March 20, 2009

March 20, 2009 | Factsheet on Financial Regulation

The AIG (and Everyone Else) Bonus Bill: Counterproductive and Unconstitutional

Whom It Really Targets

  • The Hit List: H.R. 1586 retroactively taxes AIG employees who are due deferred compensation and would tax that compensation at a 90% rate.
  • A Much Broader Sweep: Going forward, the bill also imposes a 90% federal tax rate on anyone employed by a company receiving $5 billion in TARP funds who has a family income over $250,000, individual income over $125,000 (if single or married but filing separately), or performance pay larger than adjusted gross income.
  • What Defines a Bonus? Under H.R. 1586, a "bonus" is any amount over an employee's base salary, including retention and performance pay and even deferred compensation. But compensation in banking and finance is heavily geared towards performance, with relatively lower base salaries.
  • Counterproductive Policy: While taxpayer money shouldn't be spent on excessive bonus compensation, broad-based pay caps and punitive clawbacks will hurt performance and slow economic recovery. The government is ill-suited to set private-sector pay scales and risks causing more financial damage.
  • Your Branch Manager: Anecdotally, a "Regional Branch Manager" for Bank of America who makes $250,000 plus bonuses for outstanding customer service at his branches would be taxed at 90% due to this bill.

The Real Problem, Plain and Simple

Pen on Tax form

  • How We Got Here: Senator Chris Dodd would like you to forget that he inserted specific language recognizing AIG's executive compensation into the $800 billion stimulus bill, which Finance Chairman Max Baucus now admits nobody read.
  • Government Bailouts: This is the inevitable result of government bailouts, which turn private concerns (such as compensation agreements between private parties) into public business, bringing politics where it is likely to do damage.
  • Hasty Bills Make Disastrous Policy: The very fact that this problem was created by a mega-bill that wasn't properly reviewed before passage--and is now being "corrected" by a hastily put together bill that hasn't been properly reviewed--is beyond ironic.
  • Avoid This in the Future: To avoid further entanglement of the federal government and taxpayers in routine business matters, President Obama and Congress should reject further bailouts and insist those already done be unwound as quickly as possible.

It's Not Constitutional, Plain and Simple

  • Bill of Attainder: The Constitution prohibits Congress from punishing individuals, which is the role of the justice system. This prevents legislative tyranny and is essential to ensuring that those accused of wrongs receive due process and can mount a defense. It also encourages "sound legislation," which is not accomplished by legislators being whipped into a frenzy and interfering in personal and economic affairs.
  • An End Run? Congress added more taxes to the bill to get around the bar of bills of attainder, but it can't make an unconstitutional act permissible by cloaking it in the guise of a tax bill.
  • Taxation Not the Answer: Congress is prohibited from using the tax code as a weapon of convenience against a select group of unfavorable people, even when the political opportunity exists.

For more information, please visit:http://blog.heritage.org/2009/03/20/the-aig-and-everyone-else-bill-counterproductive-and-unconstitutional.

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