Our Prosperity and Posterity

Life in post-Revolution America was rough and bears some semblance to today. The new nation was deeply in debt because of governmental spending, and foreign lenders refused to accept our paper money, insisting instead on gold. When debtors could not pay their loans, the banks started a wave of foreclosures in Massachusetts, took possession of farms and homes, and jailed debtors. Hundreds of people coalesced around Daniel Shays, a Revolutionary War veteran, who led his “army” in shutting down courts to stop foreclosures and then freeing imprisoned debtors. Neither the national or state government was willing or able to respond, so a group of Bostonians paid for an armed militia to go to western Massachusetts, reopen the courts, and defeat and arrest Shays and his army. Within a few months of this incident, the Constitutional Convention began in Philadelphia.

Shays’ Rebellion must have been on the mind of those gathered in Philadelphia during the summer of 1787, since the Preamble states that the Constitution’s purposes include “to insure domestic Tranquility,” and to “secure the Blessings of Liberty to ourselves and our Posterity . . .” These “Blessings of Liberty” included personal and economic freedom so Americans and their posterity could pursue “happiness” (the acquisition of property), which was identified as an “unalienable” right in the Declaration of Independence eleven years previously.

Regarding securing economic freedom for their posterity, the Founding Generation and their immediate successors unlike today paid off their national debt. Primarily because of the Revolutionary War, the national debt in 1791 stood at $75 million. This debt grew but by 1835, America was debt free. The Civil War caused the national debt to climb for the first time into the billions ($2.7 billion after the war), but this debt stayed rather stable until World War I pushed the national debt to $22 billion. The debt was paid down in the 1920s to $16 billion, until the social spending of the New Deal and World War II exploded the debt 1600% to an amount equal to the value of all goods and services produced in the U.S. in one year. With the rapid expansion of the economy after World War II, the percentage of debt to GDP fell while the debt increased primarily due to inflation. The debt passed $1 trillion in 1982, doubled to $2 trillion in 1986, and then added another trillion dollars in debt in 1990, 1992, 1996, 2002, 2004, 2006, 2007, and 2008. This raging appetite for debt continues. The Congressional Budget Office in March estimated that the current $10 trillion debt would double in ten years based on President Obama’s budget.

Although the Cold War, Vietnam and Iraq Wars, and other overseas ventures have consumed considerable resources, we have not had a world war for 60 years. Rather, our continuing huge budget deficits and resulting mountains of debt are attributable to expensive social programs passed largely by Democrats (who failed to raise taxes to cover the new expenses) and tax cuts passed largely by Republicans (who failed to cut spending). In other words, for the past 25 years our leaders have borrowed money so we could spend it on ourselves either for retirement benefits, prescription drugs, health care for the elderly, or simply more consumer spending – a continuing legacy of the “Me Generation.” The debt, and the burgeoning interest on the debt, we leave to our children and grandchildren.

By adding “…and our posterity” to the Constitution’s Preamble, the Founders placed upon themselves and all subsequent generations (certainly including us) a profound moral duty which we have sorely neglected. Such neglect is reason enough for the rise of future Daniel Shays. Whereas the Founders in gaining independence sacrificed their prosperity for their posterity, we have sacrificed our posterity for our prosperity.

Good Politics but Unlikely Bipartisanship

President Obama’s selection of Sonia Sotomayor as his first nominee to the Supreme Court certainly is good politics. Given Judge Sotomayor’s gender, ethnicity, and Roman Catholic background (she graduated in 1972 from Cardinal Spellman High School in the Bronx), the President tipped his hat to three important voting constituencies that favored him much more than John Kerry.

Good politics, however, does not necessarily ensure a good Supreme Court pick. Take President Eisenhower, for example. His first nomination (as Chief Justice) was a political rival for the 1952 Republican presidential nomination, and he later picked a New Jersey Catholic to curry the favor of northeast voters in the 1956 election. After Eisenhower left office, a reporter asked him whether he had made any mistakes as president. "Two," the former president replied. "They are both on the Supreme Court." Eisenhower’s selections of Earl Warren and William Brennan led to an unpopular explosion of criminal rights.

