Setting The Scene
The final days of the first Obama Administration provided him and the Democratic and Republican leadership of the Congress with a unique challenge to resolve what had by then become the most critical domestic problem of the Nation: averting the fiscal cliff. To do so required them to achieve what they had been unable to accomplish in the President’s entire initial term in office, namely, overcoming the obstacles posed by their sharply contrasting philosophies of government regarding the issues that underlie the fiscal cliff, i.e., tax policy and government expenditures. Resolving the problem was further compounded by what had become the President’s mantra in his bid for reelection: “tax the rich” to diminish cuts in programs benefiting the middle and lower classes. The argument of this piece is that there had already been enacted as part of the Affordable Care Act new tax measures that were scheduled to begin in 2013, falling only on the very taxpayers who were in the President’s target area, and that counting them would accomplish to a large extent his goal, thereby possibly removing the principal obstacle to the parties’ ability to agree on how to avert the fiscal cliff. That didn’t happen. Instead they came up with a last-minute set of tax measures, called the American Taxpayer Relief Act, to cushion the effects of the end of the Bush tax cuts on all but the “rich” American taxpayers. Much of the cliff-effect is still there. Recent events, principally an outbreak of scandals in Washington that have become the preoccupation of the government leaders, have put into serious question whether Washington will be able to engage in constructive efforts to resolve the differences over the cliff.
Failed Fiscal Negotiations
It wasn’t that long ago that the “fiscal cliff” was on the radar screens of everyone in Washington—just several months ago at this writing—but it now seems long ago and far away. It has been supplanted by an epidemic of scandals in that town that have become the preoccupation not just of the government types that occupy the Greek temple-like structures that house them—from that classic white house on Pennsylvania Avenue and the lesser structures sprawling along Constitution Avenue and the surrounding alphabetized streets—but also of folks across the Nation.
That hasn’t pushed the “cliff” off the map, just off the front pages and Sunday talk shows. It is still there, as ominous as it appeared last December when it threatened to put the U.S. economy into free fall, resulting from the dual operations of reduced government spending and higher taxes simultaneously impacting the country on January 2, 2013. The Congressional Budget Office projected that it would reduce growth of gross domestic profit by approximately 3-1/2 percent, which, combined with an already sluggish, subpar GDP, would throw us back into another recession.
So the cliff is not an empty abstraction, not just a technical matter for academicians to theorize about in lectures, and business writers in newspapers and journals to fill reams of paper hypothesizing about dire, doomsday scenarios. The effects of the cliff would be immediate throughout the economy, and chain effects would ensue as unemployment rose to even higher levels, largely a consequence of the budget sequestration law. Government benefit checks would stop. Paychecks would reflect new payroll tax hikes. Unscheduled and unpaid furloughs would become rampant throughout pubic and private workplaces. Government-run facilities would be cut back, if not shut down completely.
The dire consequences that had been predicted—itself a tactic that was doubtless exploited by some of the players only to stave off the sequester’s occurrence—have become all too true. Congress got a taste of its own medicine when its members made plans to fly home for a holiday break this past winter, only to discover that layoffs of the air traffic controllers, forced by sequester-driven budget cuts, had snarled air traffic all across the country. Congress quickly fixed that—one of the very few legislative accomplishments of the new Congress at this writing.
The waning days of 2012—the final weeks before the country arrived at the cliff’s edge—provided for the President and the Democratic and Republican leadership of the Congress a unique challenge to resolve what had by then become the most critical domestic problem of the Nation: averting the fiscal cliff. To do so would require them to achieve what they had been unable to accomplish in most of the President’s initial term in office, namely, overcoming the obstacles posed by their sharply contrasting philosophies of government regarding the issues that underlie the fiscal cliff, i.e., tax policy, government expenditures and debt ceiling limits.
