Republicans put brakes on to tax AIG bonuses

Saturday 21st March, 06:37 AM JST

WASHINGTON —

Senate Republicans are drawing out a flap that has made the Obama administration squirm, applying the brakes to Democratic attempts to quickly tax away most of the bonuses at troubled insurance giant AIG and other bailed-out companies.

Sen Jon Kyl, the Republicans’ vote counter, on Friday blocked Democratic efforts to bring up the Senate version of the tax bill to recoup most of the $165 million paid out by AIG last weekend and other bonuses in 2009. The House had swiftly approved its version of the bill earlier in the day.

By rushing, Kyl said, Democrats were letting populist outrage trump informed decision making in the Senate, which is supposed to be insulated from the pressures of public passion.

“I don’t believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences,” Kyl said on the Senate floor. “Frankly, I think that’s how we got into the current mess.”

Senate Democrats said they will try again next week to take up the tax bill and hope to complete it before April 4, when Congress leaves for a two-week spring break. Combining the disparate House and Senate versions of the bill might have to wait until after the recess.

The Senate voted last month to block the AIG and other bonuses as part of the $787 billion stimulus bill, but Democrats then watered down the measure allowing them after Treasury Department officials warned that the move could trigger lawsuits against the government.

Last week, when Treasury Secretary Tim Geithner could not talk AIG out of paying the bonuses, Republicans were quick to blame Democrats, pointing out that they were in charge of Congress and the department when the decision was made about bonuses and the stimulus bill. Democrats sought to regain the offensive—and stem the political damage—with promises to tax the bonuses away.

How to impose those taxes without running afoul of the U.S. Constitution or the law is a dispute that has Republicans urging a go-slow approach. Doing so, of course, would drag out the Democratic discomfort over administration missteps and provide plenty of time for the Republicans and others to question Geithner’s performance.

Republican reluctance also appeals largely to a key constituency that traditionally finds regulation anathema: Wall Street.

Robert Willens, a corporate tax lawyer in New York, said the Senate bonus tax bill would still allow bailout beneficiaries to negotiate higher salaries with employees to compensate for lost bonuses. The Senate bill authorizes the Treasury to issue regulations preventing firms from masking bonus payments as salaries, but it does not prevent firms from handing out raises.

“If the vast majority of bonuses become fixed salaries that would harm the institutions because they would have higher fixed costs,” Willens said. “What happens if the bank suffers through a poor year? It has all these fixed obligations they have to meet. That’s the beauty of the bonuses.”

The House bill, which passed 328-93 and split Republicans almost evenly, would impose a 90% tax on bonuses paid after Dec 31, 2008, by companies that have received more than $5 billion in government bailout money. The tax would not affect workers with adjusted gross incomes below $250,000.

The Senate bill is much broader, affecting bonuses paid after Jan 1, 2009, by firms receiving more than $100 million in government bailout money. The Senate bill would impose a 35% excise tax on the companies that pay the bonuses, and a 35% excise tax on the employees who receive them. Those taxes would be in addition to the 25% now withheld by the IRS on bonuses up to $1 million, and 35% withholding on bonuses above that.

Retention bonuses, like the ones paid to AIG employees, would be fully taxable. The first $50,000 of other bonuses, such as performance bonuses, would be exempt. The Senate bill would also cap deferred compensation for top executives at $1 million a year. Deferred compensation above that amount would come with steep penalties.

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Latest 15 of 35 Total Comments Show All

Taka313 at 02:39 PM JST - 21st March

I say give them the bonuses in front of the entire company and any AIG customers who want to show up and have their say. Most people, if shamed sufficiently, will do the right thing.

And if they still want the money, screw 'em. They can have it in pennies.

Taka
skipthesong at 05:36 PM JST - 21st March

I absolutely love how the same people that were crying about these bonuses and blaming everything under the sun on Obama and the Democrats are now trying to support Republicans on blocking legislation that would get the money back from bonuses of companies that took bailout money."

no, i think most here you say are trying to support the repubs would most likely be like me and regardless of the party, I would support the measure simply because I never supported the idea of giving them money in the first place, but since its been given out, so be it. And I also think this is more grand standing than anything. If they go through and tax them 90%, I would be very very surprised.

