Erasing history seems to be very popular these days. Both ISIS and the Taliban, for example, seem to have a pathological fear of the past that leads them to destroy entire cities and reduce religious architecture to rubble. And in the United States, activists and others from the protest industry not only attack statuary that memorializes our country’s past but also persecute individuals and even horses whose names are reminders of our past.
The U.S. Congress has its own way of monkeying with the past. It’s called ex post facto legislation — in plain language, a law that takes effect retroactively — and initially usually involves nothing more complicated than passing a law that goes into effect at some earlier date. Whether the law is Constitutional, though, is complicated enough to satisfy any real or armchair litigant.
It appears that Congress, to ease the deadline pressures on itself, is considering just such an ex post facto law for its tax cut and tax reform bill, making its provisions retroactive from January 1, 2017. It really isn’t a good idea.
The Constitution specifically prohibits Congress from passing retroactive laws, but an early U.S. Supreme Court ruling (in Calder v. Bull, 1798) found that the prohibition applies only to criminal, not civil, laws.
Not everyone agreed with the court, and some notable figures such as Thomas Jefferson and James Madison believed that the Constitutional prohibition against retroactive laws by Congress applied equally to both civil and criminal legislation. But the Supreme Court’s 1798 opinion has survived several challenges and remains the guideline.
Samuel Chase, the Chief Justice in the case, was a brilliant, if occasionally imaginative, jurist. Over 200 years later, his opinions still manage to provide fuel for both sides of the Constitutional interpretation argument that is burning in American politics and judicial appointments: strict interpretation and liberal reading.
We might think that since the Internal Revenue Code invokes specific criminal penalties for noncompliance, it could reasonably be considered a criminal law when it suddenly transforms compliance into noncompliance by rewriting history.
A retroactive increase in income tax rates, or voiding of deductions, could place some taxpayers in immediate criminal violation of the law, unless Congress covers that issue somehow in its tax reform language.
There is an economic impact to making the tax reform bill retroactive, also.
The individual tax portion of the tax reform bill, at least as it is currently being described as retroactive, would essentially be an unfunded economic stimulus program. Much of the personal income tax is deducted from paychecks, and therefore individual taxes would have been overpaid because they were based on now incorrect, higher tax rates.
The Treasury will have to refund that money to taxpayers, and that will blow a hole in the federal budget and increase the deficit.
The theoretical basis for reducing tax rates is that it will stimulate economic growth and result in higher tax revenue. The accounting problem is that even if everything works out as planned, the deficit is “now” while the offsetting tax revenue collection is in the future. Of the available economic stimulus options, tax rate reductions have a near-immediate effect. That is a distinct advantage over, say, infrastructure spending, which can take years for its full economic impact to be felt.
The timing disadvantage would be worsened if the tax reductions are given a year’s head start by making them retroactive. It is one more expenditure of funds at a time when the budget is being battered by necessary storm recovery, a buildup of military capabilities made necessary by increased security threats, and the rebuilding of our neglected, and sometimes unsafe, infrastructure.
Deficit financing of an economic stimulus would be a smart thing to do if the economy needed it, but it is not clear that our economy really does. A year ago would have been a different matter, but as things stand now the economy is growing twice as fast as it had been, on average, for the past eight or ten years. It would seem that the reduction in interest rates would be stimulus enough — by itself, without being retroactive.
In an article in the Wisconsin Law Review, Even C. Zoldan wrote regarding the prohibitions of retroactive legislation in the U.S. Constitution that, “It is beyond dispute that these clauses spring from a deeply held aversion to retroactivity.” While it is equally beyond doubt that people would look forward to a one-time, fatter tax refund check, their passion for lower taxes will be just as strong when their take-home pay is larger next year. The Congress should consider the “deeply held aversion to retroactivity” and the dubious economics of a retroactive tax bill when it drafts our much-needed tax reform bill.
James McCusker is a Bothell economist, educator and consultant.