Resolving the problem was further compounded by what had become a mantra of the President in his bid for reelection, “tax the rich” to minimize cuts in programs benefiting the middle and lower classes. The argument of this piece is that there had already been enacted new tax measures in the Affordable Care Act (ACA) and other laws that were scheduled to become effective in 2013, falling only on the very taxpayers who were in the President’s target area, thus accomplishing his goal to a large extent . One would have supposed that, if effectively brought to bear by the Republicans on the cliff negotiations, the mere demonstration of those targeted high-bracket tax increases would have gone a long way to removing the principal obstacle to the parties reaching agreement on steps for averting the fiscal cliff. That didn’t happen.
My reference here is applicable only to the ACA. Taxes on top-bracket taxpayers already were scheduled to increase on January 1, 2013 due to lapse of the so-called Bush tax cuts, not from any action of Obama or the current Congress. They were baked into the tax cuts that had been enacted under the initiative of the Bush Administration, and had a limited duration from the very start. Not so the tax provisions of the ACA. Two such opportunities in particular in the health care reform law (colloquially called Obamacare—pejoratively by the Republicans, but then proudly co-opted by the Administration) were missed by the Republican negotiators in their 11th-hour discussions with the Democratic leadership that occurred at the very brink of the cliff. The Republicans could have pointed to those provisions as “taxing the rich,” thereby potentially helping to avoid the abyss by lessening substantially the need to resort to the universally unloved budget sequester. The sequester tactic had actually been proposed by the President and adopted by Congress, on the premise that it was a remedy so unthinkable that it would force the parties into a compromise solution far preferable to them (to say nothing of its being more advantageous to the Nation’s economy) than the crude, mindless across-the-board slashing of funds that would result under the sequester at the commencement of 2013.
The sequester scare tactic didn’t succeed. Zero hour passed at the midnight stroke of the old year with the sequester permitted to take hold. The Congressional leadership, in meetings among themselves, and in two meetings between the President and the House Speaker, John Boehner, succeeded in reaching agreement on saving for low- and middle-class tax brackets the Bush II tax cuts that were scheduled to expire at year end, while permitting the pre-Bush rates to return, with some modifications, for the top-bracket taxpayers. The package, signed into law on January 2, 2013, was ingenuously (yes, i-n-g-e-n-u-o-u-s) titled the American Taxpayer Relief Act (“ATRA”).
It dealt only partially with one leg of the fiscal cliff, relating to a sharp rise in income taxes. But the cliff problem was not so much attributable to a rise in lower bracket taxes to which ATRA was directed as to the top-bracket rates. Also, the cliff consisted of a three-fold hit to the economy: rising tax rates, shrinking government expenditures, and a Congressionally-imposed limit on the federal debt ceiling. The first two were scheduled to occur concurrently at the end of 2012 under statutes then on the books. The third would not arrive on a stated date, since it was a function of the federal balance sheet as a consequence of the relation between government revenues and expenditures; but the general expectation was the existing ceiling would be reached in the first quarter of 2013. So it had to have entered into year-end fiscal considerations, and the objective of the negotiators in each party was to reach a “grand bargain” that would embrace all three elements of the fiscal cliff problem. That eluded them.
At the time not just the Republicans, but none in Congress, and—so far as I have seen—none in the press or the broader media platforms took into account the very substantial tax-raising measures embedded in the Affordable Care Act and their potential relevance to resolving the disagreements in the parties’ fiscal cliff discussions. Many have since discovered that the ACA is a veritable mini-IRC, including actual income taxes aimed directly at the “rich” high earners in Obama’s cross-hairs ($200,000, for singles, and $250,000, for married couples). (The author has refrained from citing explicitly his earlier piece in this venue that underscored just that point, except to note that BenefitsLink readers have had ready access to that article.)
The Doctor’s Diagnosis
A noteworthy statement—not specifically to the point of the targeting of the rich in the numerous income tax elements to be found in the ACA, but certainly identifying generally the massive revenue features of that law that fell principally on high-bracket taxpayers—was made this past March by Rep. Charles Boustany (R-La.), chairman of the Oversight Subcommittee of the House Ways & Means Committee. In opening a hearing of his subcommittee on “tax-related provisions in the President’s Health Care Law,” he said:
The President’s health care law contains over a trillion dollars in new taxes on employers, medical device makers, families buying health insurance, and others…. [T]he law’s new taxes make it more costly for employers to hire, more expensive for families to purchase health insurance, and more difficult for the health industry to innovate.
