Friday, March 20, 2009

In which we discover that 'constitutional' is not a synonym for 'good idea'

With regard to the constitutionality of Rep. Charles Rangel's crowd-pleasing bill imposing a 90% tax on bonuses received by AIG executives, I'll defer to the legal experts. So far, most of the professional Constitution-parsers who have sounded off on the measure say it's unlikely to be knocked down in the courts. That said, I'll chime in with agreement to the addendum that many of them add: the laser-targeted tax is an abuse of the system that violates the spirit of the Constitution.

Rangel's H.R. 1586, imposing a 90% tax on bonuses paid out by companies receiving assistance under TARP, and clearly aimed directly at AIG employees, passed in the House yesterday by a vote of 328 - 93. That overwhelming vote is a reflection of the understandably widespread unpopularity of government-subsidized companies paying out massive bonuses to their executives with the very tax money injected into their coffers to keep them afloat.

The vote is also a sign that many members of Congress are happy to have a pinata to beat on in the business sector to divert attention from the fact that the federal government either failed to perform due diligence before buying up the faltering AIG, or -- more likely -- happily signed off on the bonuses at the time and is only suffering buyer's remorse now that the public is in a rage.

Legal A-lister Lawrence Tribe told the Wall Street Journal that he saw few potential legal hurdles to the bill. The only Constitutional provision he considered likely to pose real difficulties is Article I's ban on "bills of attainder" -- laws targeted directly at specific individuals or groups -- but that "Congress (and the Executive Branch) could avoid serious Bill of Attainder problems by passing a sufficiently broad law … rather than targeting a closed class of named executives..."

Edward McCaffery, a tax expert at the USC Gould School of Law, agreed. He told the Los Angeles Times, "The courts are very reluctant to strike down tax legislation. I think a tax this high and this targeted raises some difficult questions, but at the end of the day, I would bet a constitutional challenge would not work."

Rangel was careful to avoid language in his bill that would single out AIG and its employees, referring instead to "an employee or former employee of a covered TARP recipient." That language might well meet the rather low bar set by Tribe, especially with regard to tax legislation, as mentioned by McCaffery. We all know who the law is intended to whack, but some clever crafting makes it pass muster.

And therein lies a major problem with the AIG bonus bill. If it survives legal challenges -- as seems likely -- it will do so not by being good legislation, but by being just clever enough.

As Howard Gleckman writes for the Tax Policy Center:

The AIG bonuses are an outrage. But the bigger scandal is that a grandstanding Congress wants to use the tax law to punish the companies that paid them and the employees that got them. ...

Long ago, people were rightly outraged when Richard Nixon tried to turn the IRS into a weapon to punish his enemies. This gotcha tax is another variation on the theme, and nearly as inexcusable.

The Miami Herald agrees, saying:

Using the tax code as a weapon to exact revenge on a select few, no matter how badly they've behaved, is a horrible idea. Slapping heavy taxes on the bonuses and on the company that issued them may satisfy enraged taxpayers who see incompetent executives being rewarded for failure, but it sets a bad precedent.

Remember that the constitutional ban on bills of attainder is intended to prevent the government from bypassing established laws and trials and legislatively imposing punishments on people who have done wrong -- or have offended the powers that be. Nobody is pretending that this law is anything other than a punishment imposed on people who are seen as gaming the government's (ill-considered) financial bailouts. That legal experts think such an effort will pass judicial scrutiny just means that Rangel and company are smart enough to figure out a way to violate the spirit of the Constitution and pass a law of a type that the founders considered despicable.

Gleckman points out that the tax really is retroactive, since the bonuses were agreed to last year under rules that existed then. Writing in the Washington Post, Charles Krauthammer makes the same point:

[T]here is such a thing as law. The way to break a contract legally is Chapter 11. Short of that, a contract is a contract. The AIG bonuses were agreed to before the government takeover and are perfectly legal. Is the rule now that when public anger is kindled, Congress will summarily cancel contracts?

The Constitution also bans ex post facto laws -- laws retroactively punishing behavior that was legal at the time it was done. But the courts have historically made up a loophole for tax legislation. Charles Rangel couldn't pass a law jailing AIG executives or seizing their homes as penalties for taking the bonuses, because those would be recognized as ex post facto laws. But the courts say he can use the tax code to confiscate their money.

Clever -- and wrong.

So Congress is busy throwing red meat to the mob and using constitutionally suspect means to punish business executives for taking bonuses that the government should have known about and could have addressed through regular channels such as bankruptcy -- or simply not bailing out AIG -- months ago. And the government will probably get away with its abuses of the law.

I'm sure that won't set any bad precedents for the future.

Meanwhile, the same lawmakers playing fast and loose with the Constitution to penalize the recipients of $165 million in bonuses are poised to spend us into a hole made up of a deficit of $1.8 trillion. That's in addition to the trillions in debt they've already run up.

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Blogger SR said...

Wow, until this article I was thinking Congress was doing something that if not right (right=no bailout in the first place), was less bad than before. Having considered your arguments, I'm persuaded that I was wrong :(

March 23, 2009 6:31 PM  

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