Friday, March 20, 2009

Why I oppose the AIG bonus tax bill

We are all aware of the tremendous amount of tax payer dollars being used to prop up AIG. Its in the news everyday. Everyone I know, me included is outraged at the bonuses being paid to some of the executives. Having been in many positions before where my total compensation has been a mix of base salary and a target bonus, I know that every bonus dollar I ever earned was tied to achieving some performance metric or sale of products. So in that sense I do not understand these bonuses that are going to pad the wallets of the executives in the particular division that caused this financial collapse of AIG.

Having cleared that up, I want to now bring your attention to the issue of Congress trying to pass an AIG bonus tax bill with the expressed intent to reclaim those tax-payer dollars. I am against this hasty tax bill because it draws parallels for me on another hasty tax bill that was passed many years ago and now haunts more people than it was ever intended to target.

The Alternative Minimum Tax (AMT) was introduced by the Tax Reform Act of 1969. It was intended to target just 155 high-income U.S. households that used the many existing tax loopholes to literally avoid paying income tax. President Lyndon Johnson's Treasury secretary Joseph Barr and the Asst Sec of the Treasury, Stanley S. Surrey created the initial proposals to tighten the tax loopholes that eventually led to the creation of the AMT. In April 1969 President Nixon's Administration presented its proposal for tax reform to Congress and It eventually became law. The bill, I believe was created in such haste that the AMT proposal did not include the language to adjust for inflation. Congress for years has just sat on this and done nothing about it. 40 years later, it affects more Americans than it ever was intended to apply to. There are even horror stories of this tax affecting people who bought stocks which later dropped in value during the dot-com boom, but they still owed tremendous amounts of AMT dollars to the IRS.

It is thought that by 2010, over 30 million taxpayers will be affected by AMT. Over 94 percent of married filers who have children and make $75,000 to $100,000 will pay higher taxes due to the AMT. This tax that was designed as a parallel tax system in 1969 to ensure that that a few people in higher tax bracket didn't evade paying any taxes through loopholes has now become a comman man's tax burden. Even with all this staggering data, Congress does not do anything about the AMT year after year, because its now become a significant source of tax revenues.

This is single reason why I oppose the AIG-bonus tax bill. I am of the opinion that unless the AIG-Bonus tax bill is very narrowly defined and very very temporary, it will eventually affect a much larger set of people who were never the original target of such hastily passed tax laws. I don't want my government to be reactionary and put in laws that will hurt more people in the future. I want my government to be smart about this and find other ways to recover this outrageous bonus money, not through a hastily drafted document. Let us not repeat the mistake that was AMT (IRS 6251) with another called AIG-tax.


Anonymous said...

I am under the impression of is narrowly defined: it applies to those cos that received TARP funding more than some B$.


Deepak Das said...

It may very well be that it is narrowly defined. However even the AMT was narrowly defined to affect 155 people in 1969. 40 years later it affects more people than it was intended to affect and not even the very people it was supposed to target (those at the larger income bracket). Tax laws made in haste will always have unintended consequences down the road.

Manisha Goswami said...

Taxing the bonus money is not a solution. Its like trying to cure a disease that was diagnosed at a stage when it could have been prevented. I believe government's hasty action of taxing AIG-bonuses is because of the public outrage. They could have prevented bonus handouts when they had the leverage.
AND seriously is AIG paying bonus to the executives for the financial mess they created? I dont understand the contract term which says that the employee would get the bonus even if the company goes bankrupt!!!!(little exaggeration on my part here but its my outrage)

Deepak Das said...

Well the contract is the culprit. It seems that for a company that suffered a $100B (BILLION) loss in 2008, you would think that there would be no bonuses period. But I dont get how you can write a contract that says a bonus is paid even if the company had losses and nearly brought the financial world to a standstill.