As a one-time practicing M.D., his comment on the health care law carried added weight.
In his opening remarks he also noted a form of tax under the ACA that will fall directly on businesses —
[N]ew regulations to implement the law [are] adding over 150 million new compliance burden hours a year and billions of dollars in costs that will be borne largely by employers—these are time and red-tape costs on top of the new taxes.
These can properly be characterized as government-imposed “taxes” on business—not technically, of course, but having the same dampening economic effect, while doing nothing to enhance the coffers of the government. In fact, inasmuch as such overhead costs directly reduce profits dollar for dollar, they are counterproductive as tax raisers for both taxable and S corporations; and, in case of individual taxpayers, they will also reduce the tax efficiency of the new 3.8 percent tax on net investment income discussed just below. It is pertinent to the discussion in this article to note that anything that reduces the tax funds flowing directly into the federal fisc actually deepens the fiscal cliff, since it widens the gap between the funds that the Democrats are demanding to support their social goals for the country and the income tax increases the Republicans are willing to vote to pay for those programs.
It is no accident that the ACA is loaded with revenue raising provisions, since they were calculated to mask the true cost of the health care legislation, with its greatly expanded insurance coverage and a gamut of other health benefits undeniably provided under the new health law—costs not just to business and individuals, but also to the government, both as the provider of some of the features of the new law (e.g., insurance exchanges and Medicaid enhancements), and in its function to stand up, train and maintain a greatly expanded government regulatory, compliance and enforcement apparatus, principally in the IRS and the Department of Health & Human Services. It’s a fair guess that these latter costs, and associated expenses to educate the public concerning the massive, complex, confusing and unprecedented new law, and the even more massive regulations that have already begun to flow out of the agencies, have not been reflected in the estimated costs of ACA to the government. These costs will inevitably affect adversely the problems that are embraced in the term “fiscal cliff.”
So-Called 3.8% Medicare Surtax
Directly bearing on the fiscal cliff issues dividing the parties, in the context of taxing the rich, is an ACA provision labeled “Medicare surtax” (mislabeled, actually). The health care law imposes a 3.8% levy on the net investment income (“NII” in tax lawyers’ shorthand) on amounts earned on certain investments of individuals, trusts and estates in excess of levels that parallel the higher rates now imposed under the income tax ($200,000 and $250,000, respectively, of single and joint filers). The statute cloaks the tax in Medicare garb, including it in the Title of the statute named “Coverage, Medicare, Medicaid, And Revenues,” under which is a heading reading “Unearned Income Medicare Contribution.” Proposed Treasury regulations that have been issued by IRS are more forthright, titling the regulation “Net Investment Income Tax,” which of course it is.
In its introductory “background” material the regulation states that the tax “is subject to the estimated tax provisions” (that would be a first for a true Medicare payroll tax). The clincher, for anyone doubting still, is also in the background portion: “Amounts collected under [Internal Revenue Code] section 1411are not designated for the Medicare Trust Fund.” The regulation supports, as authority for this, the explanation of the statute in the Blue Book of the Congress’ Joint Committee on Taxation. Can there be any lingering questions as to the full-fledged status of the NII tax as an income tax entirely divorced from the Medicare tax for which it is misleadingly named?
By way of contrast, the ACA also imposes an actual 0.9% increase in the Medicare hospital insurance tax on the same over-$200k/$250k category of taxpayers subject to the 3.8% NII tax. That raises the Medicare tax in 2013 from its longstanding level of 1.45 percent on all earned income to 2.35 percent on earned income over the above stated thresholds. This added Medicare payroll tax only applies to employees and self-employed persons. The employers’ share of the Medicare tax remains (at least for the present) at 1.45 percent of payroll.
