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Is the AIG Bonus Tax Really a "Tax"?

From Barrons:

Richard Epstein of the University of Chicago Law School says that while the tax is more egregious than others, there's no precedent to point to that says the scheme is unconstitutional. But this assumes that what Congress has designed really is a tax, says Erik Jensen of Case Western Reserve University Law School.

"Yes, the taxing clause of the Constitution gives Congress the power 'to lay and collect taxes,' and ordinarily a court won't strike down a charge that Congress says is a tax," Jensen wrote in an e-mail in response to our query. "But that's a matter of deference, not principle. The proposals now before Congress aren't anything like business-as-usual taxation, where deference would be appropriate. A charge imposed at a confiscatory rate of 90% on only a few specified people and on only part of their income isn't what the Constitution means by 'tax.' "

Jensen adds: "It's obvious from the way members of Congress are talking that punishment, not revenue-raising, is involved here. Whatever label Congress uses, confiscating a well-defined category of property from a small group of people sounds a lot more like a taking than it does a tax."

I think that's right (and not just because Erik's a colleague). The key to any constitutional challenge (whether under the Bill of Attainder clause or some other provision) will be convincing a court that the AIG bonus tax is not actually a "tax." The problem is that courts are usually inclined to accept congressional characterizations of legislation — though perhaps this provision will be a stretch too far.

Meanwhile, Professor Larry Tribe is reportedly having second thoughts on the constitutionality of the provision.

UPDATE: Calvin Massey thinks there are real equal protection problems with the tax a la USDA v. Moreno.

a_non (mail):
Isn't there going to also be a standing issue here? You'd have to get one of the AIG bonus recipients to file suit, I'd think. Who's going to want to be the named plainitff in that case? Yikes.
3.23.2009 1:41pm
David M. Nieporent (www):
Isn't there going to also be a standing issue here? You'd have to get one of the AIG bonus recipients to file suit, I'd think. Who's going to want to be the named plainitff in that case? Yikes.
I think given the money at stake, plenty of people will be willing.
3.23.2009 1:45pm
a_non (mail):
We'll see (maybe). The PR toll will be pretty fearsome.
3.23.2009 1:46pm
mls (www):
"The problem is that courts are usually inclined to accept congressional characterizations of legislation -- though perhaps this provision will be a stretch too far."

It is not only the courts that have an obligation to uphold the Constitution. Members of Congress and the President take an oath as well. The President appears to recognize this in his recent statements. Members of Congress, however, often speak as if the consitutional questions can be outsourced to the courts.
3.23.2009 2:19pm
NaG (mail):
While AIG people may not be too popular if they sued Congress over this clear punitive measure, there's a reason why people like Larry Flynt are sometimes the best people to be pushing for our rights -- the only way we'll be able to protect the rights of good people is if we're willing to also protect the rights of bad people. Otherwise, justice becomes a coin-flip.
3.23.2009 2:25pm
Soronel Haetir (mail):
Congress has all but abdicated the constitution to the courts. As a body Congress will do whatever is politically advantageous that the courts will let it get away with.
3.23.2009 2:26pm
einhverfr (mail) (www):
why a tax?

Why not simply pass a law indicating civil liability for anyone accepting such bonuses and make it retrospect? Since it would not be a criminal matter, ex post facto wouldn;t be an issue, and since the courts would be left adjudicating it, neither would the bill of attainder issue.
3.23.2009 2:33pm
PD Shaw (mail):
The distinction between a tax and a penalty was discussed in the Child Labor Tax case:


The difference between a tax and a penalty is sometimes difficult to define, and yet the consequences of the distinction in the required method of their collection often are important. ... They do not lose their character as taxes because of the incidental motive. But there comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty, with the characteristics of regulation and punishment. Such is the case in the law before us.


