Saturday, March 21, 2009

Taxing Away Those Bonuses

As outraged as I am that AIG paid out millions in bonuses with taxpayer dollars and as outraged as I am that it apparently happened with the complicity of the Obama administration, I am not in support of the effort to tax away those bonuses. We need to take a deep breath before we do something else stupid.

On Thursday the House of Representatives overwhelmingly adopted a bill that would impose a 90 percent tax on bonuses paid since Jan. 1 by companies that received significant bailout funds. That seems dangerous. It is using taxing authority in a vindictive manner. I am not sure what part of the constitution it violates, but surely it must be unconstitutional. Tax authority should not be used in a way that is arbitrary and punitive and just targets certain groups. If we are going to use taxing authority in this manner then who else can we go after? How about companies that pollute the environment? Instead of suing them and proving they did wrong, congress can simply tax their profits at 90%. How about gun manufactures? How about tobacco companies? How about pornographers? How about gangster rappers? How about doctors who perform abortions?

Democracy has been described as two wolves and a lamb deciding what to have for dinner. That looks like what is happening. Democracy has got to be about more than simple majority rule. It is also about rule of law and fairness and protecting the unpopular. Do we really want to go down that road of just taxing away the earnings of people we don’t like?

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  1. Great point. Who suggested that the answer to a government blunder is MORE GOVERNMENT!?

  2. Sir:

    Some selected quotes from the Cleveland Plain Dealer 3/22/09

    Article by Binyamin Appelbaum and Tomoeh Murakami Tse from the Washington Post titled "Bankers fear chilling effect of restrictions on bonuses"

    "People who work in the capital markets receive the majority of their annual income in a lump-sum payment based on their performance, the success of their unit and company profits. Paying bonuses allows firms to tie employee compensation to
    performance in given year, something management experts have long regarded as a good practice."

    No disagreement from me in principle, just wondering how this applies to AIG. And what about the chilling effect on small business owners (like myself) and the majority of the country's workers who get hourly wages or salaries when they have to grasp the idea of a contractual agreement that guarantees bonuses to people who not only drove their company into the ground but most likely didn't perform their duties at the minimum level to earn their basic pay.

    Column by Charles Krauthammer from the Washington Post:

    "There is such a thing as law. The way to break a contract legally is Chapter 11. Short of that, a contract is a contract."

    Maybe, maybe not, according to an article by Cleveland State University law professor Candice Hoke:

    "Our law is hardly impotent. Congress doesn't need new ones. Powerful legal claims and strategies are already available for recouping vast sums and setting the precedents sorely needed to radically reform Wall Street."

    She then lists and explains several legal strategies for recovering funds from AIG which I will refrain from getting too detailed about.

    1) Agency Claims: "Agency law can often trump contract law,although some lawyers are unaware of this point." AIG's executives are corporate agents and may have committed several legal violations among which are Duty of Care and Duty of Loyalty.

    2) Contracts that are 'void as against public policy' or 'unconscionable': "While our law generally enforces contracts, not all contracts are entitled to legal respect....Contract law offers several escape clauses that aren't available in everyday transactions but are justified in these extraordinary economic times." Contracts that appear to part of a scheme to violate laws here and abroad, violations of basic underwriting standards, violation of the covenant of good faith and dealing for example.

    3) Conditions for executive job retention: " Some AIG executives undertook astounding risks that justify their being targeted as defendants in lawsuits...Faster remedies than courts can provide include requiring executives to return bonuses and excessive compensation -- computed on falsely inflated records of AIG performance -- in exchange for waiving the right to sue them. Alternatively, the government overseers of AIG could state a plan to discharge the profiteering executives for gross negligence unless they repay the bonuses and excessive pay."

    Questions or comments are always welcome.

    Tom Aldrich