The Corner

Is the Bonus Tax Unconstitutional?

Yes, says Richard Epstein in the Wall Street Journal this morning. He writes:

Bills now winding their way through Congress would tax between 70% and 90% of bonuses paid to any executive earning in excess of $250,000, if he or she is employed by a business that received more than $5 billion from U.S. bailout funds. With popular outcry at a fever pitch, too few Democrats and only some Republicans are prepared to stand up to this juggernaut.

But would the courts uphold this legislation? The AIG bonuses were made pursuant to valid contracts entered into before the receipt of the bailout money. They were ratified in the legislation that provided for the bailout, and efforts to find loopholes in these contracts have proved unavailing.

Thus any sensible system of limited government should consider the proposed bills unconstitutional. Special taxes on some forms of income (but not others) and retroactive taxes put in place after business transactions are complete both merit strong condemnation. The bills in Congress are rife with both elements.

But don’t uncork the champagne yet. As Epstein explains:

Nevertheless, a constitutional attack against any such law that might emerge faces an uphill battle. Since the New Deal, if not earlier, the courts have allowed Congress and the states to decide which economic activities to tax, and how.

Read the whole thing here.

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