News of the massive amounts of deferred compensation due to
employees of AIG's disgraced financial services unit has enraged
the public. That rage has spurred Congress to fast action, and it
is now considering legislation that would impose confiscatory tax
rates on that compensation, as well as all pay above a certain
threshold to employees of companies receiving large government
bailouts.
As regards income due to AIG employees, this measure is a
punitive one, intended to punish the company's employees and
executives for conduct that Congress and the public believe
demonstrates greed and selfishness. This raises serious
constitutional concerns. First, it may be tantamount to a bill of
attainder, with respect to those individuals, and so prohibited
under the Constitution. Second, it could constitute an unlawful
taking of property.
But whether or not the measure is legally permissible, it is bad
policy because it injects massive uncertainty and risk into
compensation agreements at a time when the expense of doing so is
likely to be great. This sort of controversy is the inevitable
result of government bailouts, which turn private concerns (such as
compensation agreements between private parties) into public
business, bringing politics to bear where it is likely to do
damage. To avoid further entanglement of the federal government and
taxpayers in routine business disagreements, Congress and the Obama
Administration should reject further bailouts and insist that those
already done be unwound in due course.
Serious Constitutional Concerns
Whether the legislation before Congress is a bill of attainder,
and therefore unconstitutional, is a difficult question not
susceptible to any certain answer under existing judicial
precedent. But whatever the answer, the legislation does raise
strong constitutional concerns animated by the purposes of the
prohibition on bills of attainders. The legislation (H.R. 1586), as
introduced by Rep. Charles Rangel (D-NY), would apply to income
received in 2009 and thereafter by employees of companies receiving
more than $5 billion in federal bailout funds, as well as to Fannie
Mae and Freddie Mac. The bill defines a new class of income, "TARP
Bonus," that consists of any compensation payments in excess of a
periodic wage and any income for such employees in excess of
$250,000, or $125,000 for married individuals filing separate
returns. Under the legislation, any "TARP Bonus" would be taxed at
a 90 percent rate.
Article I, § 9, of the Constitution states: "No bill of
attainder or ex post facto Law shall be passed." The prohibition
has several purposes. First, it enforces the Constitution's
separation of powers, thereby protecting individual rights. The
judiciary, not the legislature, is the branch that judges the
application of the law to specific individuals and entities,
resolving the disputes before it on an individualized basis and
ensuring that each case is afforded due process. For Congress to
adjudge specific parties guilty and due certain punishment would
necessarily intrude on this power. The result, as the Framers well
knew from the country's colonial experience, would be legislative
tyranny: Britain's parliament regularly enacted laws naming or
describing particular individuals and sentencing them to death for
some asserted infraction, usually treason.
Second, building on the structural purpose, the prohibition
ensures that those subject to punishment will be accorded due
process. Punishment meted out by the legislature is followed not by
process but by enforcement: Property is seized, liberty curtailed,
life taken. Our civil and criminal justice systems, however,
guarantee broad procedural rights meant to protect the individual
from unjust government action. In criminal cases, for example, the
accused has a right to a trial by a jury of his peers and to legal
representation. He has a right to mount a defense and attempt to
prove his innocence or that his conduct must be excused for some
overriding reason. He is entitled, above all, to procedural
regularity-that his case will be considered in the same manner as
all others, by neutral judges and fact-finders, and that he will be
accorded all the rights and presumptions due. This great body of
procedural law, all of these rights and guarantees, would be
worthless if Congress could short-circuit it in any instance.
Third, the prohibition is an essential part of the regulation of
the legislative branch to produce "sound legislation." As the
Framers knew quite well, legislators can be whipped into a froth by
public sentiment or influential parties seeking to further their
private ends. They are sometimes too ready to write law that upsets
settled rights and expectations in life, liberty, or property. Like
the Contracts Clause (which applies only to the states) and the
prohibition on ex post facto laws, the prohibition on bills
of attainder serves to blunt legislators' predisposition to
interfere in personal and economic affairs, each instance of which
is likely to occasion more of the same until the government has
snared the "more industrious" and less influential among the
citizenry, at great expense to economic and political
well-being.
Thus, Congress should be wary, for the same reasons the Framers
were, of laws that seek to punish specific individuals for their
prior conduct. Such laws are not regulatory in nature-a person
cannot, of course, undo that which has already been done-but
punitive, and so they inevitably injure rights and upset the
private ordering of affairs, to great detrimental effect.
Punitive Legislation
The legal prohibition, however, is not so broad as that
admonition. The Court has long rejected giving the prohibition "a
narrow historical reading" in favor of a reading "in light of the
evil the Framers had sought to bar: legislative punishment, of any
form or severity, of specifically designated persons or groups."[1] To
that end, the Court has stated that a bill of attainder is any law
that inflicts punishment on "named individuals or to easily
ascertainable members of a group" without a judicial trial.[2] The
punishment may be of a criminal nature, such as imprisonment or
death, or it may be civil, such as denying an individual
compensation.[3]
To judge by the mood on Capitol Hill, Congressman Rangel's
legislation is clearly intended to be punitive. Congress's
instinct, according to the President's top economic advisor, is
"off with their heads, violate the contracts."[4] One Senator
suggested that those AIG employees due compensating "go commit
suicide,"[5] while several others suggested employees
who do not decline the compensation be fired.[6] Even the President
attacked the AIG employees' "recklessness and greed," called the
compensation an "outrage" and a violation of "our fundamental
values," and ordered the Treasury secretary to "pursue every legal
avenue" to stop the payments from being made.[7]
As concerns deferred compensation, the legislation would apply
to only a small and ascertainable class of individuals: those who
are or were employees of any of the several companies that received
large government bailouts and are now due payment for work
previously performed. It may be, in fact, that the retrospective
component of this legislation would, in practice, apply only to
employees of AIG, despite that the language used is less
specific.
