The Constitutionality of Bonus Tax Bills
Since the great wave of AIG outrage crested, I’ve heard lots of speculation as to whether or not the bills under consideration to retroactively tax bonuses paid out at bailed-out firms might be unconstitutional. The Congressional Research Service has a useful discussion of the issues (PDF) which reveals that lots of the things some people have deemed potential constitutional problems are fine, but that there may be a viable constitutional challenge under the “bill of attainder” clause of the constitution.
I continue to find the specific focus on bonuses to be somewhat mysterious. If executives were getting less money in the form of “bonuses” and more in the form of base salary, what would that really change? I’m all for measures to curb excessive compensation, but zeroing in on the bonuses seems like putting semantics ahead of real policy goals.
22 Responses to “The Constitutionality of Bonus Tax Bills”
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March 31st, 2009 at 1:17 pm
You know, there’s a really easy fix for all these constitutional issues. Just raise taxes on all the multi-millionaires instead of just the ones from AIG.
March 31st, 2009 at 1:26 pm
I think the focus has been on bonuses because to most people, bonuses imply payment for extraordinary performance. So, when you have people that lost $500 Billion get a bonus, people wonder what in their performance could possibly warrant a bonus.
March 31st, 2009 at 1:31 pm
The bonus story was a modified limited hangout.
http://en.wikipedia.org/wiki/Limited_hangout
The weekend of March 7/8 a story was leaked, yes leaked, to the WSJ and Forbes, others perhaps too, about the firms and amounts that AIG paid off in full on the Credit Default Swaps. $87 billion I believe in total. Goldman number two on the list with a number that keeps growing in reports by the way: $6b 19B 14B. The NY Times didn’t mention it.
Instead the next week the bonus story exploded. A story faces could be put on. A story people could relate to. A story pumped mercilessly by the mainstream media. When the Swaps got mentioned it was always in relation to the damn foreign banks involved.
It’s a beautiful thing.
March 31st, 2009 at 1:31 pm
I think the problem with “bonuses,” as opposed to salary, is that ordinary people – who tend not to receive bonuses as part of their compensation – understand a bonus to be a specific reward for exceptional performance. For them, then, bonuses become particularly onerous when the executive’s performance appears to end so clearly in abject failure. Base salary means they got paid but may have done their job poorly (they might get fired or receive no raise); bonus implies that they got rewarded extra for the job they did despite their pitiful performance.
March 31st, 2009 at 1:32 pm
If you have people that were tasked with winding down billions of dollars of debt and they do indeed wind that debt down, then they have earned their bonus.
March 31st, 2009 at 1:35 pm
What Patrick said.
I know that the financial industry claims that a major portion of their pay is in the form of a bonus so we should think of it like a salary. Maybe. But are we supposed to believe that they didn’t know that they didn’t orginally frame it that way to justify such high pay? Also, the system at the top was supposed to align their incentives with investors–what a joke.
March 31st, 2009 at 1:35 pm
I continue to find the specific focus on bonuses to be somewhat mysterious. If executives were getting less money in the form of “bonuses” and more in the form of base salary, what would that really change?
Part of this is due to the fact that for most people, a “bonus” is exactly that, i.e. a reward for a job well done, which is galling when the job hasn’t been. In the financial world, however, a “bonus” is very often the bulk of compensation (oftentimes making up well over 50% and sometimes up to 95% of total year’s pay), that is, it’s not so much a bonus as it is deferred compensation. When people hear that a finance professional has been awarded a bonus, they think it’s a reward, while the finance industry treats it more as compensation.
March 31st, 2009 at 1:37 pm
Judd, Listen
A big slug of the swaps were paid off. By Uncle Sam, in full, to the big banks, and Goldman of course. Hedgitarians and others not so much.
Any clerk could have done it. Open the file that says GS. Add it up, pay.
March 31st, 2009 at 1:49 pm
Rapier,
So what. Did their contract state that it couldn’t be easy? I doubt it.
March 31st, 2009 at 1:51 pm
> If executives were getting less money in the form of “bonuses” and more in the form of base salary, what would that really change?
Populist outrage is focused on bonuses because they usually imply performance-based pay, and almost nobody wants tax dollars propping up companies with executives who make millions.
Salaries are more commonly fixed and not performance-based, so there’s less outrage.
> I’m all for measures to curb excessive compensation, but zeroing in on the bonuses seems like putting semantics ahead of real policy goals.
I think it’s pointless to expect populism to be rational that way.
A rational laissez faire policy goal would be to put forward whatever regulation and legislation is necessary such that no industrial or financial company will ever:
1) Be bailed out (prevent “too big to fail”, etc.)
