Democratic members have raised a novel argument under the Fourteenth Amendment that the refusal to raise the debt ceiling is unconstitutional. For full disclosure, I was asked about this argument weeks ago by members who believe that forcing the country to default would be not just catastrophic but unconstitutional. I will be discussing this topic today on CNN and tonight on Countdown.
The relevant language of the Fourteenth Amendment states:
The argument goes that Section 4 of the Fourteenth Amendment declares:
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”
The argument goes that, by not lifting the debt limit, Congress is “questioning” “the validity of the public debt of the United States.” Under this logic, advocates are encouraging President Obama to simply pay the debts in accordance with the Constitution. That would be an extreme step that would add a constitutional crisis to an economic crisis.
The “authorized by law” clause could present an interesting debate since the debt ceiling is part of a federal statute — though conversely so is the obligation to pay things like social security.
The language is certainly written in absolute terms but it is not likely that a court would rule that it makes a failure to lift the debt ceiling unconstitutional. Congress can argue that it fully intends to pay its debts, but that there is a political dispute over how and when. They can argue that they were not challenging the “validity” of the debt but the priority in the payment. The United States will still be fully liable for the debt and the interest.
Of course, as with the Libyan War, the Administration could trigger the constitutional fight on the belief that no one will be able to get standing to challenge its payment of the debt.
Jonathan Turley
@TonyC
“They keep costs down because customers will stop buying from them if their competition is selling for less.”
Why does the competition want to sell for less? You’re going to tax away most of their profits too.
What starts happening is that businesses try to grab a certain amount of market share and then rent seek their way to more revenue.
Where is this successful country with high corporate tax rates you favor?
“Taxes don’t make them businesses inefficient, their competition keeps them efficient.”
No, profits do, and you are taking away those incentives through taxation.
You say, “businesses have no incentive to keep costs down on the products and services they sell.”
Oh bull. They keep costs down because customers will stop buying from them if their competition is selling for less. If my single-store restaurant owning friend charges fifty cents more for a burger, he sells fewer of them, because his customers are price sensitive and will go next door to the Chinese place, or walk two blocks to get a cheaper burger.
Taxes don’t make them businesses inefficient, their competition keeps them efficient. Again, taxes are not 100%, and never have been. An intelligent business owner is not going to give a crap what taxes are for the majority of his career, because as long as he can successfully expand he will keep rolling the money back into the business income-tax free. The only time income taxes make a difference is when he is DONE growing the business, and at that point, he will start paying income tax.
At that point there is no disincentive: If he could roll money into the business he would, but he has reached the point where more capital isn’t doing him any good, or he wants to retire (out of desire or age-related necessity). Businesses reach a point of diminishing returns, and not everybody wants to go into another **type** of business with their capital, they just do what they know.
But taxing him at that point does not harm his business, his business is generating $X in excess revenue, and he gets $X as income and pays taxes on it and happily spends the rest.
@TonyC, I know these debates have been heated, but I must say you are pretty much the only “regular” in this forum that argues substantive points. not saying I agree with most of them, but at least you make an effort and it’s far better than what the others do.
Now that’s the way to try to shut down debate while maintaining proper moral indignation. Good going, Mike Spindell, you should be proud.
Far be it from me to limit anyone’s free speech, or censor their ideas. However, I think we regulars, myself included must look at the residue of debating with people who lack the inclination to actually engage in logical debate. How many “back and forths” do we have to go through before we realize that we are feeding a specific troll the attention “it” craves. At first I found it interesting in the sense that cogent, informative arguments are being made in troll response. However, you can see in this thread and in other threads, they’re being hijacked away from the original topic, the points lost in a sea of confusion slipping under the waves over burdened by the excess baggage of troll response. From the standpoint of logic/facts “it” has been destroyed time and again, to what profit? Buddha had pointed this out, long before his departure, that this engagement with “it” is like the Monty Python skit where the limbless knight refuses to admit defeat. Enough already, let it froth and don’t even bother to read its outpourings. In an unresponsive forest, with no notice, it will only be the sound of one troll yapping. My answer to this particular koan is that no one will hear it.
