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Posted by on Mar 21, 2009 in Economy, Politics | 3 comments

President Obama: Veto The Bonus Bill

Democrats in Congress and perhaps even President Obama are making a colossal misjudgment by taxing the bejabbers out of compensation rewards to employees of bailed out financial firms.

The tax is a pre-emptive strike at a select few and can be viewed as prohibited by Article 1, Section 9 of the U.S. Constitution, “No Bill of Attainder or ex post facto Law shall be passed.”

Certainly, cooler heads can prevail and find other remedies to collect in some circumstances what constitutes ill-gotten gains rather than spending the time and expense fighting it through the U.S. Supreme Court.

The public is rightly outraged. They see a system rewarded for failure. If you thought the public was angry when the government gives money to the poor, they are pissed beyond rationality when the government doles it out in the billions to the rich.

The tax passed by the House and considered next week in the Senate is politically a dangerous precedent. What’s next? Taxing Ben & Jerry’s at a 90% rate because Congress deems eating too much ice cream is bad for our health?

Besides, what the Democratic-led Congress and a seemingly sympathetic president is doing is falling into a vicious trap ballyhooed for years by Republican conservatives: The Democrats’ solution to all problems is tax and spend. Not that the House Republicans aren’t co-conspirators in this bonus tax trilogy.

Perhaps one remedy is for the feds to deduct the compensation rewards of each bailed out company in future infusions of equity to keep those companies afloat.

If Congress and the feds become too punitive, any desire on the part of private investors helping the government regain stability in the market place will dry up, leaving us taxpayers in a worst situation than we now face.

I’m no fan of Congressional Republicans who vote no in lockstep against Obama’s recovery plans, but in this case Republican Sen. Judd Gregg’s statement is right on: “It is wrong to propose to use the taxing authority of the government in a manner that is arbitrary, punitive, and targeted on a single group of people who they have deemed as having acted improperly.”

The Senate bill which proposes a 70% tax on the compensated individuals and their companies was outlined by Democratic Finance Committee Chairman Max Baucus and Republican Charles Grassley as crafted to “pass muster” with the courts.

The Senate bill would apply to all employees at companies owing $100 million in bailout money. It would impose a 35 percent tax on the bonus recipient and on the company, which would apply to any amount above $50,000 for a merit bonus and to the full amount of any bonus paid solely to retain the worker.

The House overwhelmingly adopted on Thursday a bill that would impose a 90 percent tax on bonuses paid since Jan. 1 by companies that owe the government at least $5 billion in bailout funds. That tax would apply to employees with family income of $250,000 or more, and would have an impact on businesses like Citigroup, Bank of America and Wells Fargo.

Meanwhile, administration officials are backing down on the punitive tax proposals. They said instead that President Obama would assess the potential effect of the bill that emerged from Congress on efforts to stabilize the financial system.

For the first time as president, Obama must make the tough but right decision to veto the bill as it appears now and look ahead at the big picture. It’s one thing to rant about bonuses to those who drove their firms into financial ruin as was the case at American International Group. Obama’s mission is to convince Congress and the American people any future financial bailouts are not an act of rewarding failure but salvaging and regulating an industry that is the heartbeat of our world.

Wall Street firms reacted angrily to the tax proposals, with several saying they would explore ways to end their participation in the bailout program. Reports The New York Times:

The chief executive of Citigroup, Vikram S. Pandit, sent employees a memorandum Friday saying, “The work we have all done to try to stabilize the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees. It would affect countless number of people who will find it difficult, if not impossible, to pay back the bonuses that they earned.”

Other companies said they would probably refuse to participate in other Federal Reserve programs aimed at stabilizing the financial sector.

For private investment firms, the prospect that the rules can be changed at the whim of Congress introduced a powerful element of doubt in their calculations.

And from The Washington Post:

The stakes are especially high because the Treasury Department is moving ahead with a critical initiative that involves persuading private investors to buy troubled assets from banks. The administration, which could unveil more details of this plan as early as Monday, is deeply worried that investors will be afraid to participate, Treasury officials say.

The Treasury plan would include three primary components, drawing on resources from the Federal Deposit Insurance Corp., the Federal Reserve and private investors, officials say…

Fed Chairman Ben S. Bernanke said banks should structure compensation to reflect contributions to a company’s health and profitability. He said problems arose when employees were rewarded for short-term results that created long-term risks.
“Poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization,” Bernanke said in a speech to the Independent Community Bankers of America.

