances. It has responded regularly (1) by pro-
viding for "grandfathering" — exempting from adverse tax consequences transactions
completed before the effective date and even exempting non-completed transactions
when binding commitments are in place, and also (2) by providing liberal delayed
and phased-in effective dates, as well as other transition devices. The aim is to
avoid hardship and claims of unfairness whenever practicable. Not that it has al-
ways been successful in the eyes of the public. Under the 1986 Tax Reform Act, for
example, broadscale criticism was made of its failure to grandfather or provide
** Laurens Williams, Retroactivity in the Federal Tax Field, 12 U.S.C. Law School Tax Inst.
79 (1960) (former Assistant Secretary of the Treasury and Head of Legal Advisory Staff).
136
stronger transition relief for numerous locked-in positions taken under preexisting
law.
Congress has generally been very generous. In fact, it sometimes finds itself
sharply criticized for making excessive use of these transition rules. This is so when
it is said to be done to buy votes for support of a particular piece of legislation. The
targeted abuse here is the "rifle-shot" transition rule, narrowly drawn to grant relief
for a very specific taxpayer. For the 1986 Tax Reform Act, the Senate Finance Com-
mittee reported that it contained 650 rifle-shot transitional rules. According to the
conservative estimate of its then chairman, the cost was $10.6 billion in lost reve-
nue, but it was nevertheless considered critical to the passage of the Act. Other esti-
mates run two and three times higher.
Senator Carl Levin (D-MI.) referred to them as "nothing less than a tax break
for a special company". Playing on this theme, the then Assistant Treasury Sec-
retary for Tax Policy ruefully observed, "This is something less than the finest dem-
onstration of democracy in action, but I regard it as the price of reform." And in
mock admiration, still another has said that it is "in the design of transitional rules
that the act of lobbying achieves its grandest moments."
RETROACTIVITY DEFINED
I would like to say a few words about what we mean by "retroactivity."
Retroactivity is commonly regarded as appljdng new tax rules to already com-
pleted transactions. But economists and tax experts, including the Treasury Depart-
ment, point out that all effective dates — including those nominally prospective — are
indeed inherently retroactive.
Take tax legislation with a nominally prospective effective date set at the begin-
ning of the calendar year next following the date of enactment. Take then the owner
of tax free municipal bonds whose interest will become taxable prospectively only
after the new effective date; or the owner of a home whose mortgage interest for
the first time will become non-deductible prospectively after the new effective date;
or the corporate executive whose long accumillated deferred compensation will be-
come payable, or whose long-held appreciated asset is now planned for sale, and
who will be taxed prospectively after tne new effective date of a rate increase. Real-
istically, it would have to be acknowledged that this nominally prospective effective
date is in a very large sense retroactive in all these situations.
Professor Michael Graetz has ably shown why, practically speaking, all effective
dates have a retroactive impact: ***
Because all changes in law, whether nominally retroactive or nominally
prospective, will have an economic impact on the value of existing assets
or on existing expectations, the distinctions commonly drawn between retro-
active and prospective effective dates are illusory. * * * Therefore, pur-
portedly prospective changes in the law that alter people's expectations
about their earning prospects or their potential savings or consumption, or,
as is very often the case, alter the value of an asset * * * have retroactive
effects. Understood this way, all changes in law — indeed, I think, all
changes in economic laws — are inherently retroactive.
Supreme Court Justice Harry Blackmun, in his recent majority opinion in the
Carlton case, subscribed to this view in noting, "An entirely prospective change in
the law may disturb the relied-upon expectation of individuals, but such a change
would not be deemed therefore to oe violative of due process."
Despite this broad appraisal of retroactivity, tax laws must strive to meet the
American public's perception of fundamental fairness — honoring taxpayers' good
faith reliance on existing law and their abhorrence to changing the rules-of-the-
game midstream. "Bait-and-switch" taxation has already been roundly criticized,
and it might not be a bad idea to pin large posters on the walls exclaiming: "Do
not take taxpayers by surprise." "Respect taxpayers' prior reliance and irrevocable
changes of position." "Give taxpayers advance notice of congressional plans and pro-
jected dates for tax law changes." These are all important precepts in building re-
spect and confidence in our voluntary self-assessment system. And, clearly, tax leg-
islation whenever possible should have as a basic goal effective dates prospective in
nature, not retroactive in the sense generally understood.
