The Constitutionality of Taxing Bonuses

[ProSense]

Monday, March 23, 2009

The Constitutionality of Taxing Bonuses

JB

The short answer is that the current plans from both the House and the Senate appear to be constitutional. The House plan is here; a summary of the Senate plan is here.

There are five possible constitutional limitations that might be relevant.

There is no problem under the Due Process Clause of the Fifth Amendment because the tax is rationally related to a legitimate government interest. The government interest is (1) the avoidance of extraordinary rents to companies and their employees who are being subsidized by the government in order to keep the financial system working properly; and (2) preventing improper incentives and moral hazard in subsidized companies and their employees. Even if the tax is not well designed to achieve these goals, in the sense that other alternatives might achieve the government's purposes better, the tax substantially furthers these purposes.

There is no problem under the takings clause of the Fifth Amendment. The tax does not involve the seizure of real property or an interest in real property. The tax is regulatory and for a public purpose as stated above. Such a tax may or may not be good policy but it does not constitute a taking.

There is no problem under the Ex Post Facto clause because the tax is not a criminal sanction.

There is no problem under the Contracts Clause because the Contracts Clause binds the states, and not the federal government.

Finally, there is no problem under the Bill of Attainder Clause because the tax does not single out specific individuals for punishment; in addition it is both prospective and retrospective in application. First, the tax defines the class to which it applies to an abstractly defined group rather than naming particular individuals. It applies to persons working for enterprises that have received emergency government subsidy; it is not aimed at particular companies or specific employees. Second, the tax is for a regulatory purposes, as described above, and not for a punitive purpose. Preventing misuse of government funds, limiting bad incentives, and avoiding moral hazard are regulatory purposes, not punitive purposes. The fact that isolated members of Congress may have expressed an impermissible punitive or retributive purpose does not mean that the tax violates the Constitution if the text of the bill on its face has an overtly regulatory purpose. Third, the tax is both prospective and retrospective in its targets, which is consistent with a regulatory as opposed to a punitive purpose.

It is worth noting that the fact that the proposed taxes are constitutional does not mean that they are necessarily good public policy.

[damntexdem]

1. It's also not ex post facto because it taxes monies being paid this year.

And it is not a Bill of Attainder because the courts have always ruled that such bills involve punishment, not taxation.

[Raineyb]

5. It is my understanding that ex post facto only applies to criminal laws

The congress has been known to pass tax laws that effect the year starting in January in November of the year in which it's supposed to start. (ie passing a tax law in November of 2007 which effects the year starting in January 2007) I don't think that ex post facto will be an effective argument against the taxes.

Regards

On edit: Clarified the relationship between January and November.

[rocktivity]

2. Can the money being public funds versus company revenues make a difference?

And don't we now have a right to know what the execs gave in exchange for the money?

:headbang:
rocktivity

[avaistheone1]

3. Congress sure doesn't have any problem pushing union do renegotiate their contracts.

I am sorry, but for the taxpayers to pick up the tab for wealthy banker/executive bonuses makes no sense at all particularly when these bankers/executives have put the national and global economy in the toilet.

Let's assume for a moment these terrible, ridiculous contracts are legal - then let the private shareholders pay for them. These contracts were negotiated before the US taxpayer was owner. Nor were US taxpayers informed of these contracts before we purchased these institutions. So let the private shareholders pay, pay, pay for these bonuses. This may also help these bankers and executives understand what fiscal restraint, responsibility and performance are about.

[Igel]

4. Minor quibble.

It's "regulatory" because it "(prevents the) misuse of government funds, (limits) bad incentives, and (avoids) moral hazard."

However, can something be regulatory if the actions and payments are past? In other words, if it's March and I levy special tax on fast food establishments and extend that tax to all fast food establishments opened since 1/1/2008, in what sense have I regulated their behavior? I could argue that there are various purposes served by regulating, via taxation, the establishment of new ones. But I have trouble arguing that they're served in a *regulatory* way by extending the tax to cover those already opened--unless I wish to drive a portion of them out of business. The moral hazard has been committed; government funds have (or have not) been misused; incentives, bad or otherwise, were put in place and paid out. I have trouble accepting that I can regulate that which has already happened. As a parent, I hope that I'll be able, after my son has done something I find immoral or illegal, to regulate his past behavior, and possibly prevent it from having happened.

It doesn't help the argument that the purposes of the legislation, beyond imposing the tax itself, are nowhere "overt" in the House bill: they must be inferred. You may infer them from the text itself, given the proper assumptions; or you may infer it given the background, i.e., any legislative history.

At the same time, there's a question as to "subsidy". I note that the House bill doesn't use the word "subsidy", it merely speaks of "recipients"--knowing that TARP is structured as a stock-collateralized loan. Loans are not subsidies. Most people don't like it when the entity originating loans adds more restrictions ex parte, even if those restrictions don't attempt to restrict the past.

[ProSense]

6. Here:

High Court Backs Closing Tax Loophole Retroactively

[dkofos]

7. Is it constitutional to bailout corporations??

No but we did it again