The Closet Moderate: Am I Greedy?

Monday, March 23, 2009

Am I Greedy?

Well, it looks like those fat plutocrats at AIG are going to give back those sweet bonuses. Or, at least 18 of them are. As much fun as this populist news cycle has been, I'm kind of glad. I was not looking forward to the Supreme Court having to rule on how high a tax had to be before it constituted confiscation or a bill of attainder. There was no way that was going to turn out well.

It still might happen, of course. Not all of these guys (all of whom I picture looking like the Monopoly Guy) have agreed to cough up the tribute. Paul Caron at TaxProfBlog has been cataloging the arguments for and agin' if you're into what real lawyers think, but if you want an underemployed tax lawyer's ideas, read on below:

Despite my status as the Closet Moderate's closet conservative, I'm inclined to construe the taxing power of the federal government fairly broadly when it comes to income. The reason is the Sixteenth Amendment, which, in the great American Constitutional tradition, says all it needs to in just a few words:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

Incomes "from whatever source derived" is pretty expansive, and the Tax Code and the caselaw bear that out. If you earn income, the government may tax it. We, as a people, agreed to this when two-thirds of the Congress and three-quarters of the state legislatures passed the amendment in 1913. Unlike the Constitution of the great Commonwealth of Pennsylvania, the federal Constitution does not even contain a Uniformity Clause, so the Congress may charge different rates on different incomes, or on income earned in different occupations. Bonuses are income, so Congress may tax them, and may tax them at higher rates than ordinary income.

But how high can they go? How narrow can the group be on whom the tax is imposed? The House of Representatives seems to have considered these questions, and altered the bill to fit, in that too-clever-by-half way they have. They figured they couldn't levy a tax on "those AIG cocksuckers," so they levied it on "an employee or former employee of a covered TARP recipient". So, it doesn't look specific, but courts have held that you don't have to name names for it to be too specific for comfort.

Congress was also likely advised that they couldn't take 100% of the money back, so they set the rate at 90%. But, as this WSJ article makes clear, for employees living in New York City, the state and local rates are 6.85% and 3.648%, added to which is the FICA tax of 1.45%. If any of you readers are liberal arts majors like me, don't worry, I did the math: it's 101.948%.* The feds might not be confiscating all of the money, but they're making it so that the AIG guys don't get any of it, and that they actually have to go in their own pockets for about 2%. Sounds insane, but old-timers may recall that in the middle of the Second World War, the top marginal rate was effectively 90%.**

The normal equities arguments don't apply here. Normally, I'd say a 90% rate stifles innovation and industry, and I'd be right. But, this is only intended for this one unusual situation. And normally some think-tank would come up with a scenario in which the new rate would have unintended consequences, but I can't think of any. I guess my only problem with it is that, as a matter of equity, it's bullshit. The administration knew that this would happen -- they even altered the bailout bills to make sure it did happen. Now, the President thinks he can sign this bill and reap the benefits? That's messed up for the old politics, and for our hopey new politics, it's disgraceful.

Ultimately, I think the Congress has the right to do what it wants to do here. But if I was an AIG executive, I'd take the money and run.

*I didn't do the math; I copied from the article.
**Seriously, people laugh when I call FDR a socialist, but the proof is in the pudding.

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