Paul L. Caron

Friday, March 20, 2009

The 90% AIG Tax: Good Politics, Bad Tax Policy

Howard Gleckman (Tax Policy Center):  Taxing AIG Bonuses: Worse Than Paying Them (TaxVox Blog):

The AIG bonuses are an outrage. But the bigger scandal is that a grandstanding Congress wants to use the tax law to punish the companies that paid them and the employees that got them.

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.

Daniel N. Shaviro (NYU), AIG Bonus Tax (Start Making Sense):

[A] 100% "tax" on a specific group of individuals with respect to items paid before enactment of the "tax" certainly makes me uneasy. (Scare quotes because - though I am no constitutional law expert - the narrowly targeted 100% rate seems to put it on the wrong side of the amorphous line between a tax and a Fifth Amendment taking.)

Frankly, it doesn't bother me in the slightest if the 100% tax applies just this one time to just these people. They would appear to deserve it many times over. But one can never be sure that one isn't creating a precedent with legs. Might the device someday be used against someone else who just happens to be unpopular?

I'd actually like to make an example of these guys - as the French would say, "pour encourager les autres," as well as for general public morale. But I'd prefer a better way of doing it, such as investigating them for looting and fraud, which might have been amply justified even without the bonuses.

James Maule (Villanova):  Taxing Bonuses (Mauled Again):

For those who think that a 100% excise tax is unprecedented, check out what happens when a tax-exempt organization or qualified retirement plan engages in a prohibited transaction and fails to take corrective action. Yes, there is imposed a 100% tax. Though the tax has the quality of being punitive, it has an even stronger characteristic of being a deterrent. The downside to imposing a 100% tax on the AIG bonuses is that it would not serve as a deterrent. We are paying the price for decades of ineffective controls on inappropriate executive compensation and decades of weak enforcement of what restrictions are in place. There also is a risk that the tax could be challenged on the grounds it is an impermissible taking and confiscatory. ...

It's too late for deterrent taxation.  It soon may be too late, period.

Joe Kristan:  Why You'd be Crazy to Let the Government Invest in Your Business (Roth & Co.).

Elie Mystal:  Bill of Attainder? Communist Revolution? Fire Bad? (Above the Law) 

Calvin Massey (UC-Hastings): Taxing the AIG Bonuses: A "Bare Congressional Desire to Harm a Politically Unpopular Group"?

Miami Herald:  Tax Code Mustn't be Used as Weapon:

Using the tax code as a weapon to exact revenge on a select few, no matter how badly they've behaved, is a horrible idea. Slapping heavy taxes on the bonuses and on the company that issued them may satisfy enraged taxpayers who see incompetent executives being rewarded for failure, but it sets a bad precedent.

It may also violate the constitutional ban against ex post facto laws. More to the point, lawmakers are treating a symptom of the economic crisis and overlooking the root causes of the problem -- unbridled corporate greed and the failure of the regulatory system. There are better ways to channel taxpayers' anger and fix the immediate problem.

U.K. Telegraph:  Pitchfork-Wielding Anti-Bonus Mob Stirred by AIG Is Making for Losuy Tax Policy:

Outraged US legislators are pushing through punitive taxes on bonuses not just at AIG but at all recipients of government funds. The hot-headed and unfairly retroactive changes could hurt investor confidence, undermine President Barack Obama’s credibility and damage the still valuable US finance sector. ...

The bonus tax idea is bad for a range of reasons that senators should consider calmly, even if the House didn't do so.

Kay Bell:  Nullify, Don't Tax, AIG Bonuses (Don't Mess With Taxes):

[E]nough with the tax code. It's got plenty of pages already. And the administration of a special tax on just certain taxpayers would be an administrative and costly endeavor. Haven't we wasted enough on these guys already? I say just void the bonuses.

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Tracked on Mar 20, 2009 7:25:31 AM


What is the specific word for the legal process which allows or prohibits confiscatory taxes aimed at a special group-related to rendition? Are there any relevant historical examples during the Depression or earlier in US history?

Posted by: Lyric Hughes Hale | Mar 22, 2009 8:53:19 AM

I agree this is a risky precedent. But the danger of allowing people to get away with this kind of conduct is arguably even greater. It will be more convincing if it is followed by some effort to create a generally applicable rule with respect to unreasonable or excessive compensation, rather than a one-time shot in response to political pressure.

Posted by: mike livingston | Mar 20, 2009 4:16:01 PM

It's certainly unnerving to think of this narrowly targeted law as a weapon. And how effective will it be in the end as a deterrent? There is definitely precedent for assessing punitive taxes for objectionable behavior, and this tax would be very similar to the excise tax levied on corporate raiders in conjunction with greenmail. Nevertheless, it is still bad tax policy as it is aimed at a certain group of people, which some lawyers and Law School Professors will tell you - if you read the constitution - is unconstitutional. Ultimately the courts will decide after lawsuits are filed against the government, which ultimately would be very costly.