TonyC by the “logic” of your theory, businesses have no incentive to keep costs down on the products and services they sell. There is no incentive to be efficient. Under your tax scheme businesses will merely try to expand their expenses to eat up any profit to avoid your confiscatory tax. Why should some business owner try to grow the business or try something risky. You’ve taken away the reward. And why would anyone ever want to start a new business under your oppressive confiscatory regime. If an owner can’t take out profits why start a business at all. Why not just become an employee and let someone else worry about taking risks? If a business owner has no real expectation of profits after your substantial tax bite, why invest at all in the things you think he should invest in. Why invest in R&D, when I can redecorate the executive suites, buy a new fleet of cars, take expensive trips around the globe, buy a corporate jet, hire my ne’er do well family member to draw salaries,etc. Do you get the point, Marx? Even Marx understood understood the folly of his own ideas.
You ask, “Why go through the effort of doing that when they can just squander the money on other things.”
Now you are just being idiotic. As I said, they will reinvest in a business because they own the business and they are making it more valuable, tax-free. They aren’t “squandering” money on R&D or advertising, they are spending money to increase their share of their market, or to enter a new market niche, or a new market altogether (like opening a store in another town).
You say, “How do you know that they haven’t invested in a prudent amount of R&D.”
Whatever they decide to take in profit is money they have decided to NOT invest in R&D, or repairs, or advertising or any other business expense. It would be stupid to take money as a profit, pay X% of it in taxes, and THEN spend it on business expenses, when you can spend it on ALL on business expenses and not pay a dime of income tax on it. Why spend $7000 on advertising when you could spend $10,000?
If somebody intends to advertise, they do it as a business expense, not out of their pocket and personal finances. You are clearly clueless about how business and taxes actually work in this country.
Gene H:
“Private property which despite the recent nonsense of trickle down economics does not get reinvested in infrastructure and jobs creation in any meaningful way”
Now that has to be one of the most interesting statements you have made.
What do people do with private property? Do they just sit on it and let it gather dust? If they are in farm country most of them either raise crops or rent the land for pasture or for crops. If they are in the city they probably have a house on it which they rent out and even if they just live there as their primary residence they are creating jobs.
For example, I need a new air conditioning unit which is going to cost $2,300 dollars. I am creating an entire shit load of jobs:
mining
factory
shipping
installation
And all of the subsets that support each one of those components. My $2,300 purchase could quite literally create a thousand jobs. But guess what? Since the economy is in the tank and I don’t know what this administration is going to do with taxes and regulations, I am not going to make that purchase this year maybe not next year either.
The same is true for the farm land which would put extra money in peoples pockets to either invest or purchase new products.
Your assertion is just a base misunderstanding of how our economy works.
@GeneH,I didn’t say they were the same thing.I said they were similar for certain purposes. And you accuse me of not understanding English.
Also, profits that go to the owner of an LLC for example are treated like ordinary income.So you are wrong about that as well.
@TonyC
“If business income taxes are high, the best way to avoid having income is to spend excess revenue on the business before it is taxed. R&D expenses are 100% deductible and 100% untaxed. Researcher salaries, research equipment, research supplies: untaxed, untaxed, untaxed.”
Why go through the effort of doing that when they can just squander the money on other things. Avoid profits by not worrying about keeping expenses low. Waste money on tax dodges.
“When a business owner takes millions of dollars in excess revenue as income, they have already decided against reinvesting in their own business,”
How do you know that they haven’t invested in a prudent amount of R&D. Of course, by business owner you really mean shareholder for publicly held companies. Do you have a pension plan or 401k that invests in stocks? Those profits are now flowing to you in the form of stock appreciation. What do you expect to retire on. The largess from social security?
kderosa,
You apparently don’t understand that profit taking and paying wages are not the same thing. Wages are a business expense. Profit taking is removing money from the capital surplus account to distribute in the form of dividends or bonuses, neither of which are wages despite bonuses being a form of compensation.
