Well, they did it.
The US House of Representatives, apparently vying for the title of "The World's Greatest Retributive Body" passed HR 1586 - "To impose an additional tax on bonuses received from certain TARP recipients". HR 1586 was designed specifically for the purpose of taxing the bonuses of several dozen employees of AIG, the giant insurance company at the epicenter of the financial crisis.
Look, I'm no fan of AIG. AIG's reckless underwriting of credit default swaps has required a $170 billion injection of government aid to post collateral with counter-parties and extinguish obligations. And I will be surprised if AIG doesn't require more aid before this crisis is over.
So I am as infuriated as any other taxpayer to read that AIG planned to pay out $165 million in bonuses, including bonuses to employees who worked in their Financial Products group, where the credit default swaps were written.
But the speed with which the House has wielded its most powerful weapon -- As Chief Justice John Marshall put it, "The power to tax is the power to destroy" -- is a truly frightening precedent. By levying a confiscatory 90% tax on bonuses paid by firms who have received aid under the Troubled Asset Relief Program, the House has undermined the compensation model of our leading financial institutions, not just AIG. More to the point, it will create a financial hardship for many employees whose banks may not have needed TARP funds, but were persuaded by former Treasury Secretary Hank Paulson to accept them in an act of industry solidarity designed to stabilize the crisis late last year. It will also create financial hardship for many employees who had absolutely nothing to do with mortgage securities, credit default swaps or crazy leverage ratios and who probably earned their bonus. For some, it may mean selling their houses into an inventory-clogged market. For all, it will surely mean a reduction in both their saving and spending, just exactly what we don't need in the current economy.
It was bad enough last month when Deputy Sheriff Barney Fife... I mean House Financial Services Committee Chairman Barney Frank... was chiding Northern Trust for honoring its commitment to sponsor a PGA event in Los Angeles. But HR 1586 is a breathtaking act of power, passion and political pandering that should give pause to any believer in liberal democracy. Look hard enough and you will find federal aid, if only in the form of freedom from federal tax, in almost every nook and cranny of our modern society. Will lesser forms of federal aid be used as a pretext for the House to follow its new precedent of hastily drafted confiscatory taxes to coerce private behavior?
Fortunately, the administration has expressed reservations about the House bill and the public outrage has encouraged some AIG employees to forfeit their bonuses, so cooler heads may yet prevail and this hastily drafted legislation may be rejected or modified.
If you'd like to see how your representative voted, click here.
I couldn't agree more. The banks entered into a contract with the Government when they accepted TARP money. The legislation allowing the Government to enter into such a contract was rushed, sloppy, and filled with sops to special constituencies. (In short, it was like a lot of legislation.) But contracts were entered into, nonetheless. Thus not only does the new tax legislation constitute a "bill of attainder" and an "ex post facto" law, in violation of Article I of the Constitution but it also deprives the banks (and bonus recipients) of property without due process (a violation of the Fifth Amendment). Assuming that the federal courts have the same level of understanding of the Consitution one would expect of a seventh grade civics student, the legislation would be declared illegal. It is entirely possible that the federal courts will not share my view (and that they do not have a seventh grader's understanding of the Constitution) but there is certainly enough doubt to make signing such legislation potentially embarasssing even for a President with the brazenness (or should I say audacity) of Barack Obama, who is still the only individual in history to be propelled into national prominence by virtue of his position as president of the Harvard Law Review. So, after watching Obama help to rev up the masses, it will be interesting to see how he responds (or perhaps even "leads") when this legislation hits his desk. If he signs it and it withstands judicial review, it will at least open up some interesting possibilities for fiscal policy. For example, Congress could pass legislation putting similar taxes on recipients of government pensions (nothing punative or arbitrary, you know, just part of the normal legislative process); trial lawyers; recipients of contentious civil settlements; and members of Congress who got rich by marrying into money ot inheriting it from bootleggers or robber barrons.
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