Senators Unveil AIG-Inspired Bonus Taxation Proposal
Senate Finance Committee Chairman Max Baucus (D-MT) and his GOP counterpart, Sen. Chuck Grassley (IA), have unveiled a plan to prevent future AIG-type bonuses from getting paid out by imposing a 35% excise tax on both individuals and companies involved in such awards.
Baucus' and Grassley's plan closely resembles the bonus tax proposal that Sens. Ron Wyden (D-OR) and Olympia Snowe (R-ME) added to the economic stimulus bill -- before it was unceremoniously yanked from the final version of the measure.
Even if the Senate passes the Baucus-Grassley plan, however, it may not survive negotiations in the House, where Ways and Means Committee Chairman Charles Rangel (D-NY) has expressed resistance to the idea of taxing back executive bonuses.
And the Baucus-Grassley measure is restricted to bonuses "earned or paid beginning on 1/1/09," which could conceivably allow the backdating of cash payments to late 2008 as a means of avoiding the tax. Sen. Robert Menendez (D-NJ) is among those warning the Treasury Department of the backdating of bonuses.
Read the full summary of the Baucus-Grassley plan below:
· Excise tax on excessive compensationo Provisions for Companies - company must pay a 35% excise tax on:
§ All retention bonuses
§ All other bonuses over $50,000
o Provisions for Individuals - individual must pay a 35% excise tax on:
§ All retention bonuses
§ All other bonuses over $50,000
o For foreign employees - if the excise tax cannot be collected from the individual through normal withholding, then the company is responsible for paying the employee's 35% excise tax amount
o Provides regulatory safeguards that help to prevent companies from characterizing bonus payments as salaries to avoid the tax
o Provisions apply to all TARP recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac
o Applies to all retention bonuses or other bonuses earned or paid beginning on 1/1/09 and continuing through the period during which the company retains TARP funds
· One million dollar cap on deferred compensation
o There would be a $1 million limit on nonqualified deferred compensation, meaning that a taxpayer cannot defer more than $1 million in a 12 month period
§ $1 million limit would be indexed for inflation
§ If the $1 million limit is violated, compensation deferred under all nonqualified deferred compensation plans covering the taxpayer (including compensation deferred in previous years) would be taxable and such deferred amounts would be subject to a 20% penalty tax and interest payment
o Interest and earnings on deferred compensation
§ Interest and earnings on compensation deferred during the 12 month period would not be counted against the $1 million limit, so long as the earnings are based on a "market rate" of return.
§ In general, a "market rate" of return would mean a predetermined actual investment (which may include book value and a reasonable fixed rate of return)
§ The Department of Treasury would be given the authority to define a "market rate" of return
o Provisions apply to all TARP recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac
o Applies to all compensation deferred after date of enactment and continuing through the period during which the company retains TARP funds
Josh
Matt
Eric
Brian
We also need to restore an additional tax bracket for super-high incomes.
March 18, 2009 9:54 AM | Reply | Permalink
35% tax on the company, and 35% tax on the recipient? Who the hell cares?
The company is plundering itself instead of rebuilding. Why is "you can only really plunder 65% of the free money that we give you" going to stop it from plundering and make it rebuild?
The receipients, gee, they only get two million instead of three? I'm sure they're horrified at the prospect, and will therefore start lobbying their company to reform instead of continuing to give them free money.
What bullshit.
March 18, 2009 10:19 AM | Reply | Permalink
With the top tax rate is 35% already, this like 20 lashes with a wet noodle?
Democratic blowhards like Ron Wyden make me sick.
March 18, 2009 10:21 AM | Reply | Permalink
"Excise" = 35% on top of taxes normally due under the regular brackets. Assuming base salary already pushed the taxpayer into the 35% bracket, that would mean they'd have to pay 70% on the bonus amount.
March 18, 2009 10:26 AM | Reply | Permalink
If it gets to 70%, a significant portion of the remainder of the money would go to local and state taxes too. The federal government does not have to tax 100% for executives to be stripped of their entire bonus. (Though I'm pretty sure you'd need to get closer to 80%-90% for this to work. Anyone have numbers?) What gets me much more worked up is Treasury/Geithner to blame Dodd for something they have done, that they are responsible for.
March 18, 2009 10:51 AM | Reply | Permalink
Presumably the company, because of the 35% tax on them, would back into the bonus number. So a bonus of $1 Million would actually be paid out as a bonus of about $740,740.
Then the individual would be subject to the excise tax on the $740K. The excise tax paid would then likely be deductible for federal income tax purposes (as I believe all excise taxes are).
Here's the full math:
$1,000,000 bonus cost to company means:
- $740,740 bonus to individual
- $259,260 tax payment to government
$740,740 bonus to individual means:
- $259,260 excise tax to government
- $168,518 income tax ($481,481 x 35%)
After-tax employee bonus is thus $312,963, versus $650,000 had the $1M bonus been taxed normally. So this system cuts it by about 50%, I think.
March 18, 2009 11:48 AM | Reply | Permalink
Actually, looks like most federal excise taxes are not deductible (see IRS publ. 17). This means the take home could be more like $259,000, rather than $650,000 under the current tax code.
March 18, 2009 11:53 AM | Reply | Permalink
Err, sorry! Takehome = $222K (after excise tax of $259K + income tax of $259K).
March 18, 2009 12:05 PM | Reply | Permalink
Make it 100% and you'd accomplish something.
