[edited 032409 to add link]
Is the populist anger about the AIG bonuses bad? I don't think so. It is not unreasonable to be mad about Wall Street's sense of entitlement. In fact, it is out of bounds, and damaging to society, for a few people who happen to be good at math and so able to work with the various engineered financial instruments to be paid so much that they have come to think of themselves as entitled to multiple millions of dollars a year even when their reckless performance has cost the entire world dearly. 400 employees (current, former and future!) in AIG's financial products division received bonuses ranging from $1000 to $6.5 million, with 73 of them getting $1 million or more, according to Cuomo's investigation. Cuomo: AIG Execs Agree to Return $50M Bonuses, AP (Fox News: Politics), Mar 23, 2009
Is the Congressional response to populist anger bad? That's harder to say. Much of the Congressional outrage is itself derivative--if constituents get mad, then Congress gets mad, or at least appears to get mad. That's the way politics works, so nothing unusual there. But that can mean that there is a good deal of posturing intended to calm the public mood and then get on with business as usual. There needs to be a real response to the financial crisis that results in a new way of doing business and not a return to business as usual.
Is a tax on certain bailout company bonuses bad? Again, harder to say. Clawing back unreasonable compensation paid by a company that is 80% controlled by the federal government seems unremarkable, but there may be various legal issues that would depend on the details of any law ultimately passed. A law that instituted, even retroactively, a significantly higher rate of taxation on the ordinary income of individuals in a very high bracket ( $1 million or more AGI, for example) received from companies that received at least some threshold of bailout money would appear to pass muster under due process, bill of attainder and other constitutional tests as within the general taxation power of Congress, and an income tax avoids the breach of contract issue. Check out this Below the Beltway posting for a discussion of a number of these issues.
(I find the discussions of contract breach ironic--many of those complaining about breaching contracts also pushed for a requirement that the auto companies gain concessions from labor (modifications to the existing contracts) if they received federal bailout loans. If the same approach as that taken with the auto companies had been taken when the federal government first provided aid to AIG--i.e., require modifications to contracts in respect of bonuses to be paid, else no aid and likely bankruptcy and no pay whatsoever--the current bonus problem would not have arisen. But back in September the Bush administration was quite fixed on not imposing controlling conditions on bailed out companies. The fiscal crisis, caused in large part by the deregulatory mania begun in earnest under Reagan, thus broke out under a regime that tended to attempt to cure the disease with more of the same deregulatory mania.)
Furthermore, if structured correctly and if coupled with provisions in other laws, a reasonable surcharge tax on bailout company bonuses might be a start on moving to a new paradigm of thinking about managers and owners. We need to figure out how to change the laws about the ways that managers' compensation levels are set, so that we don't continue expanding the gap between overpaid CEO and underpaid workers. Limiting the corporate tax deduction hasn't worked, because courts tend to find unreasonable compensation reasonable and because the performance-related compensation loophole swallows any limitation. We need some governance changes, that put shareholders in control of the Board and, especially, of compensation. Someone suggested federal legislation that required a shareholder committee, similar to a creditor committee in bankruptcy, to handle nominations for board members and compensation for executives. We probably also need to change the tax laws about pensions and stock options, though it is difficult to know what tax incentives or disincentives make the most sense. This suggests that Congress should set up a joint committee on executive compensation to come up with across-the board reforms in a number of different areas (securities laws, tax laws) that will make a difference.
But I don't think Congress will ultimately enact any bonus tax, for two related reasons: first, neither Obama nor the Senate have the political will to take an action that might be viewed as chastizing Wall Street, see The US Senate Delays action on the AIG bonus tax, Mar. 24, 2009 (noting Obama's appearance on CBS's 60 Minutes that questioned using taxes to "target[] a handful of individuals" and the Senate's decision to defer consideration of the bonus tax bill); and second, Andrew Cuomo's success in getting a good number of the top executives to give back their bonuses (see AP story, above) will provide a cover for Congress to take no further action.
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