Government Demands a Refund

In a House vote yesterday, 328 lawmakers passed a bill to levy a 90 percent tax on the bonuses paid to employees of the companies receiving bailout money from the federal government. The insurance behemoth American International Group (A.I.G.) is at the center of the nation’s outrage over an estimated $165 million paid to executives in a department that is largely responsible for that company’s failure.

Treasury Secretary Timothy Geithner admitted Thursday in an interview with CNN that his department requested that restrictions on executive compensation for firms receiving government bailouts written into the economic stimulus bill be loosened in order to avoid legal challenges to the act. Now taxpayers are in an uproar as their money goes to those who helped bring about the financial crisis.

The House bill would tax bonuses given to employees with family incomes above $250,000 since December 31 at companies that have received at least $5 billion in government bailout money. The Senate is considering a similar bill and President Obama has indicated his support for the legislation. Congress’s plan would recoup much of the bonus pay and put the money back into the federal coffers, but will the bill pass constitutional scrutiny?

The U.S. Constitution prohibits punishing through legislation one that has not been brought to trial and criminalizing actions that have already been committed. Nonetheless, other retroactive tax provisions have been held up in court and this measure applies to bonuses paid to a host of companies both in the past and in the future.

What do your students think? Ask them to determine the constitutionality of HR 1586 through an examination of Article I, Section 9 and the bill itself.