NewYorkUniversity
LawReview

Articles

2018

A Theory of Taxing Sovereign Wealth

Victor Fleischer

Sovereign wealth funds enjoy an exemption from tax under § 892 of the tax code. This anachronistic provision offers an unconditional tax exemption when a foreign sovereign earns income from noncommercial activities in the United States. The Treasury regulations accompanying § 892 define noncommercial activity broadly, encompassing both traditional portfolio investing and more aggressive, strategic equity investments. The tax exemption, which was first enacted in 1917, reflects an expansive view of the international law doctrine of sovereign immunity that the United States (and other countries) discarded fifty years ago in other contexts. Because § 892 was not written with sovereign wealth funds in mind, the policy rationale for this generous tax treatment has not been closely examined in the aca- demic literature.

This Article provides a framework for analyzing the taxation of sovereign wealth. I start from a baseline norm of “sovereign tax neutrality,” which departs from the current regime under § 892 by treating the investment income of foreign sovereigns no better and no worse than foreign private investors’ income and by favoring no one nation over another. Whether we should depart from this norm depends on several factors, including what external costs and benefits are created by sovereign wealth investment, whether tax or other regulatory instruments are superior methods of attracting investment or addressing harms, and which domestic political institutions are best suited to implement foreign policy. I then consider whether we should impose an excise tax that would discourage sovereign wealth fund investments in U.S. companies. This tax might be designed to complement nontax economic and foreign policy goals by discouraging investments by funds that fail to comply with best practices for transparency and accountability.

The case for repealing the existing tax subsidy is strong. We should tax sovereign wealth funds as if they were private foreign corporations; there is no compelling reason to subsidize sovereign wealth. At the same time, my analysis suggests that policymakers should be cautious about going any further: An excise tax may not be the optimal regulatory instrument for managing the special risks posed by sovereign wealth funds.

Categoricalism and Balancing in First and Second Amendment Analysis

Joseph Blocher

The least discussed element of District of Columbia v. Heller might ultimately be the most important: the battle between the majority and dissent over the use of categoricalism and balancing in the construction of constitutional doctrine. In Heller, Justice Scalia’s categoricalism essentially prevailed over Justice Breyer’s balancing approach. But as the opinion itself demonstrates, Second Amendment categoricalism raises extremely difficult and still-unanswered questions about how to draw and justify the lines between protected and unprotected “Arms,” people, and arms-bearing purposes. At least until balancing tests appear in Second Amendment doctrine—as they almost inevitably will—the future of the Amendment will depend almost entirely on the placement and clarity of these categories. And unless the Court better identifies the core values of the Second Amendment, it will be difficult to give the categories any principled justification.

Heller is not the first time the Court has debated the merits of categorization and balancing, nor are Justices Scalia and Breyer the tests’ most famous champions. Decades ago, Justices Black and Frankfurter waged a similar battle in the First Amendment context, and the echoes of their struggle continue to reverberate in free speech doctrine. But whereas the categorical view triumphed in Heller, Justice Frankfurter and the First Amendment balancers won most of their battles. As a result, modern First Amendment doctrine is a patchwork of categorical and balancing tests, with a tendency toward the latter. The First and Second Amendments are often presumed to be close cousins, and courts, litigants, and scholars will almost certainly continue to turn to the First Amendment for guidance in developing a Second Amendment standard of review. But while free speech doctrine may be instructive, it also tells a cautionary tale: Above all, it suggests that unless the Court better identifies the core values of the Second Amendment, the Second Amendment’s future will be even murkier than the First Amendment’s past.

This Article draws the Amendments together, using the development of categoricalism and balancing tests in First Amendment doctrine to describe and predict what Heller’s categoricalism means for the present and future of Second Amendment doctrine. It argues that the Court’s categorical line drawing in Heller creates intractable difficulties for Second Amendment doctrine and theory and that the majority’s categoricalism neither reflects nor enables a clear view of the Amendment’s core values, whatever they may be.

Temporary-Effect Legislation, Political Accountability, and Fiscal Restraint

George K. Yin

The proper duration of legislation has become highly controversial as a result of the enactment of many temporary tax laws during the George W. Bush administration. The prevailing view is that inclusion of an expiration date or “sunset” feature in legislation permits the cost of the legislation to be misrepresented and allows its proponents to escape the discipline intended by the congressional budget process. Under this view, fiscal discipline is preserved through enactment of so-called permanent legislation.

This Article challenges that view and shows that, barring estimation error, the legislative process accounts completely for the costs of “temporary-effect” legislation but not permanent legislation. Consequently, enactment of temporary-effect rather than permanent legislation would promote more political accountability and may result in greater fiscal restraint. In addition, when temporary-effect legislation expires, the legislative process fully takes into account the cost of any extension. Extension of such legislation, therefore, competes with, and potentially displaces, adoption of other legislation. By contrast, the cost of continuing permanent programs largely disappears in the legislative process, and therefore continuation of such programs produces little or no crowding-out effect. This Article also addresses whether other features of the legislative process could overcome the problems associated with the budget accounting of permanent legislation and responds to criticisms of temporary-effect legislation.

