Court Packing's Chilling Effects
A Bad Idea
AOC is out with this tweet saying that Democrats need to have the balls to do radical things like add judges to the Supreme Court in order to get their way.
It's hard to be brief in explaining how bad this idea is. So here's a medium explanation of why this idea is so bad.
Let's say the Dems win the Congress and Presidency next week. Let's say they decide to go through with this court-packing plan and expand the court from 9 people to 13 (or maybe 15) to gain a majority. They will have established the precedent that this maneuver is acceptable.
This politicizes the court even more than it is already. If your side wins an election and you need more support for your laws, then just add another SCOTUS justice or two. This makes precedent. This makes long-term planning much more difficult.
Regime Uncertainty
There's a term for this: regime uncertainty.
From the Mises wiki:
Regime uncertainty is a concept developed by Robert Higgs, that describes a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights.
When people and businesses can't rely on a consistent rule of law, it necessarily increases their time preference. In other words, the short-term gets prioritized over the long-term.
What are those long-term plans? Investments in business.
Regime Uncertainty in Action
And we are already seeing regime uncertainty in action. M&A activity is skyrocketing right now because people are afraid of the Biden capital gains plan to eliminate preferrential tax treatment on investment income if you make more than $1 million.
I know, I know. Nice problem to have. I have several clients right now that are looking at exiting their businesses because of this. A buddy of mine who is a business broker says it's all people are calling him about. So sad for those rich guys, right? Wrong.
These are people who own small businesses. They might be making 100k or 200k a year when all is said and done, but they are building equity in their business. This is typically the vast majority of their wealth.
So maybe the business sells for 1.5M. Under the current tax regime, that's going to cost 23.8% in capital gains tax or 357,000 USD in federal income tax, plus whatever state rates might be owed. Under the Biden plan, that would jump to 555,000 USD plus state tax, a 198,000 USD difference.
Would you work harder and delay your payday if you know that you would have to increase the value of your business by 314,000 USD just to get back to the same amount net of taxes as you did before? That's a pretty hard pill to swallow. That's regime uncertainty.
The Future Would be Poorer
The same thing applies to all legislative acts if each party is willing to change the composition of the court in the future if they don't get their way in the present.
A clear example is the recent South Dakota vs Wayfair case. This case created the concept of "economic nexus" for sales tax liability. Basically, the court found that if you sell enough to people inside a state, you owe sales tax to that state even if you have no physical presence there. This has been an enormous shift in the industry. That's bad enough. If you add on top of that the idea that the court could be packed and a future court might decide the reverse, how difficult does that make it for you, the business owner, to decide what to do?
This kind of chilling effect will be felt in uncountable big ways and small ways. The net result will be decreased investment and a poorer world.
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