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Senate debates punitive tax on AIG bonuses

March 26th, 2009

A heated public outcry was the response to the bonuses awarded to top employees at the American International Group. Now, Andrew M. Cuomo, attorney general of New York state, has announced that he persuaded nine of the top ten bonus recipients to give back their money. Furthermore, 15 of the top 20 recipients returned their money, with the others still reviewing their options.The decisions came in spite of Senate Democratic Majority Leader Harry Reid’s plans to delay legislation taxing bonuses at 90 percent, which would apply to bonuses received by employees whose companies were given a bailout of $5 billion or more. Cuomo said the state’s goal was to recover $80 million in bonus money. However, $85 million paid to people outside the United States was deemed unrecoverable.Cuomo also refused to release to reporters names of the bonus recipients who had returned their money.Although many of the top bonus recipients had agreed to return the money received, AIG spokeswoman Christine Pretto said these agreements were resulting in some senior-level resignations. Furthermore, Pretto said the company expects more resignations to come. Frank Navratil, professor of economics and finance at John Carroll University, said the consequences of taxing bonuses existed in both economics and ethics. “It’s a tough dilemma,” said Navratil, describing the bonus tax bill as “confiscatory.” “There are people who make a lot of money [on Wall Street]. They are starting a clawback provision,” he said. A clawback provision would take back bonus money awarded in certain cases. If the same economic strategies that bring in a great deal of money one year result in a significant loss the next, then a lot of the bonus money awarded from the first year could be taken back. The result of such a policy may increase the risk involved in putting forth strategies to make money. The loss that might result in the long term could cancel out the immediate benefits. The current tax policy in place has essentially the same effect. “It also means that some firms that could stimulate economic recovery may not want to get involved in anything to do with the government for fear of the same kind of tax [repercussions] if they make it big,” said Navratil. “And that is a dilemma.” The upcoming Senate legislation puts punitive taxes on the bonuses, amounting nearly to their whole amounts. It is currently being stalled by Republicans. “This bill ought to slow down, and we ought to think about the ramifications of what we are doing,” said Sen. Mitch McConnell (R-Ky), the Republican minority leader, according to The New York Times. “I gather from listening to the administration over the weekend that they are having some second thoughts about whether this is the right way to go.” Even President Barack Obama, who was earlier said by the White House to be looking forward to signing the final bonus tax bill, had second thoughts about turning it into law. “We can’t govern out of anger,” Obama said in an interview on 60 Minutes, in which he labeled the House’s special tax plan for AIG executives as unconstitutional. The issue at hand is whether the government should be able to implement legislation based on public outrage and anger. John Feehery, a former Republican aide, said the anger of a mob can be politically useful, “but its usefulness tends to dissipate when you’re trying to craft careful policy.” “They are in danger of being trampled by the mob,” he said. “They [the Obama administration] have to coolly explain what they’re trying to do.” Navratil said whatever happens over the bonuses, the decisions of what to be done require careful thought and information. The overall complex picture of economics mandate scrutiny, because legislative decisions made now will likely affect future ones significantly. “There might be a restructuring and redistribution,” he said. “And bonus opportunities might be fewer in the future.”