The Constitution, Taxes, and Those Big AIG Bonuses

It's wrong to make taxes retroactive.

Over the last two weeks, America has witnessed a stellar example of exactly why our Founders blessed us with a government split into three branches, and a legislature split into two houses, all with differing terms of office.  In response to the understandable, albeit misdirected, fury of the American people over tax dollars being shelled out in million-dollar bonuses to AIG executives - despite those bonuses being legal, earned, and actually in the best interests of the taxpayer - the House of Representatives passed a bill to confiscate those earnings by imposing a 90% tax.

That, however, is not enough to make it law.  The bill must also be passed by the Senate, which takes longer, and then it must be signed by the President.  Despite the fervency and intensity of the political heat last week, this week it's burning itself out.

Unlike the panicky House of Representatives, the Senate appears to intend due deliberation on the matter; they may end up taking no action at all.  The lynch mob has been appeased, much of the bonus money was returned at legislative gunpoint, and political attention can now be distracted elsewhere.

Our Founders understood full well that the House of Representatives would be prone to popular delusions and the madness of crowds; as a result, the Senate was intentionally designed as a check against this tendency.  In Federalist 62, Hamilton and Madison wrote:

The necessity of a Senate is not less indicated by the propensity of all single and numerous assemblies to yield to the impulse of sudden and violent passions, and to be seduced by factious leaders into intemperate and pernicious resolutions. [emphasis added]

This goofy affair of the AIG bonuses is a textbook example of the impulse of a "sudden and violent passion;" a confiscatory and punitive tax targeted directly at an unpopular few is about as "intemperate and pernicious resolution" as one can imagine.  Not only foolish, there's a decent chance that it's unconstitutional, as if that means much anymore.

Many observers small and great have weighed forth on the unconstitutionality of this special tax on the grounds that it is a forbidden "bill of attainder."  A bill of attainder is a law specifically targeting certain individuals for sanction; the test case of this was a law fifty years ago barring tax dollars being spent on the salaries of three named individuals, in effect excluding them from federal employment, which was found unconstitutional by the Supreme Court.

Further back in history, Parliament could and did pass laws confiscating property or even commanding the execution of unpopular people.  Given that much of the point of the Bill of Rights is to protect the unpopular, it's perfectly logical that bills of attainder would be disallowed; whether the AIG Bonus Tax qualifies as a bill of attainder, since it names nobody specifically, is a question for constitutional lawyers.

There is a far more fundamental question, though, that's been mostly missed or dismissed.  The worst element to this tax is not that it's targeted at an unfavored group, as disturbing as that is; and not even that it's interfering in private contracts, which would have happened anyway in the bankruptcy courts where AIG, by rights, ought to be.

No, the most dangerous problem of the AIG Bonus Tax bill is that it is an ex post facto law.

The Need to Predict the Future

When we talk about the importance of the "Rule of Law," we're discussing a whole complex of interrelated factors.  A nation under the rule of law has laws that are understandable by normal people, that work in predictable and commonsensical ways, and are applied fairly to all citizens no matter who they are.

This is why, for example, we provide lawyers even to the most evil serial killers and rapists: despite their monstrosities, they are still entitled to a fair defense and must be proven guilty in a court of law rather than simply shot down like the dogs they are.

Unfortunately, America has been getting further and further away from the safe harbor of the "Rule of Law."  All too many recent cases, from the Duke rape trial to Eliot Spitzer's phony prosecutions, reveal that no matter how careful you are, nobody can walk assured of immunity from a life-destroying arrest, and nobody, no matter how wealthy, can be assured of a fair trial in open court.

As bad as this is, though, an ex post facto law is even worse, because there can be no warning or preparation whatsoever.

"Ex post facto" is Latin legalese for "after the fact."  It refers to making something illegal retroactively - that is, setting up a situation where you can do something that is perfectly legal at the time you do it, and then sometime later, the government makes that action illegal and prosecutes you for having done it.

Anybody not in possession of a time machine can instantly see how utterly unfair such a thing would be: how can you be expected to obey a law that hasn't even been passed yet?

The ex post facto restriction is generally applied to criminal laws specifically; in fact, famous Constitutional scholar Lawrence Tribe flatly dismisses its relevance to the AIG Bonus Tax.

The Ex Post Facto Clause applies exclusively to criminal punishment and poses no difficulty here. And the fact that the measure contemplated would operate retroactively as well as prospectively doesn't distinguish it from any number of tax and other financial measures that the Supreme Court has upheld over the claim that fundamental fairness precludes retroactively undoing contractual obligations. [emphasis added]

Oh well then, case closed, the Tribe hath spoken.