Nothing Sowell says answers to the logic of my argument. Nothing you say answers to the logic of my argument, and in fact you misrepresent my argument: I did not argue that “most of the profits” should be “taxed away,” nor did I argue that profits should be small. In fact, the free marketers are the ones that constantly tout that competition will naturally drive profits to their absolute minimums, so obviously it is free marketers that find that a desirable state of affairs.
If business income taxes are high, the best way to avoid having income is to spend excess revenue on the business before it is taxed. R&D expenses are 100% deductible and 100% untaxed. Researcher salaries, research equipment, research supplies: untaxed, untaxed, untaxed.
It is YOU that doesn’t understand business; the point is not to plow back their “profits” into extra R&D, the point is to have them reinvest the money BEFORE it becomes “profit.” BEFORE they pay tax on it. BEFORE they take it as income.
The incentive, for the owner, is owning the intellectual property developed, and the infrastructure to create new intellectual property. Just like, owning a one hundred store chain of restaurants is a more valuable asset than owning one restaurant, both for the owner, and for the economy and country, because a hundred restaurants employs more people, generates more sales taxes, and will **eventually** produce more income when the growth of the business comes to a natural plateau. The owner decides on that level, as well: When he thinks he cannot expand any further than he has, when he thinks reinvestment would be a waste of money, then he will take the excess revenue as profit, pay the taxes, and enjoy the remainder of the proceeeds.
I have never advocated a 100% tax on profits, which is what socialism would essentially do. You are apparently incapable of thinking in anything but binary terms; you seem to think that either the government takes NOTHING or the government takes EVERYTHING. Which is what makes discussing anything with you pointless, because I believe neither of those things will work, so as far as I can tell we have no common ground upon which to discuss anything.
TonyC, obviously you are confused as to the role of profits in business.
Thomas Sowell ha a good description of your misunderstanding in Basic Economics:
Socialists (like TonyC) have long regarded profits as simply “overcharge” or “surplus value.” Profits are merely unnecessary charges added on to the inherent costs of producing goods and services, driving up the cost to the customer. One of the great appeals of socialism, especially when it was just an idealistic theory without any concrete examples in the real world, was that it sought to eliminate these supposedly unnecessary charges, making things more affordable. Only after socialism went from being a theory to being an actual economic system did the fact become painfully apparent that people in socialist countries had a harder time affording things that most people in capitalist countries could afford with ease and take for granted. Unfortunately,people like TonyC, still cling to these misbegotten notions even after the evidence has come in.
The hope for profits and the threat of losses is what forces a business owner in a capitalist economy to produce at the lowest cost and sell what the customers are willing to pay for. In the absence of these pressures, those who manage enterprises under socialism have far less incentive to be as efficient as possible under given conditions, much less to keep up with changing conditions and respond to them quickly, as capitalist enterprises must do to survive.
It was the Soviet premier who said that his country’s enterprise managers shied away from innovation “as the devil shies away from incense.” But, given the incentives of a socialist economy, why should managers have stuck their neck out by trying new methods or new products, when they stood to gain little or nothing if they succeeded and might have lost their jobs or worse if they failed.
Under capitalism, the incentives work in the opposite direction. Even the most profitable businesses can lose market share if it doesn’t keep innovating, in order to avoid being overtaken by competitors.
While capitalism has a visible cost, profit, that does not exist under socialism, socialism has an invisible cost,inefficiency, that gets weeded out by losses an bankruptcy under capitalism. The fact that most gods are more widely affordable in a capitalist economy implies that profit is less costly than inefficiency. Put, differently,profit is the price paid for efficiency.
So, I ask you TonyC, after you’ve taxed away most profits out of the system, what incentives will businesses have to plow back their profit into extra R&D, assuming you know better than business leaders what level of R&D is appropriate? Why not just take the easy way out and let the business grow more inefficient? It’s not like you can take the profits home anymore.Just squander the profits like socialist businesses do. You’re also forgetting that the US has one of the highest corporate tax rates.