Having said this, however, I strongly urge that it would be unwise tax policy to
simply tie the hands of Congress — to flatly deny it the flexibility needed in a variety
of circumstances, (1) to meet special fiscal demands of the nation, (2) to counter un-
anticipated abuses by taxpayers, and (3) to correct its own drafting errors and over-
*** Michael J. Graetz, Retroactivity Revisited, 98 HARV. L. REV. 1820, 1822 (1985).
137
sights. In sum, Congress must have in hand all the necessary tools — including the
option to use retroactive effective dates — not only to meet its own legislative respon-
sibilities, but also to enable our tax administrators and our courts to fulfill their as-
signed roles in an efficient and reasonable fashion.
I have faith and confidence in the good judgment and essential fairness of Con-
gress. But to the extent congressional misuse of power or disregard of public expec-
tations is perceived, fortunately in our democracy there is always the monitoring
mechanism of the ballot box.
Mortimer Caplin,
Washington, DC.
BIBLIOGRAPHY
Staff of the Joint Committee on Taxation, 104th Cong., 1st Sess., Issues Presented
by Proposals to Modify the Tax Treatment Ojf Expatriation, at 86 (1995).
Richard Belas, The Post-Carlton World: Just When is a Retroactive Tax Unconsti-
tutional! 69 TAX NOTES No. 5, 633 (1995).
Michael J. George, Digging Up New Revenue: Retrospective Taxation and the Om-
nibus Budget Reconciliation Act of 1993, 96 W. Va. L. Rev. 971 (1994).
Saul Levmore, The Case for Retroactive Taxation, XXII JOURNAL OF LEGAL
STUDIES 265 (1993).
Lawrence Zelenak, Are Rifle Shot Transition Rules and Other Ad Hoc Tax Legisla-
tion Constitutional?, 44 TAX L. REV. 563 (1989).
Packwood I Rostenkowski Statement on Effective Dates of Tax Reform, 26 TAX
NOTES 1192 (March 25, 1985).
Michael J. Graetz, Retroactivity Revisited, 98 HARV. L. REV. 1820 (1985).
Stephen R. Munzer, A Theory of Retroactive Legislation, 61 TEX. L. REV. 425
(1982).
Michael J. Graetz, Implementing a Progressive Consumption Tax, 92 HARV. L.
REV. 1575(1979).
Evaluation of the Proposed Model Comprehensive Income Tax, 32 TAX LAWYER
563(1979).
U.S. Dept. of Treasury, Blueprints for Basic Tax Reform, Ch. 6 (1977).
Michael J. Graetz, Legal Transitions: The Case of Retroactivity in Income Tax Re-
vision, 126 U. PA. L. REV. (1977).
Michael J. Mclntyre, Transition Rules: Learning to Live With Tax Reform, 4 TAX
NOTES, August 30, 1976, at 7.
Note, Retroactivity of Tax Legislation: A Report by the Committee on Tax Policy,
Tax Section, New York State Bar Association, 29 TAX LAWYER 21 (1975).
Note, Setting Effective Dates for Tax Legislation: A Rule of Prospectivity , 84
HARV. L. REV. 436 (1970).
Edwin S. Cohen, The Administration's Interim Program of Tax Reform and Relief,
47 TAXES 325 (1969).
Laurens Williams, Retroactivity in the Federal Tax Field, 12 U.S.C. Law School
Tax Inst. (1960).
Charles B. Hochman, The Supreme Court and the Constitutionality of Retroactive
Legislation, 73 HARV. L. REV. 692 (1960).
Alan S. Novick and Ralph I. Petersberger, Retroactivity in Federal Taxation, Parts
I and II, 37 TAXES 407, 449 (1959).
Senator Kyl. Our last witness — I could say we are saving the
best for last — is Ms. Joanne Dixon. The floor is yours.
STATEMENT OF JOANNE DIXON
Ms. DixON. Thank you. Mr. Chairman, Members of the sub-
committee, and especially my Senator Coverdell, thank you for in-
viting me to testify today about S.J. Resolution 8, the proposed con-
stitutional amendment to ban retroactive taxes.
My name is Joanne Dixon, and I have been overwhelmed by all
of this knowledge and power in the room. I have been sitting here
trying to figure who I am, what I am doing here, and what is this
all about.
Senator Kyl. Ms. Dixon, the two of us work for you.
Senator CoVERDELL. That is right.
