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'Taxing AIG Bonuses: Worse Than Paying Them'

March 20, 2009

Congress is oblivious to the disastrous potential of their vendetta against the AIG executives, but the center-left TaxVox sees what's happening all too clearly:

If Congress wants to limit bonuses for employees of bailed-out companies, it should just do it. But using the Internal Revenue Code is a truly terrible idea. And dipping into the Code to win political points is worse. Long ago, people were rightly outraged when Richard Nixon tried to turn the IRS into a weapon to punish his enemies. This gotcha tax is another variation on the theme, and nearly as inexcusable. Imagine, for instance, if a GOP Congress retroactively barred people from deducting charitable gifts to Planned Parenthood. Or Democrats imposed a 50 percent surtax on companies that that do security work in Iraq.

This faux-populist mob isn’t being led by a bunch of back-benchers. The House today overwhelmingly passed a 90 percent tax on some of these bonuses. Senate Finance Committee Chairman Max Baucus (D-Mont) and ranking Republican Chuck Grassley (R-Iowa) would impose a 70 percent excise tax (35 percent on the company and 35 percent on the employee) on many bonuses paid by firms receiving TARP money. I’m inclined to believe they have done this to release some of the issue’s political steam before the kettle explodes, but nonetheless, it's still dreadful legislation.

Read the whole thing. And remember that if they can confiscate AIG bonuses, they can confiscate yours, too, next time you are unpopular and in the minority. What, you say you had a contract? A promise? Tough, you lost the election, buddy.

UPDATE: A roundup from the TaxProf

Also, this:

The really distressing part is what this tax will do to the corporations that we now own and are supposedly trying to save.

(Remember? That's the reason we bailed Citigroup, AIG, GM, and the rest of them out--to save them. Because we convinced ourselves that civilization would end if we didn't.)

Thanks to our stupidity bailouts, we now own major stakes in these firms (at mind-boggling expense). So it's not clear why we want to destroy them. But that's what we seem determined to do.

Related: Why you'd be crazy to let the government invest in your business

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I am thinking of doing a poll asking my readers what they would do if they had contracted years ago for a 1 million dollar bonus and relied on the promise of that bonus to remain with the company.

Would they:

A. Disclaim the bonus in the interest of their country.
B. Accept the bonus.

I think I know what the overwhelming majority, including Congressmen, would do.

I like Abraham Lincoln's definition of a Hypocrite:

"A man who killed both his parents, then pleaded for mercy on the grounds that he was an orphan."

Could you financial industry folks be any more tone-deaf? This isn't some oppressed minority here. These are people who raped and pillaged their way through our economy. That they should continue to benefit from their misdeeds is a proposition that only most Dwight Schrutean automaton could support.

Peter, sure I'd want the bonus. I don't think I should get it though. Lets put it this way: If I were a lifeguard and someone said they'd give me a million dollars to keep working for a year, I'd gladly accept. If I then proceeded to drown most of the swimmers who came to the beach, I don't think anyone would argue I should get the million dollars. Including me.

Cynic, you're missing the point. The people who "raped and pillaged" are long gone (except the ones in the House and Senate). This bill goes after the people there now trying to minimize taxpayer losses. By exercising self-righteous (and entirely hypocritical) outrage, they're going to cost us billions more by making it even harder to salvage what's left of AIG and these other companies.

It's interesting how quickly people switch from the pragmatic ("What can we do to get out of this crisis?") to the vindictive ("How can we punish them?") Lost in the discussion: we might end up doing something that benefits the recipients of ill-gotten gains, and benefits the rest of the country more. Of course, we might want to make sure we know who did the ill-getting -- a recent Washington Post article claimed that the vast majority of the AIG employees responsible for the losses have long since departed.

you pay a man in full to fix your car but he runs off in the middle of the job. you hire another and completes the work and you pay him with a check. When he drives off you cancel the check because, after all, you shouldn't have to pay for a botched job.

The AIG people were paid retention bonuses, not performance bonuese, in order to stay. Understand? They agreed to these bonuses and stayed and finished the job. What is so difficult to get about this bargain? Do you really want these functions run by a community organizer? Do you actually think that you could just pop in and close out some credit default swaps at a premium? Mad is not a strategy.

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