Other examples abound, including the selection of the “stealth nominee” whom Judge Sotomayor will replace if confirmed by the Senate. At the press conference announcing David Souter’s nomination, President George H.W. Bush said five times that the future Justice Souter was "committed to interpreting, not making the law." In promoting David Souter to conservatives, White House Chief of Staff John Sununu described his fellow New Hampshire citizen Souter as a “home run,” which conservatives foolishly interpreted as a “home run” for their team.

With this pick, it is unlikely that President Obama is repeating the mistakes of these Republican Presidents. First of all, the President is not politically indebted to Ms. Sotomayor, and although he seeks to curry favor with the fastest growing element of the electorate, he is not selecting a conservative Hispanic. Perhaps most importantly, the President has a very healthy majority of fellow Democrats in the Senate, and therefore does not have the problem usually confronted by Republican Presidents (while Republicans have enjoyed the White House for 36 of the past 57 years, they have controlled the Senate for only 14 of those years).

With confirmation assured, President Obama nevertheless will seek votes from Republican senators so he can claim bipartisan support similar to that achieved by President Clinton (the Senate approved Clinton’s choices of Ruth Bader Ginsburg and Stephen Breyer by votes of 96-3 and 87-9, respectively). Such bipartisan support is unlikely, however, since Republicans in the Senate cannot simply “roll over” like they did for Ginsburg and Breyer after the pitched confirmation battles for Chief Justice Roberts (confirmed 78-22) and Justice Alito (confirmed 58-42). Rest assured that the confirmation process, however, will not be as rancorous as that of Roberts and Alito, since the Republicans on the Judiciary Committee have no one comparable to Sen. Charles Schumer.

Republican Senators seeking cover for voting for Sotomayor should not look to the fact that the first President Bush nominated her to the federal bench. First of all, historically the selection of federal district court judges has been the prerogative of the U.S. Senators from the state where the vacancy exists. The White House and the Department of Justice’s Office of Legal Policy review the recommendations, of course, but given the nature of the work (the overwhelming majority of the 338,000 criminal and civil cases filed in 2008 are routine in nature) and the fact that few of these cases (less than 200, and some of these are appeals of State Supreme Court decisions) actually go to the Supreme Court, great deference is given to the recommendation of the Senators.

Moreover, any stamp of approval by the first Bush administration for Judge Sotomayor is particularly dubious because of the “New York Rule.” In New York (as well as other states that follow this practice), the two U.S. Senators divide their judicial selections with the U.S. Senator of the same party as the occupant of the White House getting three judicial picks and the Senator of the opposing party getting the fourth pick. The two U.S. Senators from New York during the first Bush administration were Republican Al D’Amato and Democrat Daniel Patrick Moynihan. Given Judge Sotomayor’s politics, she was most likely the pick of Senator Moynihan rather than Senator D’Amato, and the administration of George H.W. Bush merely complied with this recommendation.

Given the depleted ranks of Republican senators and their natures (which white Republican male senator from the South or West will want the role of being harsh to a Hispanic female?), the confirmation of Judge Sotomayor will not replicate the battles for Robert Bork and Clarence Thomas. Another reason for concluding that Sotomayor is a good political choice for President Obama.

More Courts Imposing Their Values

With the Iowa Supreme Court overturning a state law banning homosexual marriage and the California Supreme Court pondering the same, it could be a tough month for democracy in America. The Iowa court earlier this month declared unconstitutional a statute similar to the Defense of Marriage Act passed by the U.S. Congress and the legislatures of 18 other states. These Defense of Marriage Acts expressed the values of the popularly elected legislators and governors of these 18 states. The California Supreme Court is considering action even more egregious, this being overturning a constitutional amendment adopted directly by a majority of California voters in the last election. This California referendum, similar to the constitutional amendments banning same sex marriage passed by the citizens of 29 different states, expresses directly the values of the voters.