138
Ms. Dixon. I understand that. Yes, I know that, but being intro-
duced as Joanne Dixon, Jirard, GA — no one knows where Jirard is,
so I just decided I am also a mother and I am also an ex-farm wife,
and both of those play a tremendous part of this hearing today, for
without a mother none of us would be here, and farmers grow the
food that fuels the world. So now you know how important I am,
right? These guys just know it all, but I had a great portion to do
with our presence here today. So now I will move on. Thank you.
My husband, Jimmy, and I were farmers for 38 years in rural
Georgia and we were harmed by the retroactive tax increase con-
tained in the 1993 Omnibus Budget Reconciliation Act. I appreciate
the opportunity to share my story with you and to put a face to
the many people I believe who exist who were also hurt by retro-
active taxes.
My husband, Jimmy, and I were married in August 1955. We
farmed together since then until 1993 and it was the only life that
we had ever known. I believe that we were responsible citizens
and, like our neighbors, we farmed our land, went to church, con-
tributed to our community and paid our taxes. We were proud to
be farmers and we believed it to be a very good life.
In February 1993, my husband suffered a second heart attack.
He survived, thank God, but we knew that our life farming the
land together was over after 38 years. The physical demands and
the stress with running a farm were just too much for Jimmy.
There was no time to consider another alternative method or way
or life. His life literally was at risk and we could not continue. It
was a gut-wrenching decision. That was February, the time of the
year when the wheat already was planted and plans were under-
way to farm 2,000 acres for another year.
Jimmy had to have angioplasty after the second heart attack,
and there we were having to face the most traumatic experience
ever. We had to auction off everything we had worked for our en-
tire lives. I could never put our feelings into words to adequately
express what we went through. I will never forget the day of the
auction itself. Looking back, I really don't know how we stood it,
but we did manage. Soon after, we had to sell the livestock on the
farm because the cattle were calving at the time and Jimmy and
I just could not handle this alone.
We had a wheat crop, 2,000 acres ready to farm and a large por-
tion of our equipment was set up on a lease/purchase arrangement,
and we also had a leased irrigation system. While we used the pro-
ceeds of the auction to pay these leases off and to pay the auc-
tioneer his percentage, this counted as income. In addition, we sold
crops in January that were harvested in 1992. The funds from sell-
ing these we call carryover crops were intended to provide the
cash-flow necessary to prepare for spring planting, but they still
counted as a part of our income.
On this income, we dutifully paid income tax and capital gains
tax. Then we were forced to relive this painful period of our lives
because we had to pay still more in retroactive taxes based on the
income from liquidating the only life that we ever knew. The
amount of money itself was not a large amount, but we still had
to pay the retroactive tax out of funds we had planned then for re-
tirement. However, for me, that is not the issue.
139
After what we had been through and what we had already paid,
about equal to what we had worked for our entire lives, to know
that the Federal Government can tax you simply because it chooses
was a real shock. I truly believe that if our tax bill had been more,
it could have brought on another heart attack for Jimmy. It could
have cost his life.
Furthermore, our situation also left us with no way to recover
this money we had to pay in this additional tax. We were out of
business. The retroactive tax was a shameful tax. The only protec-
tion I believe people like me would have is to amend the Constitu-
tion to ensure it never happens again. I wholeheartedly support
Senator Coverdell's proposed amendment.
Thank you very much.
Senator Kyl. Thank you very much, Ms. Dixon. It is interesting
that Ms. Dixon kept to the time limits, while none of the rest of
us have.
Ms. Dixon. I really wanted to say if I had gone first, I would
yield my time.
Senator Kyl. Thank you all for your testimony.
Senator Coverdell, would you like to begin the questioning?
Senator CovERDELL. I want to thank all the panelists for taking
their time to be here and sharing their thoughts with us.
To Mr. SCHMITZ AND Dr. Pilon, I would just add you have elo-
quently covered ex post facto and due process, but I would say
there is a third provision and I would welcome you to review it,
and it is bills of attainder. If you go back and you visit the debate
over the retroactive taxation — and I would suggest this probably
happens in others, as well, of retroactive taxation — it is clear time
and time again that certain classes of citizens will theoretically be
subjects of the retroactive tax attempt. I think the Constitution ad-
dresses that under "no bill of attainder."
So I think there are three provisions of the Constitution — ex post
facto, due process, and bills of attainder — that deal with this sub-
ject matter. As I said in my opening statement, I think the Con-
stitution pointed in every way it knew to suggest that this was not
an acceptable concept.
