Unchecked Power

But how to actually regulate sugar? Try to fix some limit on serving sizes? Require soda-makers to de-sweeten pop? Such command and control options would no doubt be hamfisted. And so the Post suggested the all-purpose solution: new taxes. (Never mind that Washington already dramatically inflates sugar costs through a tangled program of price supports and import controls.) “Sugar taxes are not about punishment or blame,” the Post declared, “but are about nudging people from destructive behavior in a way that’s both economically efficient and less coercive than many alternatives.”

The Post might have added one other advantage to using taxes to regulate — such regulations are almost guaranteed to get a pass from the courts, which for more than a century have encouraged lawmakers to use tax-collectors as go-to regulators, especially when the constitutional power to regulate something is in doubt.

The tax code is complicated not just because generations of rent-seekers have manipulated it for their advantage but because taxation has become an all-purpose method of regulation, one that is virtually preapproved by the courts. The power to regulate and the power to tax have been crossbred, becoming a sort of hybrid power, one that is rarely challenged, but very much needs to be.

The Affordable Care Act is the most recent, and perhaps most disturbing, example of how the tax code can be used to sidestep the Constitution’s restraints on Congress— a case that will long be studied by those eager to expand the power of the federal government. Obamacare’s success before the Supreme Court will encourage future legislators to exploit the same dangerous loophole: the legal principle that just about any regulation can be justified if it comes packaged as a tax. Which makes Obamacare another sort of case as well — a case for radically reforming the tax code.

The Affordable Care Act has found itself before the Supreme Court in two high-profile cases. The second time, a key question was how much leeway the IRS should have in its implementation of Obamacare. During oral arguments in King v. Burwell last March, Justice Anthony Kennedy pressed a point that prognosticators (wrongly) took as a clue to how he might vote: “It seems to me a drastic step for us to say that the department of Internal Revenue and its director can make this call one way or the other when there are — what?— billions of dollars of subsidies involved here.”

It’s an obvious question: How is it that the IRS got in the middle of health care policy? Isn’t there something odd about using tax collectors to regulate medicine? But the question came late. Making the IRS Obamacare’s enforcer was, for the Court, not a legal pratfall but the very thing that allowed the law to pass muster the first time around.

When Obamacare first came before the Court, the question was whether Congress had the right, using the “individual mandate,” to fine consumers who chose not to buy health insurance. Lower courts had found that the mandate was a “penalty,” not a tax — a key distinction, because if the mandate wasn’t a tax, it had to be justified under Congress’s power to regulate interstate commerce.

But if the mandate could be labeled a tax, there was no constitutional quibble to be had: “Put simply, Congress may tax and spend,” Chief Justice John Roberts wrote in his opinion in that first Obamacare case, National Federation of Independent Business v. Sebelius. “This grant gives the Federal Government considerable influence even in areas where it cannot directly regulate,” Roberts wrote. “The Federal Government may enact a tax on an activity that it cannot authorize, forbid, or otherwise control.”

In other words, for all the Constitution’s efforts to rein in the power of Congress and the president, those restrictions largely fall away if a regulation can be packaged as a tax.

And the power of taxation is not limited in the way other enumerated powers are. Compare, in the Sebelius ruling, how restrictively Roberts reads the commerce clause with how expansively he conceives the power of taxation.

If the commerce clause can be used to justify regulating “individuals precisely because they are doing nothing,” the chief justice warned, it “would open a new and potentially vast domain to congressional authority.” How vast? Unlimited, because on any given day there are “an infinite number of things” that people don’t do.

And yet Roberts dismissed that very distinction — the difference between doing something and doing nothing — once the question was about taxes. He briefly entertained the question of whether it’s “troubling to permit Congress to impose a tax for not doing something.” But he quickly cast that concern aside, in part by invoking the famous Benjamin Franklin line that “nothing can be said to be certain, except death and taxes.” Comforting, that.

If the individual mandate is “just a tax hike on certain taxpayers who do not have health insurance,” Roberts wrote, “it may be within Congress’s constitutional power to tax.” Why? Because “it makes going without insurance just another thing the Government taxes, like buying gasoline or earning income.”