Class Certification in the Age of Aggregate Proof

Richard A. Nagareda

Few pretrial motions in our civil justice system elicit as much controversy as those for the certification of class actions. This Article offers the first account of the challenges courts face today in light of an important series of federal appellate decisions that direct the district courts to resolve competing expert submissions on the class certification question during the pretrial stage, even when the dispute overlaps with the merits of the litigation.

Across broad swaths of class action litigation today, plaintiffs rely on aggregate proof—evidence, typically of an economic or statistical nature, that presupposes the cohesiveness of the aggregate unit for litigation and, from that perspective, seeks to reveal quantitatively a common wrong attributable to the defendant. Debates over the proper role of aggregate proof arise in what otherwise might seem disparate disputes over class certification across securities, antitrust, Racketeer Influenced and Corrupt Organizations Act (RICO), and employment discrimination litigation. Too often, however, courts have taken at face value the evidentiary form that aggregate proof assumes in motions for class certification.

This Article urges a new conceptualization of the challenges in class certification facing courts today. The real question about aggregate proof in class certification is not one that speaks to the relationship between the court and the factfinder in the (usually hypothetical) event of a class-wide trial. Rather, the institutional relationship that really matters is the one between the court and the legislature as expositors of governing law. Properly understood, aggregate proof frequently offers not so much a contested view of the facts but, more fundamentally, a contested account of governing law—one eminently suited for judicial resolution and appellate correction de novo, without concern about possible intrusion into the role of the factfinder.

This Article exposes how renewed attention to the judicial duty to “say what the law is” can lend coherence to the law of class certification, offering the first extended assessment of such controversial recent litigation as the civil RICO class action against the tobacco industry in connection with its marketing of light cigarettes and the employment discrimination class action—the largest certified class in history— against Wal-Mart concerning the pay and promotion of its hourly female employees. The Article concludes by relating the analysis of class certification tolarger changes in the civil justice system that seek in various ways to address the reality of settlement, rather than trial, as the endgame of litigation.

Originalism Is Bunk

Mitchell N. Berman

Critical analysis of originalism should start by confronting a modest puzzle: Most commentators suppose that originalism is deeply controversial, while others complain that it means too many things to mean anything at all. Is one of these views false? If not, how can we square the term’s ambiguity with the sense that it captures a subject of genuine debate? Perhaps self-professed originalists champion a version of originalism that their critics don’t reject, while the critics challenge a version that proponents don’t maintain.

Contemporary originalists disagree about many things: which feature of the Constitution’s original character demands fidelity (framers’ intent, ratifiers’ understanding, or public meaning); why such fidelity is required; and whether this interpretive obligation binds judges alone or citizens, legislators, and executive officials too. But on one dimension of potential variability—the dimension of strength—originalists are mostly united: They believe that those who follow some aspect of a provision’s original character must give that original aspect priority over all other considerations (with a possible exception for continued adherence to non- originalist judicial precedents). That is, when the original meaning (or intent, etc.) is adequately discernible, the interpreter must follow it. This is the thesis that self- professed originalists maintain and that their critics (the non-originalists) deny.

Non-originalists have challenged this thesis on varied wholesale grounds, which include: that the target of the originalist search is undiscoverable or nonexistent; that originalism is self-refuting because the framers intended that the Constitution not be interpreted in an originalist vein; and that originalism yields bad outcomes. This Article proceeds differently. Instead of mounting a global objection—one purporting to hold true regardless of the particular arguments on which proponents of originalism rely—I endeavor to catalogue and critically assess the varied arguments proffered in originalism’s defense.

Those arguments are of two broad types—hard and soft. Originalism is “hard” when grounded on reasons that purport to render it (in some sense) inescapably true; it is “soft” when predicated on contingent and contestable weighings of its costs and benefits relative to other interpretive approaches. That is, hard arguments seek to show that originalism reflects some sort of conceptual truth or follows logi- cally from premises the interlocutor already can be expected to accept; soft arguments aim to persuade others to revise their judgments of value or their empirical or predictive assessments. The most common hard arguments contend that originalism is entailed either by intentionalism or by binding constitutionalism. Soft arguments claim that originalist interpretation best serves diverse values like democracy and the rule of law. I seek to show that the hard arguments for originalism are false and that the soft arguments are implausible.

The upshot is not that constitutional interpretation should disregard framers’ intentions, ratifiers’ understandings, or original public meanings. Of course we should care about these things. But originalism is a demanding thesis. We can take the original character of the Constitution seriously without treating it as dispositive. That original intents and meanings matter is not enough to render originalism true.

