I just can’t believe that this is a good idea. What’s to stop the government from doing future “targeted tax laws?” This is essentially a tax on 400 people, which I think is a dangerous precedent to set. Not to mention, that the only reason these people can get these bonuses is because of a provision in the Stimilus Bill that allowed for payement of contractual bonuses – and most of the Lawmakers now passing this bill voted for the stimulus.

JillEE,
The government already does targeted taxation and tax cuts. From a tax policy perspective, it’s probably a bad idea, but it’s not a new thing.

And adam, again, putting aside whether it’s a good idea or not, the taxation in no way interferes with preexisting contracts. The Financial Products employees would still receive their bonuses; they would just pay a good portion of the contractual bonus to the government in the form of essentially an excise tax.

Again, although cathartic, it’s probably a bad idea. But the employees don’t appear willing to give back the money on their own, and people are unhappy enough that something is going to give. The target tax, as bad as it is, may be better than interfering with contracts. (Although there has been plenty of contractual interference in other areas, e.g., auto companies, that aren’t as white-collar, so I’m not sure I’m sold on the don’t-interfere-with-our-contracts argument).

You know, I am not in an industry that uses bonuses. And as a teacher, I will never ever ever break 100,000 in salary, let alone bonuses, so I really really don’t care if these guys hurt a little when no getting the “expected” bonus. But it does seems absurd that Congress would go after them like this. I would rather they spend their time working on health care.

BTW–the general outrage the news continues to report over AIG bonuses seems to be perpetuated by the press; I think most Americans could have been over the bonuses in about 24 hours–we have bigger fish to fry, folks.

I agree with ESO #6.

We have no problem with the gov’t spending like it does.

And where’s the outrage over Congress giving themselves a raise during all of this? They now make about $170,000 which is a lot more than your teacher salary, ESO.

Would it have been better for AIG and the world at large if the bonuses had not been contracted, and the employees, who were offered the bonuses to induce them to stay at the helm of their sinking ship, had instead left the failing company?

How currupt do you have to be to take a bonus you didn’t earn. The only recourse is taxing them. If I screwed up the way these financial people did I would be in jail, a homeless shelter, or dead. Thank God none of them are engineers that design airplanes they would have been so short sighted as to make them from paper mache because it is cheaper. That is how well they performed and in a true market system they should have been fired not given extremely unjustified bonuses. These guys have never performed well and the bonuses they got over the last several years were also unjustified because that just fed the rush to risk more and get us in so deep to make the collapse worse. I think jail is more in line with what they deserve but taxing them is more than equitable. All of these people would be unemployed without the bailout to pocket that money and act like they deserve is a horrible lie.

I was in an industry that used bonuses. What I found was that each year some form of bonus was dangled in front of us and by the end of the year if results were good the program was changed to screw us or results were bad so we got nothing. I guess I’m in the wrong industry. I should go to one where you get a bonus even if your results are so bad that they put the entire world at risk you can still rake in millions.

I’d be very careful about cheering the confiscatory taxation of a targeted group of people. Once the Taxman gets a taste for a certain type of money, he rarely – if ever – gives it up.

Moral of this story? While you’re busy cheering the AIG execs “getting their just desserts”, you might want to watch your own wallet. The next bonus they come after just might be yours.

You can’t just use taxes to out-and-out confiscate things. That’s wrong. No matter what you’re confiscating.

If you want to take away their money, then why even bother with passing a tax law? Why not just send US Marshalls to collect the funds?

ESO #6, if your teacher’s union weren’t fighting the idea tooth-and-nail, you’d have bonuses in your industry too:
http://dcteacherchic.blogspot.com/2008/07/q-session-with-michelle-rhee-concerning.html

The government uses taxes to confiscate a portion of my check every month; we are talking about degrees not kind. I agree anything approaching 90% is bad precedent.

I have no idea who is getting bonuses at AIG, but I wouldn’t be surprised if a lot of them desereved them. In terms of employees and revenues, AIG Financial Products is a relatively small division that took out-sized risks. Certainly the people who made the decisions in that shop, and the people to whom they reported, don’t deserve anything but a kick in the nut sack. But the guy who ground out $100 million in revenue in responsibly underwritten auto insurance policies might be worth keeping around.

Personally I’m outraged by the outrage. As a non-home owner I want to see housing prices drop–I hope they go all the way to zero–but I suspect they will go all the way to where people can afford the house they live in without renters subsidizing them–if the government would only let them. But the greedy home owners don’t seem to care about doing what is right by people like me (living in Western squalor in my two bedroom apartment). All they care about is that their property value be kept up, even if it means being subsidized by the very person they are denying the American dream. You expect to be screwed by a dirty corporation, but it hurts when it’s your neighbor.

