Wrong Tool for the Job: The House Passes 90 Percent Tax on Bonuses Paid by TARP Recipients

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Americans are not very permissive when it comes to folks who are on the dole. Poor families receiving welfare in the United States are subject to a long list of work requirements and time limits and they can be sanctioned (that is, they can have their tiny benefit checks cut off) for failure to comply with the rules.

So it is not remotely surprising that taxpayers also want to establish some strict rules for large institutions that are on the dole. The taxpayers have handed over spectacular sums to bail out financial institutions, which amounts to corporate welfare on an epic scale. They obviously want to know that their money is being put to the use intended (i.e., saving us from another Great Depression) rather than just funding a third or fourth vacation home for a bank executive.

The delicate little problem for Congress is that lawmakers have a tendency to be awfully lax on the recipients of corporate welfare -- until their permissiveness is brought to light in some scandalous display. That's pretty much what happened recently as reports surfaced that American International Group (AIG) had paid out $165 million in bonuses after receiving $170 billion in federal TARP funds.

In the hurried butt-covering that followed, the House of Representatives grabbed the nearest tool (the U.S. tax code) and tried to use it to hammer a defect out of their bailout program to make it more acceptable to the newly attentive public. On March 19, they approved a bill that we are not exactly impressed with.

The House bill would impose a 90% tax on bonuses paid to employees of Troubled Asset Relief Program (TARP) recipients, as well as the mortgage giants Freddie Mac and Fannie Mae. The tax would apply to bonuses paid to employees of companies who have received $5 billion or more in government aid since the beginning of 2008. The tax would no longer apply when bailout-fund recipients have paid back enough to the federal government to fall below the $5 billion mark. The tax would only be imposed on employees whose adjusted gross income exceeds $250,000.

Much of the AIG bonus money was reportedly paid to the financial services group that got the firm in so much trouble with credit default swaps. Besides AIG, the bill would affect bonuses paid by eight other companies, including Goldman Sachs, J.P. Morgan, and Citigroup because the tax would apply to all bonuses paid after December 31, 2008.

As appalling as the AIG bonuses are, it's important to remember that the tax code exists to raise revenue to fund public services. Tax policy should be thoughtfully designed and carefully implemented to raise sufficient funds for services in a fair and equitable manner. Just as tax subsidies for business unnecessarily complicate the tax code, tax penalties that correct mistakes Congress made in crafting programs unrelated to tax policy are ill-advised.

Finally, taxpayers (even the least deserving) should be able to predict in advance the tax effects of their transactions. Changing tax rules or the rules of any program mid-stream seems unfair. After all, even the poor families who get the meager welfare benefits provided in most states are told about the program's rules before they receive their benefits.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog, http://www.justtaxesblog.org/

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