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Ex Post Facto Taxation

18 March 2009

“No bill of attainder or ex post facto law shall be passed.” – Article 1, Section 9, United States Constitution, referring to limits on the power of the Congress.

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And so, twelve months or so after being apprised of AIG’s contractual obligations toward its senior executives, Rep. Frank, Sen. Dodd, Sen. Schumer, Sen. Baucus, and others – presumably including Secretary Geithner, who serves at the pleasure of President Obama – are trying to figure out how to apply a punitive tax to the $170MM in bonuses that AIG paid out during the last week.  To achieve what these brilliant thinkers wish to achieve – to “recoup taxpayers’ dollars” – such a tax will have to be applied retroactively, that is, to transactions that have already taken place.

It has been done before.  But the very idea ought to send a chill up the spine of any civic-minded American.

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It’s tempting to say that the ends justify the means in the present case.  Using federal tax revenues to extend massive bonuses to executives who have driven a corporate ship aground is an obscenity.  

The proper solution, of course, would have been to let AIG file Chapter 11 and let the chips fall where they may.  It is not quite right to claim that AIG’s ascension was “unregulated.”  The regulation on AIG was, in fact and originally, the profit/loss statement distributed to shareholders.  That is as it should be, assuming full transparency.  Moral hazard is real, and it’s got to be retained as a regulatory force for restraint.

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We’ve got to start resisting the temptation to punish privately held entities for legally entering contracts with their employees, which is what is happening here.  Far worse, though, is the virtually unlimited power that is usurped by Congress when we, the governed, give our tacit consent to systematic violations of bedrock constitutional ideas.  Article 1, Section 9 is such an idea.  In his concurring opinion in United States v. Carlton (1994), Justice Scalia, concurring with the Court’s judgment but rejecting its expansive reasoning, lamented that “the reasoning the Court applies to uphold the statute in this case guarantees that all retroactive tax laws will henceforth be valid.”  He was not amused or encouraged by it.

Professor Somers of UCLA writes succinctly:  “Changing the rules of the game after economic commitments have been made is an abhorrent idea.”  He quotes another concurring opinion by Justice O’Connor, who observes that “the tax consequences of commercial transactions are a relevant, and sometimes dispositive, consideration in a taxpayer’s decisions regarding the use of his capital.”  The net effect of retroactive taxation is to deprive citizens of salient information about the economic implications of their transactions – not because the citizens are guilty of neglecting salient information, but rather because the salient information does not yet exist at the time the transaction takes place.

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The prerogative to levy and collect taxes is not in dispute here.  The dispute concerns the way in which Congress exercises its prerogative.

The problem, as ever, is structural, constitutive, and long-term, which is to say the citizens of the United States do not have an adequate attention span, apparently, to appreciate it.  Still:  whatever finite sums might be recovered by a punitive, retroactive tax initiative in the case of AIG will have been won at great cost to our ability to forecast economic conditions, to the extent they are knowable, that will obtain at the time we enter into a transaction.  That is to say, it greatly diminishes our capacity to act rationally in economic terms.  Our economy, based as it is on nominally free markets, requires that we have reliable access to all knowable information that impinges on our economic decisionmaking.  (Whether or not we expend the energy to obtain that information is another question entirely.  That is a question of neglect, and the market will punish us for electing not to expend that energy.)

qb

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One Comment leave one →
  1. 20 March 2009 2:43 am

    You read my mind. I intended to blog about this very topic today. Thanks for getting this out there before I could get to it.

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