H.R.1586 imposes a 90% tax on bonuses paid to employees of firms that have received over $5 billion from the government’s TARP program. The tax only applies to households with a total income (bonus plus salary) greater than $250,000. The legislation defines a bonus as any payment in addition to normal periodic compensation. Employees who refuse or return a bonus payment are not subject to the tax, but employers may not incentivize return of the money or reimburse the employee. The tax applies to all bonus payments received since the beginning of 2009 and expires only when a firm that has recevied TARP funds owes the government less than $5 billion. Employees of Fannie Mae and Freddie Mac are also subject to the tax.
The Middle-Class Position:
Middle Class Supports. Taxpayer bailout funds should be used first to prevent a collapse of the financial system and next to make the financial system work for current middle-class Americans by addressing the housing crisis and increasing the availability of loans. Under no circumstances should taxpayer funds pay exorbitant executive bonuses. The tax on bonuses imposed by H.R.1586 provides taxpayers with a measure of accountability by recovering taxpayer funds that are misused by financial institutions whose very existence is largely predicated on government assistance. The tax cannot excuse the government’s initial failure to limit executive compensation at firms propped up by taxpayers. However, the bill will protect middle-class taxpayers by holding firms accountable when they use public money inappropriately for bonuses.
As difficulties for middle-class Americans worsened at the end of 2008, Congress prioritized the country’s financial sector instead of struggling homeowners and the growing ranks of the unemployed. Legislators rushed passage of the Emergency Economic Stabilization Act (EESA), arguing that a failure to shore up the financial system would cause great pain throughout the economy. In exchange, they promised strict oversight and accountability for the $700 billion of taxpayer money that would be funneled to the very banks and financial institutions responsible for the current crisis. But strong measures to ensure appropriate use of taxpayer funds were not included in EESA. Despite a majority government stake and commitment of $183 billion of government funds, American International Group paid executives bonuses unthinkable to the vast majority of working Americans. Similar compensation payments are planned for executives of the housing finance companies Fannie Mae and Freddie Mac, which are also under government control.
From the Experts:
AIG now claims that it had no [legal] choice but to pay [the bonuses]. However, had the federal government not bailed out AIG with billions in taxpayer funds, the firm likely would have gone bankrupt, and surely no payments would have been made out of the plan. My Office has reviewed the legal opinion that AIG obtained from its own counsel, and it is not at all clear that these lawyers even considered the argument that it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money. – Andrew Cuomo, Attorney General of the State of New York, March 17, 2009
What have we learned thus far? Even in a crisis such as we are experiencing, transparency, accountability and a strategy with clearly delineated goals are necessary to maintain public confidence and the confidence of the capital markets. – Elizabeth Warren, Chair of the TARP Congressional Oversight Panel, February 24, 2009
Beyond this Bill:
H.R.1586 should be unnecessary. Congress had ample opportunity to ensure that inappropriate bonus payments were not paid to employees of firms supported by taxpayer dollars. Indeed, in practice the legislation only recaptures taxpayer money, which itself expends additional IRS resources and occupies time better spent by Congress addressing the housing crisis, health care reform, and climate change. The type of ad hoc, retroactive legislation characterized not only by H.R.1586, but by the Emergency Economic Stabilization Act, calls into question Congress’s commitment to smart, long-term, sustainable investment and to real accountability with consequences for inappropriate behavior. The economic crisis demands flexibility and creative solutions to unexpected challenges. However, payment of bonuses was not only foreseeable, but legislation to prevent it was proposed. Congress must redouble its efforts to provide the accountability H.R.1586 offers before the middle-class taxpayer is put at risk.
Total amount of federal assistance authorized for AIG, according the Government Accountability Office, in dollars: 182,500,000,000
Minimum amount of bonuses distributed to employees of AIG’s Financial Products Subsidiary, the unit principally responsible for the firm’s collapse, in dollars: 165,000,000
Percent ownership stake in Fannie Mae, Freddie Mac, and AIG held by the United States government, respectively: 79.9, 79.9, 77.9
Value of assets received for every $100 the Treasury Department spent on the ten largest TARP investments in 2008, in dollars: 66
Value of securities received by Berkshire Hathaway for each $100 it invested in Goldman Sachs in September of 2008, in dollars: 110
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