Thursday, March 26, 2009

How the Supreme Court might look at the tax on executive bonuses

Richard Epstein of the University of Chicago argues today that the Supreme Court is not likely to strike down the recently passed House bill taxing bonuses received by executives in companies receiving bailout funds. Going through the history of how the Court has looked on previous tax provisions passed by Congress, he is not optimistic that they would balk at this bill on any of the arguments that have been put forward of the bill as being a bill of attainder, ex post fact law, or unlawful takings.
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.
It's all very discouraging. We are left to put our faith in the Senate and the President to realize that such a bill would not be conducive to the sort of public-private partnerships that they're hoping to form in order to address the toxic assets. The President seems to be waking up to the reality that governance by throwing a demagogic snit is perhaps not the best tactic to use in economically parlous times. If Epstein is correct that the Court would uphold the law, let's hope that the President applies the brakes as the Senate considers the bill. Perhaps the Senate could fulfill the role that George Washington said it was designed for - to be the saucer to cool the tea heated up by the House.