Professor Balkin Defends Constitutionality of Bonus Tax

Professor Jack Balkin has summarily rejected most of the prevailing constitutional arguments against the House of Representatives measure that would tax bonuses received by AIG executives and other TARP participants. The five most prevalent arguments include that the tax would violate the: 1. Due Process Clause of the Fifth Amendment; 2. Takings Clause; 3. Ex Post Facto Clause; 4. Contracts Clause; and 5. Bill of Attainder Clause. I agree with Balkin that 2, 3, and 4 are not relevant, but his due process and bill of attainder analysis is too swift.

Due Process
With respect to the due process argument, I agree with Balkin that a reviewing court would likely consider whether the measure is "rationally related to a legitimate government interest." Balkin argues that Congress can legitimately seek to avoid "extraordinary rents" to TARP participants and their employees and to curb "improper incentives and moral hazard in subsidized companies and their employees."

Assuming that these interests are indeed legitimate, the due process problem arises because in February, Congress explicitly exempted AIG's bonus payments from legislation that regulates compensation and bonus practices of TARP recipients. Although the measure would have effectively banned the controversial bonus payments, Congress gave the provision prospective, rather than retroactive application.

I would normally agree with Balkin that courts should not second-guess Congress under ordinary rational basis review. But AIG acted with explicit legal authority when it paid the bonuses. Neither the original version of TARP nor the regulations promulgated by the Treasury Department in the Bush and Obama administrations bans the bonuses. Congress recently enacted a measure that would have banned the bonuses, but it does not apply to AIG. Apparently, the Treasury Department requested that the restrictions not apply retroactively, and Congress agreed.

Now, Congress is trying to direct the Treasury Department to change course and subject the bonuses it only recently voted to exempt from regulation to an almost 100% tax. Even if these facts do not lead 5 or more Supreme Court Justices to conclude that the law violates the Due Process Clause, the issue strikes me as being a bit more complicated than Balkin's analysis suggests.

Bill of Attainder
Balkin's analysis of the bill of attainder issue is too abstracted and divorced from the factual context in which the tax proposal arises. Balkin dismisses the bill of attainder argument because the law does not "single out" individuals and it applies retrospectively and prospectively:

First, the tax defines the class to which it applies to an abstractly defined group rather than naming particular individuals. It applies to persons working for enterprises that have received emergency government subsidy; it is not aimed at particular companies or specific employees. Second, the tax is for a regulatory purpose, as described above, and not for a punitive purpose. Preventing misuse of government funds, limiting bad incentives, and avoiding moral hazard are regulatory purposes, not punitive purposes. The fact that isolated members of Congress may have expressed an impermissible punitive or retributive purpose does not mean that the tax violates the Constitution if the text of the bill on its face has an overtly regulatory purpose. Third, the tax is both prospective and retrospective in its targets, which is consistent with a regulatory as opposed to a punitive purpose.

If the factors Balkin lists are the only ones a court would consider in a bill of attainder analysis, I would argue that they could weigh against the tax, and not necessarily for it. Balkin's argument that the tax does not target AIG recipients and that it applies to an "abstractly defined group" requires us to suspend reality. Even though the House measure is written in general terms, the motivation behind the measure is very clear: The House seeks to "punish" AIG and its executives by recouping almost 100% of the bonus payments.

Balkin's argument would legitimize the type of formalistic arguments that litigants often make when they want to avoid the impact of and impulse for their actions. Formalism has been invoked to justify gross violations of due process and equality (such as segregation and unequal application of the criminal law). Balkin's abstracted analysis of the bill of attainder provision comes dangerously close to legitimizing the very type of formalistic arguments that routinely mask and excuse injurious and unfair governmental action.