Also, "Are the politicians also receiving bailout money from the government?" In a way, yes they are. They just, all of them both side, voted to raise their salaries. Their benefits have increased year after year. Their kids schools are paid for by a tax payer fund. And let's not forget their retirements entitlements go up. Really, if you want to get rich these days, just become a politician and make sure you can jump party to party.
buddha4brains at 06:17 PM JST - 21st March

I agree with the Repubs on this - doesn't happen often.

While the bonuses is a big chunk of change, it is chump change compared to the billions AIG paid out to foreign entities and American companies that had already received a first bailout (double dipping as it were). The more I read about this stinking pile of financial doo-doo the more I agree with Sen. Shelby who wants to slow things does a bit, assess what is really going on, and then act.
smithinjapan at 06:19 PM JST - 21st March

Skip: "no, i think most here you say are trying to support the repubs would most likely be like me and regardless of the party, I would support the measure simply because I never supported the idea of giving them money in the first place..."

So you're just angry about what happened in the first place and are therefore supporting these people getting large bonuses from taxpayers money for a little 'even-Steven', regardless of the fact that you say you're against the money having been given out at all. Bizarre... very bizarre.

"..., but since its been given out, so be it."

Yeah... since one thing was done best not try to remedy it at all, eh, skip? Just let all your tax money go to bonuses when a company says the money is needed to save it, and not try to get any back. Good solution!

"... And I also think this is more grand standing than anything."

I agree they are to an extent pandering to the general outrage of the public, but they are also providing a means to get some of the money back. Now, if you want to talk about PURPOSELESS grandstanding... well... just read this article and look at the Republican side of stopping the legislature. Now THERE'S some genuine grandstanding!
smithinjapan at 06:27 PM JST - 21st March

buddha: "The more I read about this stinking pile of financial doo-doo the more I agree with Sen. Shelby who wants to slow things does a bit, assess what is really going on, and then act."

What AIG has done most certainly needs to be looked at in depth and analyzed, but I fail to see how taxing the bonuses that come directly from the aid money is contrary to that.
sailwind at 07:02 PM JST - 21st March

Now, if you want to talk about PURPOSELESS grandstanding... well... just read this article and look at the Republican side of stopping the legislature. Now THERE'S some genuine grandstanding!

Smith your thoughts on this part from the article?

The Senate voted last month to block the AIG and other bonuses as part of the $787 billion stimulus bill, **but Democrats then watered down the measure allowing them **after Treasury Department officials warned that the move could trigger lawsuits against the government.

I think that maybe your 'anger' at the Republicans is pretty misguided.

Your target should be at the Democrats who give them the green light to pay the bonuses using TARP money. Why the pass on that Smith?

The Senate is actually doing the prudent thing here for once, much to my suprise. Breaking or changing a legal contract that was already written no matter how bad it actually turned out in the long wrong, is never something that should be subject to whims of the moment.

What's next Smith, we tear up the most important contract we have the constitution? After all that is all that piece of paper is. A contract between the people and the Government. We change that on a whim because we no longer like the freedom of press clause?

Think Smith..........Unintended Consequences, if this isn't truly thought out and good legislation is not passed, you could very well see a serious erosion of personal freedom, it stinks that Congress and Obama authorized the pay out in first place. But they did and screwed up the first time, let's make sure they don't screw it the second time by passing rush legislation that very well set up a very bad precident on how the Government can break its already given promises at the drop of a dime.
SuperLib at 07:15 PM JST - 21st March

The shouldn't get the bonuses is what my moral compass says. But they had a contract and the government knew about it before they approved the bailouts. For that reason I'd rather them get the bonus as opposed to watching the government pull strings in response to the media. That scares me more.
Taka313 at 09:47 PM JST - 21st March

Superlib,

I agree with you. However, whether it is a corporation or the govt., the idea of voiding legitimate contracts in the interest of the "greater good" is what scares me.

