Reacting to public anger over the taxpayer-subsidized bonuses paid to AIG executives, the House last week came up with a proposal to reclaim the money by imposing a 90 percent tax on the bonuses. Opinions on the legality of the tax vary, but it’s vulnerable in part because it is so patently punitive.
The tax remedy can be attacked in court under several provisions of the Constitution, most obviously the one barring “bills of attainder,” which is what it’s called when Congress acts as judge and jury and imposes a punishment.
President Barack Obama, a former law professor, explained the problem on “60 Minutes”: "As a general proposition, you don't want to be passing laws that are just targeting a handful of individuals. You want to pass laws that have some broad applicability. And as a general proposition, I think you certainly don't want to use the tax code to punish people,"
Years of litigation may await the tax proposal if enacted and the bill for litigation could conceivably exceed the sum of the bonuses. Since the bonus fracas arose, however, the Sunday talk shows, business editorialists, the law blogs and AIG’s current chief executive have generated a number of alternative ways to get the money.
Here are the top ten:
1) Ask nicely: This is, in fact, what AIG chairman and CEO Edward Liddy told a House committee he was doing.
2) Redo the punitive tax bill: The most glaring constitutional problem with the bill is that it’s punitive, enacted in the heat of Congress’ reaction to public anger. But this could be remedied. In a blog post this weekend, Harvard Law Professor Laurence Tribe explained that it might be fixed by applying the tax to a much broader class of bonus recipients, past, present and future, without being so obvious about who Congress has in mind and why. Impose the tax, Tribe suggested, “on the basis of some criterion sufficiently general to avoid classification as a measure targeting solely a closed class of identified and named individuals. ... The aim of such a tax would be manifestly regulatory and fiscal rather than punitive and condemnatory, and that the tax would be part of a measure that would be prospective as well as retroactive in its operation, would serve to blunt the force of any bill of attainder challenge.”
3) Renegotiate the contracts: Start over. Take the contracts that promised the bonuses and renegotiate contracts without bonuses, like the auto industry is doing with the United Autoworkers.
4) Rescind the contracts: If the bonus recipients won’t renegotiate, simply withdraw the contracts under which they received the bonuses. “Every first-year law student learns that a court can invalidate a contract’s ‘unconscionable’ terms, rescind it or reform it,” James P. Tutill, a lecturer at the University of California-Berkeley law school blogged over the weekend. “If these bonus contracts benefiting the very people who have destroyed incalculable amounts of wealth in the pursuit of their own personal greed don’t warrant revision, rescission or reformation, then our legal system is seriously deficient."
5) Modify the contracts: A close cousin of rescission, but not to be confused with “abrogation,” this would entail “unilateral modification,” as Deborah W. Post, of the Touro Law School, put it in a post at the New York Times “Room for Debate” blog. “Modification is something most at-will employees know well. ‘Unilateral modification,’ modification without employees’ consent, is standard procedure at most companies unless the workers have a union and a collective bargaining agreement — and in recent years, we have seen that a contract may not protect you even if there is a union and a collective bargaining contract.”
6) File suit: Since the government owns 80 percent of AIG, it could sue AIG to reclaim the money. Rep. Barney Frank (D-Mass.) chairman of the House Financial Services Committee, floated this over the weekend in an appearance on “Face the Nation.” “We own about 80 percent of the company,” he said. “We should assert our rights. ... One of the things we ought to be doing is suing as a shareholder, saying, look, these are people who were paid bonuses that they weren't entitled to.”
7) Make AIG sue itself: In a variation on Frank’s proposal, the shareholders, in this case, the government, would demand that AIG’s directors sue AIG to get the bonuses back. Michigan State University Law Prof. Mae Kuykendall noted that under the law, the directors, rather than shareholders, run the company and have a duty to act in the best interest of the shareholders, in this case, by suing to retrieve the bonuses. When they don’t, shareholders (the U.S. government) can go to court to force the directors to sue. “You’ve got to demand that board do the suit,” she said. In effect, she said, a court would force the board to “step into the shoes” of shareholders.” The problem with such a proposal, she said, is that the corporation winds up funding both sides of the suit, so “you never get much of a real benefit” and it “probably wouldn't yield anything.”
8) Threaten to fire the bonus babies: “If I were in charge of AIG, I'd call in these folks and I'd say, ‘Look, you either give them back or you're fired’” Sen. Kent Conrad, (D-N.D.), said on ABC’s “This Week.” “That we can do, because we own the company.” Sen. Susan Collins (R-Maine), on the same program, seconded the motion. “We can make sure that there is pressure for people to voluntarily get the money back or else they're going to lose their jobs or there's going to be no further funding for AIG.”
9) Declare Bonus Babies “Enemy Combatants: ”Why not use the powers promulgated by the Bush administration to deal with the recalcitrant bankers and traders?" asks Michigan State’s Kuykendall. She raised this possibility in a post at Constitutional Law Prof Blog, noting that she was not serious, but rather offering a commentary as much on the Bush administration’s enemy combatant approach as on the AIG situation. “Declaring them enemy combatants would seemingly open up a much wider range of legal tools for gathering information about co-conspirators and possible continuing plots, and for persuading them to return the money.”
10) Reclaim AIG campaign contributions: Make members of Congress who have received campaign contributions from AIG — or any company paying bonuses — send the money to the Treasury.