Why the AIG Bonus Tax Is a Good Idea

I have to disagree with ScienceBlogling Mike Dunford about the proposed plan to tax 90 percent of bonuses paid out since Jan. 1 by any company that had accepted more than $5 billion in government bailout funds. I think it’s a perfectly acceptable thing to do.


So far, no one, conservative or liberal, has been able to find any constitutional grounds on which to oppose the bill. This leaves this argument:

We can’t afford to use the tax code as a political weapon. It’s wrong, and it sets a hideous precedent.

Say this to anyone familiar with the history of taxation in the U.S., and they’ll burst out laughing. We’ve engaged in all sorts of taxation policies as ‘political weapons’–that is, policy remedies. The capital gains tax was instituted because of a belief that profits made from non-inventory sales (e.g., stocks, bonds) should be taxed at a higher rate (originally, a much higher rate) than labor should be taxed. These arguments have never been made politely: phrases like ‘great malefactors of wealth’ and robber barons were the tame stuff (along with ‘welfare queens’). We used to tax all income in the highest tax bracket at ninety percent because it was viewed as good policy–and making life fairer for the little guy. And the arguments over the flat tax versus a progressive tax are nothing more than (asymmetrical) class warfare in the guise of tax policy.
We also choose to lower tax rates based on certain activities: tax deductions, or what tax economists call tax expenditures.
Dividends are taxed at lower rates than income (unless you’re in the lowest bracket). But imagine if we had a policy where the first $200,000 of dividends were taxed at the current rate (15%), and every dollar of dividends after that was taxed at a 90% rate: basically, you can live comfortably (very comfortably) if you don’t work, but if you want to live the high life, you have to pull down a paycheck. Now suppose we called this the “Paris Hilton and Nicole Richie Are Stupid Twits Act.” Is this vindictive? Or good policy? If I wanted to be vindictive, do you think I would fuck around with a tax?*
As I see it, this is Congress regaining some of the authority that it should have never ceded to either the Bush or Obama Administrations (and keep in mind that it was the Obama Administration that urged Congress to not claw back bonuses to bailed out companies in the first place). Sure, it would have been better if Congress had tried to reassert itself as a coequal branch of government during the runup to the Iraq War (for example), or the passage of TARP, but better late than never.
This is the right thing to do. And it’s good policy.
*Tuesday, while waiting in line at the deli counter at the supermarket, I heard two stock clerks talking about AIG. They were saying things like “Take their hands off, like they do in Saudi Arabia.” That’s political vindictiveness.

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12 Responses to Why the AIG Bonus Tax Is a Good Idea

  1. Joshua says:

    “Take their hands off” is about the attitude I’ve encountered from most people I know. Frankly, being taxed at 90% is getting off easy considering how colossally these people have fucked up. In a just world, they’d not only all lose their jobs, they’d never work in the financial industry again for the rest of their lives. But since it’s not a just world, I’ll take the 90% tax.

  2. Joshua says:

    (Especially since, to my knowledge, said tax only applies to their bonuses, while their comically inflated regular salaries are still subject only to the 36% marginal tax rate for income over $250k.)

  3. Dave X says:

    I think the big law problems with a tax like this are the ex-post-facto and Bill of Attainder. Tax policy is fine going forward, but the retroactive part is awkward. Also, I think these bonus contracts were written as poison pills back in 2007 during Bush’s administration, and re-affirmed during the Bush administration’s September bailout–they set Obama’s administration up for this circus.
    I think going after AIG and the people who sold bad contracts for fraud would be better law. And it could claw back far more money from more responsible people.

  4. Mark P says:

    Standard disclaimer: I’m not a lawyer. Still, I think the prohibition of ex post facto laws applies mainly to criminal law.

  5. Troublesome Frog says:

    We also choose to lower tax rates based on certain activities: tax deductions, or what tax economists call tax expenditures.

    Normally, you do those things *before* those activities take place. I’d love to see those guys keelhauled, but the reality is that it looks like what they did was legal at the time, and it was the government’s job to catch it beforehand.
    Setting a precedent that when the government is pissed off at you, they can try to levy a punitive tax on just you is really not any better than rewriting the constitution to allow the Congressional Bill of Attainder of 2009 in which Mike the Mad Biologist is Hereby Ordered to Relocate to Federal Prison for some clever but legal use of Turbo Tax in 2006. Shame on us for letting it happen.

