Is the Bonus Tax Unconstitutional?

The Supreme Court defers too much to Congress.

Bills now winding their way through Congress would tax between 70% and 90% of bonuses paid to any executive earning in excess of $250,000, if he or she is employed by a business that received more than $5 billion from U.S. bailout funds. With popular outcry at a fever pitch, too few Democrats and only some Republicans are prepared to stand up to this juggernaut.

But would the courts uphold this legislation? The AIG bonuses were made pursuant to valid contracts entered into before the receipt of the bailout money. They were ratified in the legislation that provided for the bailout, and efforts to find loopholes in these contracts have proved unavailing.

Thus any sensible system of limited government should consider the proposed bills unconstitutional. Special taxes on some forms of income (but not others) and retroactive taxes put in place after business transactions are complete both merit strong condemnation. The bills in Congress are rife with both elements.

Nevertheless, a constitutional attack against any such law that might emerge faces an uphill battle. Since the New Deal, if not earlier, the courts have allowed Congress and the states to decide which economic activities to tax, and how.

Two basic principles that animated our Constitution appear to have no traction today. One holds that property is the guardian of every other right. The second asserts that voluntary exchange is the source of general peace and prosperity. Today's Supreme Court looks to neither principle for guidance.

What about the suggestion that the current tax is either a bill of attainder -- legislation directed at punishing particular individuals -- or an ex post facto law, both of which are forbidden? No luck. A bill of attainder has to name a small group of individuals, and the class of financial executives affected by the legislation under consideration is too large to fit comfortably into that category. The prohibition against ex post facto laws has been held to cover only criminal laws, not taxes. And as for the constitutional provision against the impairment of contracts, that only limits state, not federal, power.

Today the last, best hope of a constitutional counteroffensive relies on substantive due process and the takings clause. But the courts have resisted both arguments on numerous grounds. First, it's not clear whether contract rights would be held as a species of property, or whether taxes count as a taking of private property. Deny both these propositions, and the constitutional inquiry reaches a dead-end.

Yet even if these knockout blows are averted, the Supreme Court is quick to accept justifications for presumptive constitutional lapses. It may seem laughable after the recent Congressional hearings, but our Court supinely defers to Congress's supposed "expertise" on complex matters of taxation and regulation.

Worse, the Supreme Court has eagerly embraced the toxic theory that parties are deemed to assume the risk of regulation and taxation when they are given sufficient notice of Congress's extensive legislative activities in these areas. Hence the more Congress broadcasts its intentions, the fewer rights ordinary individuals have against it.

In the 1980s, for example, the federal Pension Benefit Guaranty Corporation (PBGC) lured in multiemployer plans with the express promise they could withdraw without penalty if they did not like its fund management. But when the funds went south, the Court used the sufficient-notice theory to bless Congress's decision to tax these companies on the withdrawal of their funds.

Double crosses are now fair game. In good times they won't happen, because sensible legislators know that capital and labor will flee our shores if we engage in senseless acts of plunder. But these are not ordinary times, nor is this an ordinary Congress. The $165 million in bonus payments may be small potatoes compared to the $700 billion at stake in the AIG bailout, no less to the damage caused when investors, foreign and domestic, lose confidence in our institutions. But populist fury and Congressional fecklessness continue.

People are right to ask when this cycle will end. Can Congress pass retroactive tax increases on all high-income earners? Can it give tax breaks to TARP-friendly banks as it hammers those who stay out of its bailout clutches?

Who knows? But if Congress doesn't stop its descent into the abyss, the Court should confess its past sin of constitutional passivity and stop it for them.

This piece originally appeared in Wall Street Journal

This piece originally appeared in The Wall Street Journal