January 8, 2013

Our Obsolete Constitution?

James Madison would have supported the flat tax.

By common consent, our constitutional system of government is broken in some deep way that resists any short-term fixes. Anyone who has witnessed the fiscal cliff saga must fear that the brinksmanship so evident between the Republicans and Democrats is rapidly becoming par for the political course. Now that the negotiations have been completed and the debt limit battle looms nigh, it is clear that our nation’s political problems have gone from bad to worse.

Our modern constitutional system seems to be weighed down by non-stop political crises, from entitlement reform to labor relations. With each new crisis comes a short-term fix. Over time, these fixes will only exacerbate the nation’s long-term problem of living beyond its means—for now, short-term interest rates remain low enough to fund the nation’s tidal wave of debt.

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  Illustration by Barbara Kelley

What, if anything, should be done about our political crises? On this question, a recent New York Times op-ed by Georgetown Law Center professor Louis Michael Seidman gives precisely the wrong answer. In his piece, “Let’s Give Up on the Constitution,” Seidman attributes the current “fiscal chaos” to an antiquated Constitution to which we should owe scant respect. In this vein, he dismisses the founding fathers as “a group of white propertied men who have been dead for two centuries, knew nothing of our present situation, acted illegally under existing law and thought it was fine to own slaves.” Why therefore should anyone care about what James Madison thought when he wrote the Federalist papers nearly 225 years ago?

The problem with the original constitutional design, he goes on to argue, is that it requires all revenue measures to begin in the House of Representatives. But the framers had a point in having revenue measures originate in the more populous house; it is an indirect way of restraining the propertied elites in the Senate. Beyond that, this limitation is easily evaded by a variety of procedural maneuvers and has not limited some of our more grotesque revenue bills from being passed into law, including the noted exemplar spawned by the recent fiscal cliff negotiations.

Unfortunately, Seidman has the causation reversed. The reason why the situation today is so perilous is that Congress is not strictly bound by the Constitution, just as Seidman advocates. There are currently no constitutional constraints limiting the discretion of Congress to decide what tax burden will be placed on what groups for what reasons. In fact, the only restraint on taxation is a broken-down system of public deliberation, which results in a fruitless question to find, as Seidman puts it, “a common vocabulary to express aspirations that, at the broadest level, everyone can embrace.” Otherwise, Congress is free to dispense tax favors and impose tax burdens as though there were no tomorrow.

Yet there is no such common vocabulary because there are a set of irreconcilable political ambitions from which neither side will retreat. The progressives think in terms of income and wealth redistribution; they believe that the problems of economic growth and jobs will take care of themselves, notwithstanding four years of high unemployment rates and an ever more progressive system of taxation. The fiscal conservatives think that low taxes on a broad economic base, coupled with the deregulation of labor, real estate, and financial markets, will produce the high growth rates that will, in the end, do more to help the other 99 percent than the policy agenda of the current progressives.

James Madison's Wisdom For Today

On these issues we can learn far more from James Madison than his modern critics. In Federalist Number 10, he addressed the problem of factions, writing: “By a faction, I understand a number of citizens, whether amounting to a majority or a minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community.”

The chief mission of government, he asserts, is to develop permanent institutional restraints to guard against factions. One of those was originally found in Article I, section 8, clause 1, of the Constitution, which stated that “Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.” Madison took a very narrow view of that Clause in Federalist Number 41, noting that the Clause had been lifted from a parallel provision in the Articles of Confederation that in no way sought to confer unlimited powers on the federal government.

In his view, the proper way to think about this clause of the Constitution was to link the objects on which Congress could spend money to those that it could regulate under its enumerated powers, all of which were given far narrower readings in 1787 than they are today. If anything, an even narrower version of the clause seems defensible given that all three objects of permissible expenditure of public revenues are public goods of the sort that must be supplied to all individuals if they are to be supplied to any.

Paying off state debts and providing for the common defense are classic public goods. The last power that deals with the “general Welfare of the United States” is not some open sesame clause that renders irrelevant the limitations of paying off debt and providing for the common defense. The key words here are “of the United States,” which refers to the nation as a whole, not—here the link to Federalist 10 becomes explicit—to this or that particular faction.

