Taxes a tool for social good, not bullying to conform

by Clint Rickards, 3L
Law Weekly
March 24, 2009

Last Thursday, the House of Representatives passed a bill imposing a 90 percent tax on bonuses paid out by certain companies receiving federal bailout funds to certain employees. The legislation, which was passed in response to public outrage over bonuses paid to employees of insurance company AIG, is attempting to recover these paid bonuses that were otherwise allowed by an amendment to the bailout bill (and for those of you who haven’t been following “As the Bailout Turns,” in our last episode Connecticut Senator Chris Dodd claimed that it was the Obama Administration, specifically Treasury Secretary Tim Geithner that pushed for said amendment, while Geithner seemed to point the finger at Dodd).

After the legislation passed, various academics, business professionals, and politicians weighed in. Some suggested that the tax bill may be unconstitutional because it is an unlawful retroactive tax, although others such as constitutional scholar Larry Tribe defended the bill’s constitutionality.

Banking and business executives questioned whether the bill would make employee retention difficult and also noted that the tax affects many employees that were not responsible for the current financial troubles. And the previews for the next episode of “Days of Our Bailout” indicate that the Obama administration is asking the Senate to back off slightly in its version of the bill (and in “All My Bailout,” Dodd is facing a potential tough re-election in Connecticut).

Despite having taken Tax I, I’m by no means an expert on tax law. But I do remember something that came up a few times in class: Tax policy is social policy. We see this in everything from the marriage bonus (or penalty depending on how the numbers work out), to the premiums on owned homes, higher education credits, and even the progressive tax system.

We use the tax system to create benefits and incentives for socially desirable activities; for example, the gay marriage debates indicate that one reason that homosexual couples seek marriage recognition is to gain many of the economic and social benefits of marriage.

However, some of the biggest, and perhaps most important tax benefits are the benefits we give to nonprofit organizations. In a nutshell, in return for refraining from certain political activities, such as lobbying, nonprofit organizations including educational institutions and religious organizations are exempt from paying most taxes. And it is precisely this benefit that allows nonprofits to exist.

Think about the value of the land Georgetown sits on, both here at the Law School and over on main campus; while I don’t know precisely how much the taxes would be, I think “certainly would make our tuition go up” is a safe estimate.

After I graduated from college, I worked for a small town YMCA for two years, and I know that we likely would not have been able to afford any of our youth or family programs if we also had to pay taxes.

So what worries me most about the House bailout tax bill and the impending vote in the Senate (which some suggest might be a test for the Obama administration as to how much control it can exercise over Congressional Democrats), is not the bill’s constitutionality, but rather the precedent it sets: the government using taxes as a club to force private organizations to act in a way the government wants.

While I don’t deny that tax policy is social policy, what worries me is the direct control that Congress is seeking to enact over the social policy.

Giving a tax break for owned homes encourages home buying, but nobody is forced to buy a home. Taxing cigarettes raises prices, but nobody is forced to buy them.

However, the current tax bill is a closer call; taxing bonuses effectively prevents compensation (either warranted or unwarranted), but nobody is forced to reject the bonus or seek a better paying job. But tax a nonprofit, and the nonprofit is almost forced to comply.

This may seem like an extreme view or a slippery slope fallacy, but reality may be closer than it appears. In the wake of the Proposition 8 vote in California, many people called for a revocation of the Mormon Church’s tax-exempt status. While these claims were largely based on arguments that the Church had violated anti-lobbying provisions, these claims also seemed to be a result of what the Church stood for: opposition to gay marriage. Many other religious groups and institutions have also faced difficult questions involving whether to risk losing their tax exempt status or to oppose gay unions, demonstrating the real threat that tax revocation can pose to an organization. Any question of social policy frequently has nonprofits on both sides of the debate, and the danger of revoking tax-exempt status can simply devastate one side or another.

This isn’t to say that I disagree with the idea that we should use tax policy as a way to shape society, and AIG may not be the most sympathetic organization, but the damage this type of thinking can do to nonprofits cannot be ignored. We should be extremely worried when we use taxes to narrowly control a specific group or target a discrete act. At those moments, tax becomes less of a social policy tool and more like a social billy-club.