To Mr. Caplin, a question, and hopefully in this exchange we
point to the problem here. What would have been the notice in this
particular case of retroactive taxation? Was it the President's cam-
paign where he said taxes would be lowered? Was it his State of
the Union where he said the middle class will be asked to make
a contribution? Was it the nature of the debate, for which no one
could determine from day to day which piece would or would not
be a part of the law?
I can't for the life of me think of any way for which you could
conclude that President Bush should have been — or something he
said, the appropriate notice, where not only did the Congress,
working off the various notices that were coming from the new
chief executive — it is beyond me how you could ever reach back into
a prior administration.
Mr. Caplin. You say a prior administration?
Senator Coverdell. Right.
Mr. Caplin. I have never heard of a situation like that, really.
You know, I can't think of a case like that, but I think in a given
140
period of time, let's say, whether the Democrats were in control or
the Republicans, there have been instances when specific legisla-
tion has been proposed during the tax shelter era when the tax
court was just clogged up with tens of thousands of cases, 50,000,
60,000 cases clogged up there, and corrective legislation was pro-
posed as part of a large bill, but it held over and they announced
an effective date. They announced the effective date in the commit-
tee, not a Presidential message. Then the legislation was finally
passed a year or so later, but they did block the shelters during
that period of time.
Now, if that hadn't happened, the committee reports normally
give you a blueprint of exactly what you should do. I mean, if you
want to really specialize in tax avoidance, read the committee blue-
print, the joint committee staff analyses where they tell you exactly
what the problem is. Then if the legislation is passed a year later,
I mean you have lost billions of dollars. I mean, this is the last
chance to get on board and people flock to that.
So I mean it is rare for a Presidential message. I don't know if
this is exact, but there was a tax message given. I know President
Kennedy gave a tax message. Now, I don't recall whether he an-
nounced any effective date in that, but that would have been the
type of instance, something very specific.
Senator CovERDELL. I would just argue in this most recent case
it is particularly egregious because not only can you not fix a date,
but the messages are absolutely incongruous that were being sent
to the American people. I would also say that the dilemma that Ms.
Dixon and her husband found themselves in — now, you are a tax
attorney and have deep understanding. You are a Washington resi-
dent with past Government service, but I would simply argue that
the vast majority of Americans are in the situation of the Dixons
and I think it is an undue burden to think that they — the law firms
understand, but the vast majority of our people can't even begin to
work off the suggestion that there is an announcement in the Fi-
nance Committee or in the Tax Committee.
I think, also — and this is a point on which we disagree — that you
are making an argument I have heard — I have only been here 36
months, but I hear it often. It is the same argument for not having
a balanced budget amendment to the Constitution; that is that the
Congress ought to have the flexibility and it can make the prudent
decisions. But I think the American people are at a point where
they want more protection and have become increasingly, and I
think understandably disillusioned with that flexibility, which has,
I think, been ably described by Ms. Dixon.
I know in some conversations there was another individual who
would come under bill of attainder because of his success, but
somebody you knew about that had to pay a huge sum of
Ms. Dixon. One hundred and eighty thousand dollars.
Senator CovERDELL. One hundred and eighty thousand dollars of
retroactive taxes?
Ms. Dixon. Of retroactive taxes.
Senator Coverdell. I would say that would affect anybody.
Ms. Dixon. Well, it affected everyone because he owned fast food
restaurants, so middle America paid for that when they bought
hamburgers or whatever. He could make his up.
141
Senator COVERDELL. But somebody paid for it.
If you don't mind, Mr. Chairman, her husband to whom she has
been referring is here, Commissioner Jimmy Dixon, and we are
glad you have survived these incidents so well. I think we ought
to at least acknowledge him.
Senator Kyl. I was going to say it is good to see you here in view
of the health difficulty that you had, and I am sure that it was add-
ing insult to injury when you had this obligation to the Federal
Government after these health difficulties.
Dr. Pilon seemed to want to make one other comment in re-
sponse.
Mr. PiLON. Yes. In listening to Mr. Caplin responding to Senator
Coverdell's question, I was struck by the picture of Mr. and Mrs.
Dixon poring over committee blueprints, as he put them, and won-
dered when they would have time to plant the crops as they were
poring through these oftentimes voluminous records to keep up
with the latest in tax law. This is the kind of inside-the-Beltway
picture that we are invited to believe substitutes as notice in these
matters and I think you have put your finger exactly on the point,
Senator Coverdell.