Yes, but who would want to live in Detroit?

Today they tax AIG bonuses at 90%. Who knows, tomorrow it may be Mormon income taxed at 90%. After tithing you’d be left with nothing.

This whole situation, especially the governments imbecilic plans and responses, disgusts me.

Suppose your employer asks you to do job X, and promises that if you do job X you will be entitled to a certain payment. You do job X, and you receive the payment. Now the biggest shareholder of the company, who actually knew about the contract when he invested in your company (although it wouldn’t matter if he didn’t), believes you were paid too much. He may even be right. Your shareholder wants to confiscate your money, but can’t. However, he happens to be very politically connected. He convinces his political pals to pass a special law taxing your payment.

You really think this is ok?

Now think about this. Suppose you have financial expertise that is in great demand. AIG manages hundreds of billions of dollars and desperately some really smart people to clean up the mess left behind by the other clowns. You are one of the best with a long track record of success and demonstrated integrity. How likely is it that you, or any other person who has any other option at all, will ever want to work there as long as the company is controlled by a shareholder who pulls these kinds of stunts, and thus proves it is even more inompetent than the previous management?

Is this really how you want your huge investment being managed?

#24 – That would be an interesting blog discussion.

For those LDS executives that have had their bonuses taxed at 90%, do they need to pay tithing on those funds?

The latest xkcd comic has a take on the innumeracy at work here.

Dishonest:
Bailout: $170 billion
Bonus: $165 million

Honest:
Bailout: $170,000 million
Bonus: $165 million

Dear News Organizations:
Stop giving large numbers without context or proper comparison. The difference between a million and a billion is the difference between a sip of wine and 30 seconds with your daughter, and a bottle of gin and a night with her.

Devyn: Yes, you are missing somethihg. I am not a dyed in the wool Republican, and the reasons I gave (#28) for being disgusted with the actions of Congress had nothing to do with paranoia about the Government coming after my money. They have a lot to do with with my basic moral convictions (when you make a contract with somebody, and they keep their end of the bargain, then you should keep yours) and my belief that actions like this by Congress put the taxpayers’ dollars in jeopardy by ensuring that no qualified person would ever want to go near that trainwreck. It is just a stupid way to run a business and to manage your investment.

Re: 32,

Perfect. I was just about to post that link when I saw your comment.

In general, there’s no question that the ethics of the situation are atrocious, but in no quarter are they worse than in the US Congress. It’s change I can believe in, but I wish I didn’t.

Devyn S: I think it is paranoia to suggest that the Government will come after more of us to tax us

Yet another straw man. The premise of the income tax has always been to make other people pay for government. When it was introduced, the biggest selling point was that only the richest 3% of Americans would pay it, and it has always been based on the theory that someone else should pay for our services — that’s what makes the constant cry of Democrat politicians to tax the rich so disgusting on every level, and it’s what makes the buy-in of your average Democrats on this constant cry so idiotic . It’s a safe bet that this is not the last time that Congress will go after the money of some rich few in order to satiate the envy of others — but it will have to be a very rich few, otherwise the unfairness will be too obvious.

This law sets a precedent allowing Congress to decide that hitherto legal wages are unacceptable, and can therefore be confiscated at the whim of the Congress. This is a grotesque expansion of the power of the US government — much worse than anything in the Patriot Act. This is true whether or not the Congress ever comes after anyone else.

Also, the tax bill functions as an ex poste facto law, because it retroactively repeals the bonuses that Congress already passed.

Lastly, the government is expressly given the right to tax in order to raise money, not in confiscate wealth. This is a purely confiscatory tax that doesn’t even have the pretext of raising wealth.

There should be a court battle that ensues. The Supreme Court is populated by some pretty stupid people, but I can only hope that they make the right decision and put Congress back in its place.

Devyn: The contract was honored only in the narrowest, nit pickiest, legalistic sense of the term. Let’s not kid each other. Congress is the controlling shareholder. They wanted to confiscate the bonuses and they have used their power to tax as a way of doing that. I believe that is a dishonorable way to behave. A contract was made in good faith, and it should be honored.