The holding of this Lochner era case is no longer good law, but I believe this discussion has been cited approvingly by the SCOTUS on more than one subsequent occasion.
3.23.2009 2:47pm
Stacy (mail) (www):
"Why not simply pass a law indicating civil liability for anyone accepting such bonuses and make it retrospect? Since it would not be a criminal matter, ex post facto wouldn;t be an issue, and since the courts would be left adjudicating it, neither would the bill of attainder issue."

Why not skip the preliminaries? We could get a couple hundred Congressmen together and string the bonus recipients up from lampposts -- the fact that the great majority of them weren't actually involved in the malfeasance just adds authenticity to the mob-justice aspect...
3.23.2009 3:06pm
BGates:
We could get a couple hundred Congressmen together and string the bonus recipients up from lampposts

I'd have to endorse any scheme that gets a couple hundred Congressmen, rope, and lampposts in one convenient location.
3.23.2009 4:34pm
Randy R. (mail):
So let me guess: All those people who have been for years complaining of the black robed tyrants who fail to defer to the wishes of the majority in our democracy, are now asking for them to overturn a our democracy?
3.23.2009 4:55pm
StephanieInCA (mail) (www):
Every time I start to lose my ire about this whole AIG fracas, I just go back and watch some of the AIG ads from a few years ago. Gets me all worked up again in no time.

Interestingly, AIG has removed its ad gallery from its site, but you can still find some of the ads here: http://urbzen.com/2009/03/23/too-big-to-fail-fail/
3.23.2009 5:33pm
lonetown (mail):
So Tribe has consulted with the Obama administration and is now changing his opinion to one that would appear to provide cover for the administration.

How is this different from Yoo?
3.23.2009 6:44pm
Michelle Dulak Thomson (mail):
Randy R.,

So let me guess: All those people who have been for years complaining of the black robed tyrants who fail to defer to the wishes of the majority in our democracy, are now asking for them to overturn a our democracy?

Yeah, I want them to overturn "a our democracy" when that "democracy" (are you really, seriously referring to Congress?) has discovered its $164M boo-boo and moved swiftly to correct it by taxing the bejeezus out of the miscreants (the people who wrote and passed the legislation? Of course not, silly; the people who got the money).

Whether this counts as a "tax" is beyond me; I've said in earlier threads that we've so much experience by now of "taxes" designed (ostensibly) to discourage behavior rather than to raise money that this one looks different in degree rather than kind. It does look, to me, as much like a bill of attainder as anything can without actual miscreant's names printed in it — and unless I completely misheard an early-morning NPR broadcast, Obama won't sign the thing anyway, so it's all moot.

Really, the whole thing would've delighted Gilbert & Sullivan. "We let them pay employees to stay on? We specifically passed legislation guaranteeing they could do that? Well, fine; let's just tax it all back again. No problem!" You could make an operetta-length farce out of the possible bills and counter-bills, and rattle off the text of each new hurriedly-inserted amendment in rhymed patter-song. At least, you could if you were Gilbert, which I'm afraid I'm not.
3.23.2009 8:42pm
The Original TS (mail):
Jonathan,

As you've been posting extensively about the AIG bonus mess, I have a question you might be able to answer, why isn't Cuomo guilty of coercion/extortion?

As you know, he, somehow, has made it his brief to "investigate" the AIG bonus recipients. I just read this in the NYT,

Now, the firm's chief operating officer, Gerry Pasciucco, had set a 5 p.m. Monday deadline for staffers to indicate whether they planned to return their retention payments, and if so, what percentage. His e-mail included what appeared to be a tacit ultimatum from Cuomo.

"We have received assurances from Attorney General Cuomo that no names will be released by his office before he completes a security review which is expected to take at least a week," Pasciucco wrote."To the extent that we meet certain participation targets, it is not expected that the names would be released at all."