These two taxes are projected to generate over $200 billion of additional revenues in the next 10 years, which will flow directly into the U.S. Treasury. Remember that none of the 3.8 percent “Medicare” surtax will go into the Medicare Trust Fund. Together the two new taxes are expected to produce enough revenue to cover nearly 20 percent of the federal government costs of its ACA responsibilities. Of course, these are only guesstimates from the Congressional Budget Office, and, like almost all such projections that are a normal part of the legislative process, typically underestimate costs and overstate revenues—not deliberately, of course. But, to the extent that inclusion of the taxes in non-tax legislation reduces the apparent cost that is ascribed to the legislation, it clearly helps the cause of the proponents of the law. One cannot easily doubt that was its intended effect.
Other ACA Taxes
There is also a litany of other taxes, penalties and fees introduced in the ACA, as alluded to in Chairman Boustany’s remarks quoted above, that one can presume had similar motivation. They too could legitimately be brought to bear by Republicans in addressing the fiscal cliff problem (when and if the parties get together again to fix the cliff topic), inasmuch as they, like the Medicare taxes above, have been designed to hit high bracket businesses and individuals, by reason of being (i) targeted at big businesses (viz., medical device makers, pharmaceutical manufacturers, and health insurance companies), or (ii) drafted with specific thresholds based on size of business payrolls or on individuals’ income levels, as regards health insurance or self-insurance mandates imposed on businesses, or relating to insurance that individuals must purchase for themselves or their families, or (iii) imposed on the purchase of a specific luxury health item colloquially called a “Cadillac insurance plan.”
These have been assigned a $107 billion revenue gain, excluding the insurance mandates. Noncompliance with the individual mandates will attract penalties that will be enforced by IRS, beginning in 2014 (modestly at first, $95 in 2014, but sharply escalating in succeeding years, topped at $695 in 2016, plus COLA increments thereafter). Businesses having over 50 employees (full-time or part-timers whose aggregate work weeks are the equivalent of at least 50 full-time employees) are subject to fines of $2,000 or $3,000 per employee predicated on circumstances of coverage and noncoverage specifically identified in the law.
The revenues forecast from penalties alone is $65 billion, predicated on the premise that businesses will choose the penalty as the more cost effective alternative. In fact, anecdotal evidence supports the claim that businesses in great numbers are already dropping employer-provided health coverage, and presumably many others that had considered instituting such plans have now abandoned that idea. As the 2014 tax year draws closer, it can confidently be assumed many more will do the math and drop their plans, as articles in trade papers or cost analyses by accountants lay it all out for them. I obviously am not privy to the algorithms that the government statisticians employed to arrive at their $65 billion penalty figure, but my uneducated guess is that it will become many multiples of that if the insurance mandates remain on the books (let alone if ACA in its entirety survives promised further Republican repeal efforts) for the full decade on which the Congressional Budget Office bases its projections.
But Is a Penalty a Tax, and Why Does It Matter?
Readers familiar with the celebrated Supreme Court decision last June upholding the constitutionality of the ACA law, Florida v. Department of Health and Human Services, will know that the correct answer to the first part of the question in the subtitle just above is “it depends,” and, as to the second part, the proper response is “it matters more than anything else in the decision.” If the penalty is not a tax, the Act would have failed to pass the constitutionality test under the Congress’s taxing power for the five justices forming the majority of the Court; but if it were considered a tax for purpose of determining whether it passes the prerequisite “case or controversy” test in order for the court to “take jurisdiction” of the case in 2012 (in plain talk, to allow a case to be put on the docket of a court), they would not have taken jurisdiction, because, although the penalty had been enacted before the case went to trial, it would not have gone into force until 2013; and so no one potentially subject to it could have paid the penalty before challenging it in court in the Florida case. A specific law, the Anti-Injunction Act, applicable explicitly to “taxes,” bars a lawsuit to challenge a tax before it is payable. The High Court, specifically addressing that statute in the majority opinion, held it to be inapplicable because the majority opinion concluded that the statute did not apply to penalties.