To pile on with Gene H, a point of business logic, in the first world countries at least: Before profits become profits, they are “excess revenue,” meaning the business brought in more money than it needed to break even on costs and salaries. There are two main things a company can do with excess revenue. They can just keep it, which makes it profit, and taxable as income. If they do that, then they will lose some of it to the tax rate, currently about 30% or so.
The second thing they can do with excess revenue is reinvest it in their business. They can repair an old machine, for example, or buy a new machine. They can open a new store or factory, and buy all the stuff it needs. They can hire more salespeople or production staff. They can spend it on advertising to grow their business. They can buy better phones. They can even start a different kind of business altogether; if a steel mill owner wants to open a bakery and a bicycle repair shop, he doesn’t have to pay taxes on the money it takes to do that.
When excess revenue is spent on legitimate business operations the tax rate is zero. Business expenses are not counted as excess revenue, at all, even if the business expense is voluntary (like choosing to open another store) or dumb. Reinvestment gets the biggest tax break of all, and it is fair: All business owners, from one-man operations to giant corporations, can get the rate.
Further, business expansion expenses help the economy. Some of it is to create jobs directly with new employees, others purchase goods that eventually translate into inventory reductions that creates or sustain production jobs.
So one way to encourage this kind of expense is to raise the cost of the alternative; which is the income tax rate for business income. Raising income taxes (without allowing loopholes) encourages business owners to reinvest, in order to legally avoid the income tax. They avoid it by directly reducing the excess revenue before it has to be declared as income.
This in turn means that increasing government revenue does not have to be the **point** of increasing the high-end income tax rate, because even if government revenue declines the **economy** can be improved by greater spending in the private industry. The Laffer curve is immaterial, the objective of the government should not be to maximize its **own** revenue, it should be to maximize GDP. Taxing high-end income should indeed reduce the total take of the government, but it will also increase reinvestment and therefore the GDP.
This is why trickle-down economics doesn’t work. Reinvestment is a risk, so **lowering** the tax rate on profits can make taking the profits and paying the tax the less risky alternative. **Raising** the tax rate on profits can make the risk of reinvestment the more attractive alternative.
When a business owner takes millions of dollars in excess revenue as income, they have already decided against reinvesting in their own business, or really any new business they can directly invest in, like a partnership (I say this to distinguish it from a public company stock purchase). If they wanted to invest it, there are legal ways to arrange that investment using their excess revenue as a business expense and therefore legally avoid the income tax on it, and when talking about large sums, they can easily afford the business attorneys and high-end accounting firms that can navigate those waters.
@GeneH
Profiting taking, like paying wages, doesn’t take money out of the private sector, it merely shifts it around. It becomes consumption in part and investment in part. You really don’t understand economics do you?
“These types of public works projects actually drain money out of the private sector.”
So does profit taking without reinvestment in infrastructure. Profits leave the flow of investment and job creation to become private property. Private property which despite the recent nonsense of trickle down economics does not get reinvested in infrastructure and jobs creation in any meaningful way. The only market segment that has benefited from the excess profit taking is the luxury goods market and that is a narrow and limited market with low caps on growth potential.
As to what you think is fair or unfair, you’ll find that I don’t take what you say seriously. As a matter of logic, the failure of business to invest in creating infrastructure and ergo jobs in the 1930’s combined with the weak stock prices indicates that the growth in GDP came from somewhere else. The only somewhere else in the economy at that time was the WPA employing people and giving them money to spend which in turn builds GDP.
You also don’t read very carefully or well. I specifically said what overcame the lack of job growth in the private sector – which was influenced by outside factors and not domestic policy – was the conclusion that America’s involvement in WWII was inevitable which in turn removed any hedging concerns about European markets. Uncertainty was replaced by certainty. That does not change that the GDP growth of 1939 as it was absent any influence of private investment in infrastructure could only have come from the one area where money was being added back into the consumer economy in the form of creating disposable wages through employment albeit temporary: the WPA.
GeneH,
I think that may have been your first civilized post related to a disagreement of opinion.
Actually, I don’t miss the point. These types of public works projects actually drain money out of the private sector. The money to fund these projects has to come from somewhere: Increased taxes which come from the private sector or increased public debt which crowds out private debt.
