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“The practical difficulty with our government has been that most of those who have administered it have taken it for granted that the Constitution, as it is written, was a thing of no importance; that it neither said what it meant, nor meant what it said…”     Lysander Spooner

March 19, 2009

Does Congress Have The Authority To Take Back The AIG Bonuses ?

by Doug Mataconis

The hyperbolic rage against the AIG bonuses has finally transformed itself into legislation:

While American International Group Inc.’s chief executive says the firm could recover millions in bonuses via voluntary means, that’s not slowing a legislative effort to recoup the money and shift the incentive-based pay structure traditionally used by financial institutions.

The House is scheduled to act Thursday on legislation (HR 1586) that would impose a 90 percent tax on bonuses given to highly paid employees not only of AIG, but of all recipients of more than $5 billion in federal bailout funds, a group expected to include about a dozen financial institutions, according to Ways and Means Chairman Charles B. Rangel , D-N.Y. Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. would likely be among the affected companies.

“I expect to see an overwhelming vote,” House Majority Leader Steny H. Hoyer , D-Md., told reporters Wednesday afternoon.

Of course you will. The question is whether Congress even has the authority to do pass legislation of this type. Several pundits — here and here for example — have argued that the move would violated several provisions of the Constitution, but the sad truth of the matter is that this Congressional mugging is, most likely, Constitutional.

Bill of Attainder and Ex Post Facto Arguments

Article I, Section 9 of the Constitution includes the following limitation on Congressional power:

No Bill of Attainder or ex post facto Law shall be passed.

A bill of attainder is generally defined as follows:

“These clauses of the Constitution are not of the broad, general nature of the Due Process Clause, but refer to rather precise legal terms which had a meaning under English law at the time the Constitution was adopted. A bill of attainder was a legislative act that singled out one or more persons and imposed punishment on them, without benefit of trial. Such actions were regarded as odious by the framers of the Constitution because it was the traditional role of a court, judging an individual case, to impose punishment.” William H. Rehnquist, The Supreme Court, page 166.

Since the legislation being considered by Congress would apply to anyone who receives a bonus from any entity that received more than $ 5 billion in TARP funds and isn’t just limited to recipients of bonuses from AIG, it is likely general enough to get past any question that it is an unconstitutional Bill of Attainder.

As for the ex post facto argument, the Supreme Court decided way back in 1798 that this provision only applies to criminal laws, not civil laws such as a tax measure, so there would be no bar to the bonus tax even though it is theoretically retroactive.

Other Constitutional Arguments

As the Wall Street Journal notes, the remaining arguments against the bonus tax plan are even weaker. The Contract Clause of Article I, Section 10 only applies to the states; the Takings Clause of the 5th Amendment has never been interpreted to apply to tax laws; and, the Due Process Clause of the 5th Amendment only applies to procedural due process, which would clearly exist in this case.

Finally, a post at Wizbang has also raised an Equal Protection objection to the planned tax:

[W]e might as well mention the concept of Equal Protection, since a law taxing only AIG employees would clearly violate it.

As I noted above, the proposed legislation does not only apply to AIG employees or bonus recipients. Therefore, it’s unlikely that they could make a successful claim that they were being singled out as a class by the law. Even if they were, it’s unlikely that they would be considered a suspect class for equal protection purposes, meaning that the law would only have to pass the fairly liberal rational basis test. Most importantly, though, it’s fairly clear from the language of the Fourteenth Amendment that the Equal Protection Clause only applies to the states:

1. All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

So, as far as the Constitution goes at least, Congress is, sadly, within it’s authority to tax away to oblivion the AIG bonuses.

Cross-posted from Below The Beltway


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5 Comments

  1. Hmmmmmm, I think that the argument could be made that income taxes are due at the time you are paid the money, so a bonus paid last Saturday, with taxes withheld at time of payment, could not be subject to a tax increase passed this week.

    As I see it, you cannot tax what I got last week with a bill passed this week. But then, I believe in the intent of the Constitution, and as I see it, that is what the framers of the Constitution intended to protect us from.

    Thanks for the link to Calder v. Bull. I would like to think that it could be overturned, but I doubt this Court would.

    Comment by Merf — March 19, 2009 @ 8:55 am
  2. From your quote by Justice Rehnquist:

    A bill of attainder was a legislative act that singled out one or more persons and imposed punishment on them, without benefit of trial.

    I’m not an attorney, let alone Laurence Tribe, but I can’t help but wonder if it could be argued that the bill is intended to be a punishment.

    From my view, the bill is being proposed as an emergency response to outrage by constituents over the bonuses. Bonus recipients are just the red-headed stepchild being beaten by an alcoholic Congress drunk with power. Congress is punishing a definable class of easy targets.

    Wouldn’t the motive of punishment be more pertinent than the scope of people affected?

    Comment by Akston — March 19, 2009 @ 10:31 pm
  3. Merf,

    There are many many examples of the type of retroactive taxation that you’re talking about and there’s never been a successful court challenge to such a law.

    Comment by Doug Mataconis — March 20, 2009 @ 5:22 am
  4. Akston,

    From what I’ve read of the very small amount of cases that deal with this issue, the Courts typically look to the impact of the law more than what may be on the Congressional Record regarding individual Representative’s motivations.

    In this case, the law that the House passed applies to anyone receiveing a bonus from an entity that received more than $ 5 Billion in TARP funds. While this is a small universe of people, it is, I think, general enough to withstand a Bill of Attainder challenge.

    Additionally, it’s worth noting that it appears highly likely that the Senate will not go as far as the House did and that the final legislation will be significantly moderated from what was passed yesterday.

    If that’s the case, then I think most of these Constitutional arguments will become moot.

    Comment by Doug Mataconis — March 20, 2009 @ 5:24 am
  5. Unfortunately, Doug, you are correct. Congress gets away with targeting very small groups all the time.

    Comment by Merf — March 20, 2009 @ 8:05 am

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