Chief Justice Roberts, writing that opinion, pulled off a Solomon (without acknowledging that Biblical precedent): he cut the question in half. He opined that a penalty is not a tax under the Anti-Injunction Act; but a penalty is a tax under the Constitution and so falls within the Congress’s power of taxation. Had he decided both issues consistently, regardless of which way, this article would either be irrelevant or premature. (That was doubtless not a consideration in the case.)
Gilbert and Sullivan would have had a heyday with the case. I can hear Ko-Ko singing, “Here’s a pretty mess…”
Back to the Cliff: 11th Hour Passage of ATRA
The question can fairly be asked whether the party leaders of both parties in Congress will in the reasonably near future get back to the business of completing the resolution of the fiscal cliff crisis, given the heightened antagonism that is already evident between the Republican and Democratic members of Congress, and between the Congress and members of the Administration, principally as a result of the political scandals that have erupted since the signing of ATRA into law on January 2, 2013.
In fairness it must be acknowledged that the parties negotiating the fiscal cliff threat made some progress. “Progress” of course is in the eye of the beholder. Some beholders are certainly aghast at the work product of those negotiations. It is called, as noted above, the American Taxpayer Relief Act (ATRA for short). It is short on relief for those stunned beholders who see tax rates rising with their every turning of the page—the top-bracket taxpayers, whose own taxes were the target. Predictably their view is a narrow one bounded by dollar signs. But conservative economists, whose only axe to grind is one they view as making the American economy strong again, see raising taxes as the wrong medicine at a time the Nation is struggling to shake off the deepest recession and, probably, the highest unemployment since the Great Depression (which of course was not so “great” for those who fed their families by selling apples on street corners after the ’29 crash).
ATRA emerged at the very end of 2012, for the purpose of preventing for low- and middle-bracket taxpayers the return of tax rates on New Year’s Day to the pre-Bush-cut levels that would otherwise have occurred at midnight on December 31, 2012. That was one of the three drivers of the fiscal cliff fears, the other two being the severe across-the-board budgetary cuts under the sequestration legislation that was also scheduled to occur at the same time, and, finally, the fast approaching need to adjust the debt ceiling limits to avoid defaults by the government on outstanding commitments. Economists of all persuasions were certain that such a triple-headed hit would derail the economy from any hope of a recovery from the shocks it experienced in 2008, some predicting that the combined effect of automatic tax hikes and spending cuts could reach over $600 billion in the first year and total, in aggregate, $7 trillion over 10 years. All agreed that the immediate consequence would be a sharp blow to consumer confidence, which would further aggravate problems.
That got the attention of Congress. ATRA was quickly fashioned to draw lines between the tax hit to top-bracket taxpayers and the tax on all others. That very well served the “tax the rich” position of the Democrats in Congress, and the Republicans could not withstand the heat of proposing to deny tax relief to the lower-bracket taxpayers unless it were also granted in the top bracket. So, after some token resistance to going along with granting tax relief for some if it were not granted to all (holding the middle class tax relief hostage, was the charge against the Republican tactic), they went along with the raising of just the top bracket, notwithstanding the no-tax pledge many of them had taken.
However, ATRA did very little to resolve the fiscal cliff. Any hope of reaching a “grand bargain,” as it was then called, did not have a chance as 2012 came to an end. Its effect on reducing the reinstatement of the pre-Bush II tax rates was minimal. It did nothing in respect of the budgetary cuts that the Republicans were demanding, nothing about the sequester, and nothing about raising the impending debt ceiling. So it was a very incomplete fiscal fix.
Of course, the sequester that was about to spring into play would force cost savings in the Federal budget, but it actually saved more than even the Republicans wanted. For one thing, defense spending took the biggest hit, roughly 50 percent of the total. Moreover, with the enactment of ATRA having presumably given the Democrats all they were seeking in respect of tax relief, the Republicans would appear to have lost their leverage. That is not to say that ATRA forecloses reconsideration of the denial of tax relief to the top brackets. What one term of Congress does the next term can obviously overturn. That goes for everything ATRA resolved; and it is a two-way street.
