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Retribution Only Apparent Goal of Webb-Boxer “Bonus Tax”

3 min readBy: Scott Hodge

A basic tenet of sound taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy is that tax laws should not be applied retroactively. If taxpayers are to have any respect for the tax system and the rule of law in a free and democratic society, they must have confidence that the economic decisions they make today will not be taxed retroactively in the future. In today's case, fairness demands that Senators Webb and Boxer resist using the tax code to retroactively enact a punitive tax on a few people, no matter how politically unpopular those people are today.

But retribution appears to be the sole goal the so-called Taxpayer Fairness Act, S. 2994, sponsored by Senators Jim Webb (D-VA) and Barbara Boxer (D-CA), that is being considered in the Senate today. The legislation would retroactively impose a one-time 50 percent tax on bonuses in excess of $400,000 paid in 2009 to executives by financial firms that received more than $5 billion in federal TARP moneys.

Whatever one thinks of the firms that received federal bailouts, what is particularly unfair about this tax is that it is being imposed on income that has already been subject to federal, state, and local income taxes. Indeed, the 2009 bonus of a high income bank executive in New York City would have already been taxed at nearly 50 percent when federal (35 percent), state (8.97 percent), local (3.64 percent), and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es (2.9 percent H.I. tax) are combined. The additional 50 percent rate proposed by Webb and Boxer would effectively confiscate the remaining portion of those bonuses. But that seems to be the goal.

The Webb-Boxer bill is similar in intent to H.R. 1586, the so-called AIG bonus bill, passed by the House of Representatives on March 19, 2009, which sought to impose a 90% income tax on bonuses earned by employees of financial firms that had received more than $5 billion in TARP funds. Tax Foundation Tax Counsel Joe Henchman determined that H.R. 1586 was "not only poor tax policy but also constitutionally suspect."

According to Henchman:

James Madison once wrote: "The sober people of America…have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less-informed part of the community." The AIG tax bill upsets settled expectations and sets the precedent that our tax code can be used to inflict retroactive punishments on unpopular groups.

Congress is not unaware of its own proclivity to use the tax code retroactively. Indeed, the principle of avoiding retroactivity was "sufficiently important that the Congress codified it with respect to Internal Revenue Service regulations. In 1996, as part of the Taxpayer Bill of Rights 2 (H.R. 2337), the Congress established that the effective date of any temporary, proposed, or final regulation may not be earlier than the date the regulation is published in the Federal Register. It also established that the effective date of a final regulation can be no earlier than the date it was published in the Federal Register in temporary form."

However, the Supreme Court has ruled on whether retroactive tax law changes violate the prohibition on ex-post facto laws. According to Wikipedia, "In the 1994 opinion United States v. Carlton, the U.S. Supreme Court unanimously held that retroactive tax laws did not violate the constitutional prohibition on ex post facto legislation, provided their retroactive application was "supported by a legitimate legislative purpose furthered by rational means."

If this is the standard by which the Webb-Boxer bill should be judged, then it surely fails because the retribution that is clearly the essence of S. 2994 is as far as you can get from a legitimate legislative purpose.