Breaking News! Dog Bites Man. Congress Passes Law.

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"The
Power to Tax involves the Power to Destroy." ~ John Marshall

Ominously,
the government has crossed a threshold with the passage of the 90%
tax on AIG bonuses. Unfortunately, you could make that statement
almost every day now, as the government rushes to douse fires it
helped to start.

Technically,
only the highly compensated employees (over $250,000/year) of firms
taking more than $5 Billion in TARP funds are subject to the tax.
But, onerous burdens that fall on unpopular classes today can easily
become universal tomorrow. Witness the AMT.

There are several
disturbing aspects to this new tax.

First, there
is the rank hypocrisy of members of Congress calling AIG and other
companies' executives to task. Charlie Rangel actually said "stop
the thievery at Americans' expense." A letter of resignation
was not forthcoming.

Congress hasn't
laid it on this thick since . . . well, since last year's steroid
investigations. We all know Congress didn't have anything more important
to worry about than whether Barry Bonds or Alex Rodriguez had other
men stick needles in their buttocks.

Second, there
is the high rate of these taxes. The argument will surely be made
that since these greedy executives are already paying a 90% confiscatory
rate on their undeserved bonuses, it isn't too much of an imposition
to have to pay a mere 50% marginal rate on their regular compensation
over $250,000. How can they complain? The income tax is just an
excise tax on the act of earning a living in the United States of
America, where the federal government provides its citizens with
the most freedom and opportunity of any country on the planet, right?

At least the
United States will finally be back at the progressive forefront
of Western nations in taxation, except for that upstart Sweden that
had the audacity (before 1991) to impose a 106% tax rate on some
of its top earners.

Third, although
tax policy has long been part of a carrots-and-sticks approach to
influencing social policy, this new tax achieves in one fell swoop
a blatancy of purpose and obtuseness of application that Congress
has only previously dreamed of. Actually, in the wake of another
financial scandal that had government fingerprints all over it,
ENRON, Congress passed Section 409A (which applies draconian penalties
to a still not quite defined concept of noncompliant nonqualified
deferred compensation) as a warm-up for its current act. It seems
Congress is on a roll.

Fourth, although
federal courts generally view the Constitution as completely irrelevant
when it comes to government revenues, some Republicans in Congress
may actually have read it in the months since George Bush left office.
Some ill-fated taxpayer is likely to challenge this new tax on the
basis that: (i) it is an ex post facto law that unfairly and retroactively
applies to the taxpayer; and that (ii) it is a bill of attainder
that illegitimately singles out a single actor, AIG. These issues
are worth thinking about on their own merits, but I wouldn't hang
my hat on them as workable arguments.

Finally, the
whole idea that these bonuses are ill-gotten gains does not pass
muster. These bonuses are based on legal contracts. Many of AIG's
employees worked hard for the company and deserve what they bargained
for. Are these necessarily the people you want leaving the company
right now?

Most of my
readers will realize that a lot of Wall Street types depend on their
bonus for 90% of their annual compensation. Some of these employees
may be complete slime, but in the past that's never been a prerequisite
for voiding a contract. If there has been wrongdoing, I am sure
one of the sharks, errr . . . I mean tort lawyers, circling Wall
Street these days will pick up on the scent.

It is a legitimate
criticism that these contracts may have been horrible ideas in the
first place, but I am sure that in the future there will be a lot
more scrutiny applied to this area by shareholders and boards of
directors, whether or not the federal government interjects itself
into the equilibrium.

I've listed
a few reasons to be dubious about this tax on bonuses; however,
there is at least one possible silver lining. As soon as financial
executives come up for air after lapping up the government largesse,
they may realize that it's not all milk and honey. What they thought
was a free delicacy actually upsets the stomach. Now, if they can
foreswear any more public money and return their TARP funds, that
will be a real sign of recovery that the market can celebrate.

March
23, 2009

Rett
Peaden [send him mail]
is an attorney and adjunct professor of law in Atlanta, Georgia,
where he specializes in tax law, probate and trusts.

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