Thursday, April 16, 2009

More Courts Imposing Their Values

With the Iowa Supreme Court overturning a state law banning homosexual marriage and the California Supreme Court pondering the same, it could be a tough month for democracy in America. The Iowa court earlier this month declared unconstitutional a statute similar to the Defense of Marriage Act passed by the U.S. Congress and the legislatures of 18 other states. These Defense of Marriage Acts expressed the values of the popularly elected legislators and governors of these 18 states. The California Supreme Court is considering action even more egregious, this being overturning a constitutional amendment adopted directly by a majority of California voters in the last election. This California referendum, similar to the constitutional amendments banning same sex marriage passed by the citizens of 29 different states, expresses directly the values of the voters.

The decision by the Iowa Supreme Court is not, of course, the first time a court has thwarted the will of the people. Courts in California are rather notorious for this, having ruled unconstitutional two popular referenda declaring illegal aliens ineligible for public services (Proposition 187) and seeking term limits on congressmen (Proposition 227), and also ruling unconstitutional California’s Defense of Marriage Act (a ruling that led to the constitutional amendment which the court is now considering). This thwarting of the will of the people is not limited to California. The U.S. Supreme Court in 1996 threw out a Colorado constitutional amendment approved by a majority of Colorado voters that prohibited any preferential treatment for homosexuals.

Each time a court overturns a referendum or statute expressing the values of the people or their elected representatives, confidence in the judiciary and the rule of law diminishes. The U.S. Supreme Court itself recognized this inevitable outcome of judicial action in one of the most closely watched cases of our generation, Planned Parenthood v. Casey. In Casey,the Court reconsidered its 1973 decision of Roe v. Wade but this time, unlike previous abortion cases, the pro-lifers appeared to have the edge. Since 1973, the avowedly pro-life President Reagan had nominated three justices to the Supreme Court (Justices Scalia, Kennedy, and O’Connor), and the professed pro-life President George H.W. Bush had added two more (Justices Thomas and Souter). With the pro-life Chief Justice William Rehnquist solidly in favor of overturning Roe, it appeared likely that the regulation of abortion would return back to the states for consideration of what, if any, protection the people’s representatives would give to unborn babies (prior to Roe v. Wade, some states gave little protection and some states extensive protection).

The Court in Casey affirmed a woman’s right within limits to abort her baby. The important aspect of Casey for purposes of this article, however, is the reasoning provided by the three Republican appointees (Kennedy, Souter and O’Connor) who commanded the decision in this case. They wrote that in spite of the continued controversy and annual January marches on Washington, generations of women had come to expect the right to abort. More fundamentally, the three Justices noted that the root of the U.S. Supreme Court’s power resides “in its legitimacy, a product of substance and perception that shows itself in the people’s acceptance of the Judiciary as fit to determine what the Nation’s law means and to declare what it demands.” A large part of this legitimacy is based “on the very concept of the rule of law underlying our own Constitution [which] requires such continuity over time . . .”

Justice Scalia in his dissent directly addressed the legitimacy of the Court and the rule of law. He noted first of all that longevity of a ruling like Roe does not ensure its continued vitality and correctness – the “separate but equal” principles of Plessy v. Fergusoncontinued for three generations of blacks and whites before being overturned in Brown v. Board of Education. More importantly, Justice Scalia addressed the Court’s disregard of the expressed will of the people. He wrote: “As long as this Court thought (and the people thought) that we justices were doing essentially lawyers’ work up here – reading text and discerning our society’s traditional understanding of that text – the public pretty much left us alone. . . . But if in reality . . . our pronouncement of constitutional law rests primarily on value judgments, then a free and intelligent people’s attitude towards us can be expected to be (ought to be) quite different. The people know that their value judgments are quite as good as those taught in any law school – maybe better. . . . Value judgments, after all, should be voted on, not dictated . . .”

Yesterday’s Tea Parties demonstrate that ordinary people in America are frustrated because the will of the elite (a category that certainly includes the judiciary) seems to trump the will of the electorate. Iowa is certainly no exception to this perception. The more the courts flaunt the will and values of the people, the more the American people will question the legitimacy of the judiciary. At some point the people will simply reject the will of the rogue judiciary, leading to first sporadic and then more generalized break-down of the rule of law, which would have devastating consequences to the functioning of our society.

