AIG Saga: A Horrible Tax Idea

The House of Representatives, leading the anti-AIG mob, wants to throw tar on the fledging insurance giant. Today, the House overwhelming passed a piece of legislation that will levy heavy taxes on “bonuses” at AIG and otherwise. If the Senate passes the bill too, grabbing the other side of the barrel of tar, then surely the White House will follow with a pile of feathers soon too. (Yeah the metaphor maybe broke down).

In any case, this tax is so outrageous its almost incomprehensible how politically blind it is:

First, how scary is it that we as a country are enmass supporting a tax targeted as a tiny group of Americans that is completely driven by the political moment? What if policy analysts suddenly became politically unpopular, and the nation rose up in outrage that people such as myself get paid to write our thoughts on blogs by non-profit companies… should all of my salary be taxed away? Think through the logical outcome of this precedent if dragged to its final conclusion.

Second, Nancy Pelosi said today after the House passed the tax legislation, “We want our money back now for the taxpayers.” So I have a question, what about the rest of the money? What about the rest of the money? The $165 million is less that one tenth of one percent of the taxpayer dollars given to AIG. Thats .01% of the bailout money. THAT is the figure we’re so enraged about? Nancy Pelosi’s state is getting over $570 million in earmark money. What if we want that money back? Where is the outrage over all other taxpayer money wasted? Pelosi uses military jets to fly herself and her family around the country (for “security reasons”) which costs loads of money, why not stop that? Its just so disingenuous to claim fury over a minutia of spending when there is so much more waste going on.

Third, we would not even be having this conversation if AIG had been allowed to fail in the first place. Government can’t run businesses. The CEO of AIG, Ed Liddy, was appointed by the Treasury Department. The country can’t run a business, it just doesn’t operate well by national committee. Politicians can’t make the tough choices that would be good for a firm but bad politically. I continue to argue that we don’t know who got this money or why they did, but it could be perfectly legitimate. And if so, it just proves that politicians can’t mix their political interests with the right choice in business. If they did not deserve the bonuses then its just more evidence that keeping zombie firms alive is a pure waste of money. So what if you tax these bonuses, if AIG isn’t being run right then all the rest of the $172 billion is being wasted too!

Forth, there is a little thing forbidden in the Constitution called ex post facto law (Article 1, Section 9). Essentially this means you can’t pass a law forbidding something that was done in the past and prosecute it. Laws can only pertain to the future. Thus, the spirit of that idea is completely violated by this House bill that was passed. A contract was drawn up between AIG and its employees. That contract gave the employee the expectation that if he performed X services that he would get Y pay. But this bill proposes to tax away the bonus money (again, just part of general compensation, but with a particularly term attached) that was given away in the past. While they are at it, why not just tax all bonuses from AIG for the past 10 years? Its the same basic logic that would allow it. What confidence does this give to anyone with a compensation contract now? How is this justice?

The reality is that none of the bonus money should be given because the firm should be defunct. However, it was saved, and like it or not that salvation money must be used to meet their legal, binding contracts. All of this craziness is just blind anger that is missing the point of the issue.