The average American just is not sitting around following the
latest missives from Congress to rearrange his affairs so that he
can thereby avoid taxes. The world doesn't work that way, and you
know it, of course. I think that the arguments that purport to tell
us that it does just simply miss the real life. Mr. and Mrs. Dixon
have to live their lives, get on with their lives, and they have to
arrange their affairs with respect to broad notice, and I think you
hit it exactly right.
Were we to take the Mr. Clinton of the campaign, the Mr. Clin-
ton of the inaugural address, the Mr. Clinton later on down the
road, which statements of those — often contradictory statements —
are we to repair to by way of gaining notice of what is going on?
Senator Kyl. Even in situations where — I will give you an oppor-
tunity to respond in just a minute on my time. How is that?
Mr. Caplin. Thank you.
Senator Kyl. The capital gains tax reduction that was supposed
to take place — constituents asked me what the effective date was.
Senator Coverdell will recall one of the effective dates was going
to be January 1, 1995. Another effective date was going to be Janu-
ary 1, 1996. Another effective date was going to be the date of en-
actment, and there were two or three other potential effective
dates. Every time I would go home, constituents would say, well,
what is going to be the effective date of this? Nobody could say, and
in the end it didn't even pass.
Mr. Caplin, the one thing I would like to say about your testi-
mony is that I think that much of your discussion about transition
rules designed to protect people would not be proscribed by this
amendment because it is not the imposition of a tax, but rather re-
lieving someone of a tax burden, at least for a while. The wording
of the amendment provides, "No Federal tax shall be imposed for
the period before the date of enactment of a tax."
So, clearly, where you need to allow for a transition to a new
kind of tax code, we are going to be providing people an oppor-
tunity to make changes before the new tax is actually applied. But
142
I don't think the intent here is to preclude us from being able to
help people with these transition rules, but rather to make it more
difficult for us to go back in time at a point in time when they were
not able to change their behavior.
You see, the retroactive tax on the Dixons here they could never
have done anything about. There was never a notice given to them
in time for them to do something about it. The tax was actually
made retroactive to a point earlier than the time the Congress even
began the debate on the proposal, technically even before the ad-
ministration took office. So there was no way for anybody to change
their behavior even with a notice later on. I think that is the pri-
mary thing we are trying to deal with here.
Mr. Caplin. I am very S3anpathetic to Ms. Dixon. I think almost
anybody would have to be. I am not particularly familiar with the
exact transaction she is talking about as to what was retroactive
as of what date.
When I am talking about the Chairman of the House Ways and
Means Committee announcing that capital gains shall be lessened
as of January 1, 1995, I would regard that as a rather specific com-
mitment, and it isn't just in the Beltway. Typically, newspapers
around the country pick this thing up pretty broadly.
Senator Kyl. But it didn't happen.
Mr. Caplin. That is right.
Senator Kyl. Therefore, somebody going ahead and selling an
asset based on that certainly
Mr. Caplin. Yes. I would have been very cautious about that
under the circumstances. That is right, that is right. It is a very
difficult situation. There are hardships. I mean, even today the last
piece of a transition rule was taken care of. Personal interest was
made non-deductible and over a 3-year period they allowed for
some transition device. You wouldn't have to pay the full tax in 1
year. Congress, in its wisdom, used a 3-year period.
I abhor retroactivity. I gave you examples of really true retro-
activity that wouldn't be covered by your bill, as I understand it.
I mean, the fact that I had deferred compensation for my entire life
as a lawyer to be paid to me after my retirement next year and
you make an effective date today — I am now going to have higher
rates that next day. I mean, what about protecting me? I mean, I
have a lifetime tied up in my pension plan.
I just feel that I would come and try to convince you somehow
that you have to give me some relief and leave it to your good judg-
ment and wisdom. The question of what would compel the majority
of Congress to make a bill retroactive — there has to be some strong
needs.
Senator Kyl. Yes; the need for revenue. I am not sure that is
strong enough.
If I could, because the time is short here, I think one can argue
making — well, making perfection an enemy of the good is another
way to say it. There will always be effects on people as a result of
what we do, but there is a difference in magnitude, it seems to me,
between the error that we propound when we announce an effec-
tive date some time into the future as opposed to going back in
time when people don't have any opportunity to do anything to al-
leviate that particular burden. We are addressing the latter, not
143
the former. We can't solve everything or we would — as Dr. Pilon
said, the argument, in a sense, proves too much. We would be pre-
cluded from acting at all.
