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The AIG tax bill's possible benefits

03/20/2009

In a fit of economic idiocy driven by misdirected populist outrage, the House of Representatives passed H.R. 1586 on Thursday afternoon, subjecting to a 90% tax rate any bonus paid to a person who works at any institution which has received at least $5 billion in TARP money whose:

(1) family income is over $250,000
(2) individual income is over $125,000 if he/she is married but files a separate tax return

I have not yet heard anyone in the media mention (2) above, and few people have mentioned that people can have plenty of income sources outside their salary. So, someone could be making $50K from a job at a TARP-related firm but have $200,000 in income from a spouse or from investment property rental or whatever, causing their bonus to be taxed at 90% (before the other taxes on the payment which will put the total tax over 100%.) But even beyond these details, the bill is more draconian than most people understand.

The bill covers any partnership (which could be in terms of its business operations entirely unrelated to the business of the bank or investment house which received the TARP funds) which is majority-owned by one or more persons who would be covered under the above definition.

Imagine that an executive at one of the 9 institutions which have received more than $5 billion in TARP money (Citigroup, JP Morgan Chase, Wells Fargo, Bank of America, Goldman Sachs, Merrill Lynch, Morgan Stanley, PNC, and US Bancorp) has a family partnership that runs another business; say a farm or a dairy or a small factory. And imagine that the terms of the partnership are essentially a modest salary for the participants and then bonuses based on a combination of the firm’s overall performance and the quality of the work of each partner. H.R. 1586 would seem to tax at a 90% rate each partner’s “bonus” which is in excess of his base salary from the operation of his family’s farm. And it apparently does not exclude those family members who have nothing to with a bank, TARP, or anything else; it simply targets the partnership.

House Minority Leader John Boehner, during the House debate on the bill, said “Are you kidding me? This is a joke. Vote no!” Earlier he called the idea a “sham” and an “attempt to cover someone’s rear end”, which it undoubtedly is given the news that someone from the administration, specifically the Treasury Department, added bonus-protection language to Christopher Dodd’s amendment to the “stimulus” bill. The feigned anger by Tim Geithner earlier this week makes the “sham” claim that much more believable since we learned that the New York Federal Reserve told the Treasury Department about the bonuses more than two weeks before they were paid. Geithner is either a liar, incompetent, or (based on his excuse for filing incorrect tax returns) both. I predict that Dodd will join some Republicans in calling for Geithner’s resignation in an unsuccessful attempt by Dodd to prevent losing his own re-election in November.

As with everything done by government out of anger, the negative consequences of this measure if it emerges without major changes from a House-Senate conference will be substantial. But just as liberals’ “good intentions” frequently cause bad outcomes, the accidental effect of this bill might be good news in the fight against the current trend toward economic fascism.

It’s true that this bill will likely cause good employees to leave AIG, Fannie Mae, and Freddie Mac, causing the taxpayers to lose much more in value than Charlie Rangel and friends are trying to “claw back” through this legislation. Indeed, preventing this “brain drain” was almost certainly one of the Treasury’s goals when asking Senator Dodd to protect the bonuses though I don’t doubt that there was also some political payback involved for all the donations AIG had given Democrats.

But the bill will also likely cause the firms listed above to move as quickly as they can to return their TARP money, or at least to return enough so that their total participation is under $5 billion. Citigroup and Merrill Lynch may not be able to return the money quickly because of their financial situations, but most of the other institutions probably could…and their total participation is just under $75 billion. Since compensation structures in investment banking (and to a lesser degree in standard banking) are frequently heavily geared toward bonuses, we could see firms moving rapidly to throw off the chains that come with government/taxpayer money, and a corresponding lessening of the control by Democrats in Washington of our financial industry.

A secondary benefit of H.R. 1586 is that it will remind the many Wall Street hypocrites who earn good livings through capitalism but gave large campaign donations and their votes to our sometimes socialist, sometimes fascist, but always anti-capitalist president that they can not buy the affection, nor even respect, of a life-long enemy any more than Israel can buy the affection of Hamas. AIG, which gave about 3 times as much money to Democrats as to Republicans in 2008, with Chris Dodd and Barack Obama being the top two Senate recipients truly embodies the maxim that “people get the government they deserve.”