Charlie Rangel Says Don't Tax AIG Bonuses - And He's Right. (Updated - but he didn't mean it)

Update: My praise for Charlie Rangel in this post was, sadly, premature. Politico is now reporting that Rangel has gotten behind a 91% tax bracket for AIG bonuses.

When it comes to the AIG bonuses, I'm about as angry as any other taxpayer who has been paying attention. This morning, I was absolutely undelighted to read that quite a bit of the "retention" money is going to people who have, in fact, not been retained. The look I just took at AIG Chariman Edward Liddy's opening statement for today's Congressional hearing did absolutely nothing to improve my mood. When he says, "I share that anger," one has to wonder how much of that anger he actually understands.

Not to try to dish out the class warfare, but that's probably because he's rich enough that the numbers don't mean the same thing to him that they do to most of us. On the (very very small) chance that he might see this, let me try to put this into perspective. According to reports, one of the bonus recipients who worked in the AIG unit that caused the catastrophe received a $4.6 million retention payment, and has left the company.

The name of the $4.6 million dollar person has not been released - Mr. Liddy is apparently afraid that publicizing the names of the recipients might endanger their lives - so for the sake of simplicity I'll be referring to this person as "Mr. Scheisskopf". Mr. Scheisskopf worked for the unit at AIG that wrote credit default swaps that dropped AIG - and the American Taxpayer - in the drink. After contributing to a catastrophic collapse of the entire company that has required billions of taxpayer dollars, Scheisskopf, for whatever reason, left the firm. Now, as a "retention" award, the un-retained Scheisskopf is walking away with a cool $4.6 mil.

Let's put that in perspective. The median income for a man in the US was a little over $45,000 in 2007. More than half the wage-earners in the country, at whatever their current salary might be, would have to work for more than a century to earn what this AIG joker is walking away with. Scheisskopf walking away with far more money than most of us will earn in a lifetime, and to top it all up, we're the ones who are paying to clean up the mess he left. If Mr. Liddy thinks that he shares the popular anger about this right now, I'd suggest that he think again - preferably after spending three or four years working a long-hour, low pay job.

Under the circumstances, it's no wonder that people are really, really angry. It's no wonder that people want to take whatever steps they possibly can to repossess the money. So it really shouldn't be any surprise that some members of Congress are now proposing a super-special, for moron executives of companies receiving corporate welfare only, give-us-back-your-bonus tax bracket.

Fortunately, NY Rep. Charlie Rangel, Chairman of the House Ways and Means Committee, is injecting a much-needed voice of reason into these discussions:

But the reaction of another of the chairmen, Representative Charles B. Rangel of the tax-writing Ways and Means Committee, underscored the legal and political complexities facing Democrats as they scramble for a solution. Mr. Rangel, a Democrat from New York, objected to one of the most popular ideas being floated -- a confiscatory income tax on the recipients. The tax code is not "a political weapon," he told reporters.

Right on.

I don't just want to see the government recover every dime of these "retention" bonuses, I want them to recover the money from the greedy morons that got us into this mess in the first place. Absent a confiscatory tax, that's not going to happen. Which means that I've got to accept, however reluctantly, that it shouldn't happen.

Rangel is right. We can't afford to use the tax code as a political weapon. It's wrong, and it sets a hideous precedent. Today, it's AIG execs getting slapped. Who's next, and why?

More like this

"Rangel is right. We can't afford to use the tax code as a political weapon. It's wrong, and it sets a hideous precedent. "

True - this is a very dangerous idea.

I see the source of this problem this way: the argument is that the bonuses must be paid because of the contracts with the workers, and "we can't just tear up the contracts". probably true. But, when the auto companies wanted money, the demand made by the government was, essentially, that the contracts with the auto workers had to be torn up (renegotiated, in the polite form) before money would be given. Why wasn't the same demand made in the case of the banks, and AIG, in particular?

A very American point of view... And while it is not for me to tell you how to run your own country, I would point out that the tax code always has and always will be a political weapon.

When Adenauer implemented a 90 % marginal tax rate for the topmost income brackets in the immediate postwar years, it was not just about financing the reconstruction of Germany. It was equally much about taking the money away from all the war profiteers who had for some reason or another never been convicted and shot (usually because they were considered vital to the functioning of the German economy...).