I also want to say to Joe Schmitz that this is not the only subject
upon which I am familiar with his writings. He has written exten-
sively on a variety of constitutional issues, including a recent piece
on the tenth amendment, and I think his statement about the his-
tory of this issue will be particularly informative to the record be-
cause it is apparent that the Supreme Court is not going to change
the law any time soon.
I was going to ask you what it would take, but I gather it is not
in the cards. I think we can just summarize it that way. Therefore,
this very extensive and interesting historical perspective which you
have provided will enable us, the Congress, to make the change
that it appears to me the Court simply doesn't have the stomach
for.
I am interested at this point, as I am sure Senator Coverdell is,
in getting any other judgments as to precisely how we can best do
this, assuming that we want to do it, to deal with the problems and
issues that have been raised. But I think the historical record that
Joe Schmitz writes about and that Dr. Pilon has testified about
makes it crystal clear that it was the original intent of the Fram-
ers. So if the Court isn't going to do it, we have got to do it and
the question is how best to do it. Rather than raising all kinds of
burdens about why it is hard, I think we ought to be focusing on
how we can make it happen.
Now, given the fact that we have about another 7 minutes here,
if Senator Coverdell would like to engage in another round of ques-
tioning or make any comments or if any of the other witnesses
would like to add something, I would afford you that opportunity.
Senator Coverdell. I will defer to the witnesses and the Chair-
man, other than to say that I think the national security issue
could be rather comfortably dealt with. Perhaps that is a reason to
override, but that would not be inordinately difficult in our lan-
guage to deal with in terms of if there were a hostile conflict that
called on the Congress. Some of the retroactive taxation has actu-
ally been directed at resolution of those kinds of matters.
The one with which we are mostly currently dealing is egre-
giously absent any national security and really only relates to na-
tional spending priorities. But if we could all come together, taking
your admonishment, and work toward perfection of it, I think we
can produce something that eliminates all but the intellectualizing
in terms of what ultimate flexibility might enable us to do, which
I reject, but I will stop with that, Mr. Chairman.
Senator Kyl. Well, may I just ask one final question, then, of any
of you? I guess I will address it to you, Mr. Caplin, but I would
like to get Joe Schmitz' reaction to this, too.
Am I correct that transition rules designed to allow people not
to be taxed for a period of time until they can get their affairs in
order to comply with a new provision in the code — that that would
not be proscribed by this particular provision? Am I correct in that?
Mr. Schmitz. I would say definitely that would not be covered by
the prohibition. I mean, there is a fundamental difference between
taking property away from a citizen and allowing the citizen to
144
keep his own property. You know, we talk about tax breaks and,
you know, we have to ultimately face the fact that taxation is tak-
ing money from individuals or companies. It is a fundamental
power that a sovereign has.
You know, when we go back to Blackstone, if I could just refer
back to the 18th century again, Blackstone defined four essential
elements of any civil law, and I will just read it. This is right out
of what the constitutional Framers cited in the debate over the Ex
Post Facto Clause and due process provisions. Blackstone says that
a civil law is, "a rule of civil conduct prescribed by the supreme
power of a State."
Now, we have two problems we have to deal with today. One is
sort of the elementary, fundamental problem about prescription. I
mean, it is just so fundamental of any rule. You have got to write
the laws and you have got to write them in advance of when they
apply. I mean, the idea of a retroactive tax is just so abhorrent, as
I said, and I can't imagine our Founding Fathers even listening to
this debate without being completely disgusted that we are even
sitting here having to debate this.
The other problem actually comes right out of Blackstone's defi-
nition, too, that these rules have to be prescribed by the supreme
power of a State. Essentially, our retroactivity laws now are pre-
scribed by the Supreme Court, which is not supposed to have any
legislative power at all. In this regard, I would like to compliment
Senator Kyi for cosponsoring a current proposal that would essen-
tially try to wrest some of this power back to the legislative body.
There was a bill, if you don't mind, Senator Kyi, introduced on
March 20, last month, called the Tenth Amendment Enforcement
Act of 1996, which provides a very simple rule of construction for
the courts. It says, "Any ambiguity in this Act or in any other law
of the United States shall be construed in favor of preserving the
authority of the States and the people." That is exactly what the
Court doesn't do now, especially in the tax area.
Correct me if I am wrong, Mr. Caplin. Any ambiguity in the tax
law, by Court edict, gets construed against the individual.