For example, ATRA dealt with revisions of the estate and gift tax regime, raising the top rate from 35 percent to 40 percent, but preserved the lofty level to which the exemption had risen, $5.25 million (with periodic COLA adjustments). The President’s 2014 budget proposal, released on April 10, 2013, would lower the exemption back to the 2009 level, $3.5 million. By the same token, the Republicans can propose that the top income tax rate of 39.6% established in ATRA be set back to the 35% level that obtained under the Bush II tax cuts. The jockeying with the President over raising the debt ceiling would seem to be an optimal time for Republicans to press that argument.
Enter the Debt Ceiling
The need for Congress to act on raising the debt ceiling is only months away, as this is written. It seems the best occasion for Republicans to recover some ground they lost to the White House in the income tax discussions accompanying the recent enactment of ATRA. The wild card could be the state of the congressional investigations at that time (of which more anon).
The periodic ritual of raising the limits on the federal debt in order to assure that the U.S. will continue to pay its bills is the bedrock of the nation’s full faith and credit. But it is also the battle ground on which the parties fight their continuing “Big Government versus Small Government” war. The last time that occurred was in 2011, and it resulted in one of the major credit-rating agencies downgrading the rating of U.S. bonds, mainly because of the mere spectacle of our government’s messy handling of its fiscal affairs.
The approach of another outbreak of such war is certainly on the minds of those in Washington and in party club houses around the country, particularly in view of its ramifications for dealing with the unfinished business of the parties’ handling of the elements of the fiscal cliff. The first shot in the current battle appears to have been delivered by the recently confirmed Secretary of the Treasury, Jack Lew, who lost no time in sending what can only be characterized as a provocative letter to Speaker Boehner, dated May 17, 2013, gratuitously asserting that “Congress should act sooner rather than later to protect America’s good credit and avoid the potentially catastrophic consequences of failing to act until it is too late.”
I say “gratuitously” because the Speaker, who had been around this course many times before, hardly needed such advice from a newly minted Treasury Secretary. It was presumably just a rhetorical device for the Secretary’s laying a foundation for his stern warning that followed:
[T]he creditworthiness of the United States … is not a bargaining chip to be used for partisan political ends. I want to reemphasize what the President has said repeatedly regarding any threats to cause default in order to extract policy concessions from the Administration: We will not negotiate over the debt limit. The creditworthness of the United States is non-negotiable.
It sounds like the Administration is girding for a fight. I cannot say whether that was an example of the defensive, in-your-face posture that the Administration is preparing to take in response to the blows it is expecting from Republicans in the investigative hearings relating to the alleged scandals involving several of its major agencies. But it does not bode well for a constructive working relationship with Republicans in finishing the unfinished fiscal cliff fix, which is the sole concern of this paper.
QE 3 to the Rescue
“QE” is government-ese for “quantitative easing,” a term coined some years ago by international economists to describe a fiscal maneuver developed to enable governments to stimulate a nation’s economy when old-line methods, like resetting interest rates, were not accomplishing their goals. It was first employed abroad in several countries and thereafter abandoned when regarded as ineffective because of prevailing local conditions. It was subsequently introduced by the Federal Reserve in this country several years ago when our interest rates had dropped so low they were barely above zero, leaving the Feds with no room to use that strategy.
It is now in its third iteration here—hence the current variation of the original term: QE 3. It has grown to a $85 billion-a-month U.S. Treasury bond-buying program by the Federal Reserve Banks aimed at boosting growth in the U.S. economy by holding down long-term interest rates and pushing up the price of long-term government bonds to induce investors to purchase stocks. The objective is to spur consumer spending, hiring and investment, which has been sluggish because of the fiscal cliff concerns—i.e., recent federal tax increases and government spending cuts. It has been reported that the Federal Reserve expects these factors to continue to weigh on the economy through the 2nd and 3d quarters of 2013, after which it expects the private sector’s rebounding housing market and strong consumer spending to overcome the current fiscal drag, enabling the Fed to terminate its QE operations.
