Monday, March 23, 2009

The Constitutionality of Taxing Bonuses


The short answer is that the current plans from both the House and the Senate appear to be constitutional. The House plan is here; a summary of the Senate plan is here.

There are five possible constitutional limitations that might be relevant.

There is no problem under the Due Process Clause of the Fifth Amendment because the tax is rationally related to a legitimate government interest. The government interest is (1) the avoidance of extraordinary rents to companies and their employees who are being subsidized by the government in order to keep the financial system working properly; and (2) preventing improper incentives and moral hazard in subsidized companies and their employees. Even if the tax is not well designed to achieve these goals, in the sense that other alternatives might achieve the government's purposes better, the tax substantially furthers these purposes.

There is no problem under the takings clause of the Fifth Amendment. The tax does not involve the seizure of real property or an interest in real property. The tax is regulatory and for a public purpose as stated above. Such a tax may or may not be good policy but it does not constitute a taking.

There is no problem under the Ex Post Facto clause because the tax is not a criminal sanction.

There is no problem under the Contracts Clause because the Contracts Clause binds the states, and not the federal government.

Finally, there is no problem under the Bill of Attainder Clause because the tax does not single out specific individuals for punishment; in addition it is both prospective and retrospective in application. First, the tax defines the class to which it applies to an abstractly defined group rather than naming particular individuals. It applies to persons working for enterprises that have received emergency government subsidy; it is not aimed at particular companies or specific employees. Second, the tax is for a regulatory purpose, as described above, and not for a punitive purpose. Preventing misuse of government funds, limiting bad incentives, and avoiding moral hazard are regulatory purposes, not punitive purposes. The fact that isolated members of Congress may have expressed an impermissible punitive or retributive purpose does not mean that the tax violates the Constitution if the text of the bill on its face has an overtly regulatory purpose. Third, the tax is both prospective and retrospective in its targets, which is consistent with a regulatory as opposed to a punitive purpose.

It is worth noting that the fact that the proposed taxes are constitutional does not mean that they are necessarily good public policy.