The courts can still forestall this by heeding the wisdom of Justice Scalia, who recognized that the values of five Supreme Court Justices must not trump the values of millions of American voters. Unless the judiciary wakes up, soon the American public will join the refrain of President Andrew Jackson, who said: “[Supreme Court Chief Justice] John Marshall has made his decision, now let him enforce it.”

Tuesday, April 07, 2009

Be Grateful Not to Work for AIG

As March Madness fades into April Apathy, one wonders what will next draw the attention of a sizeable portion of the American public. Will it be the latest apologies by our President, or will it be the looming tax deadline of April 15? My guess is that most American pragmatists will opt for the latter. For those, be grateful that you are not one of the current villains of America, the AIG bonus recipients.

I frankly never thought I would feel sorry for a Wall Street big shot who received in a bonus a multiple of what I make each year as a humble grad school prof. Yet, given the death threats some bonus recipients and their families have received from certain frenzied and pathetic members of the public, and the "encouragement" the AIG "bonus babies" have received from New York's Attorney General Cuomo (who apparently had little legal basis for demanding the return of the bonuses), one cannot help but feel some sympathy, particularly for those AIG executives who had absolutely nothing to do with the AIG practices that led to its demise and need for a bail-out. Particularly galling, of course, is the fact that the Democrats' stimulus package specifically permitted these bonuses in a bill that was not circulated for consideration prior to its vote (can any thinking person in light of this lack of order and courtesy to fellow congressmen trust the government in any way with our economic well-being?). My focus of today, however, is on the tax implications for the bonus recipients.

AIG is, of course, a corporation, and as a corporation, it withholds from employee compensation such items as social security taxes, Medicare taxes, state income taxes, and federal income taxes (in fact, if AIG does not withhold taxes, goes bankrupt, and there are insufficient funds to pay the tax withholdings, the members of the Board of Directors are personally liable for them!). Therefore, following the normal course of business, AIG withheld from the recent bonuses the appropriate tax withholdings given to its executives. Assuming that the executives receiving a million dollar bonus were in the highest federal income tax bracket, were residents of New York City, filed joint tax returns with their spouses, and had $357,700 in other income (a reasonable assumption to make in light of the size of the bonus!), AIG would withhold as much as $320,362 in federal income taxes, $14,500 in Medicare taxes (there is no cap on these unlike social security taxes), $77,700 in New York State income tax, and $36,480 in New York City income tax. That leaves a little more than half a million dollars in the bonus (still a good paycheck!) for the executive, spouse, and family.

New York Attorney General Andrew Cuomo pursued these bonus recipients and according to his office's press release, nine of the top ten bonus recipients (15 of the top 20) had agreed "to give the bonuses back." But give it back to whom? AIG? The government?

Please remember that having received and paid tax on the money, the AIG executives are free to dispose of it (spend it, invest it, donate it) as they see fit. What they do with the money, however, has consequences. Spending the money, of course, pleases the sellers of goods and services, and generates even more taxes for some government entities (the State and City of New York, for instance, with their respective sales taxes of 4 percent and 8.375 percent). Donating the money, however, raises other issues. If the entity receiving the donation is a charitable organization (church, school, etc.), the donation is tax deductible subject to certain limitations. If the receiving entity is not a charitable organization, the person making the gift cannot deduct the amount given from his income.

AIG does not, of course, qualify as a charity since it was not organized for charitable or educational purposes (the fact that AIG is currently a "non-profit" and a subject of US Treasury "charity" does not count). It also is not yet an arm of the government (donations to government are also tax deductible). Therefore, "giving the money back" to AIG is a donation to a non-charitable organization, meaning that the donation is not deductible and therefore the government can keep the income taxes generated by the bonus.

Lawyers or accountants more clever than me perhaps can structure this "donation" in such a way to minimize the inherent problems discussed above. Better yet, high priced lobbyists perhaps can add yet another provision to the Internal Revenue Code that is already the size of a big city phonebook. This legislative fix may be in the works, since the House AIG bonus confiscation bill excludes from income any amount if waived by the employee, although there remain problems with this as noted by the Wall Street Journal. Nevertheless, it is unjust to even incur the expense of a high-priced tax attorney, accountant, or lobbyist to fix this mess caused by the negligence of Congress. In situations like this, the wisdom of Ronald Reagan becomes clearer and more necessary each day, particularly his statement that the "most terrifying words in the English language are: I'm from the government and I'm here to help."