TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, February 3, 2009

Using the Tax Code to Get Back the $18b Wall Street Bonuses

The Daily Kos proposes the use of the Tax Code to retrieve the $18 billion in bonuses paid out by Wall Street firms, which President Obama characterized as "shameful"":

Any employee, consultant or officer of any entity that was the recipient of funds provided under Public Law 110.348, commonly known as Toxic Asset Relief Program, shall have the portion of income consisting of special discretionary remuneration taxed at the following rate:

  • Amount up to $50,000, as ordinary income
  • Amount Over $50,000, up to $500,000, at 75%
  • Amount over $500,000, at 95%

For those who doubt that this would be constitutional based on the proscription against ex-post facto laws, such restrictions only apply to criminal legislation. ...  As stated in Karpa v. Commissioner, 909 F.2d 784, 786 (4th Cir.,1990):

The prohibition against ex post facto laws applies only to penal legislation that imposes or increases criminal punishment for conduct predating its enactment... The ex post facto clause is not applicable to legislation imposing civil disabilities...Applying these general principles, the Supreme Court rejected an ex post facto challenge to Connecticut's retrospective application of a tax penalty in Bankers' Trust Co. v. Blodgett, 260 U.S. 647,... The statute challenged in Bankers' Trust imposed a 2% tax on the value of estate property for the five years preceding a decedent's death where it appeared that the property was taxable and no state or local tax had been assessed or paid during the year preceding death... The Court recognized that the sanction for failure to pay taxes is "usually punitive," and the Connecticut provision for "penalizing a delinquency" was no exception... But the Court held that "[t]he penalty of the statute was not in punishment of a crime," and hence the ex post facto prohibition was simply not implicated." [Citations and footnotes omitted.]

For a contrary view, see Steve Selinger, The Case Against Civil Ex Post Facto Laws (Cato Institute).  (Hat Tip:  Al Rodbell.)

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I'm still baffled as to why people seem intent on taxing "bonus" income separately from other income. Imposing restrictions on total compensation from TARP-funded companies, particularly those that accept such funding after the terms are imposed -- ex post facto laws, whether constitutional or not, hit my fairness button a lot harder than paying bonuses to employees of these banks does -- seems like a reasonable idea; I personally would allow any such threshold to be exceeded, but only with payment deferred until the government is paid back, and junior to the government's claims. Treating the end-of-the-year lump sum separately from the installments, though, seems hard for me to fit into any sensible sense of justice, fairness, or even envy or egalitarianism.

Posted by: dWj | Feb 3, 2009 10:25:30 AM

I,for one,think this proposition is a fantastic idea.Unfortunately,by the time legislation authorizing it were passed,it would be so loaded with pork,the revenue to be collected would be dwarfed by the new spending.

Posted by: mark finley | Feb 3, 2009 12:06:40 PM

Oddly, I had the same thought, but failed to do more than tell family and colleagues. Kudos to the Daily Kos. A retroactive tax certainly would be appropriate. The rates suggested are not inconsistent with top marginal rates that the Code once contained. Moreover, retroactive taxes arguably are not, contrary to the selective scholarship in the Cato piece, unconstitutional. See generally, US v. Carlton, 512 US 26, 30-31 (1994), (federal estate tax amendment was constitutional because it was not arbitrary or irrational legislation and was enacted for a legitimate legislative purpose); Welch v. Henry, 305 US 134, 150 (1938) (upholding a tax retroactive to the year preceding the year of enactment). Whether there is political will to impose such a tax is another matter.

Posted by: Anthony Ilardi | Feb 4, 2009 11:25:44 AM