But is choosing not to buy insurance the same as choosing to buy gasoline? “Buying” and “earning” are both, of course, things that people do. Roberts wasn’t worried, it seems, about opening a vast domain of congressional power by allowing Washington to tax the infinite number of things that people don’t do. Indeed, Roberts bluntly wrote, “[I]t is abundantly clear the Constitution does not guarantee that individuals may avoid taxation through inactivity.”

Congress’s power to tax, in other words, is a sort of trump card. Those who think limits on federal power are, by and large, a good thing have long found this to be a problem — not only because it opens the regulatory floodgates, but because it encourages lawmakers to indulge in dishonest acts of legal camouflage.

A century ago, Second Circuit Court of Appeals judge Charles Merrill Hough warned, in a Harvard Law Review article, that the desire for federal action was far outpacing the powers given to the national government: “Appetite for broad general legislation grows, and the discovery of enough powers enumerated or implied to justify national and nation-wide regulation of industrial and social conditions becomes increasingly difficult.”

Hough recognized that this led to a corrupting sort of legislative creativity, in which it had become commonplace to have statutes “whose constitutional support bears no sincere relation to the legislative and popular purposes sought to be attained.” Hough called these laws “covert legislation” and warned that such statutes were “habit-forming.” And how!

Hough pointed to Congress’s struggle to find a constitutional means by which to regulate cotton futures, in which lawmakers settled on a tax. The ability to suppress behaviors with prohibitive taxation, Hough wrote, demonstrated “the covert capabilities of the taxing power.”

The constitutional trump is just one of a whole raft of advantages, from the legislators’ point of view, that come from regulating under the cover of taxation. Another is the protection afforded by the Anti-Injunction Act, which keeps courts from blocking the collection of a tax. A tax law generally can’t be challenged until after the tax has already been paid. Mere regulations can be fought before they are in force; regulatory taxes must be coughed up before they can be contested.

Then there’s what Kinky Friedman would refer to as the “financial pleasure”: When regulations are taxes, it usually means moneys are being collected, an obvious benefit from the government’s point of view.

And finally there’s the advantage of having an all-purpose, ready-made, prefunded regulatory body — the IRS — that makes it ever so easy to regulate activities and enterprises that previously hadn’t been regulated.

Consider the language supporting regulatory taxation that is included in the “analytical perspectives” section of the president’s annual budget proposal — justifications so taken-for-granted that the wording is changed barely, if at all, from year to year. The language touts the behavior-modifying incentives and disincentives available— “deductions; credits; exemptions; deferrals; floors; ceilings; phase-ins; phase-outs” — always taking care to add that “there is an existing public administrative and private compliance structure for the tax system.”

Who can argue against the efficient use of existing administrative infrastructure? Except those vaunted efficiencies may be imaginary. The IRS has already used the burden of administering Obamacare as an excuse for not answering taxpayers’ basic questions. “Because of the zero funding for the Affordable Care Act,” IRS commissioner John Koskinen told Congress, the IRS had “to move a significant part of that support for taxpayer service” into support for Obamacare. There may be, as the boilerplate puts it, “an existing public administrative and private compliance structure,” but piling new duties on it is hardly cost-free.

The efficiency argument also assumes that tax-collectors have the skill sets to shape policies that have little to do with revenue. Regulatory taxation gives the taxman the power to make hugely consequential decisions in areas well outside the most generous estimates of his competency. This is how the IRS ends up smack in the middle of health care policy.

Using the infrastructure of tax collection to calibrate regulatory incentives and disincentives can (or should one simply say does?) lead to IRS abuse. What is the Lois Lerner affair but an example of the IRS being allowed to determine which speech is encouraged by gaining IRS approval and which speech is discouraged by getting the IRS runaround?

