A Special Tax on AIG?

By Neil Ozarkar

Certainly there has been tremendous public outrage at the recent storylines surrounding AIG. As a company, it has received multi-billions of dollars of bailout money to prop itself up, but, in the process, it has made some poor public relations decisions regarding how to spend some of the money. AIG executives were first criticized for an exorbitantly expensive strategy retreat, and news just came out recently that AIG paid out $218 million dollars in bonuses, with 73 employees receiving bonuses over $1 million. AIG has asserted that the bonuses were given out as contractual obligations to employees. While this seemed odd to me (doesn’t “bonus” imply something not guaranteed?), AIG’s bonus plan does seem to include guaranteed retention clauses.

Despite the fact that annual bonuses can be very high in the upper management tiers of any company, I normally do not have any problems with this as it is the basis of a capitalistic society. However, in this case, I can easily understand and join in to the public’s outrage in seeing government bailout money being used for bonuses to people in a company that has basically failed. As a response, Congress is now considering passing a special 90% income tax law on the AIG bonuses. While I understand in principle what Congress is trying to do, when I first heard of this, I immediately thought that there may well be some constitutional issues with this, such as under due process or the takings clause.

Initially, I thought that this law may have limitations under the takings clause. However, the 16th Amendment (Income Tax amendment) describes no explicit limitations on Congress’ power to tax. In fact, a few years after the amendment was passed, the Court in Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916) dismissed the takings clause as well as the due process clause as limitations on the power to tax:

“So far as the due process clause of the Fifth Amendment is relied upon, it suffices to say that there is no basis for such reliance, since it is equally well settled that such clause is not a limitation upon the taxing power conferred upon Congress by the Constitution; in other words, that the Constitution does not conflict with itself by conferring, upon the one hand, a taxing power, and taking the same power away, on the other, by the limitations of the due process clause.[…]”

The Brushaber Court further held that “even punitive taxation does not rise to ‘a gross and patent inequality’ in violation of the Fifth Amendment.” (http://www.taxfoundation.org/blog/show/23608.html).

I then thought other constitutional questions may arise under the Bill of Attainder and Ex Post Facto clause. In Article 1, Section 9 of the Constitution, one of the limitations on Congress is that “No Bill of Attainder or ex post facto law shall be passed.” A bill of attainder is a law that singles out an individual or small group for punishment. In essence, it is a limitation to separate powers: the legislature should not get involved in matters that are typically part of the executive branch (prosecution) and judiciary. U.S. v. Brown, 381 U.S. 437 (1965). An ex post facto law is a law that retroactively aggravates the punishment for a crime or defines a criminal act where it was previously not. Conceptually, this seems to apply here as the 90% tax would be a retroactive punishment; however, the ex post facto limitation is reserved for criminal acts. Calder v. Bull, 3 U.S. 386 (1798).

Based on my analysis, it seems that the special tax on AIG may be constitutional with the best argument being under the Bill of Attainder clause, but I am sure that there will be some challenges to the bill once it is passed.

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