Mr. Caplin. That is not quite accurate, really.
Senator Kyl. What is the general rule?
Mr. Caplin. Well, I think you will find the Supreme Court and
lower courts will interpret them the other way. Frequently, it is the
level of advocacy that has been involved.
Senator Kyl. There are some general rules of interpretation,
though, are there not?
Mr. Caplin. I really don't think so.
Senator Kyl. Well, we don't need to debate that here.
Mr. Caplin. Right, right.
Senator Kyl. I had promised that we would be done by 2:30. Dr.
Pilon has a last comment. If I could ask you and then we will ad-
journ.
Mr. PiLON. I would just say in response to Mr. Caplin the history
of the courts' interpretation is not the kind of thing that would en-
courage the taxpayer. The point that you raised, though, Senator
Kyl, about transition rules and periods and a period of time for
people to get their economic affairs in order under new conditions
145
that may be emerging and to go without being taxed during that
period is, I think, a very important issue.
It came up a Uttle over a year-and-a-half ago when we held hear-
ings on Senator Coverdell's bill in August 1994. It came up in the
form of testimony that was put forward by Mr. Ronald Pearlman
during that time, and the fear seems to be on the part of opponents
of this amendment that it would result in some loss of revenue flow
to the Government, which some people think is a bad thing.
There, it seems to me that the Government has to simply bite
the bullet and say, yes, we are going to have to suffer some reve-
nue loss as a result of mistakes that we may have made or changes
that we want to make in the name of fairness; that is to say, as
long as you think of the taxing situation as a zero-sum game where
someone else's relief for a brief period of time means that someone
else is going to have to pay more, then you will never get out of
this conundrum.
You have got to stop thinking of it as a zero-sum game and start
thinking of it as a game in which we are going to start rolling back
taxes, returning power and the ability to keep their own money to
the American citizen. Once you do that, then the so-called transi-
tion problem becomes far, far less. I think that the distinction that
you made earlier on is absolutely to be focused upon; namely,
changing the rules in the middle of the game versus changing the
rules retrospectively. It is bad enough that you are going to have
to change the rules in the middle of the game.
We have gotten ourselves into this gargantuan taxation situa-
tion, as Senator Coverdell mentioned in his testimony, and now we
have the problem of getting ourselves out of it. It is a little bit like
the Soviet Union and Russia today getting itself out of the massive
socialism and all the problems that attend that it got itself into.
People are going to be hurt in the process of getting out of this
problem.
The idea is, though, that if you do it with a distinction between
changing the rules in the middle of the game versus changing the
rules retrospectively, that is extremely important to preserve that
distinction and under no condition should you tax retrospectively
even if you have to incur some burdens or impose some burdens
upon people as a result of changing the rules in the middle of the
game, which is what you are going to have to do under any cir-
cumstances.
Senator Kyl. Mr. Caplin has one very short remark, please, and
then Senator Coverdell.
Mr. Caplin. I want to say this here that I am strongly opposed
to retroactive legislation and I would do everything I could to avoid
it, but I was really making the argument for flexibility to take care
of the emergency, the threat to our national security, any other cri-
sis that might arise.
If you want to have the perfect world in terms of having pure
prospective legislation, you have to think seriously of something
that is more than the typical retroactive legislation. The man who
has invested his fortune in real estate on the supposition that there
are going to be certain deductions that he will be able to take year
after year and he cannot change it without maybe bankrupting
himself, selling that property at a bad price because the value of
146
the property probably will go down if the deductions aren't there —
just like your own home; if you don't get the deduction for taxes
that you pay in connection with your house, the value of that house
is going to go down. So I think if you are going to think of this en-
tire problem, you have to think of the locked-in position already.
Senator Kyl. It sounds like a good argument for the flat tax.
Senator Coverdell. Well, I would only argue that this would
correct a portion of the egregious nature of changes of the rules in
midstream and that we ought not to take other unsolved problems
which ought to be aired here and let that be the argument for not
making the fundamental change.
I am sitting here as I have heard this and I am thinking of the
vast court of public opinion of the American people. If you put the
question to them, now, let's see, should we amend the Constitution
so that there shall be no retroactive taxation or should we protect
the Congress from the foible of making a mistake and not being
able to go back and correct it and modify it, you would want to get
out of the way of the answer, it would be so forceful.
I thought your analogy of the schoolyard was very appropriate.