Under New York's statutory definition, 2nd degree coercion is,

A person is guilty of coercion in the second degree when he compels or induces a person to engage in conduct which the latter has a legal right to abstain from engaging in, or to abstain from engaging in conduct in which he has a legal right to engage, by means of instilling in him a fear that, if the demand is not complied with, the actor or another will: . . . 5. Expose a secret or publicize an asserted fact, whether true or false, tending to subject some person to hatred, contempt or ridicule;

I would imagine that Cuomo doing this "under color of law" makes this worse, not better.

Of course, we don't know exactly what communications occured or if Cuomo hinted at any sort of criminal prosecution but the facts that we have seem disturbing enough.

If I were to try something like this in my practice, I have no doubt that the bar would hand me my head even if the DA didn't. Is this a sort of "When the AG does it, that means it is not illegal" situation? What am I missing here?
3.23.2009 11:39pm
Jeff Walden (www):
It's worth noting that it's not just a 90% tax, leaving 10% left for the person to actually receive -- add in state taxes and, at least in California, the taxes on the bonus amount to more than the bonus itself! How can one say with a straight face that this isn't a taking, given that in some circumstances it might even take more than was given?
3.23.2009 11:54pm
Dan Weber (www):
All those people who have been for years complaining of the black robed tyrants who fail to defer to the wishes of the majority in our democracy, are now asking for them to overturn a our democracy?
The judiciary is a check on government power. It's part of government, of course.

A judiciary that decides to never hear any cases is the same as one that doesn't exist. A judiciary that hears cases but always says "yeah, the government can do that" is the same as one that never hears any cases.

And we aren't supposed to just rely on that one branch to protect our rights. The legislative and executive branches are supposed to jointly and severally not violate the Constitution by not passing, signing, or enforcing unconstitutional legislation. In practice those two branches have been all too willing to show boat for their constituents by being unconstitutional and then letting the judicial branch to the unpopular stuff.

That's the general. If you're talking about specifics (like Proposition 8, since you're talking about "overturning democracy," a phrase that I personally hate because democracy is basically mob rule), I'll remind you that "Constitutional" isn't the same as "good" and "Unconstitutional" isn't the same as "bad." That is, a law may be entirely legal, yet horribly bad. This is another reason that the legislative and executive branches aren't supposed to push off the unpopular stuff to the judicial branch -- sometimes the judicial branch can't nullify the bad law without breaching power itself.

It seems to me that both Proposition 8 and this AIG seizure are constitutional (in their respective domains), yet they are both very bad laws.
3.24.2009 11:14am
Simeon (mail):

AIG SAGA AN INAPPROPRIATE GIVEAWAY

The AIG issue to me is a no-brainer. I advise all concerned parties to check out the meaning of the word "bonus". Most of the definitions I found out are closely connected to profit, gain, reward, performance and such.....Please what do you find ?

Bonuses to me are paid for excellent and exceptional gains, and profits made by businesses. Not for running a company to a zero base. All the top executives who "mistakenly" collected the said bonus will agree with me that they would not reward their employees for failure to perform in any fiscal year.I therefore aplaud those 15 AIG executives who have returned back their own share of the tax-payers'sweat, mistakenly gotten money, mistakenly tagged "bonus".

Yes the contract was signed, but by man , and not by a mysterious superhuman who was not aware of the economic situation we found ourselves. The contract can always be re-written based on situation on the ground.

I strongly advise the remaining executives who have not returned their own share to do so. I am ready to pull my weight behind the payment of your bonus if we have made at least some profits. Not so fast. After all, you managed the company to its present state of no return.
Common sense requires that you also bear part of the brunt. You should all return that money because it is not yet time for us to pay any bonus.

So the talk about taxing, 90 or 100% is a euphemism. The money was collected at an inappropriate time. Return the money back to its rightful place. Period.

Simeon
3.24.2009 1:39pm
Dan Weber (www):
Wow, that was the most uninformed comment so far. It feels like astroturf but I can't google the typos and find them in other places, so it looks like it was written especially for us!
3.24.2009 2:03pm

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