The Disutility of Injustice

Paul H. Robinson, Geoffrey P. Goodwin, Michael D. Reisig

For more than half a century, the retributivists and the crime-control instrumentalists have seen themselves as being in an irresolvable conflict. Social science increasingly suggests, however, that this need not be so. Doing justice may be the most effective means of controlling crime. Perhaps partially in recognition of these developments, the American Law Institute’s recent amendment to the Model Penal Code’s “purposes” provision—the only amendment to the Model Code in the forty-eight years since its promulgation—adopts desert as the primary distributive principle for criminal liability and punishment.

That shift to desert has prompted concerns by two groups that, ironically, have been traditionally opposed to each other. The first group—those concerned with what they see as the over-punitiveness of current criminal law—worries that setting desert as the dominant distributive principle means continuing the punitive doctrines they find so objectionable, and perhaps making things worse. The second group—those concerned with ensuring effective crime control—worries that a shift to desert will create many missed crime-control opportunities and will increase avoidable crime.

The first group’s concern about over-punitiveness rests upon an assumption that the current punitive crime-control doctrines of which it disapproves are a reflection of the community’s naturally punitive intuitions of justice. However, as Study 1 makes clear, today’s popular crime-control doctrines in fact seriously conflict with people’s intuitions of justice by exaggerating the punishment deserved.

The second group’s concern that a desert principle will increase avoidable crime exemplifies the common wisdom of the past half-century that ignoring justice in pursuit of crime control through deterrence, incapacitation of the dangerous, and other such coercive crime-control programs is cost-free. However, Studies 2 and 3 suggest that doing injustice has real crime-control costs. Deviating from the community’s shared principles of justice undermines the system’s moral credibility and thereby undermines its ability to gain cooperation and compliance and to harness the powerful forces of social influence and internalized norms.

The studies reported here provide assurance to both groups. A shift to desert is not likely either to undermine the criminal justice system’s crime-control effectiveness, and indeed may enhance it, nor is it likely to increase the system’s punitiveness, and indeed may reduce it.

Public Wrongs and Private Bills: Indemnification and Government Accountability in the Early Republic

James E. Pfander, Jonathan L. Hunt

Students of the history of administrative law in the United States regard the antebellum era as one in which strict common law rules of official liability prevailed. Yet conventional accounts of the antebellum period often omit a key institutional feature. Under the system of private legislation in place at the time, federal government officers were free to petition Congress for the passage of a private bill appropriating money to reimburse the officer for personal liability imposed on the basis of actions taken in the line of duty. Captain Little, the officer involved in one oftcited case, Little v. Barreme, pursued this avenue of indemnification successfully. As a result, the ultimate loss associated with that officer’s good faith effort to enforce federal law fell on the government rather than on the officer himself.

This paper fills out the picture of government accountability in the early nineteenth century by clarifying the practice of congressional indemnification. After identifying cases in which officers sought indemnity from Congress through a petition for private relief, we examine the way official liability, as administered by the courts,
interacted with private legislation, as administered by Congress, to shape the incentives of government officers to comply with the law. We find that a practice of relatively routine indemnification took the sting out of sovereign immunity, a doctrine that key players—including James Madison and John Marshall—treated as thinly formalistic. We also find that Congress assumed responsibility for deciding when federal officers were entitled to indemnity for acts taken in the scope of employment.

The antebellum system thus contrasts sharply with modern government accountability law. Jurists today tend to regard sovereign immunity as a barrier to relief, rather than a principle of forum allocation that preserves legislative primacy in the adoption of money bills. Moreover, courts today often refrain from deciding the question of formal legality in an effort to strike a proper balance between the victim’s interest in accountability and the official’s interest in immunity. Whatever the wisdom of the resulting body of qualified immunity law, the doctrine reflects judicial control of matters that the early republic had assigned to the legislative branch.

The Reconstruction Power

Jack M. Balkin

Modern doctrine has not been faithful to the text, history, and structure of the Thirteenth, Fourteenth, and Fifteenth Amendments. These amendments were designed to give Congress broad powers to protect civil rights and civil liberties; together they form Congress’s Reconstruction Power.

Congress gave itself broad powers because it believed it could not trust the Supreme Court to protect the rights of the freedmen. The Supreme Court soon realized Congress’s fears, limiting not only the scope of the Reconstruction Amendments but also Congress’s powers to enforce them in decisions like  United States v. Cruikshank and the Civil Rights Cases. Due to these early cases, Congress was often forced to use its Commerce Power to protect civil rights. Modern decisions beginning with City of Boerne v. Flores and United States v. Morrison have compounded these errors.