When Roosevelt implemented a 90 % marginal tax rate in the New Deal (we're beginning to see a pattern here...), it was at least as much about taking the money away from the people who had brought the Great Depression on the US as it was about funding the Interstate Highway system.

When Thatcher downsized taxes on real estate and raised poll taxes to compensate, it was quite explicitly about making more people who were then renting buy real estate, because homeowners voted Tory, and renters voted Labour.

When Ronnie Raygun and Greenspan raised payroll taxes in the '80s, it was less about Social Security than it was about shifting the tax share from rich to poor, by using these increasing payroll taxes to finance massive tax downsizings for the rich.

When Bush the Lesser pushed through massive tax downsizings during his first term, it was not (just) about giving money to his rich friends (although that was certainly a paramount concern). It was also about "starving the beast" - deliberately cutting off tax revenues in order to create a manufactured revenue crisis that would provide a political window of opportunity to cut back on public services.

And so on and so forth and etcetera.

So the only problem that I can see with the proposal as reported is that it's an ex post facto income tax, instead of an honest-to-God confiscatory wealth tax. The latter kind would work much better, be much cleaner legally and avoid all the messy and politically charged discussions on who y'all need to claw back your money from.

Of course, for those who are ideologically opposed to confiscatory taxes of any kind, there is also another solution...

- Jake

Of course the tax code is a political weapon/tool/whatever you want to call it. We impose sin taxes, we impose taxes on illegally acquired money (think Al Capone), and you're saying we shouldn't tax these bonuses? I disagree.

How about instituting a 90% income tax bracket for any individual or company covering any kind of income over $1-million earned in any way (salary, contract, commission, bonus, capital gains) through dealing in any way (trading, brokering, lending, receiving, etc) in public or private securities or commodities that are not regulated in some way (through SEC, FDIC, etc)? This tax would hit these AIG yahoos because (AFAIK) the credit-default-swaps are not currently regulated. It would be a disincentive for trading in unregulated securities in the future. It would be a strong incentive for the financial community to push the Feds to get any new derivative regulated as soon as possible. While regulation isn't a guarantee that bad things won't be done (think Bernie Madoff), at least it would be some kind of public insurance (or assurance) against really serious abuses by otherwise law abiding financial firms. The $1-million limit should (for example) allow Joe Taxpayer to loan his buddy $10,000 without triggering the penalty.

I don't know if this might just push any unregulated security exchange to off shore markets, or push financial services companies off shore.

The current executives say that the market ties their hands. They must offer such bonuses because if they don't, some other company will. So let us (the Federal Government) level the playing field so that the incentives for such abuses are dramatically lowered.

Alternatively, one could imagine a 90% income tax bracket for anyone in a company earning more than, say, 400% above the pay of the lowest earner in the company.

Thanks to Mr. Scheisskopf and others like him who created this crisis, my retirement prospects (which were tantalizingly close) now look like getting pushed out a few years.

I don't get the psychology of these ass-clowns. If you gave me $4mil, I would happily retire to my modest suburban home and never bother anyone again. In fact, I'd become a minor philathropist, in a quiet local way. But Mr. Scheisskopf, I guarantee you, is even now working on some scheme to get himself even more money and/or power.


I agree, the tax is a bad idea. The congress and treasury would have done themselves well to look at any obligations the company they were buying had, and perhaps wrote into the deal that these contracts are null and void if you take the money. Some due diligence would have been nice...

The whole populist outrage card is being played well by Obama and congress.

At the end of the day, the bonus money is a tenth of a % of what we've given them in bailout money. Who cares, where'd the 10s of billions go?

Agree, and Agree with Patrick's "At the end of the day, the bonus money is a tenth of a % of what we've given them in bailout money. Who cares, where'd the 10s of billions go? "

What we should do is prosecute the folks who got us into this mess for fraud. AIG execs who wrote insurance contracts their company could not cover were defrauding the insured. We're already funneling the 10s of billions to the insured, since AIG is "too big to fail". Now we should investigate the people who sold that fraudulent insurance. It may well be these bonus-getters, but we already have laws against fraud.

I don't know if this might just push any unregulated security exchange to off shore markets, or push financial services companies off shore.

Fortunately, there is an exceedingly simple solution to that: Simply declare all debts - private and public - to flag-of-convencience countries null and void. The reason that this would work gets a little convoluted, but basically it would nuke the Cayman Islands and the like back to the stone age.

