Sunday, September 09, 2012

Ex Post Facto Taxation

An ex post facto law takes effect in the past, before it was enacted. Suppose on September 3, 2012, a law takes effect banning smoking as of January 1, 2012. Someone who smoked in January 2012 would be penalized, even though smoking was legal in that month. The U.S. Constitution recognizes, in Article I, section 9, that such ex post facto laws are unjust.

Amnesty laws are also retroactive. When a law is passed decriminalizing acts committed in the past, these are ex post facto, but they benefit those affected, and so these are equitable. The amnesty law says that the previous law is changed and will no longer be enforced, so the action is forgiven.

When taxes change, they too must not apply greater tax rates for past events. If taxes go up, the higher rates should apply only to future actions, and when tax rates go down, transactions in the past must still get taxed at the rates then in effect, unless there is a tax amnesty.

The U.S. Commerce Department has now imposed an ex post facto tax of about $100 million. Higher tax rates, ranging from 31 to 250 percent, have been imposed on the solar cells made in China. The reason for the higher tariff on the panels, bought up to 90 days prior to the imposition of the higher tax, is anti-dumping legislation. The U.S. companies affected include many small businesses, the type that do the most to increase employment. Some of the companies were exporting low-cost solar energy products to rural areas in foreign countries. The higher tariffs also contradict the alleged policy of the government to promote the use of solar energy.

The Commerce Department responded to some companies that make solar panels. These firms claim that Chinese producers are getting subsidies that enable them to sell their goods below the costs of production. I will not analyze the anti-dumping legislation itself, but only the retroactive aspect of the imposition of tariffs.

Entrepreneurs make decisions based on marginal analysis. They calculate the marginal cost, the cost of producing extra amounts, based on the costs of buying more inputs. They calculate the marginal revenues, the income from selling extra units of output. To maximize profit, they produce more if the marginal revenue is greater than the marginal cost, and produce less if the marginal cost is greater than marginal revenue.

The firms purchased the Chinese panels given the cost, including taxes, at the time. Then they get slapped with a higher tax on the past purchase. When the decision would have been to avoid purchasing the panel, given the higher tax, the ex post facto tax destroys the firm’s economic calculation. The result is not just less profit for the firm, but greater waste and inefficiency for the economy. The ex post facto tax prevents resources from being allocated to their most productive and benefits-maximizing uses.

There have been previous similar retroactive import taxes. These ex post facto taxes violate the prohibition of ex post facto laws by the U.S. Constitution, but the courts have historically been very lenient on the Constitutionality of federal taxation. In 1994, in United States v. Carlton, the U.S. Supreme Court held that retroactive tax laws were Constitutional. The rot had started much earlier, in 1798, when the Supreme Court, in Calder v. Bull, illogically held that the prohibition against ex post facto laws applied only to criminal laws.

Logically, the reverse should be the case. The ex post facto prohibition should apply to civil cases, but not to criminal law when the crime was evil under natural law. Thus if it was legal to murder particular types of people in the past, then a law recognizing that such murder was evil and should be illegal would be proper, especially when the Constitution already recognizes the existence of natural law and natural rights. Thus also, slaves may be set free even if the slaves were legally the property of the owner in the past. But it is not immoral to import goods; indeed, the tariff itself violates the natural right to freely trade.

Ex post facto taxation is an assault on property rights. Nobody’s property is safe if government can confiscate it due to actions that were legal at the time, but later become illegal. Ex post facto laws also destroy the concept of the rule of law. Under the rule of law, people are supposed to know the current laws, and base their actions on such laws. But if laws change, not only do people have to alter their future acts, but they cannot know if their current acts will get slapped by a higher penalty than that set by current law. The regime becomes a rule by chiefs who arbitrarily impose costs rather than rules that apply to all at the current time.

The U.S. Constitution clearly and simply states, “No Bill of Attainder or ex post facto Law shall be passed.” What part of “no” do the Justices not understand?


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