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Taxing the bonuses

Depends on how such income is differentiated from other income.

A law that specifically targets AIG or certain AIG employees would set a dangerous precedent.

But a law more generally aimed at "employees of companies that applied for and received direct federal financial support necessary for survival" would be acceptable. Since in the free market these people should have lost their jobs and hence income anyway, or at least have their contract renegotiated in bankruptcy court, leading to a reduction in pay.

Such a law would basically make a rescue by the government more similar to a bankruptcy filing, by for example taxing 100% of bonus income and all normal income over 20 times the median income.
 
It's a good idea. These people still don't realise exactly what it is they have done, or what they are responsible for, or what has been done to keep them in work. It is the governments job to pull them into line. Always has been, always will be. That's why we have governments. Those bonuses are being paid for by the taxpayers money, which was not given to AIG to keep it's senior workers living in fantasy land. The rescue money is supposed to be used to keep AIG afloat so it doesn't cause any more economic carnage.
 
First, I'll just say this about the bonuses themselves: the argument that no one high-up at AIG-FP deserves a salary is ridiculous. Surely there were some executives that did a good job and brought money into the institution. If there weren't, that would be the second-best reason to let AIG drown in the sea of its own creation. (The first being that we shouldn't be rewarding a failed company.)

Anyway, on to the stupid tax. Yes, it's stupid. But I see no reason it would be declared unconsitutional. A 1987 tax increase retroactive to 1986 was upheld by the Supreme Court in 1994 (United States v. Carlton, 512 U.S. 26) in a case that cost the plaintiff $600,000. A 1981 case (United States v. Darusmont, 449 U.S. 292) upheld Ford's Tax Reform Act of 1976, which retroactively increased minimum taxation amounts. Most absurdly, the Court of Appeals for the Third Circuit upheld a rule in 1996 (Tate & Lyle, Inc. and Subsidiaries v. Commissioner of Internal Revenue Service, 87 F.3d 99) that was finalized in 1993 and altered the interpretation of a regulation that became effective in 1984, requiring retroactive taxes to be paid for the previous ten years. If'n that ain't retroactive enough to violate the conscience, I don't know what is. There are many other examples.

Furthermore, for anyone touting ex post facto prohibitions in the Constitution, the Supreme Court decided over two hundred years ago (Calder v. Bull, 3 U.S. 386) that provision applies solely to criminal cases -- civil cases are exempt from the clause. This would not be a criminal case unless someone refused to pay the tax, but then they would be breaking the law after it was made and it wouldn't be an ex post facto issue.

The Contracts Clause may be referenced, but that clause has been upended since at least the New Deal Era, and it only applies to the states anyway. The Takings Clause of the fifth amendment could be sensibly applied, but I think we all know how impotent that restriction has become -- as long as the tax would satisfy a "public purpose" (satisfying the bloodlust of the mob would likely qualify) it'll do just fine under that attack. Considered further, the fact that any case attacking the law would involve economic rights would almost certainly doom it from the outset, as these rights are held more breachable than others, for reasons my rational mind cannot comprehend.

The Attainders Clause is the only method which, in my view, has even a remote chance of success. However, since the law isn't meant to replace a trial and find anyone guilty of any crime, even this option's probability of success looks grim. Even the premise that the law is intended to inflict punishment on a specific group of people is flimsy. The Supreme Court, in upholding (yet) another retroactive tax scheme, stated in Welch v. Henry (305 U.S. 134), "[t]axation is [not] a penalty imposed on the taxpayer... It is but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens." Taking this view, that taxes are not punitive measures, the Attainders Clause attack fails.

In conclusion: the law is stupid and ridiculous, and is an illustration of partly why I think the market is in turmoil (there is no solid ground upon which investors can stand), but will not be ruled unconstitutional in any court challenge, barring massive reconsideration of precedent.
 
parky76 said:
WE own AIG. WE bailed them out. WE kept them breathing.

If WE want to tax their bonuses 100%..that is OUR right.

It is OUR company!!!
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We own the company. We don't own the employees.

I, for one, am quite certain we could have chosen not to pay the bonuses. However, we did pay them. Of course, everyone involved is insisting that Those Other Guys were really responsible, but Chris Dodd is lucky this is happening at the beginning of a term. He might have enough time to do the damage control necessary to win re election.

That isn't the issue. The point is that these people made a bunch of money. I don't think they deserved it, but they made a bunch of money. It is their money. Now, the government is going in and taking it back. Just seizing it.

Let's think of it this way. Suppose Congress had passed a law saying it was a crime for companies receiving TARP money to pay bonuses, or for employees to accept them. Anyone granting or receiving such a bonus would be thrown in jail for 1-5 years. Such a crime is retroactive to January 1, 2009.

Obviously, such a statute would be unconstitutional. It is the definition of an ex post facto law, and you can't do that. So, what if, instead, it made it a misdemeanor, punishable by a fine, equal to 90% of the bonus money. Obviously, once again, unconstitutional.

However, the law passed this week has exactly the same practical effect as the obviously unconstitutional law. But this law's ok?

I fully agree that the bonuses should never have been paid. However, they were paid. I'm not very keen on the government confiscating a previously made payment.
 