- Jake

When Roosevelt implemented a 90 % marginal tax rate in the New Deal (we're beginning to see a pattern here...), it was at least as much about taking the money away from the people who had brought the Great Depression on the US as it was about funding the Interstate Highway system.

During the New Deal, the marginal tax rate was hiked up to 80%. It only went up to 90% during WWII. The 90% eventually funded the Interstate Highway System, but not until Eisenhower.

By william e emba (not verified) on 19 Mar 2009 #permalink

What AIG did isn't fraud. It was just unwise wagering. Insurance companies are like bookies -- you bet them that something bad is going to happen to you, and they bet it isn't. Like bookies, they study the odds carefully and rig the prices so that on average they're always take in more than they pay out. But every now and then a long-shot comes in and the bookies, or insurance companies, find themselves unable to cover their debts.

Someone on the internet compared AIG to a company offering flood insurance in a city which hasn't flooded for a hundred years. People like to build by the river, and since the insurance companies never have to pay out, everyone wants to be in the flood insurance business. The competition drives prices down, but since no one ever pays out, it's still all profit. Cheap insurance drives more construction on the river. Why not? You're covered. Everybody's happy... Until one day the river finally does flood (or real estate prices finally *do* start to fall) and everyone comes to the insurance company with their hands out, and they haven't got nearly enough money to pay all of the claims.

Also, while I'm in favor of doing what we can to stop the bonuses from being paid out (I've read that there are other bonuses, besides the one to this group, which bring the total over a billion, IIRC) I'm not really in favor of a tax this narrowly targeted either. Not because taxes shouldn't be political weapons, but because I don't really want the government to be able to say "Hey, you over there. Yeah, you in the blue sweatshirt. We just passed a law that says you have to give us all your money. Hand it over." Taxes should target broader groups of people. They shouldn't be personal. If only because, if a precedent like this is set, we'd never hear the end of it from internet libertarians who believe that taxation is the same as a mugging already.

Something really disturbing to me is the turn towards a general anger towards anyone in the financial industry making large bonuses.

I agree that anyone being paid a large bonus when past performance has been poor deserves getting taxed on their bonus (but agree with Mary--this absolutely needs to be broad and cannot be directed at specific people).

Large banks are heterogeneous and are actually a conglomeration of many different businesses. These banks have units that have caused outrageous losses and units, and units that, despite the constant bombardment of bad news, continue to make money. The bills being discussed by the House don't differentiate between a worker that created $10 million in losses and was awarded a $1 million profit and the worker that created $10 million in profit.

AIG is a perfect example of this. AIG was basically bankrupted by a single unit in London. Many of its foreign units that it is attempting to sell at firesale prices, have continued to make money.

Again, though many people are uncomfortable with the idea of this, there really are people out there in the financial services industry that continue to produce large amounts of real wealth for their customers, and if you don't pay these people, they either stop what they are doing or they all leave and go to firms that received less than $5 billion in TARP money. Does that make sense? The banks that received the most money, you have all their most profitable employees leave and go to firms that received less, leaving large banks that have huge losses with no profitable businesses?

As a country, we need to be smart and directed about what we're doing. Many things went wrong in the financial services industry, but we can't just throw everything out the window. Credit cards, mortgages, home equity loans, credit default swaps--they can all be abused, but are you going to ban all credit cards, mortgages, etc.?

Besides the whole issue of fairness that Mary reminded us of, we need to be careful we're not doing the equivalent of commiting a beheading of a sick patient because we found that he had a huge tumor. Especially since this patient, if beheaded, would leave our economy even sicker, even more hopeless...

I foresee serious problems with the implementation of Rangel's proposed bill.

First of, an individual who makes 125k base and 125k bonus is incentivized to get himself fired sometime in December, collect some unemployment maybe. This way, he limits his taxable income to less than 250k and he will not be subject to this bill. In other words, Americans are encouraged to not work in order to maximize post tax income:
The binary nature of this bill has perverse side-effects.

Second, imagine a friendly, hard working, smart man or woman who has had enough of Wall Street. She got a 300k bonus, let's say, and resigned shortly afterwards in February. Maybe she will go educate kids in poorer countries, maybe she will go party in Vegas, maybe she will go to medical school. Either way, instead of expecting to pay 150k in taxes, this woman will now pay 270k in taxes. Such treatment from the government is insulting.

By NotSoQuick (not verified) on 21 Mar 2009 #permalink