  6. Hal says:

    This is maddening. People are missing the big picture here. Our government made it ok for these people that we bailed out to get the bonuses then they turned around and singled out those people for a tax! That seems down right evil.
    They just announced adding another trillion plus dollars to our debt enslaving more Americans to future taxes. Our debt is about to, if it hasn’t already, out pace our GDP for pity sake.
    Did you see what that did to things like gold! I was watching with the free widget ExactPrice ( http://www.learcapital.com/exactprice ) when the announcement came out and it sky rocketed. But what a lot of people haven’t mentioned is that it just before that announcement the gold dropped big time. Smelled like manipulation to me. And I saw in the news that a number of banks are now buying up gold. I wonder how many bought gold during that drastic fall only to have it sky rocket on the FED announcement.
    Something that’s been itching at the back of my head was the FDR deal where they made it illegal for citizens to own gold and so confiscated all the gold they could get their hands on. With this 90% unconstitutional tax they just levied against the AIG employees I am not so sure that we won’t see a redo of FDR where they’ll come and take our real wealth in the form of land and precious metals to secure real wealth once this money bubble bursts.

  7. D. C. Sessions says:

    Fair’s fair. How about if, instead of taxing the current round of “bonuses,” we just make two changes:
    1) Remove any Federal relief funds from their books for purposes of calculating compensation, and
    2) require that these companies restate earnings for prior years based on the actual (as opposed to cooked) earnings?
    Oh, wait — that would invoke SarbOx, and any bonuses based on those earnings would be jeopardized. Dang. Wonder how that would work out?

  8. Moopheus says:

    I don’t agree that it’s good policy. Good policy would have been to let the bastards go broke. Failing that, good policy would not have put an exemption in the bailout bill allowing the bonuses to begin with. When the bailout funds were originally approved, the likelihood that some portion of the money would end up directly in the pockets of the people who made the messes and ran their companies into the ground was predictable and foreseen. This is not good policy. This is a sloppy band-aid to cover the failure of Congress to do the job the right way the first time. And that happened because too many in Congress (esp. Dodd, Schumer, and Frank) are tools of the industry.

  9. Orac says:

    Normally, you do those things *before* those activities take place. I’d love to see those guys keelhauled, but the reality is that it looks like what they did was legal at the time, and it was the government’s job to catch it beforehand.

    Exactly. Laws using tax policy to punish AIG executives retroactively are clearly ex post facto laws and arguably bills of attainder. They are as obviously unconstitutional as I’ve ever seen because they are in essence retroactive. Worse, they’re just an obvious ploy on the part of our legislators to keep public anger from being directed where it belongs on this issue: Right at our legislators and leaders who gave AIG money by the shovelful without any real oversight.

  10. Edward says:

    I seem to recall that we’ve had tax rebates passed after the end of the year that applied to the previous years tax returns. Nobody complained then. Even if one accepts the ex post facto argument, it could be argued that as long as Congress acts before April 15th, it isn’t ex post facto. The Tax rates for 2009 could still be changed, but does that mean that my January 2009 earnings can only be taxed at the rates that were in place now? If so, none of us will get a tax cut applied to our January 2009 earnings for the return due in April 2010.

  11. Joe Shelby says:

    The ex-post-facto has nothing to do with tax rebates or changes in the tax plan that are *untargetted*.
    What makes this different from any counter-example anybody has tried to bring up is how specifically targeted it is. Yes, a cigarette tax only taxes smokers, just as a gas tax only taxes drivers. But it taxes them all equally based on their chosen consumption.
    A tax bracket, even a 90% one (and I do have my problems with any tax bracket that high, on 4th amendment grounds) is at least fairly applied to ALL who are in that income range (give or take their ability to deduct or account their way out of it).
    But this particular bill is targetted to a very very specific subset of people, based solely on who they work for, at companies practically listed by name, applied in violation of a pre-existing law AND in violation of a contractual agreement. This basically makes dealing with the U.S. Government the same as dealing with “Vinnie the Loan Shark”.
    Darth Vader once said, “I am altering the deal. Pray I don’t alter it any further.”
    Is that REALLY the image of our government we want to project to ourselves and to our economic allies?

  12. DonnaDiva says:

    What makes this different from any counter-example anybody has tried to bring up is how specifically targeted it is. Yes, a cigarette tax only taxes smokers, just as a gas tax only taxes drivers. But it taxes them all equally based on their chosen consumption.

    You’re describing a distinction without a difference. The employees of companies getting TARP money will have their bonuses taxed equally, based on their chosen employment. I don’t HAVE to smoke, but I do, and the (federal and state) government has seen fit to “punish” me for it via various taxes that amount to roughly 80% of the cost of a pack of cigarettes. No one was seriously advancing constitutional arguments on my behalf when the recent SCHIP tax hike on cigarettes was passed. Tell me, why should cigarettes be taxed any differently from any other consumer product? There’s not a manufactured item out there that doesn’t pose some kind of harm to human health, the environment, or global resources. Mind you, I understand the rationale for sin taxes and I really wasn’t complaining until I saw so many pundits rending their garments over the supposedly hideously unfair tax being levied against the people who, oh you know, destroyed the freaking global economy. Cry me a river. Last time I checked, my smoking didn’t cause a bank to fail. Why don’t we classify exotic financial instruments as a “health hazard” and tax those who are responsible for their existence accordingly?

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