When we strip away these doctrinal glosses and look at the original meaning and structural purposes underlying the Reconstruction Amendments, we will discover that the Reconstruction Power gives Congress all the authority it needs to pass modern civil rights laws, including the Civil Rights Act of 1964. That was the original point of these amendments, and that should be their proper construction today.

When it enforces the Reconstruction Amendments, Congress is not limited to remedying or preventing state violations of rights. It has long been recognized that Congress may reach private conduct through its Thirteenth Amendment powers to eradicate the badges and incidents of slavery. But Congress also has the power to enforce the Fourteenth Amendment’s Citizenship Clause—a guarantee of equal citizenship that, like the Thirteenth Amendment, contains no state action requirement. The Citizenship Clause, designed to secure equality of citizenship for freedmen, gives Congress the corresponding power to protect the badges and incidents of citizenship. Congress may therefore ban discriminatory private conduct that it reasonably believes will contribute to or produce second-class citizenship.

In addition to having powers to enforce the Citizenship Clause, Congress also may reach private action to prevent interference with federal constitutional rights. Along with its powers to enforce the Guarantee Clause, Congress may therefore reach private violence designed to deter political participation, terrorize political opponents, or undermine representative government.

The failure of state and local governments to guarantee equal protection of the laws was a central concern of the framers of the Fourteenth Amendment, and giving Congress the power to remedy this violence was thus one of the central purposes of the amendment. Today, this same power enables Congress to pass laws banning violence directed at women and other federal hate crimes legislation.

Finally, because of institutional differences between courts and legislatures, Congress may implement the state action requirement more broadly than courts currently do, for example, by imposing antidiscrimination norms on government contractors and operators of public accommodations. For this reason Title II of the 1964 Civil Rights Act, which bans discrimination in public accommodations, is not only a legitimate exercise of Congress’s power to enforce the Fourteenth Amendment; it is a paradigmatic example of that power.

The Supreme Court did not reach these questions in 1964 because it feared that overturning old precedents like the 1883  Civil Rights Cases would encourage Southern resistance to the new Civil Rights Act. But we should have no such compunction today. It is long past time to remedy the Supreme Court’s errors, and reconstruct the great Reconstruction Power of the Constitution.

“The People” of the Second Amendment: Citizenship and the Right to Bear Arms

Pratheepan Gulasekaram

The Supreme Court’s recent Second Amendment decision, District of Columbia v Heller, asserts that the Constitution’s right to bear arms is an individual right to armed self-defense held by law-abiding “citizens.” This Article examines the implications of this description, concluding that the Second Amendment cannot concurrently be a right of armed self-defense and restricted to citizens. The Article proceeds in three parts. First, it analyzes the term “the people” as it has been interpreted in recent Court cases. The Article concludes that constitutional text and Supreme Court jurisprudence provide no sustainable basis to believe the Second Amendment is limited to citizens. Second, the Article situates Heller within a historical context of gun regulation motivated by racial animus and xenophobia, manifested by contractions of citizenship to exclude—and gun laws intended to disarm—racial minorities and noncitizens. Third, the Article attempts to revive a coherent theory justifying the limitation of gun rights to citizens but ultimately concludes that armed self-defense is conceptually unrelated to historically political rights such as voting and jury service. Thus, Heller’s holding regarding who is entitled to armed self-defense is logically unsound and doctrinally troubling.

Patentography

Jeanne C. Fromer

Many critics have noted that patent litigation’s institutional structure is riddled with shortcomings that lead to unjust and inefficient outcomes and decrease public faith in the legal system. This Article relies on theory and empirical data to propose that the patent litigation system can be improved by harnessing patentography—the geography of patent disputes. There are three principal concerns with patent litigation’s institutional structure: widespread forum shopping in district court patent cases, district courts’ typically poor factfinding and lawmaking in these cases, and insufficient deference by the Federal Circuit—the court hearing nearly all patent appeals—to district courts’ factual findings. Harnessing patentography by restricting venue in patent litigation to the principal place of business of one of its defendants will help repair each problem. It will clamp down on forum shopping. Contrary to conventional wisdom, it will also improve district courts’ patent decisionmaking. As industries tend to cluster stably in discrete geographic areas, my proposed rule will tend to cluster patent cases by technology in particular districts, such as software cases in the Northern District of California and pharmaceutical cases in the District of New Jersey. Clustering together large numbers of an industry’s patent cases in a limited number of district courts will develop those courts’ proficiencies in patent law and in the underlying industry-specific facts critical to sound legal determinations. Under my proposal, this clustering will occur in districts in which judges and juries already tend to have background industry knowledge, given the associated industry cluster. An empirical review of patent cases filed in district courts in 2005 confirms that harnessing patentography as I propose would intensify patent litigation clusters. Finally, improving district courts’ decisionmaking ought to encourage the Federal Circuit to defer more appropriately to district courts’ factual findings.