Nullify, don't tax, AIG bonuses

Two days ago, the head of the House tax-writing committee spoke out against the idea of a specific tax on recipients of AIG bonuses. The tax code is "not a political weapon," said Rep. Charles Rangel (D-N.Y.).

Today, Rangel has loaded his tax gun.

He and his House colleagues are debating a bill, H.R. 1586, sponsored by the Ways and Means chairman which would take 90 percent of the AIG bonuses back in federal taxes. It would apply to bonuses paid since Jan. 1 by the federally rescued insurance giant or any other company accepting more than $5 billion in bailout money. It also would apply only to individuals with total adjusted gross income exceeding $250,000 per year.

What a difference a couple of days and a lot of angry public outcry make.

It's unclear how much of a chance Rangel's bill has. The format under which it's being debated, known as suspension of the rules, means that the measure needs a two-thirds majority vote to pass. That means he must get a "yea" vote from all his fellow 253 Democrats and pick up 34 Republicans votes.

Good luck with that, Charlie, both in keeping all the Dems corralled as well as persuading enough Republicans.

UPDATE, 2:40 p.m. March 19
I underestimated Charlie. His bill did pass.
But I stand by my position
detailed a little later in this post.

And even if H.R. 1586 somehow passes in the House, it then must face the Senate. Over on that side of Capitol Hill, Senate Finance Committee Chairman Max Baucus (D-Mont.) and the committee's ranking member Charles E. Grassley , (R-Iowa) are drafting their own, and different, version of AIG-whacking legislation.

Bad idea anyway: I hope H.R. 1586 doesn't clear the House. As irked -- yeah, that's a good, and printable, word for it -- as I am about the AIG bonus deal, I think Rangel was correct in the first place.

Congress it trying to overcompensate now for it's egregious lack of oversight when the Troubled Asset Relief Program (TARP) deals were cut last year.

And to prove how weird politics and our country's financial situation is now, I agree with House Minority Leader John A. Boehner (R-Ohio), who opposes Rangel's bill. "It’s nothing more than an effort to cover somebody's rear end because of the political damage that’s out there," Boehner said.

Supporters of the measure say the measure is necessary because the AIG bonuses "go against the ideals of capitalism," that we shouldn't reward the people who helped create the current economic mess. And then there's the matter of taxpayers/voters footing the bill. All true.

But enough 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?

Void the bonuses: I say just void the bonuses. Yeah, yeah, contracts. Big deal. Contracts are renegotiated or broken all the time. Just ask any divorce lawyer who's looked a prenup and laughed.

Plus, I would argue that any contracts that workers had with AIG were voided the minute that AIG money quit being used and bailout funds were accepted. He who controls the purse strings makes the rules. Guess what, ladies and gentlemen, new sheriff in town, new wallet, new rule: No bonuses.

Yes, there are legal issues. And concern about government intervention now, after the fact, is understandable. Ideally, the bonus clause and the possible (probable) problems it could cause should have been caught well before the payout date. And apparently it was in the legislation but removed. That's another matter to deal with on its own.

Right now, however, it's worth the risk and precedent to nullify the TARP bonus provision and take the money back rather than extend the matter and creating collection issues through another tax season.

Comments

[Michael Rozbruch, IRS Problem Solver]

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 lawsuits are filed against the government, which ultimately would be very costly.

[Jared Porcenaluk]

I very much agree. However, I am not sure if nullifying the bonuses would be the best way to go. Although the government has broken more promises than it has probably even made, one more is not going to help. I am not a lawyer nor a politician, but there must be a better way to not tax nor nullify these bonuses whilst still 'punishing' those who accepted them. Perhaps give them a time window to give 100% back to the government (like they really know how to use it better than the average millionaire, right?), or their names will be announced to the public. However, this is all really masking the truth: the government was in control of the company when these deals to give bonuses were going down. Hm...once elections come back around, we're just going to have to take a little closer look at whose responsible for letting these things slip through the crack.