Once you start allowing contracts to be broken on a whim, no matter how legitimate the reason, you set an ugly precedent, in my opinion.

Look at professional athletes, for example. They sign contracts with the owners for a specific salary, but now, for some reason, if they have a great year and feel deserving of more money, they hold out for a new contract.

I don't know who started it, but once it happened, it became the norm. In my opinion, that's too slippery a slope to start down.

Taka
buddha4brains at 09:49 PM JST - 21st March

smithinjapan I do not trust government when they go for populist sentiment to justify their actions. I did not trust Bush & Co. when they swayed public opinion towards their pet projects. I am not going to start with Obama. Like I said, it stinks no matter how many times you turn it over.
Wolfpack at 10:41 PM JST - 21st March

Hasty decisions make without sober consideration is what caused this problem to begin with. Usurping the Constitution is not the way to handle this issue. The government cannot target selected individuals for retribution. Besides, BO and the Democrats in Congress that so want to express their "outrage" through government coercion are the same people that pro-actively inserted legislation into the recent "porkulus" bill to allow them to have the bonuses. They were not upset about the bonuses then - now they are because they were caught helping out their major political donors.

I don't think anyone in a failing business should get a bonus - why Obama, Geithner, and Dodd believe they do is pure political payback for the dollars given to the Democrat's during the last campaign.
SuperLib at 01:15 AM JST - 22nd March

Taka313: However, whether it is a corporation or the govt., the idea of voiding legitimate contracts in the interest of the "greater good" is what scares me.

Right, we're in the same boat. There's a cost to what they government's doing....but only a handful of people are talking about it. The government is essentially voiding a legal contract. Nice can of worms to open.

I especially like the points about the government officials giving up their salaries. They were the ones who were supposed to provide oversight. Obviously they dropped the ball as well. Who's going to vote to tax their salaries at 90%?
Molenir at 02:56 AM JST - 22nd March

The worst part about taxing the money back, is that it will mean a lot of really smart, talented people will quit AIG and look for employment elsewhere. Other banks from other countries are aware of this too. They won't even hesitate to poach the best employees. Add to this the likelihood that it will increase the credit crunch as banks and other financial institutions that received money rather then loaning money out, they're going to start trying to pay back the government in order to get out from under this and keep their people.

The more you look at this, the more it stinks, even more then the bonuses. I say, poison pill or no, leave the bonuses. They shouldn't have been paid, but now that they have, eat the pill and move on. Just make sure it doesn't happen in the future.
Taka313 at 07:47 AM JST - 22nd March

Superlib, Thanks. That's why I have been lobbying here, and with my Congressman, to give them the bonuses in a very public setting. Let them accept their checks in front of a hoard of people they screwed.
Would you accept millions of ill-gotten dollars in front of the people you just royally screwed? I am pretty sure that I don't have the stones to do something that callous.

Taka
JoeBigs at 08:19 AM JST - 22nd March
Molenir at 02:56 AM JST - 22nd March The worst part about taxing the money back, is that it will mean a lot of really smart, talented people will quit AIG and look for employment elsewhere.

Are you talking about the same "really smart, talented people" that nearly bankrupted AIG? In my book (I am not a Republican) the folks at AIG who are getting these bonuses do not deserve them. I do not believe in giving money to folks that not good at their jobs.

But again I am not a Republican.....I do not know why but this fiasco reminds me of Michael "Brownie" Brown.
1. Giving bonuses to people who nearly bankrupted your compnay is really stupid.
2. Giving bonus to the same people who nearly bankrupted our nation is criminal.
So I say tax them for being really really stupid, it is our money. Oh wait tax them for everyone's share except Molenir's share. He likes giving his money to really stupid people.
buddha4brains at 08:57 AM JST - 22nd March

Don't forget that while the dollar figure looks high, as a percentage of the bailout (which AIG will eventually pay back) the bonuses are only a 0.09% of the bailout.

There seems to be more smoke than fire with this increasingly faux-issue. The Democrats are going to strangle themselves on this one if they are not careful (and they usually aren't).