"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
