The Bonus Tax

Really? Another post about the AIG bonuses? Don't worry, I'm just as sick of this story as you are. The fact that the media and Congress won't let this story about $165 million out of over $100 billion in bailout payments to AIG alone (not to mention billions more thrown to the other financial institutions) just die already, is a total joke. The media is doing it because they're the media and this is what they do. Congress, however? They're just trying to cover their own asses and try to hope people forget that they're the ones that approved all of this money without first putting some restrictions on it. This faux outrage after the public's reaction to it is absurd.

Everyone is wondering how Geithner overlooked this, and I'll tell you why: he was focusing on the $100 billion, the big picture, instead of the relatively small peanuts of the $165 million in bonus payments. In more relatable figures, focusing on $165M out of a $100B bailout, is like if you were very generous and did your friend a favor and lent him $1,000 to keep him afloat for a little while and then spent a week obsessing over a specific $1.65 - what he did with it, who he gave it to, and whether the person he gave it to deserved it.

So now the House, in order to quell populist outrage, has passed an over-broad, far overreaching bill that will retroactively tax these bonuses at a 90% rate, effectively totally erasing them. I entertained the notion of using the tax system to solve this a couple days ago, but I never had something this extreme in mind. This bill potentially raises constitutional issues, as the tax may be considered a "bill of attainder", which can be briefly described as "legislative punishment," and is unconstitutional under Article I. Laurence Tribe seems to think the tax is legal. Others disagree.

Early signs show that the both the Senate and President Obama are supportive of this bill, or at least slight variations of it. Once it passes the Senate, I hope that, rather than signing the bill and creating a tumult at AIG and Wall Street that could have drastic ramifications, that Obama uses the bill as leverage against these employees to renegotiate the bonuses, in a manner similar to what Noam Scheiber suggested a few days ago. These employees need their money and we need them to stay at AIG and help us fix this mess. Give them a certain percentage (about 1/3) up front, put another 1/3 in escrow for the employees to potentially receive if they stay at AIG, help fix things, and do a good job, and let the government recoup the final 1/3. There, I just solved the AIG bonus crisis. Now, can we please get back to the actual crisis?