Given their disdain for regulation and dislike of taxes, you might think conservatives would be doubly opposed to regulations packaged as taxes. And yet many seem to be as enamored of regulatory taxes as liberals. There are those who think regulation via taxation is less oppressive than outright prohibition. Enact a ban and there is no choice; but with a tax, one can choose to pay or not according to one’s druthers. (This is one of the reasons Roberts gave to explain his sanguinity in allowing Obama-care’s individual mandate to survive as a tax: “We do not make light of the severe burden that taxation — especially taxation motivated by a regulatory purpose — can impose,” he wrote. “But imposition of a tax nonetheless leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.”)

And then there are those amenable to the expansion of government power as long as it’s couched in the economist’s language of “incentives” and “disincentives.” Regulatory taxes are the preferred tools for tinkering with imperfect (are there any other kind?) markets. If some activity of mine imposes costs on society (and what activity doesn’t?), the idea is to put that cost back in my lap through taxes. In this way I’m either discouraged from engaging in the activity in the first place, or I’m made to pay the costs I’ve imposed.

The patron economist for this sort of thinking is Arthur Cecil Pigou. Harvard economics professor and chief economist to President George W. Bush, Gregory Mankiw is a prominent Pigouvian, arguing that regulatory taxes “are often the least invasive way to remedy a market failure” and that they restore market efficiency “without requiring a heavy-handed government intervention into the specific decisions made by households and firms.” Taxes that discourage, for example, the use of fossil fuels are labeled “smart taxes,” which must, we’re thereby encouraged to think, be the best sort of taxes.

But as Clemson University economist Bruce Yandle has pointed out, “Pigou was not much of a Pigouvian.” Let’s say an optimal assortment of taxes and subsidies could be divined: Who, given even the slightest familiarity with government in action, would imagine that lawmakers and regulators would implement that optimal assortment? We “cannot expect that any public authority will attain, or will even wholeheartedly seek, that ideal,” Pigou himself wrote. “Such authorities are liable alike to ignorance, to sectional pressure and to personal corruption by private interest. A loud-voiced part of their constituents, if organized for votes, may easily outweigh the whole.”

Flip through the pages of R. Alton Lee’s History of Regulatory Taxation, and you’ll find case after case of the loud-voiced constituents Pigou warned against and their ceaseless efforts to get their competitors’ products taxed out of business. In 1886, lawmakers from dairy states combined to suppress “oleomargarine,” which was cutting into the butter business. The legislation imposing a hefty tax on the cheap butter-substitute, HR 8328, was penned by the National Dairymen’s Association.

Makers of oleomargarine appealed to the Supreme Court, arguing that taxes were being used to destroy an otherwise perfectly legal business. But because the destruction came in the form of a tax, the Court was satisfied it was constitutional: From “the beginning of our government,” the justices ruled in Magnano v. Hamilton, “the courts have sustained taxes although imposed with the collateral intent of effecting ulterior ends which, considered apart, were beyond the constitutional power of the lawmakers to realize by legislation directly addressed to their accomplishment.”

It was hog farmers who used the tactic next, lobbying for legislation to tax newfangled pseudo-lard made from cottonseed oil (a sort of proto-Crisco). Producers of the oil, having paid attention to the fate of the oleo crowd, got themselves organized and managed to keep the “compound lard” levy from passing.

Come the turn of the century, oleo was still on the market, and so the dairymen came back to Washington, looking for stiffer taxes, especially on margarine tinted yellow to resemble butter. When other farmers looked to Washington to clamp down on speculation in cotton futures, Arkansas senator James P. Clarke urged lawmakers to use the taxing power, describing it as “one of the most comprehensive and flexible powers of the Government .  .  . the best means of regulation or suppression at its command.” Alabama congressman Oscar Underwood heartily agreed: “If you want to use the most effective power,” he proclaimed, “there is no greater power in the government than the power to tax.”

There were those who saw, all along, where this was headed. “Once enter upon this kind of legislation,” stem-winding Texas senator Joseph W. Bailey cautioned, and “it will end only after the Congress of the United States has become a kind of board to settle the rivalries between competing manufacturers .  .  . according to the power and influence of the rivals.”