After the recession of ’37 it should be expected that the economy would grow. It’s a called a business cycle for a reason. It is not, howeer, fair to attribute that growth to the WPA absent some analysis. Also, the reason the economy finally turned around by the 40s was that we had geared up for WWII. That is the common understanding. And, it’s clear that people will only make those kind of sacrifices for something like a major war.
kderosa,
You, like Morgenthau, miss the point of projects like WPA to boost the economy. The jobs created don’t have to be permanent to boost the economy. They just have to real paying jobs that allow people to continue to purchase until such a point as the economy expands in terms of permanent job creation. The economy was indeed to that point by the end of the 1930’s with the GDP rising 7%. The reason for the still high unemployment rate wasn’t the failure of WPA to boost the economy but rather an external factor, namely the suppression of stock prices caused by market tension over the developing war in Europe. Once that wave of tension broke and it was clear that America was not going to be able to avoid joining the war, American jobs grew at a staggering rate as company’s previously hedging against the market volatility created by Europe quit hedging and started building out their manufacturing and services bases once again.
Krugman acknowledges that public works programs don’t need to create permanent jobs when he advocates such programs. However, unlike 1938-1940, corporations are not building out infrastructure at this time not because of uncertainly Europe (or even the Middle East). Many are posting record profits and have record high stock prices. The reason corporations are not creating real permanent jobs now is simple profit taking over capital reinvestment. In short, private greed is taking precedence over the overall health of the economy.
“You really dont understand me at all, people helping people in this country has a long history but it was neighbors helping neighbors or the community coming together and raising a house for someone who had theirs burned to the ground. It was not some detached and unaware father figure in Washington, DC.”
Roco,
I understand you far too well. I’m sure my neighbors would have kicked in the almost million dollars that my medical expenses required last year. You are being completely naive in your supposition that community will get together to aid others in pain. It certainly didn’t help the young family man in Arizona who couldn’t get the new heart he needed.
Now I got my transplant at age 66. My fortune was that I have the best blood type for transplants, was in otherwise good physical shape, live a healthy lifestyle, had a wonderful caregiver as support and am mentally stable. The fact that I went to a hospital with a relatively short waiting list and one of the Country’s best Heart Surgeons also helped greatly.
Truly though, given the limited amount of donors, did I deserve a heart more than a 39 year old family man with young children? He did have a heart available too, but he lives in Arizona, a State that shares your values. He wasn’t eligible for Medicare and thus didn’t have the resources to pay for it. Obviously, his Arizona neighbors didn’t chip in to pay his costs.
“You really dont know too much about people like me, you just have your liberal “mythology” about how we are.”
You’re right Roco, you may well be a fine and generous fellow, a pillar of your community and generous in charity. However, it is you, blinded by your
mythology, that can’t see the logical conclusions of your beliefs. If the people who follow your political leanings were in power in my time of need, I’d be dead. That is the plain fact of the matter. A reliance on the charity of one’s community is all well and good, but it will never be enough to cover those in need. That is why when the “death panel” argument was brought up by the opponents of health care it seemed to me a grim irony. Your beliefs empower implicit “death panels,” letting the marketplace act as decider of who lives or dies.
I can see how this is fine with you impersonally, but personally for me as one who has benefited beyond hope, I have a better understanding and empathy for the travails of those in need.
Mike Spindell:
“Just as it’s been said that all politics are local, all politics are personal too. Without Social Security and Medicare I would literally be dead today”
Do you really think I am for kicking someone to the curb? I am not, some people need help at certain times during their life. We should have money set aside for those times.
I just do not believe in a cradle to grave system of welfare. People do better when they have skin in the game, people need to be productive and know they can be useful. It is part of our nature.
You really dont understand me at all, people helping people in this country has a long history but it was neighbors helping neighbors or the community coming together and raising a house for someone who had theirs burned to the ground. It was not some detached and unaware father figure in Washington, DC.
You really dont know too much about people like me, you just have your liberal “mythology” about how we are.