Posted by: Michael Rozbruch, IRS Problem Solver | Mar 20, 2009 2:03:32 PM

"One issue with the way this tax is structured is that it targets the people who worked at firms that lost money, rather than the people who lost money."
yeah, that's what I'm reading. Liddy is getting $1/year salary. The AIG minions are mostly people who did not crash the company and are trying to pick up the pieces in a way that reduces the hit to taxpayers (who are now part owners of AIG).
But the whole point is to deflect attention from the Trillions in deficits, the hundreds of Billions in bailouts, the tens of Billions in earmarks and so focusing on some Millions in bonuses.

Posted by: Jim,MtnViewCA,USA | Mar 20, 2009 12:57:32 PM

Envy-ridden mobs are ugly things, even when they meet inside large marble buildings and maintain a civilized veneer.

Posted by: Dana H. | Mar 20, 2009 12:13:50 PM

Let me see, let's vilify and target tax people who signed a contract to stay in a dead end job and unwind complicated trades and hedges($1.6 TRILLION) upon completion of which they will be unemployed. They stayed knowing that those who left were finding employment and there was no assurance that they would find jobs at the end of flattening out their portfolios. The US taxpayer owns 80% of the company with this huge amount of money at risk. The US taxpayer via congress has decided to break the contracts, and stomp the constitution in the process, call it "tax" if you like. Now having broken "faith" with their employees, congress, et al., should not be surprised when they get back the retention payment with resignations. Then the people who know and best understand the AIG portfolio can go to work at UBS, HSBC, Credit Suisse, Deutche Bank, Mitsubishi Bank, etc., and trade against that $1.6 TRILLION portfolio, that they know every part of. The American taxpayers, who basically own the portfolio, will have to try to find people to replace evil bonus managers, and get the new people up to speed. Billions and billions of dollars later, the people who left AIG will be much richer then if they had stayed, the foreign banks who are outside TARP will be billions of dollars richer, and the American taxpayer will be pouring tens of billions of dollars more into AIG to cover very avoidable losses. But hey, the taxpayer will have saved 163 million and showed them.

Posted by: JC Jim | Mar 20, 2009 11:56:03 AM

I hope this doesn't galvanize the tax protestor movement. For once, tax protestors might be able to show that the government is illegally confiscating income. Even if that is incorrect as a matter of constitutional law, I could easily see why someone would be angered by this act of Congress and be more motivated to cheat on taxes.

I agree with Daniel Shaviro's comments.

Posted by: andy | Mar 20, 2009 11:45:09 AM

Leno went after Obama on this point but then let him off the hook without getting a straight answer. I so very much wanted to hear Obama say straight out that this was a political stunt my Congress. But Jay let me down.

Posted by: Diego | Mar 20, 2009 11:31:18 AM

To suggest one more reason why this tax is poorly thought out:

Isn't the AIG division that is receiving this bonuses located in London? Isn't this foreign personal services income?

If so, will any of them even be subject to US income tax?

Posted by: ODB | Mar 20, 2009 11:22:59 AM

What is you were paid a bonus in 2008 and now in 2009 you have to repay it? A cash-basis employee would have paid taxes on the bonus in 2008 but can't deduct the "negative payroll check" in 2009?

And if he were a 1099 contractor, he'd get a loss carryforward but that would not do him much good for cashflow today right?

Posted by: AJ Lynch | Mar 20, 2009 11:08:23 AM

One issue with the way this tax is structured is that it targets the people who worked at firms that lost money, rather than the people who lost money. So if AIG's head of structured products quits to start a hedge fund, his replacement gets hit with the tax -- while the guy who lost all that money is doing just fine (possibly doing better than fine by buying while his former employer is liquidating). Usually, politics gets unproductive when it gets too personal, but for once we're not being personal enough.

Posted by: TaxRascal | Mar 20, 2009 10:23:55 AM

How about a 90% "tax" on campaign contributions received from firms, or their employees, which have received bailout money?

Posted by: xxx | Mar 20, 2009 6:28:58 AM

As someone who has long been bothered by the vast profits reaped by unworthy individuals in the "entertainment" industry, I've sometimes pondered the "amusement" tax, an old but little-known tax (since not large or transparent) which some localities have long had on movie and other theatres, and whether it could be expanded into a national tax in order to see if that old saw about that which is taxed you will get less of really works.

But now, I see the possibility of a 90% tax on any individual from income in excess of $250,000 arising in connection with the movie industry. I'm willing to exempt live performances. Maybe while we are at it, though, we can expand it to income from TV.

I'm glad that Prof. Tribe has explained how we can do so constitutionally through careful drafting. I expect the groundswell to tax people we don't like to start growing as a consequence, and I don't think the list of AIG executives even scratches the surface of that group.

Posted by: Arthur | Mar 20, 2009 6:19:32 AM