To see why, it is useful to compare the collective expenditures made for the general welfare of the United States and corporate expenditures that are made for the general welfare of corporations. Limitations are always put into corporate charters to ensure that cash or property is not transferred from one unfortunate group of shareholders to another with more power, like the company’s officers or directors.

The key challenge in the formation of a union among jealous states is to give them confidence that their taxes will similarly be spent on collective goods, and not on transfer payments that subject one faction to expropriation by another. To be sure, there are always some difficult cases, but these are not sufficient to upend the overall system. No one should doubt that the creation of an interstate highway system falls within the conception of general welfare even if the network of local roads does not.

The Flat Tax Solution

The limitations from the spending clause are one component of a constitutional system dedicated to the control of factions. But it is also necessary to insist, as a constitutional matter, that all taxes be flat, as yet another protection against the risks of redistribution through faction. This can be done through a consistent application of the Takings Clause.

Many people might be either aghast or amazed at so strong a claim. But in its short form, the argument runs as follows. There is, in principle, no watertight distinction between taxes and takings. With the latter, the government occupies property, for which it must pay compensation. With the former, it threatens to seize property, via a tax lien, if taxes are not paid. In both cases, the government is allowed to take so long as it supplies compensation.

With specific parcels of land, that is done through cash payments from the public treasury. With taxes, the benefits come in the form of (non-divisible) public goods. To be sure, it is impossible to supply exact equivalents between property taxed and benefit supplied. But without question, the flat tax gives the best first estimate, while limiting the power of Congress to use an explicit program of redistribution that can rip a nation apart.

The efforts of all branches of government to keep that understanding alive were more or less successful until the early part of the twentieth century, when progressive forces began to overwhelm the more pristine conception of Congressional powers. The Sixteenth Amendment, ratified in 1913, removed the requirement that income taxes be apportioned among the several states, and was widely understood to authorize the imposition of progressive taxation as well. The Maternity Act of 1921 relaxed matters on the spending side to allow for federal funding for maternity and child care.

The Supreme Court brushed aside the constitutional challenge to the law in the 1923 cases of Massachusetts v. Mellon and Frothingham v. Mellon on the ground that neither individual citizens nor the states had standing to challenge the law. So the law went without any judicial review of whether this expansion of the federal spending power met constitutional muster.

By this time, the original understanding of federal powers to tax and spend were in tatters, and it took only some deft words by Justice Benjamin Nathan Cardozo in the 1937 case of Helvering v. Davis to make it crystal clear that the power of Congress faced little or no oversight from the Court. That understanding was carried forward by all sides in last year’s health-care case, NFIB v. Sebelius (2012), which upheld the individual mandate, making clear that Congress was subject to no check in its exercise of the taxing power so long as there was some rational basis to forge a connection between the ends chosen and the means selected to reach those ends.

The older conception of public goods has been entirely rejected by all justices on the Supreme Court regardless of their political persuasion, so we have a current legal regime that is just the one Professor Seidman craves. On taxing and spending, we have a constitutional structure that is not informed by a single action or statement of James Madison or any other founder. Instead, our structure allows Congress to debate the many vexing problems of current times unhindered by constitutional principle, passing statutes whose “wisdom or fairness” is beyond the power and the competence of the courts to judge.

It is precisely because this New Deal constitutional structure is in place that we face fiscal cliffs and political chaos. Congress has so many degrees of freedom that it is all too possible for a winning coalition to target its enemies in order to help its friends. Thus it is now in the interest of President Obama to demonize the “millionaires and billionaires” who do not pay their “fair share” of taxes under a tax scheme that looks more progressive than any this country has faced since 1979.

In effect, popular groups can isolate and outvote persons of property in ways that will only give Congress more resources to spend money on special programs whose costs are high and benefits are dubious. Though we may have escaped a worse fate by resolving the fiscal cliff negotiations, next time we may not be so lucky.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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