It is certainly true that you will find lots of people willing to work at AIG. I am a significant shareholder of several different companies. We try hard to get the best people, not just people willing to work. I want people who could go anywhere, but they choose to work in my businesses because we treat them well. Those people will make you far, far more money than the warm bodies that AIG is going to attract with Congress in charge. Congress is not doing what is best for taxpayers when they engage in political stunts like this, and I am surprised that anybody would think that these shenanigans are in the country’s best interest. What they are doing is stunningly stupid.

I agree with you that the compensation structures at AIG and at a great many other companies (not just financial services companies) are out of whack.

Let’s not take our eyes off the real bozos. Has anybody ever seen a greater collection of asses, including the dumb- and horses’- variety, than this current batch of Geithner, Dodd, and Schumer?

Hank Paulson and his republican benefactors seem to come to mind…

We, the taxpayers, now own 80% of AIG! I want the best people running the company so that I get a return on my investment. If we are effectively capping salaries at for anyone who works there, we are not going to have the best people working there.

Side note 1: It’s not the salaries that are the problem, it’s the bonuses.

Side note 2: What if these are the best and brightest available? (No, even I don’t think that.)

Side note 3: What makes you think that you couldn’t hire anyone better if you installed a more punitive bonus structure? Do you mean there aren’t a bunch of B-school grads who wouldn’t take that gig if you said “You get a $50K bonus IFF (if and only iff) you achieve these particular metrics”?

This is the fallacy behind the “we must offer obscene” bonus thinking. That somehow it gives you “better” employees. No, it just gives you employees who work to get the bonus.

So all of our high-priced “talent” is going to flee to other countries? What, and screw them up too? Seriously, should we really be worried about losing the bad apples at AIG?

I’m looking for the link, but there was a comment somewhere (Daniel Gross? Mark Cuban? Warren Buffett?) about the airline industry a few years ago, where someone complained about how the airline industry would flop if we drove out all of the airline management experts, and the retort was that there would always be a supply of young, energetic executives who would give their eyeteeth to turn around a messed-up company, even if they had to work for $300K and nothing more. That the challenge itself would produce the needed supply of people looking to solve it.

I know it was Cuban who has stated that any entreprenuer who worries more about tax policy than his company wasn’t worth investing with…

Maybe relocating Wall Street to somewhere like Kansas City or Chicago or Denver or Phoenix or Cleveland — and employing the people who’d prefer to live there instead of New York — might save it. Maybe the kind of people who’ve traditionally worked in Wall Street, with its model, are not the people to save it… Companies relocate IT operations to cheaper parts of the country all the time. Maybe we should do the same with finance and the economy…

queuno: So all of our high-priced “talent” is going to flee to other countries? What, and screw them up too? Seriously, should we really be worried about losing the bad apples at AIG?

Unfortunately, the members of Congress that screwed up the mortgage market will not be going oversees. It’s the victims of their malfeasance that will flee. Furthermore, now is the time when we need these victims most — members of Congress have finally decided that traditional credit-worthiness measures aren’t simply tools of racism, and our newly freed financial executives could actually do some good if we could get them to stay.

queuno: I don’t know the people at AIG, so I don’t know how many of them I would want to keep. But I rather suspect that you don’t either and I am damn sure that Congress does not. But this is not about retaining any particular people. It is about retaining and recruiting good people. And the only requirement I want to put on companies that receive bailout money is that they recruit and retain the best people we can find. Talent is not indifferent to compensation, and it is naive to think that you can attract the top talent without paying competitive compensation. That does not mean that you automatically get the best by paying a lot, and I do think that many compensation schemes on Wall Street were seriously flawed. But it is crazy to argue that the mere fact that the government has elected to become a company’s largest shareholder means that the recipient of that money should pay its management team much less than the market rate. Why would you want to invest, and then impose restrictions that make it significantly harder to recruit good people to manage your investment? No private investor would ever do that, so why would you encourage Congress to do that with your money?

DKL: “The fallacy lies in the belief that other countries won’t allow the bonuses prohibited by the United States. In other words, if we don’t offer them, somebody else will, and whoever does will end up that much farther ahead in the global competition for financial industry”

Total Fantasy! (honestly) Its about power and what it allows then to get away with. Exec hold almost all the power and so give themselves these massive bonuses, added into their contracts. Unions today hold very little power, with some 15% membership and probably less in finance, so unionized workers don’t get many bonuses or pay rises. Then if execs in those other countries have enough power they then will steadily increase their income just as the US ones have being doing since the ’70′s, irrespective of what happens in the US market or with US taxation rates.

But you’re right about congressmen not paying for this when clearly they should. I mean even places like Iceland and Norway have suffered due to the USCongress’ incompetence.

