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Friday, March 20, 2009

Slippery Slope Watch II

To be clear: The Solipsist is not a tycoon.  He is not a master of the universe (well, except maybe his little corner of it).  He has no sympathy for the financial savants who got the country--the world--into its current economic mess.

Nevertheless, there is something troubling about the confiscatory tax rates Congress has approved in order to claw back some portion of the bonuses paid to executives at AIG and other going concerns (drunkenly staggering concerns?) that have received federal bailouts.  The news was that a tax rate of 90% would be imposed on executive bonuses paid out at any firms holding more than $5 billion of taxpayer money.

Inherently, there is nothing wrong with this tax rate.  Heck, even a 99% tax rate could be justified on the grounds that receiving 1% of SOMETHING is still better than receiving 100% of NOTHING, which is what these folks would have gotten if they HADN'T received federal money.  What bothers the Solipsist, though, is the retroactive nature of the taxation.  Look, YNSHC is as outraged as anyone at the thought that these folks are being rewarded for, not to put too fine a point on it, failure (see post of 3/15/09).  And if these people had any consciences whatsoever, they would voluntarily forego these bonuses, as many of them have already agreed to do.

They are not, however, LEGALLY obligated to do so.  The federal government had the opportunity to forbid the payment of any "retention bonuses" as a condition of receiving bailout money.  They did not do this.  As loathsome as the behavior of AIG and its ilk is, this is one thing that we cannot blame on them.  The payments were simply the fulfillment of a contract, and the last time YNSHC checked, one of the major functions of government--ANY government--is to ensure that legal contracts are fulfilled, whether the contracts themselves are desirable or not.

The problem is what happens from here on out.  Even if we all agree that these particular executives deserve to be soaked for as much as possible, what happens once this precedent is set?  Let's say Bill owes his friend Fred money.  Bill borrows money from his parents to pay Fred.  But Bill's parents think that Fred doesn't really deserve THEIR money (even though they've essentially given up claim to it by lending it to Bill to do with as he saw fit).  So Bill's parents come to Fred and ask him to give them back most of the money.  Should Fred have to give the money back to Bill's parents?  YNSHC doesn't think so.  Bill has to pay his parents back as soon as possible, but it's not really Fred's problem (although a real friend would probably try to help Bill out).  Legally speaking, though, couldn't the government now invoke the AIG rule to gouge Fred?

Again, to reiterate, there is no sympathy here for these executives.  And going forward, the government should make clear that any such bonuses WILL be taxed at a 90% level.  Or a 99% level.  Or a 99.999% level.  Whatever.  But you can't change the rules of the game midstream.

That just seems un-American.

1 comment:

  1. I see your point and you make a fair one. A contract is a contract. But these are extraordinary times and I think some post-bonus punishment is warranted. There's no precedent for the government bailing out these malfeasant industries so existing rules may not apply in all circumstances. Bonuses for at best utter incompetence and at worst criminal levels of greed? C'mon! A bonus is intended to reward GOOD performance and should be contingent on results. And if your performance helps contribute to the financial collapse of your country, GIVE IT BACK! It's my money anyway!

    Now I'm ready for Wharton!