The decision by the Iowa Supreme Court is not, of course, the first time a court has thwarted the will of the people. Courts in California are rather notorious for this, having ruled unconstitutional two popular referenda declaring illegal aliens ineligible for public services (Proposition 187) and seeking term limits on congressmen (Proposition 227), and also ruling unconstitutional California’s Defense of Marriage Act (a ruling that led to the constitutional amendment which the court is now considering). This thwarting of the will of the people is not limited to California. The U.S. Supreme Court in 1996 threw out a Colorado constitutional amendment approved by a majority of Colorado voters that prohibited any preferential treatment for homosexuals.

Each time a court overturns a referendum or statute expressing the values of the people or their elected representatives, confidence in the judiciary and the rule of law diminishes. The U.S. Supreme Court itself recognized this inevitable outcome of judicial action in one of the most closely watched cases of our generation, Planned Parenthood v. Casey. In Casey,the Court reconsidered its 1973 decision of Roe v. Wade but this time, unlike previous abortion cases, the pro-lifers appeared to have the edge. Since 1973, the avowedly pro-life President Reagan had nominated three justices to the Supreme Court (Justices Scalia, Kennedy, and O’Connor), and the professed pro-life President George H.W. Bush had added two more (Justices Thomas and Souter). With the pro-life Chief Justice William Rehnquist solidly in favor of overturning Roe, it appeared likely that the regulation of abortion would return back to the states for consideration of what, if any, protection the people’s representatives would give to unborn babies (prior to Roe v. Wade, some states gave little protection and some states extensive protection).

The Court in Casey affirmed a woman’s right within limits to abort her baby. The important aspect of Casey for purposes of this article, however, is the reasoning provided by the three Republican appointees (Kennedy, Souter and O’Connor) who commanded the decision in this case. They wrote that in spite of the continued controversy and annual January marches on Washington, generations of women had come to expect the right to abort. More fundamentally, the three Justices noted that the root of the U.S. Supreme Court’s power resides “in its legitimacy, a product of substance and perception that shows itself in the people’s acceptance of the Judiciary as fit to determine what the Nation’s law means and to declare what it demands.” A large part of this legitimacy is based “on the very concept of the rule of law underlying our own Constitution [which] requires such continuity over time . . .”

Justice Scalia in his dissent directly addressed the legitimacy of the Court and the rule of law. He noted first of all that longevity of a ruling like Roe does not ensure its continued vitality and correctness – the “separate but equal” principles of Plessy v. Fergusoncontinued for three generations of blacks and whites before being overturned in Brown v. Board of Education. More importantly, Justice Scalia addressed the Court’s disregard of the expressed will of the people. He wrote: “As long as this Court thought (and the people thought) that we justices were doing essentially lawyers’ work up here – reading text and discerning our society’s traditional understanding of that text – the public pretty much left us alone. . . . But if in reality . . . our pronouncement of constitutional law rests primarily on value judgments, then a free and intelligent people’s attitude towards us can be expected to be (ought to be) quite different. The people know that their value judgments are quite as good as those taught in any law school – maybe better. . . . Value judgments, after all, should be voted on, not dictated . . .”

Yesterday’s Tea Parties demonstrate that ordinary people in America are frustrated because the will of the elite (a category that certainly includes the judiciary) seems to trump the will of the electorate. Iowa is certainly no exception to this perception. The more the courts flaunt the will and values of the people, the more the American people will question the legitimacy of the judiciary. At some point the people will simply reject the will of the rogue judiciary, leading to first sporadic and then more generalized break-down of the rule of law, which would have devastating consequences to the functioning of our society.

The courts can still forestall this by heeding the wisdom of Justice Scalia, who recognized that the values of five Supreme Court Justices must not trump the values of millions of American voters. Unless the judiciary wakes up, soon the American public will join the refrain of President Andrew Jackson, who said: “[Supreme Court Chief Justice] John Marshall has made his decision, now let him enforce it.”

