Taxing AIG Bonuses is the Right Thing to Do

The House of Representatives, in a fit of righteous indignation, last week passed legislation taxing the bonuses paid to AIG executives. The House believed that these bonuses were unmerited and that they were paid out using money given to the troubled insurer by US taxpayers. Since the bonuses should never have been paid, it is only right, reasoned the House, that the taxpayers get the money back. The legislation taxes these bonuses at a 90% rate. Objections to the move are silly and ill-founded, and the only thing that is really wrong is letting the recipients keep 10%.

Some of the howling comes from the Republicans in Congress who believe that it is simply wrong for the government to deny top management extra cash. They claim that this is the American way. It boggles the mind to think that they don't realize what these bonuses represent – a loss to shareholders. If a company profits, that is if shareholders see their stake increase in value, it is quite legitimate to share some of the proceeds with the staff that produced the profits. However, AIG didn't make any money. The fact that the bonuses were contractually required is nonsense. AIG may well have committed fraud in writing insurance without sufficient resources to back it up. That's fraud that renders the contracts unenforceable.

Another argument, heard from both sides of the political spectrum, is that the tax is an ex post facto law, which is contrary to the American Constitution. This is simply incorrect. The American government has the right to determine what the tax code will look like for the year 2009 until the end of the year. This tax on bonuses doesn't affect extra cash handed out in 2008, or 2007, only 2009. And because taxes for 2009 aren't due for over a year, there is plenty of time for the AIG swindlers to do their tax planning to avoid (or evade) taxes for this year. Had 2008 bonuses been addressed, it would be ex post facto legislation, but that is just not the case.

A further objection is that this is effectively a bill of attainder and contrary to the Constitution (Chris Matthews of MSNBC and others have worried about this). Once again, the facts don't support the objection. The tax on AIG bonuses addresses a class of taxpayer, not an individual. Yet historically, a bill of attainder was passed against named persons. For example, such a bill was passed against the regicides Oliver Cromwell, Henry Ireton, John Bradshaw, and Thomas Pride. The bill did not state “any and all involved in the death of Charles II,” but rather it addressed these four by name. The tax on bonuses is no more a bill of attainder than a new tax on those buying yachts would be.

The confusing part in all of this is the 90% rate. It is clearly meant to be punitive, and it is meant to “get back taxpayers' money.” That's fine as far as it goes. However, the top 4 executives receiving bonuses at AIG received more than $4 million each according to Connecticut's Attorney General Richard Blumenthal. So, each will get to keep more than $400,000. And that is plain wrong as well.

And so, in Swiftian fashion, one offers a modest proposal. Let them keep their bonuses. And make them take an equivalent, marked-to-market, amount of toxic bank assets for their portfolio. They get to keep their bonuses, the banks get rid of some bad assets, and the taxpayers have a little less to bankroll.

© Copyright 2009 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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