And:
“Britain has already overtaken the US in the finance market thanks to over-taxation” Even though high income earners in Britain are taxed through the roof???

Queuno – good points. DKL – I hardly think people are going to flee overseas for jobs. I heard the same rhetoric when Clinton was elected by conservatives and the same whining by Democrats when W was elected… Of course, if the bozos on Wall Street want to move overseas – let them!

I wrote something last month related to DKL’s point about how little some people pay. (“Tax Credits Can’t Stimulate Me“) For 2009, my federal income tax will be zero. My household is larger than most, but our income is somewhere around the 80th percentile, so if I won’t pay income tax for the next few years, who will?

And it is especially galling when we have to listen to these sanctimonious lectures about fairness in taxation from the likes of Tim Geithner. This is a man who “forgets” to file his 1040, and now he is running the Treasury department. God help us all.

There’s also a lot of irony in the fact that Obama gave Richard Holbrooke a high ranking position in the state department.

Holbrooke served on the board for AIG from 2001 to 2008, resigning right before the collapse.

55. DKL – you are correct that they were not talking about executives leaving, but it was the same rhetoric – “the world is ending, people will flee”. In my mind, let them go. The US financial industry will NOT go overseas – it cannot and will not. Perhaps we lose some of the bozos running things, but I am guessing that Wall Street will remain where it is for a long time.

Agreed that the purpose of the tax was to take the bonus back – and I think it is a good idea, while you do not.

While I don’t like paying that much in taxes either, the reality is that if you make more, you likely should pay more (at least to me). It seems more like the Law of Consecration. While I complain about the taxes we pay, it is still less than many EU countries.

56. John Mansfield – move to an AMT state like Taxachussets and watch the credits fly away and soon you too can pay as much tax I do! :)

57. Mark Brown – ok I agree with you on the bonuses – definitely a screwup on the Obama’s side.

58. Mark Brown – Agreed, I am amazed at the gall of some of the Washingtonians to not pay their taxes – do they think they won’t get caught???

59. queuno – believe me it is high on my radar (we like Austin), just missing a job. The temp this morning was a whopping 27 degrees here in Beantown.

60. Tim J – no worse than the Bush administration giving all of the noncompetitive contracts in Iraq to Halliburton (Cheney’s old place). They are all corrupt – both sides of the aisle.

Actually finance jobs have gone overseas and have been doing so for some time. London has made a concerted effort to attract such jobs and companys and has had real success.

While I agree that the bonuses are an outrage, the efforts to steal them back are a greater outrage still and probably unconstitutional. If the plan is for the government and the private sector to work together to fix the mess we are in then government cannot change the rules each time there is some public outrage over how some sliver of the money is spent. Doing so makes the private sector very nervous about doing anything with the government.

The public needs to understand the the whole situation is inherently unfair and that the task at hand is to fix the mess. Fixing the mess does not imply exacting revenge or even making things “fair.”

63 – Tim – I did not infer Halliburton got us into this mess, although I am sure some liberals would blame them…

64 – ARJ – are the jobs leaving or just new jobs being created? I don’t think that Wall Street will cease to be Wall Street and there will always be a need for a large number of employees there.

Devyn S: The US financial industry will NOT go overseas – it cannot and will not

Actually, it can and it will. It’s already headed there, and has been for a while due to boneheaded overregulation passed by an hysterical Congress in the wake of financial scandals. We need to try to reverse this drain, and not accelerate it. And the tax penalties will accelerate it.

Furthermore, it’s just wrong on principle to use taxes to just out-and-out confiscate money, and it buggers the mind that anyone could think otherwise. Seriously, what ever happened to due process?

arj, well put! When you and I agree on a political issue, it must be right.

Here’s George Will’s take on the matter, which, as usual, light on actual argumentation, but superb when it comes to using words to accurately characterize the issues at hand.

arj, The Economist is right, only it’s not just London. Hong Kong and Dubai are also upping the ante. China is desperate for global financial clout to complete it’s industrial portfolio and the UAE is looking to move beyond it’s current position as the capitalist bastion of the Middle East, and become a global financial competitor.

Do the math: London doesn’t have to take a single job from NYC — all it has to do is retain it’s current financial standing while NYC’s share gets diluted by competition from UAE & Hong Kong.

Devyn S.,

I believe that London has special tax status for financial services and for foreigners that work in the industry. Also, Sar-Ox is a huge disincentive to do things in the USA.

We need to compete in the global economy. Others have made it a priority and we have to at the very least react if not lead.

