AIG and Taxing Bonuses

The AIG mess has settled prominently in the country’s headlines over the past week.  I think what we’re being fed by members of Congress is largely disingenuous.  Politicians knew that the bailout provisions didn’t address the bonuses that were contractually due the executives who played a role in the credit crisis.  Apparently the government was concerned that restrictions on bonuses would not survive a legal challenge.

But the pending solution seems even more problematic.  It certainly doesn’t seem right to have people responsible for the mess to benefit financially from large bonuses funded by American taxpayers.  Yet Congress’s proposed 90% tax solution is remarkably overbroad.  As Henry Blodget notes, the bill would require anybody working for a TARP corporation who makes over $250k to fork over 90% of any bonuses received.  This necessarily includes people who had nothing to do with the credit crisis.

Jake DeSantis, executive vice president of AIG’s financial products unit, recently sent a resignation letter to chief executive Edward M. Liddy.  The NY Times has published the letter here.  I urge either of my two readers to check it out as it really captures the point.

Outrage can be dangerous if it’s not controlled.  We should probably keep our heads and go after the right people. But even a more narrowly tailored approach that targets those responsible seems constitutionally problematic.  President Obama, a former Constitutional Law professor, recognized this in an interview with Steve Kroft on 60 minutes:

“As a general proposition, you don’t want to be passing laws that are just targeting a handful of individuals.  You want to pass laws that have some broad applicability.  And as a general proposition, you certainly don’t want to use the tax code to punish people.”

Well, as a general proposition, this bill sorta does both of those things.  Admittedly, targeting everyone who works for a TARP corporation and makes over $250k is broader than just targeting those responsible, but it’s overbreadth makes it incredibly unfair.  So, at best, it seems like Congress’s solution will either be 1.) constitutional but unfair or 2.) fair but unconstitutional.

Jack Balkin, who is a bit more of an authority on the subject than I am, says that the bill is constitutional.

There is no problem under the Due Process Clause of the Fifth Amendment because the tax is rationally related to a legitimate government interest. The government interest is (1) the avoidance of extraordinary rents to companies and their employees who are being subsidized by the government in order to keep the financial system working properly; and (2) preventing improper incentives and moral hazard in subsidized companies and their employees. Even if the tax is not well designed to achieve these goals, in the sense that other alternatives might achieve the government’s purposes better, the tax substantially furthers these purposes.

If this holds true, then the bill would fall into category #1 above, in that it is constitutional but unfair.  The idea of taking money from people who had nothing to do with this mess doesn’t seem right to me.  As Balkin himself writes, even if the bill doesn’t run afoul of the Constitution, it doesn’t mean that it’s necessarily good public policy.