Be Grateful Not to Work for AIG

As March Madness fades into April Apathy, one wonders what will next draw the attention of a sizeable portion of the American public. Will it be the latest apologies by our President, or will it be the looming tax deadline of April 15? My guess is that most American pragmatists will opt for the latter. For those, be grateful that you are not one of the current villains of America, the AIG bonus recipients.

I frankly never thought I would feel sorry for a Wall Street big shot who received in a bonus a multiple of what I make each year as a humble grad school prof. Yet, given the death threats some bonus recipients and their families have received from certain frenzied and pathetic members of the public, and the "encouragement" the AIG "bonus babies" have received from New York's Attorney General Cuomo (who apparently had little legal basis for demanding the return of the bonuses), one cannot help but feel some sympathy, particularly for those AIG executives who had absolutely nothing to do with the AIG practices that led to its demise and need for a bail-out. Particularly galling, of course, is the fact that the Democrats' stimulus package specifically permitted these bonuses in a bill that was not circulated for consideration prior to its vote (can any thinking person in light of this lack of order and courtesy to fellow congressmen trust the government in any way with our economic well-being?). My focus of today, however, is on the tax implications for the bonus recipients.

AIG is, of course, a corporation, and as a corporation, it withholds from employee compensation such items as social security taxes, Medicare taxes, state income taxes, and federal income taxes (in fact, if AIG does not withhold taxes, goes bankrupt, and there are insufficient funds to pay the tax withholdings, the members of the Board of Directors are personally liable for them!). Therefore, following the normal course of business, AIG withheld from the recent bonuses the appropriate tax withholdings given to its executives. Assuming that the executives receiving a million dollar bonus were in the highest federal income tax bracket, were residents of New York City, filed joint tax returns with their spouses, and had $357,700 in other income (a reasonable assumption to make in light of the size of the bonus!), AIG would withhold as much as $320,362 in federal income taxes, $14,500 in Medicare taxes (there is no cap on these unlike social security taxes), $77,700 in New York State income tax, and $36,480 in New York City income tax. That leaves a little more than half a million dollars in the bonus (still a good paycheck!) for the executive, spouse, and family.

New York Attorney General Andrew Cuomo pursued these bonus recipients and according to his office's press release, nine of the top ten bonus recipients (15 of the top 20) had agreed "to give the bonuses back." But give it back to whom? AIG? The government?

Please remember that having received and paid tax on the money, the AIG executives are free to dispose of it (spend it, invest it, donate it) as they see fit. What they do with the money, however, has consequences. Spending the money, of course, pleases the sellers of goods and services, and generates even more taxes for some government entities (the State and City of New York, for instance, with their respective sales taxes of 4 percent and 8.375 percent). Donating the money, however, raises other issues. If the entity receiving the donation is a charitable organization (church, school, etc.), the donation is tax deductible subject to certain limitations. If the receiving entity is not a charitable organization, the person making the gift cannot deduct the amount given from his income.

AIG does not, of course, qualify as a charity since it was not organized for charitable or educational purposes (the fact that AIG is currently a "non-profit" and a subject of US Treasury "charity" does not count). It also is not yet an arm of the government (donations to government are also tax deductible). Therefore, "giving the money back" to AIG is a donation to a non-charitable organization, meaning that the donation is not deductible and therefore the government can keep the income taxes generated by the bonus.

Lawyers or accountants more clever than me perhaps can structure this "donation" in such a way to minimize the inherent problems discussed above. Better yet, high priced lobbyists perhaps can add yet another provision to the Internal Revenue Code that is already the size of a big city phonebook. This legislative fix may be in the works, since the House AIG bonus confiscation bill excludes from income any amount if waived by the employee, although there remain problems with this as noted by the Wall Street Journal. Nevertheless, it is unjust to even incur the expense of a high-priced tax attorney, accountant, or lobbyist to fix this mess caused by the negligence of Congress. In situations like this, the wisdom of Ronald Reagan becomes clearer and more necessary each day, particularly his statement that the "most terrifying words in the English language are: I'm from the government and I'm here to help."