Law Professor Questions If 90% Tax on Bonuses is Constitutional

Despite all  the talk about the 90% tax on bonuses passed in the House I don’t expect to ever see it enacted. I figure that it will fail to pass the Senate, possibly be vetoed by Obama if it does pass, and will have trouble holding up in court if it ever becomes  law. Greg Sargent reports that a former legal adviser to Obama does believe it is unconstitutional:

I just got off the phone with Harvard professor Laurence Tribe, who advised Obama during the campaign, and he says he’s leaning towards seeing the new House bill to tax back all the AIG bonuses as unconstitutional.

Tribe’s assertion could spell big trouble for the measure, because it could harden opposition within the Obama administration against the proposal at a time when Obama and his advisers are already expressing doubts about it.

Tribe had previously said that he thought the measure — which would slap a 90% tax on bonuses for executives whose family incomes exceed $250,000 — would pass constitutional muster. But now, after taking a closer look, he’s not so sure.

Tribe says the problem with the bill is that the Constitution forbids Congress from enacting a “bill of attainder,” which would essentially “legislate punishment of an identifiable class,” as he put it. Tribe noted that the Supreme Court had used that clause to slap down other laws.

Tribe says the main problem is that it’s hard to make the case that the law isn’t “punitive.”

“Its punitive intent is increasingly transparent,” Tribe says. “when you have Chuck Grassley calling on [executives] to commit suicide, and people responding to pitch fork sentiment, it’s hard to argue that this isn’t an attempt to punish an identifiable set of individuals who are the subject of understandable outrage.”

David Kurtz adds, “The White House is cool to this legislation to begin with. Tribe’s changing course may help give the necessary political/legal cover to slow roll it in the Senate or eventually veto it — if it gets that far.”

This might be more effective as a threat than as actual legislation, and the proposed tax, along with public outrage, does appear to be having an effect. The Caucus reports:

Attorney General Andrew M. Cuomo of New York announced late Monday afternoon that 9 of the top 10 bonus recipients at the American International Group had given back their bonuses.

He also said 15 of the top 20 bonus recipients in A.I.G.’s financial products division had given the money back, for a total that he estimated at about $30 million. “Those bonuses will be returned in full,” Mr. Cuomo said during a conference call with reporters.

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3 Comments

  1. 1
    Eclectic Radical says:

    The ‘Bill of Attainder’ argument depends on the manner in which one looks at this law. Of course, not being a lawyer, I am entirely unwilling to say that this law, as written, is constitutional when Professor Tribe says otherwise. The specific mechanism of this bill, as an excessive tax beyond what a normal individual would pay, probably does qualify as a ‘bill of attainder.’

    The issue of whether such a legislation in general is or is not a ‘bill of attainder’, however, depends on how one views it: if the money, once given to AIG, is the sole property of AIG, then trying to get any of it back from employees after AIG pays it to them as bonuses IS a bill of attainder. Period.

    However, if one views the money as either a loan to AIG from the government or a stake of federal interest in AIG, then it can be argued that the federal government has the power to say what AIG can or can’t do with the money. Under those conditions, there is no bill of attainder because the executives are not being punished, rather the money is being recovered after improper use.

    This is the kind of ‘how many angels can dance on the head of a pin’ argument that justifies the existence of lawyers in the first place. The lack of transparency in the Paulson bailout package makes it very difficult to know for sure just what the proper view of the federal monies received by AIG really is. Considering the nature of the Paulson plan, there is a strong possibility this money was given to AIG without the kind of strings the government should have attached.

    This is the problem with a massive bailout of private enterprise that does not include partial nationalization or other controls. One either allows a business to fail, nationalizes it outright, or structures an explicit agreement (such as the explicit agreement reached with Chrysler in the 1980s) for the use and repayment of the money. One does not simply hand blank checks to people who ruined their companies by writing too many bad checks.

  2. 2
    Fritz says:

    First — I am really bothered by the ex post facto nature of the tax change.  It does not seem right for Congress to be able to change the tax law for a year that has already started.

    Second — not all AIG entities were screwing the economy.  This law will punish all AIG employees who got such retention bonuses — even if they were employed in above-board and profitable parts of AIG.  And almost every one of those employees will now quit.  Assuming that a significant number of them got such bonuses because they were useful and needed the taxpayer will, again, be left holding the bag — since we now own a sizeable chunk of a company that either is or shortly will be bleeding talent.

    Third — it would not take a rocket scientist to figure this law could also apply to any corporation that participates in the “public private partnerships” that Treasury is desparately promoting.  Any company that gets into a Treasury embrace may well see high-priced talent fleeing for the exits — or at least those companies will find that golden handcuffs are not compelling.

  3. 3
    Eclectic Radical says:

    First – Yes. Even if one believes an effort to recover the money is desirable, changing the tax law in this way is probably unconstitutional. It’s really poorly thought out even if one agrees with what congress wants to do.  I’m not sure I do, for the reasons I listed above and will repeat now: unless the AIG bailout agreement was written a lot better than I believe it was, which we do not know because of the lack of transparency in the Paulson bailout, the government can’t simply take the money back after the fact. The proper recourse would be a Justice or Treasury department lawsuit against AIG, not congressional action. If the bailout was written properly, then the executive branch (in a law enforcement capacity) might have grounds to take the money back… but not congress through this kind of legislation.

    Second – AIG did not have any ‘profitable parts’, or at least it’s profitable parts did not make up for the massive hemorhage of money from the mortgage securities parts. It was allegedly going to go bankrupt, and allegedly needed the bailout not to fail. This is allegedly why we bailed them out. This part doesn’t bother me so much as number one. A bankrupt company has no business giving out performance based bonuses to its executives, and would be prevented from doing so in actual bankruptcy.

    Third – I don’t think the high priced talent has done so well for itself that it deserves to remain high priced. This part doesn’t bother me at all. What does bother me is the structure of the ‘public private partnerships.’ I would prefer to see either emergency nationalization on the 1930s model or strictly structured and conditional loans on the 1980s model. In the former case, higher profits (and the higher risk entailed in them) would be deliberately forgone in return for greater security of the investments of shareholders and despositors. In the latter case, each agreement would be specifically tailored for the instituion or company receiving federal money.

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