For these individuals, then, the legislation closely resembles a
bill of attainder, because it would punish a specific and
ascertainable group of individuals for conduct in which they have
already engaged-agreeing to work in exchange for deferred
compensation that Congress now considers to be excessive-in light
of the company's performance.
The chief defense of the bill would be that it is too broad to
be a bill of attainder because its prospective component does have
a regulatory purpose and would be generally applicable, making it a
proper exercise of Congress's broad taxing power. At some point,
however, a tax-if narrowly enough targeted and sufficiently
punitive in intent-would cross the line to being a bill of
attainder. Perhaps Congress can take a clearly impermissible bill
of attainder and cloak it in the guise of a broader tax that
includes some prospective elements and the courts would consider
the conglomeration permissible. Comments by Members-for example,
Senator Max Baucus (D-MT) suggested, "We need to find out the
answer to this question: What is the highest excise tax we can
impose that is sustainable in court?"[8]-indicate that this is the
tack Congress has taken.
But perhaps the courts would not approve. A court seeking to
give meaning to the prohibition on bills of attainders-and seeking
to prevent Congress from writing this clause out of the
Constitution-would have to do more than simply determine that a
bill is not, in its whole, punitive and narrowly targeted. Rather,
the court would have to look beyond the form of the legislation,
much as courts, in economic matters, look beyond the text of
contracts to their "economic realities." A court examining H.R.
1586 in this manner, and as applied to those AIG employees due
deferred compensation, would find, at the bill's core, a narrow and
punitive measure, one that surely runs afoul of the Framers'
purposes and perhaps, as well, the Constitution's text.
A Taking?
In addition, a sufficiently narrow tax provision may constitute
a taking, as prohibited by the Takings Clause of the Fifth
Amendment. That clause requires "just compensation" for "private
property taken for public use." While exercises of Congress's power
to tax are generally not susceptible to Takings Clause challenges,
it is not difficult to conceive of prohibited exactions that the
government could seek to accomplish via tax policy-for example, a
100 percent income tax on a particular individual. As Professor
Eric Kades has explained, "A tax singling out one or a handful of
citizens offends the constitutional principle the Supreme Court has
repeatedly invoked: the Takings Clause is designed 'to bar the
Government from forcing some people alone to bear public burdens
which, in all fairness and justice, should be borne by the public
as a whole.'"[9]
A takings analysis, in this case, would likely follow similar
contours as under the prohibition on bills of attainders, focusing
on the breadth of the tax, its apportionment, and its extent-that
is, the proportionality of its burden. That the law is unclear
counsels caution, for even if the letter of the law may not be
breached, surely its purpose would be.
An Inevitable Result
Government actors face large incentives to interfere in economic
affairs, and the consequences of their interference can be
enormous. It is an especially pernicious (and underestimated)
aspect of bailouts that they transform private affairs into public
business. Seen in that light, the imbroglio over the compensation
paid to AIG employees was just one in a series of political
controversies resulting from the tension that inevitably results
when public funds are used to rescue private companies.
The primary risk is that Congress will use this and other
controversies to weaken the mechanisms of private ordering, such as
contractual rights that are at the core of our economic freedom and
prosperity. Striking down contracts arbitrarily, because they have
attracted public scorn or offend lawmakers in some way, raises the
costs of making and enforcing agreements across the economy by
reducing the certainty of all agreements. Madison himself described
the slippery slope that would result: The more the legislative
branch interferes in private affairs, the more who will demand that
it interfere in their affairs, to their advantage, and the less the
role private agreements will play in economic life.
Consider this a tax on contracting. First, more contracts will
require a lawyer's hand in drafting to avoid government abrogation.
Some parties may decline to contract at all, costing the U.S.
economy the surplus of their avoided transaction, while others may
change the terms of their agreements-no doubt many executives will
eschew performance-based pay for higher salaries and greater perks
that do not provide the same incentives. Still others may shift
their business to foreign shores that show greater respect for the
rule of law.
This tax will fall most heavily upon the financial sector, which
is already reeling from the economic downturn, and especially those
businesses that have accepted government funds. If these businesses
restructure their compensation systems to avoid performance pay, it
is performance and economic recovery that will suffer. And if they
feel pressure to pay their workers less than the market is able to
bear, their employees will leave to work for their competitors or
hedge funds that are less subject to political scrutiny.
Taxpayers should be outraged that they are being asked to make
large deferred compensation payments to employees of companies that
have received billions in government aid, but this type of
situation is the inevitable result of government intervention in
the private sector. That is where outrage should be directed.
Be Responsible
Unless it wishes to strike another blow against economic
recovery, as well as offend the Constitution's principles and
perhaps its requirements, Congress should realize the prudential
limits of its powers and competence and take no action against
those receiving deferred compensation for work that they have
already performed. It should also pursue a positive agenda to
ensure that this situation does not repeat itself. Rather than ban
bonuses or performance pay and cap salaries-all of which threaten
to stifle economic growth-Congress should draw the line on any
additional bailouts of private businesses and demand that the Obama
Administration provide clear timetables and milestones for
carefully unwinding the ones already made. This is the only
responsible way to guarantee that taxpayers will not be on the hook
again.
Andrew M. Grossman is
Senior Legal Policy Analyst in the Center for Legal and Judicial
Studies at The Heritage Foundation.