Not only did the new tax on oleomargarine pass, it was upheld by the Supreme Court, which ruled it would allow regulatory taxes as long as there was at least some pretense of revenue-collection. The Court said in McCray v. United States (1904) that it would strike down such regulations only if it “was plain to the judicial mind that the power had been called into play, not for revenue, but solely for the purpose of destroying rights.” Those who would use taxes to regulate have found this to be a rather easy hurdle to clear.

Significant pushback to this expansive standard wouldn’t come for nearly two decades. In Bailey v. Drexel Furniture Company (1922), the Supreme Court ruled that a tax on child labor wasn’t really a tax at all but a ban dressed up as a tax. Such a welcome constitutional check on Congress’s taxing power, one might think, would have put at least a semi-kibosh on the regulatory tax racket. Instead, it merely proved to be one more incentive to involve tax collectors in the business of regulating: Because as long as there are taxes being collected by the IRS, the courts have proved willing to accept that regulations are mere taxation.

Which brings us back to Obama-care. In Sebelius, Chief Justice Roberts contrasted the Affordable Care Act with the child labor law struck down in Drexel. He pointed out that the levy against child labor “was enforced in part by the Department of Labor, an agency responsible for punishing violations of labor laws, not collecting revenue.” Obamacare’s individual mandate, by contrast, is administered by the IRS. The presence of the tax agency, instead of being a screwy regulatory aberration, serves as proof that the individual mandate is indeed a tax, and thus constitutional under Congress’s taxing power.

The legal precedents allowing Congress to use its taxing powers for regulatory purposes are by now so long-established that challenging the practice in court is a nonstarter. Persuasive as arguments such as those made by Judge Hough against “covert legislation” may be, the case law is settled: Accumulated court rulings not only allow but encourage lawmakers to justify regulatory overreach as taxation.

Watch, for example, what happens with the licensing of gun dealers: How long before restrictive regulatory taxes on those licenses become an effective end-run around the Second Amendment?

Is there nothing that can be done to constrain this “power to destroy,” as Chief Justice John Marshall once described taxes, a power that, as he warned in Weston v. Charleston, “in its nature acknowledges no limits”?

The answer is to limit that power by embracing a flat tax. The virtues usually claimed for a flat tax include spurring growth, as investment would be made on economic principles instead of being guided by tax loopholes; reducing corruption, as the lobbyists, lawyers, and accountants who cultivate the tax code would find themselves looking for more productive employment; and fundamental fairness (see Stephen Moore’s “Remember the Flat Tax?” May 4, 2015).

But let’s add to those compelling reasons one more: Radically simplifying the tax code means radically reducing the opportunities for lawmakers to shape and control our lives. It doesn’t mean Washington can no longer regulate, merely that regulations would have to be implemented and justified within the limits of the powers enumerated in the Constitution, rather than under the expansive catch-all of taxation.

Presidential candidates making the case for a simplified tax code, as many in the Republican field have been doing, should look beyond arguments about fairness and growth. Important as those issues may be, the more fundamental question is whether there can be any effective limits on federal power. The courts aren’t about to restrain lawmakers from regulating through the tax code, which makes a flat tax potentially the most important reform that could be made to constrain the regulatory state.

This would obviously be a long-term effort. Imagine that a flat tax replaces the current code, like a blackboard wiped clean. Before the chalk dust settles, someone will have suggested the smallest of exceptions that need to be made to correct for this or that. And then, perhaps another eminently reasonable idea — a “smart tax,” no doubt — and another: Blank blackboards just beg to be written on.

The challenge would be not only to achieve a flat tax, but to maintain it in the face of endless pressures to use the tax code to regulate. But it’s worth the effort. Of all the good reasons to embrace a flat tax, the most compelling may be that it bolsters individual freedom.

Is it possible? Why not? After all, when old Ben was listing the things you could count on, he didn’t say “death and regulatory taxes.”

Eric Felten is managing editor of The Weekly Standard. His most recent book is Loyalty: The Vexing Virtue.