So it is fair to say that QE 3 has been the linchpin of the government’s response to the fiscal cliff. Wall Street’s reaction has been a good barometer of the mood around the country. Every time there is a rumor that the Fed may announce at the next monthly meeting of its board that it will stop using its magic bullet, the market plunges. Even if some leading indicator, like a drop in unemployment or a rise in corporate profits, suggests that such good news may trigger the Fed’s abrupt withdrawal tactic, the market analysts don’t know whether to cheer or shudder.
Such uncertainty has its own adverse impact on the fiscal drag. Many believe it would be far preferable if Washington did the job of finishing the fix of the fiscal cliff by achieving, as part of the upcoming debt ceiling negotiations, the “grand bargain” that has so far eluded the negotiators, rather than the Fed’s resorting to market manipulations the likes of quantitative easing. We could then give back to the Cunard Line sole possession of the QE designation which it initiated many decades ago with the launching of its first super-luxury ocean liner bearing the name “Queen Elizabeth.” As part of Britain’s World War II war effort, QE 1 served with great distinction as a troop ship, adding immeasurably to the luster of that proud name. With elimination of quantitative easing from the toolbox of the Fed, the term “QE 3” would uniquely refer to Cunard’s third ship to bear the name “Queen Elizabeth”; and the term “quantitative easing,” with its associated shorthand handle, could be consigned exclusively to esoteric exchanges between the mandarins of high economics.
Tsunami on the Potomac
Suddenly almost simultaneous eruptions of apparently scandalous actions—in the CIA and State Department (the Benghazi affair), in Justice (AP subpoenas), in the IRS and probably also in its overlord, the Treasury Department (the Tea Party trigger of allegedly heightened scrutiny of 501(c)(4) tax exemption requests), and even in the White House (all three of the above, but especially as relates to the IRS’s admittedly uneven processing of tax exemption applications and the President’s dubious denials of knowledge, let alone complicity, in that sordid business)—have spawned Congressional investigations into the IRS actions, with more certainly to follow; and there are likely to be hearings into the other two matters as well. These will doubtless stretch over much of the time and of the campaigning leading up to the mid-term elections in November 2014, leaving little time for the Congress to do anything but the most urgent business of the Nation (e.g., the debt limit), and even less goodwill with which to do so.
That deadlock not only has not eased one whit up to the very time this piece is being composed, but inevitably is bound to lock down even more tightly as the politicized jousting of the combatants in the Congressional hearings pours more salt into the wounds already opened in past battles in recent years, starting with the year-long confrontations of the parties over health care reform.
The Inspector General of the Treasury Department, who has been investigating the tax exemption process by the IRS (discriminatory by its own admission), has testified that inadequate management was much to blame, but that his investigation is continuing. His implication is obvious: more damaging disclosures may yet follow, reaching into high offices of the IRS. The newly appointed interim Commissioner of Internal Revenue—hurriedly placed in the job by the President within 48 hours after questions began to swirl around the White House as to the implication of the President himself in the Tea Party affair—issued a strong statement to the effect that the Service’s own investigation will go wherever the evidence leads, and any responsible persons will be punished. Impartial observers are quick to point out, “this is not Watergate.” But the very fact a need was felt for such a disclaimer is itself evidence that a faint scent of Watergate hangs over these proceedings.
The hearings, though barely begun, are already digging deeply into the innermost operations of the IRS exemption process, and claiming victims from its highest levels. The casualties so far are shocking. The former Commissioner of Internal Revenue, a longtime and highly respected executive in the Service, was summarily fired by the President. The director of the IRS unit dealing with tax exemptions has taken the Fifth Amendment and been placed on administrative leave. The former head of that unit, who now heads the Affordable Care Act Office of IRS, has attracted challenges to her fitness to occupy her present post, presumably for no reason other than her former association with the exempt organizations function; and she may feel obliged to step aside, or be pushed to do so, lest her mere presence were thought to compromise the effectiveness of the critical role assigned to IRS under the ACA. The present commissioner of the division whose span of authority includes that function has announced his imminent retirement. Even the Counsel to the President has felt compelled to disclose publicly what he did or did not tell the President and his rationale (on the surface, a seeming surrender of the lawyer’s privilege, which may prove costly to his client). All of this occurred in just the first fortnight of the congressional digging.