March 18, 2009 10:33 AM | Reply | Permalink
Taxing it at this rate will end the practice going forward. The mere idea of paying 70% income tax on anything would cause these guys to stroke out.
March 18, 2009 10:53 AM | Reply | Permalink
"would cause these guys to stroke out"
LOL, excellent phrase!
March 18, 2009 12:55 PM | Reply | Permalink
Problem is, taxing them 70% of the taxpayers money allows them to do the same thing that taxing 99% of the taxpayers money does. It lets them award themselves with money they did not earn while their company is having to be propped up by the federal government. It wouldn't shock me in the least to see a company with a 70% taxxed rate award their execs with a 10 million dollar bonus so they could keep 3 of it, and all the taxpayer gets in return is 7 million of the dollars they gave the company back, so that we can give them the money back again. Its ignorant.
March 18, 2009 1:35 PM | Reply | Permalink
I see your point. However, I stand by my position that they'd never get that far down the logic tree before they have a fatal stroke. Post-Reagan tax ethics is so deeply ingrained in them that they'll all pop a vein over the very concept of a 70% effective rate first.
March 18, 2009 4:25 PM | Reply | Permalink
Congress has to be careful to draft this legislation in a way that doesn't run afoul of the constitutional proscription against bills of attainder. Here's a good discussion (via The Volokh Consipiracy) of the issue from a former clerk for Justice Sandra Day O'Connor.
The task is complicated by the legislators' overheated rhetoric. Among other factors, courts will look to whether the legislative record evinces an intent to punish. See Consolidated Edison v. Pataki, 292 F.3d 338 (2d Cir. 2002). I don't know whether a court would consider sources outside the official legislative record, but I can't imagine the cause is helped by comments like Senator Grassley's call for AIG executives to commit suicide.
Personally, I don't think that the intent of this legislation is punitive. The goal is not cause the targeted individuals to suffer. It is to recover public funds that were intended to stabilize the financial system, not to enrich a few individuals. Nonetheless, the legal analysis is hardly clear.
March 18, 2009 11:45 AM | Reply | Permalink
As much as I am furious about these bonuses, and I don't believe that they are iron-clad, I also don't believe in using tax law to get back at people we are mad at. It just doesn't seem like the right thing to do.
Increase taxes across the board on incomes greater than 500,000 dollars; increase the payroll tax so that it applies to all earned income to fund Social Security fairly. Put the people in jail who fraudulently abused their positions to manipulate the markets. But don't create a new tax aimed at a bunch of people who are getting something most of us agree they shouldn't get. That seems like a variation of vigilante justice and it doesn't smell right to me.
I understand that a sizable percentage of these people don't live in the US. Does that mean they aren't subject to US taxes?
March 18, 2009 12:27 PM | Reply | Permalink
I agree that taxes shouldn't be used punitively, but that's not what I see this as doing. The goal is to recover the public fisc, not to make these individuals suffer. I think that's an appropriate use of Congress's tax power. (I'd rather see this done through the bankruptcy laws though.)
As for people who live outside the United States (and I assume you mean both U.S. citizens and non-U.S. citizens), I don't see how that limits Congress's constitutional authority to impose a tax, but it certainly might present an obstacle for the United State's ability to collect a tax. From the summary above, here's how the Baucus-Grassley plan would address the issue:
March 18, 2009 1:29 PM | Reply | Permalink
This isn't a tax intended as punishment, this is a tax aimed at prevention of waste of taxpayer money by taking money from the federal government, giving it to a business so they won't fail, then watching the business take said money and give it directly as bonus compensation when they claimed they HAD to have said money so their business would not fail. They agreed not to use the money in this manner, and did so anyway, the tax aims to hold them to their word.
March 18, 2009 3:48 PM | Reply | Permalink
Congress needs to address the issue of the largely unregulated derivatives market. All of this started when the Republican Congress dismantled some of the New Deal safeguards and all hell has broken loose.
Enron was just the first example with energy derivatives in an unregulated market. And it was forecast THEN that the continued lack of regulation in the future could result in the bankruptcy of a company with far more tenacles in the financial system. Say hello to AIG, folks.
So, yes, our Democrats in Congress (a few of whom have been complicit in this lack of regulatory oversight) need to step out (apparently this requires a lot of courage) and address the regulation issue for derivatives.
One thing this has done for us is flush out those who are in the pockets of the "don't regulate us" companies and individuals. Sad to see so many Democrats being flushed out.
Write or call your Congress critters and demand regulation in the derivatives market.
March 18, 2009 1:22 PM | Reply | Permalink
I posted this elsewhere, but in case anyone missed it:
http://tpmcafe.talkingpointsmemo.com/talk/blogs/cjames/2009/03/leave-aig-alone.php#comment-3411043
It is a November, 2008 letter written to Cuomo by Liddy promising not to do what has happened.
March 18, 2009 1:44 PM | Reply | Permalink
My guess it was Baucus, and not Dodd, who was actually responsible for stripping out stimulus provisions barring these and similar bonuses, inserting instead the exemption language in the final conference version.
Baucus was there in the conference committee. Dodd wasn't. And Baucus emerged as spokesman on the bill as well.
His emergence on this issue now seems disingenuous.
March 18, 2009 2:54 PM | Reply | Permalink
All compensation at bailed-out firms over $400,000 should be taxed at 100%.
A new 35% tax on some bonuses. Big deal.
The top bonus at AIG was $6.4 million. That recipient is still making millions from public money.
March 18, 2009 3:31 PM | Reply | Permalink