2) Be nationalized or government-owned (never run these types of enterprises, incl. Fannie & Freddie)
3) Have any level of compensation regulated (no salary, bonus, or minimum wage limits)
To satisfy #1 and #2, I would look to a model similar to antitrust law. If a company grows so large that the state cannot allow it to fail, then the state should preemptively split it rather than having to subsidize or run it later.
#3 runs counter to progressive politics, but best from an economic standpoint
March 31st, 2009 at 1:55 pm
Agree with all who cited the special Wall Street definition of the term “bonus,” different from common usage.
As I understand it, and it’s especially galling, the whole reason for categorizing part of the compensation package as a “bonus” is to shelter it from the IRS.
March 31st, 2009 at 2:07 pm
JBJ gets it right. Corporations can’t deduct non-performance-related pay above $1 million, therefore, salaries are generally capped at $1 million. “Performance” bonuses are what lead to the huge executive pay packages, not salaries.
March 31st, 2009 at 2:17 pm
Thanks, politicalfootball. I suspected there was something like that at work.
The link still doesn’t work, but I suspect there’s an argument to be made for it being a bill of attainder. From the best I can tell, the Supreme Court has only ruled on bill of attainders about 3 times in the past century, and none of those cases were very germane to the bonuses. It’s not a very settled part of the law.
March 31st, 2009 at 2:32 pm
My gripe is bonuses have been used to hide compensation from shareholders and thus from accounting and accountability. They have also been used to cheat America out of tax revenue.
If these people think they are worth millions, let them get a salary of millions and defend themselves in front of shareholders.
March 31st, 2009 at 3:10 pm
I think Matt used the word ‘mysterious’ either too quickly or improperly, or both. Or, perhaps he meant ‘mysterious if you are rational about all this, as opposed to being whipped into a populist frenzy by [fill in blank]‘.
So lots of people have explained why folks are all up in arms about the bonuses. But is there a serious argument that there should not be – in order to help rebuild this country from the destruction wrought by “free market” ideology – some caps on overall compensation, or preferably very high marginal tax rates (I’d be happy with a debate on 80 v. 95%) on extremely high incomes? I don’t mean telling me that people are going to “go Galt” or leave the county, I said serious arguments.
Finally, @Gherald L (#11), though you may be portraying someone’s (your?) idea of how to best regulate the economy, I’m not sure (1) what laissez faire has to do with proposed regulation and (2) your third point seems to me to be an assertion, rather than an argument. Just to take the minimum wage argument, yes, in some theoretical micro class you can make nice graphs showing how this increases unemployment and decreases “utility”, in the real world there is lots of evidence that this is BS. For a theoretical underpinning, I could suggest Jamie Galbraith’s book The Predator State.
March 31st, 2009 at 3:53 pm
Even then, they wouldn’t have to. Shareholders, according to this:
http://www.nytimes.com/2009/03/29/opinion/29Icahn.html
don’t have a whole lot of power.
Voters have more power to control congressional pay than shareholders have with regard to executives at their companies.
March 31st, 2009 at 4:34 pm
oters have more power to control congressional pay than shareholders have with regard to executives at their companies.
At least shareholders can sell their stock…to get away from the US government, you have to leave the country!
I don’t think we’ve optimized corporate governance – but I wonder if we really could, due to Hayek’s Socialist Calculation problem which manifests itself in corporations just like communist dictatorships!
March 31st, 2009 at 5:11 pm
How the fuck is this a bill of attainder?? Any lawyer in the house please answer because I’ve heard this argument and I can’t escape the conclusion that it’s bullshit.
A bill of attainder is a CRIMINAL matter. It’s a law that says so-and-so is guilty of a crime. Anne Boleyn and her brother were attainted for treason, I believe. It’s an abuse that a legislature uses to imprison or otherwise punish someone against whom the evidence is insufficient to obtain a conviction in a court.
This bonus tax legislation consists of taxing certain kinds of income at a certain rate. It seems to me that such a thing is at the heart of Congress’ explicitly granted powers, and in any case is very far from a matter of criminal anything.
March 31st, 2009 at 5:52 pm
No, a bill of attainder doesn’t have to be criminal: see U.S. v. Lovett, for example.
March 31st, 2009 at 9:16 pm
The focus on bonuses is because the outrage on that is sustainable, since everybody understands what’s wrong with getting a “bonus” i.e. something extra, for screwing up spectacularly. Its much harder to get a working definition of “too high” salaries.
Wall St twisted the meaning of bonuses for their own reasons. So far, they’ve enjoyed the benefits of this perversion. Its only fair that they also suffer the downside.
March 31st, 2009 at 9:20 pm
To elaborate, there’s a lot of talent devoted to knocking down any opposition to the interests of the biggies, with smoke and mirrors. So when you find something that people can understand really well (a bonus for screwing up), you go with it bigtime.
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