Or is it?  We have nothing but respect for Prof. Tribe's scholarship; but, nevertheless, he is not himself the living embodiment of the Constitution.  Let us consider what it actually says - in Article I, Section 9:

...The privilege of the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.

No Bill of Attainder or ex post facto Law shall be passed.

...No Tax or Duty shall be laid on Articles exported from any State.

Not only does the Constitution itself not restrict the ban on ex post facto laws to criminal matters, but they are prohibited immediately prior to a section talking specifically about taxes!

Which is not to say that Prof. Tribe made up his limiter; far from it.  The Constitutional Dictionary notes:

ex post facto adj. Formulated, enacted, or operating retroactively. [Med Lat., from what is done afterwards] Source: AHD

In U.S. Constitutional Law, the definition of what is ex post facto is more limited. The first definition of what exactly constitutes an ex post facto law is found in Calder v Bull (3 US 386 [1798]), in the opinion of Justice Chase:

"1st. Every law that makes an action done before the passing of the law, and which was innocent when done, criminal; and punishes such action. 2d. Every law that aggravates a crime, or makes it greater than it was, when committed. 3d. Every law that changes the punishment, and inflicts a greater punishment, than the law annexed to the crime, when committed. 4th. Every law that alters the legal rules of evidence, and receives less, or different, testimony, than the law required at the time of the commission of the offense, in order to convict the offender."

Justice Chase applied ex post facto restrictions to criminal law - and rightly so for obvious reasons - but how is it not every bit as applicable to civil law, tax law, or any other kind of law?  No doubt it's not quite as bad to have your money taken as your freedom or your life, but it's still wrong when done unjustly.

Can anybody seriously think that the Founders, as careful as they were to protect people's lives and freedoms from a predatory government, would not feel just as strongly about their money or property?

Actually, we don't need to guess; they made their views perfectly plain for the ages.

The moment the idea is admitted into society that property is not as sacred as the laws of God ... anarchy and tyranny commence. Property must be secured or liberty cannot exist.

- John Adams

Government is instituted to protect property of every sort .... This being the end of government, that is not a just government,... nor is property secure under it, where the property which a man has ... is violated by arbitrary seizures of one class of citizens for the service of the rest.

- James Madison

Of course the government has every right to assess and collect taxes.  In fact, a great deal of the reason for the Constitution was to give the federal government the taxing powers it had not had under the Articles of Confederation.

The question is simply this: is it right, just, and Constitutional to create a new tax on income after it has already been earned?

Logically, it cannot be so.  It's a truism that people consider the potential tax liabilities of their actions while they're planning them; indeed, the government counts on exactly that.

To encourage people to buy houses, it allows you to deduct the interest.  To encourage charitable giving, it allows that to be deducted - or did for two hundred years, until Obama's latest attempt to tax charities.

And so on down the line, with tweaks, exemptions, deductions, and extra charges in the tax code, encouraging the preferred and discouraging the disliked.  Environmentalists among us even want to discourage carbon emissions by slapping a special tax on them; the whole point of this tax is to get people to stop polluting so they won't have to pay, so they would want the tax to be as widely known as possible.

Why, in this one case, does the government want to avoid the requirement of giving warning to taxpayers? The only possible reason is the same reason a burglar comes quietly by night - to fleece his victim without warning or the opportunity to prepare a defense.

Regardless of what judges and professors may say, such actions are totally contrary to the intent of the Constitution, the Founders, and indeed the whole history of America.  That we have put up with them for some time does not make it right.

In a Constitution which, we are told, has an immutable right to abort your own child hidden slyly in there somewhere between the lines, surely the clear ban on crystal-ball requirements to keep the law should apply across the board.

The Senate has done its job in slowing down the unconstitutional and unjust AIG Bonus Tax, but in a way, it's a shame the Supreme Court didn't get a chance to clearly set down an ironclad ban against ex post facto laws in all areas of life.  We have a hard enough time keeping track of the laws of today; it's entirely too much to have to worry about tomorrow's as-yet-unwritten laws too.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments
What's funny is that Fannie and Freddie employees got bonuses... But where is the outcry about that? hmm..??
April 10, 2009 12:17 PM
It turns out that the banks were forced to issue shares of stock to the government:


"We don't believe it is tenable to opt out because doing so would leave you vulnerable and exposed. If a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance," the document said, citing Paulson talking points.

"These documents show our government exercising unrestrained power over the private sector," Judicial Watch president Tom Fitton said in a statement.
May 14, 2009 8:23 AM
Add Your Comment...
4000 characters remaining
Loading question...