Of course, none of these officials (save possibly the President’s counsel) had responsibilities directly germane to the fiscal cliff. But no one can presume to foretell where this kind of blood-letting will end in Washington now that it has begun. There are collateral effects that can spill over into other operations of government. A possibly far-fetched, but not inconceivable, outcome is that the hearings will so damage the IRS reputation that efforts will be made to remove, or at least greatly diminish, its authority over implementation and enforcement of Obama’s dearly cherished Affordable Care Act. Alternatively, Republicans, already committed to continue their efforts to repeal ACA, as probably the principal focus of their campaigns in the coming midterm elections, may be emboldened by current attacks on the IRS to argue that, with the badly damaged Service so central to the functioning of the ACA , the statute cannot stand as presently constituted and must be repealed and only thereafter replaced by legislation reconceived on a more sustainable and truly affordable basis. Not just affordable in name—affordable to the entire society, not least the Government. The ACA is a budget buster, a great contributor to the fiscal cliff.
Not only is one unable to foretell how any of the above scandals will play out and with what collateral effects, but also what other such events may transpire with equivalent or even worse consequences for the nation’s economic or other well-being. Indeed, as this article was undergoing its final edits, another shocking disclosure occurred, which very well could cut deeper into the public consciousness: the revelations by a young and lowly ontractor to our National Security Agency that his job involved spooking the phone calls and computer messaging of vast segments of our population on a continuous basis, as part of the anti-terrorist activities of our government. That really has brought the actions of the government close to home to Americans, with an impact far more immediate than the activities that have been disclosed in the previously reported scandals. Shades of George Orwell’s Nineteen Eighty-Four, which introduced into the consciousness of readers Big Brother and around-the-clock surveillance. Of course, the Orwell nightmare scenario lacked the anti-terrorist justification that the current NSA program is rested upon. Its repercussions are unimaginable at this point. It will surely lead to a Congressional investigation at least as far-reaching as those already underway or in preparation.
As this piece is lofted into cyberspace, nothing more appears to have been done about the fiscal cliff since ATRA was passed. The sequester still reigns. It may be a triumph of hope over experience to anticipate, in this environment, that the looming “cliff” will be averted in the remaining months of this investigation-cluttered 2013 year. Perhaps the best thing that can realistically be hoped for in the remainder of the First Session of the new Congress is a lifting of the debt ceiling, coupled with some accommodation to Republicans for their acquiescence, and application from time to time of a few band aids to ameliorate sequester effects. That will just push Cliff Day down the road, for the next Session to grapple with.
That can happen of course. It is within the power of Congress to postpone and/or remediate the effects of the sequester as it continues progressively to bite into the economy; or, failing that, the Congress can accomplish a retroactive salvage action. But neither of these is ideal. The uncertainty that has kept businesses sitting on the estimated trillions of dollars of working capital, acting as a leash on the U.S. economy and a drag on the persistent unemployment figures, will only cause these conditions to worsen the longer meaningful action is delayed.
There is another way: put an end to the dystopian actions (inactions?) that have characterized the political parties’ practices for too long. Is that too much to hope for?
Copyright 2013, A. D. Lurie
Alvin D. Lurie is a practicing pension attorney. He was appointed as the first person to administer the ERISA program in the IRS National Office in Washington. He is general editor of Bender’s Federal Income Taxation of Retirement Plans (LexisNexis), a 2-volume treatise, and he is also editor of the annual compendium of articles published under the title New York University Review of Employee Benefits and Executive Compensation (LexisNexis). Mr. Lurie is the first recipient of the Lifetime Employee Benefits Achievement Award sponsored by the Employee Benefits Committee of the American Bar Association Tax Section. He can be contacted at Alvin D. Lurie, P.C. in Larchmont, New York, at (914) 834-6725