It’s easy to talk about what’s going on with AIG from the outside, when we’re being fed all kinds of terrible news by a Congress and Executive that are trying to cover their asses. But The New York Times published a resignation letter today by one of AIG’s executives. It’s worth reading.

Some particularly salient paragraphs:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down….

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

This gives lie to the idiotic notion so frequently advanced here and elsewhere that these AIG guys are just a bunch of bozos. But it doesn’t feel as good to actually give credit where credit is do — not when you can go off half-cocked and so easily be perceived to occupy the moral high ground by virtue of misinformation and deceit.

Pelosi, Frank, et. al. have been telling so many lies for so long. The only real question is why Democrats are so stupid that they still believe them. Fiduciary Duty, which defines business obligations, is the highest standard of conduct under the law — higher than any standard to which elected officials are subject. This jihad of theirs on business is the grossest hypocrisy.

“What’s your secret? Did you hire Tim Geithner, Tom Daschle, and Charlie Rangel to do your taxes?”

The heart of it is having five children. For each child, $3,500 is subtracted from taxable income (line 42), which in the 28% bracket reduces the tax by $980. Then there is a tax credit (line 52) of $1,000 for each child. So, my federal income tax this year is $9,900 less than it should be had we no children. My financial life is very simple; I work it all out by hand in one short evening. (I believe tax returns and genealogy should be recorded by hand to maintain an intimate familiarity.) No fancing accountant money shielding tricks.

My federal income tax bill for 2008 is $2,700. A sixth child will join our family later this spring, so that will drop next year’s tax another $1,980, and on until my oldest becomes independent. Plus I bought a house in January, so unlike this year, there will be mortgage interest deduction, and as I noted grimly while filling out Form B, the money that went into the down payment won’t be generating income in 2009.

I suppose if stories like mine get out, the child tax credit will become known as the “fecund Mormons suck the nation dry” credit. Devyn S. could do a 700-comment post on it.

Devyn, as someone who is out of work in this poor economy, I can tell you that my financial misfortune does not justify anybody else’s. It’s would be wrong for me to look at them and say, “Well good! Now they know what it’s like.” But there’s an important difference here. I got paid until my last day of work. This guy worked for a year for $1 based on a contract that would pay him in March 2009. Then in March 2009, it turns out that he’s worked a full year for basically a dollar. Your capricious attitude toward other people’s wealth is, frankly, alarming. You seem to be saying, “Hey, who cares. Just take it, because it irritates me for them to have it, and there aren’t that many of them.”

Furthermore, if you need me to explain Barney Franks involvement in all of this, then perhaps you haven’t looked hard enough at this issue to proffer an informed opinion. Frank is the one who pushed laws that required banks to abandon traditional credit-worthiness measures in favor of quota-based lending programs.

Frank is the chairman of the House Financial Services industry, and whenever his committee would meet, if anyone brought up the ass-backwards lending programs and the impact they were having on banks, he would shout them down and condemn their alarmist rhetoric.

I agree that George W. Bush is partly to blame. He and several Republicans frequently talked of an “ownership society” that seems to be turning into a “the government bought my house” society.

78. DKL – I am not begrudging the guy his bonus, I am begrudging that the bonus is coming out of my pocket. I think since the government is not the primary shareholder of AIG, they should not be giving out bonuses in this environment. So while the guy may have worked for a year for $1 (I don’t know what his personal balance sheet looks like), it is unfortunate but that is the situation we are in. He clearly did not need the money if he is giving it away anyway. I know what Barney Frank has been up to and I think that he and Pelosi are morons, but I wanted to push you to admit that this is not just a Dem problem but W has his share to carry (thanks for acknowledging). Oh, we are in an ownership society all right, just didn’t know the Government would be doing all of the owning…

79. Mathew Thanks – nice commentary. You said very nicely what I was unable to say.

Devyn–I’m pleased you like what I wrote, but I’m no more a reflexive advocate for regulation as I am for less regulation. Jobs will absolutely exit the US if the regulatory environment becomes overly onerous.

Much more importantly, if wealth continues to flow out of the US, there will no longer be a compelling reason for investors to come into the US at all–and we will be racing to the bottom alonside little islands the world over.

One additional follow-up. The letter that DKL in #74 was from someone who receive $780,000 as a bonus and he was going to donate it to Charity. So clearly he is not exactly a poor person. Given that, I still don’t see why someone should be compensated so highly – it seems the system is a bit out of whack.

Thanks for share! really great blog!