Many bank employees, particularly those who work in the capital markets and investment banking, get the majority of their annual compensation in the form of a lump-sum payment at year’s end, a practice that is designed to tie pay to performance…

Treasury and Federal Reserve officials are also preparing to partner with private investors to create funds that could buy toxic assets, which provided the financing for troubled loans such as mortgages and have been at the heart of the banking system’s troubles. The funds would borrow money at favorable rates from the Fed — without having to pay back the loans for at least five years and possibly as long as seven years — to buy the assets, freeing banks to lend once again, a source said.
Finally, the Treasury and Federal Reserve would expand a recently-launched program that provides financing to private investors to buy assets that back new consumer loans, such as credit card debt, student loans and auto loans. That initiative would be broadened to address toxic assets that have been sitting on the books of banks for months, not just new ones.

Yet, some bank CEOs just don’t get the cultural change imposed by Washington.

Bank of America chief executive Kenneth D. Lewis told employees in a memo that they deserved to keep their pay.

Vikram Pandit of Citigroup argued that most of those responsible for the bank’s mistakes in recent years had left the company, and that the remaining employees were playing a key role in helping the nation to recover.

Cross-posted on The Remmers Report

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Copyright 2009 The Moderate Voice
  • $199537

    Although I think these taxes are extremely questionable constitutionally there is no way Obama will veto this bill. He will not go against his own party and what appears to be public sentiment.

  • AustinRoth

    As much as I think this is a truly horrible precedent for Congress, I have to agree that cold, political calculus says it will pass and be signed into law. Now, 2 -4 years down the road, it will be interesting to see the unintended consequences of this ill-conceived bill, and the denials of those who are pushing for it and supporting it.

  • I think Congressman Ron Paul summed this controversy up pretty well on CNN on Friday:

    Well, it happended because we did something that was outrageous. These bonuses are outrageous. 165 million dollars is a lot of money. But so is 700 billion dollars of unconstitutional appropriations. That’s where the problem came from. So yes, people are concentrating on these bonuses right now, but they’re missing the point. The point is that we shouldn’t be in the business of bailing out all these companies. And we don’t even know where the rest of the money went. We just discovered–probably inadvertantly–that there were some bonuses. Now everybody is outraged, which they should be. So what do they do? They pass 700 billion dollars worth of unconstitutional appropriations. Then they come in and they discover this. The public gets notice of it, so the Congress has to act and feel outraged. So they pass a bill, which is an ex post facto bill, as well as a bill of attainder, which is unconstitutional. So they’re using the tax code to punish people. So they do one harm–one thing wrong–they create a problem–an unintended consequence. Then they go back and they solve the problem by more of the same. Which is essentially what we are doing with our economy…

    Because they–in Congress, they panic. They react minute to minute, whether it’spassing the PATRIOT ACT or doing all these things. They react in emotional ways. So when the banking crisis hit, instead of dealing with over the last decade, which I’ve been begging and pleading for them to do, they wait and “Oh there’s a financial crisis.” Oh, it came from too much spending, too much taxes, and too much printing of money. So what do they do? They spend more! They blindly appropriate this money. And I just think the whole process is outrageous!…

    Ultimately, Congress should assume responsibility. This is what’s happened over the many, many decades–that we have transferred the responsibility of the Congress into the executive branch. The executive branch writes laws, and the courts rule, and Congress has reneged so much on their responsibility. And now all we know how to do is . . . spend money. don’t say how it should be spent, and then we allow the Federal Reserve to print money. We can’t audit the Federal Reserve. So it’s Congress’s fault. If Congress would wake up, we could reign in a lot of this. So, to me, it was very annoying to concentrate on doing what we were doing on Thursday and pretending we were going to improve things. This is just a gross distraction from the important issues that we should be dealing with.

    Politicians are like lemmings. They are so eager to prove to the American public that they share its concern, that they’re willing jump on board the bandwagon and pass the latest law–no matter how bad it is and even if they haven’t even read it.

    I blame the American people as well for their insistence that Congress impose a new law for every problem that comes down the pike without regard to their constitutional limitations. It seems that in the eyes of the American people, a sin of comission is forgiveable while a sin of omission is absolutely unforgivable.

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