I can remember those schoolyards and I can remember — I know
you have all heard this — you are changing the rules; that is not
what the rule was. It is fundamental. This is a fundamental trans-
gression of American fundamental concept of fairness wherever the
flag flies. I close on that.
Senator Kyl. Thank you. That is a great statement to close on.
Again, we thank all of the members of the panel for being here. I
would like to notify everyone that the record of this subcommittee
hearing will be kept open for 2 days for the submission of any
statements on this amendment.
The hearing is now closed.
[Whereupon, at 2:34 p.m., the subcommittee was adjourned.]
147
APPENDIX
Proposed Legislation
104th congress
1st Session
S. J. RES. 8
Proposing an amendment to the Constitution of the United States to prohibit
retroactive increases in taxes.
IN THE SENATE OF THE UNITED STATES
January 4, 1995
Mr. COVERDELL (for liimself, Mrs. HUTCHISON, Mr. SMITH, Mr. LOTT, Mr.
Helms, Mr. Kempthorne, Mr. Craig, Mr. Shelby, Mr. McCain, Mr.
Warner, and Mr. Roth) introduced the following joint resolution; which
was read twice and referred to the Committee on the Judician'
JOINT RESOLUTION
Proposing an amendment to the Constitution of the United
States to prohibit retroactive increases in taxes.
1 Resolved by the Senate and House of Representatives
2 of the United States of America in Congress assembled (two-
3 thirds of each House concurring therein), That the foUow-
4 ing article is proposed as an amendment to the Constitu-
5 tion of the United States, which shall be valid to all intents
6 and purposes as part of the Constitution when ratified by
7 the legislatures of three-fourths of the several States with-
8 in seven years from the date of its submission by the Con-
9 gi-ess:
148
2
1 " Article —
2 "Section 1. No Federal tax shall be imposed for the
3 period before the date of enactment of the tax.
4 "Section 2. This article shall take effect the date
5 of its ratification . " .
•SJ 8 IS
149
104th congress
2d Session
S. J. RES. 49
Proposing: an amendment to tlie Constitution of the United States to require
two-thirds majorities for bills increasing taxes.
IN THE SENATE OF THE UNITED STATES
February 27 (legislative day, Februaey 23), 1996
Mr. K-i-L (for himself, Mr. Ccn-ERDELL, Mr. Craig, Mr. Faircloth, Mr.
Grajms, Mr. IxHOFE, Mr. Kempthornte, Mr. Lott, Mr. McCain, Mr.
Pressler, Mr. Santorum, Mr. Shelby, Mr. Smith, Mr. Thomas, and
Mr. Thompson) introduced the following joint resolution; which was read
twice and referred to the Committee on the Judiciar\-
JOINT RESOLUTION
Proposing- an amendment to the Constitution of the United
States to require t\vo-thirds majorities for bills increasing
taxes.
1 Resolved by the Senate and House of Representatives
2 of the United States of America in Congress assembled
3 (two-thirds of each House concurring therein), That the fol-
4 lo\^ing article is proposed as an amendment to the Con-
5 stitution of the United States, which shall be valid to all
6 intents and purposes as part of the Constitution when
7 ratified by the legislatures of tliree-fourths of the several
•(Star Print)
150
2
1 States witliin seven years after the date of its submission
2 by the Congress:
3 "Article —
4 "Section 1. Any bill to levy a new tax or increase
5 the rate or base of any tax may pass only by a two-thirds
6 majority of the whole number of each House of Congress.
7 "Section 2. The Congress may waive section 1 when
8 a declaration of war is in effect. The Congress may also
9 waive section 1 when the United States is engaged in mili-
10 tary conflict wliich causes an imminent and serious threat
11 to national security and is so declared by a joint resolu-
12 tion, adopted by a majority of the whole number of each
13 House, which becomes law. Any pro\dsion of law wliich
14 would, standing alone, be subject to section 1 but for this
15 section and wliich becomes law pursuant to such a waiver
16 shall be effective for not longer than 2 years.
17 "Section 3. All votes taken by the House of Rep-
1 8 resentatives or the Senate under tliis article shall be deter-
19 mined by yeas and nays and the names of persons voting
20 for and against shall be entered on the Journal of each
21 House respectively.".
BOSTON PUBLIC LIBRARY
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SUFFOLK UNIV LAW LIBRARY
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BOSTOKPn|XUg^^
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ISBN 0-16-054969-8
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