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FiveThirtyEight

Politics

Is nobody else made deeply uncomfortable by this idea?

Senate Majority Leader Harry M. Reid (Nev.) said Finance Committee Chairman Max Baucus (Mont.) would unveil a proposal by tomorrow that would tax up to 98 percent of the bonus money. “That will certainly send a message to the people at AIG and all others who try to benefit from the hardships the American people face,” Reid said.

In the House, Reps. Steve Israel (N.Y.) and Tim Ryan (Ohio) introduced the “Bailout Bonus Tax Bracket Act” to create a 100 percent tax on bonuses over $100,000 that are distributed to employees of financial firms receiving federal bailout funds. Currently, the IRS withholds 25 percent from bonuses less than $1 million and 35 percent for bonuses more than $1 million dollars. The Israel-Ryan proposal would apply to all bonuses to government-supported firms such as AIG that have been given since Jan. 1.

There’s been some discussion about whether levying a tax of this nature would be legal, or instead would represent an unconstitutional bill of attainder. Lawrence Tribe of Harvard Law School says the bill would probably pass constitutional muster, although the answer is less than 100 percent clear.

I’m not sure that’s the whole crux of the matter, though. Among the most basic duties of a functioning government is to uphold contracts. The “retention” bonuses paid to AIG executives were almost certainly bad contracts from an economic point of view, but legally they may be just as valid as any others (I qualify this statement only because we haven’t actually seen the contracts). If the government passes a tax of this nature, it is not only failing to protect those contracts but is actively seeking to circumvent them.

“What is the highest excise tax we can impose that will stand up in court?”, Max Baucus suggested today. “Let’s find out.”

Legal? Perhaps. Constitutional? Probably. But Congress’s intervention in the Terri Schiavo case was probably constitutional as well. Nevertheless, it represented a gross overreach of the chamber’s authority, and ultimately undermined, at least a little bit, the rule of law.

When historians look back on this period, this is not likely to be seen as one of our prouder moments. Moreover, I wonder if it does not augment the view that the financial crisis was perpetuated by a few bad apples, when the real causes were far more systemic, and systemic reform will be required avoid their recurrence. If the public needs some way to crucify CEOs and other high-paid executives who had their fingers on the button when the economy went to hell, let’s at least find a way that doesn’t tempt fate with the rule of law.

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