I think FlamingMoe's legal analysis is correct. There is a reason that I said, in the OP that it was "practically a tax of attainder". The phrase has, of course, no real legal meaning. This certainly isn't a bill of attainder in the full legal sense, and yet, it smells like one to me, and it makes me rather uneasy for that reason.

There is one thing I might disagree with Moe on. He said it would be upheld "barring massive reconsideration of precedent". I wouldn't be stunned and amazed if such a thing happened. I think this law is sufficiently narrowly targeted, that they may just decide it is a dangerous enough precedent to take on. I wouldn't expect it, but I wouldn't be stunned and amazed, either. It might be influenced by how the political situation heats up around this issue in the weeks to come, too.
 
egslim said:
Depends on how such income is differentiated from other income.

A law that specifically targets AIG or certain AIG employees would set a dangerous precedent.

But a law more generally aimed at "employees of companies that applied for and received direct federal financial support necessary for survival" would be acceptable. Since in the free market these people should have lost their jobs and hence income anyway, or at least have their contract renegotiated in bankruptcy court, leading to a reduction in pay.

Such a law would basically make a rescue by the government more similar to a bankruptcy filing, by for example taxing 100% of bonus income and all normal income over 20 times the median income.
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^ I like this.
 
Meadmaker said:
I, for one, am quite certain we could have chosen not to pay the bonuses. However, we did pay them. Of course, everyone involved is insisting that Those Other Guys were really responsible, but Chris Dodd is lucky this is happening at the beginning of a term. He might have enough time to do the damage control necessary to win re election.

That isn't the issue. The point is that these people made a bunch of money. I don't think they deserved it, but they made a bunch of money. It is their money. Now, the government is going in and taking it back. Just seizing it.
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When the government stepped in to save the company instead of letting it go bankrupt, its labourcontracts were inadvertedly saved in the process. That's the key issue.

Had the market taken its course AIG would have been liquidated last year, and hence none of its employees would have received a bonus over 2008.

These people didn't make a bunch of money, they got it by accident because their labourcontracts were "linked" to AIG's (allegedly) systematically important contracts with other financial businesses. Linked by virtue of being issued by the same company.

What's wrong with the government seizing back money it inadvertedly handed out because of legal complications? That's what I call responsibility towards the taxpayer.
 
egslim said:
What's wrong with the government seizing back money it inadvertedly handed out because of legal complications? That's what I call responsibility towards the taxpayer.
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Suppose my employer decided I made too much money last year, and tried to take it back. It wouldn't fly. I'd keep the money. What we have here is the government deciding that these people made too much money, and trying to take it back. (FWIW, I will not say that they "earned" that much money, but they did get it because their employer voluntarily gave it to them. ) The government didn't attach the appropriate strings when they took over pseudo-ownership of AIG.

It's a really dangerous precedent, using the tax code to correct mistakes.
 
Meadmaker said:
Suppose my employer decided I made too much money last year, and tried to take it back. It wouldn't fly. I'd keep the money. What we have here is the government deciding that these people made too much money, and trying to take it back. (FWIW, I will not say that they "earned" that much money, but they did get it because their employer voluntarily gave it to them. ) The government didn't attach the appropriate strings when they took over pseudo-ownership of AIG.

It's a really dangerous precedent, using the tax code to correct mistakes.
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As an owner of AIG, I feel that the bonuses were fraud, therefore I want them back.
 
I think such a law is a bad idea.

AIG is not a solvent company. They should be declared bankrupt and all their assets including recent excess compensations and distributions should be properly distributed by the bankruptcy court just like any other bankruptcy.

Congress shouldn't pass new laws with more loopholes when existing laws can be applied.
 
parky76 said:
As an owner of AIG, I feel that the bonuses were fraud, therefore I want them back.
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Unless I've missed something, there was absolutely nothing fraudulent about them. Lots of things could reasonably be said about the bonuses, but fraud isn't one of them.
 
parky76 said:
As an owner of AIG, I feel that the bonuses were fraud, therefore I want them back.
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No.
This is an instance where the slope is just too slippery to meander down.
Morally, this is no different from warentless wiretapping on grounds of "fighting the good fight."

The bonuses were a big mistake, but to tax them back is an even bigger mistake.
 
In my company we only get a bonus if we actually make a profit of a set size. Bonus should be company stock also. Not cash.

They should withold the amount from the next bailout, I dont believe taxing it is the solution.
 
Dan O. said:
I think such a law is a bad idea.

AIG is not a solvent company. They should be declared bankrupt and all their assets including recent excess compensations and distributions should be properly distributed by the bankruptcy court just like any other bankruptcy.

Congress shouldn't pass new laws with more loopholes when existing laws can be applied.
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That's not an option. The number of companies dependent on it is huge. If it falls, a lot of them would not be able to legally operate, for example. A lot them would be depending on claims to be paid for the continued operation. A lot of them would be in breach of guarantees they have made to other companies. It's a massive chain that can't be allowed to fail.
 
funk de fino said:
In my company we only get a bonus if we actually make a profit of a set size. Bonus should be company stock also. Not cash.

They should withold the amount from the next bailout, I dont believe taxing it is the solution.
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That's not an option, either. They have to pay as much as it takes to keep the company solvent.
 
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