Bonus Tax: Now What?

March 20, 2009 — -- The House acted with lightning speed to slap a big tax on bonuses at firms like AIG, but now the bill faces an uncertain future.

President Obama is giving the bill a cool reception and in the Senate, where it was introduced, Republicans have slowed down the legislative process, arguing against haste.

Politically, supporting a tax on bonuses for bankers is easy -- all but six Democrats and nearly half of the Republicans in the House supported the tax.

Even Republicans who have signed a pledge never to raise taxes, including the No. 2 Republican in the House, Eric Cantor of Virginia, voted in favor of the tax.

But there's a larger problem that's plaguing lawmakers: The bonus tax may simply be a bad idea with unintended consequences that could complicate economic recovery efforts.

Opponents say the bonus tax may scare away the very companies that the Obama administration's soon-to-be-announced plan for toxic assets depends on. Treasury Secretary Timothy Geithner's plan depends on attracting public financing to buy toxic assets. Even without the bonus issue, this may be a tough sell. With the bonus issue, those private investors may simply stay away.

Mounting Concerns

The lead editorial in today's Washington Post lays out the argument against the measure, saying the House "had the feel of a mob scene yesterday."

"By changing the terms of a deal months after it was entered into, Congress will show the government to be an unreliable partner, further draining confidence from the financial system and endangering long-term recovery," the editorial said.

This concern explains, in part, why the White House has stopped short of saying the president will sign the bonus tax bill.

And in a jocular appearance Thursday on "The Tonight Show With Jay Leno," Obama seemed to give the legislation a gentle thumbs down.

"I understand Congress' frustrations and they're responding to I think everybody's anger," Obama said. "But I think that the best way to handle this is to make sure that you close the door before the horse gets out of the barn. And what happened here was the money's already gone out and people are scrambling to try to find ways to get back at them."

The president then called for more systemic tax reform, returning to a tax posture similar to that in the 1990s, before tax cuts championed by President George W. Bush and enacted by Congress disproportionately cut rates for the wealthiest Americans.

"Where you and I," he said to Leno, "who are doing pretty well, pay a little bit more to pay for health care, to pay for energy, to make sure the kids can go to college who aren't as fortunate as our -- as my kids might be. Those are the kinds of measured steps that we can take. But the important thing over the next several months is making sure that we don't lurch from thing to thing so we try to make steady progress, build a foundation for long-term economic growth."

GOP Opposition

Republicans have criticized the bill to tax executives at AIG and banks receiving TARP funds for different reasons.

Rep. John Boehner, the Republican leader in the House, who voted against the AIG tax, said it was little more than theater drummed up by Democratic legislators to respond to public outrage.

"Listen, this bill is nothing more than an attempt for everyone to cover their butt up here on Capitol Hill -- it's full of loopholes," said Boehner.

When the Democrats who control the Senate tried to vote on the provision Thursday night, Republicans exercised their right to slow the bill down, arguing that passing hasty legislation -- such as the $700 billion taxpayer bailout of the financial system, which passed last year, and the $787 billion stimulus bill last month -- is part of what created the AIG bonus scandal in the first place.

"I don't believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences," said Sen. Jon Kyl, R-Ariz, as he objected to the tax bill on the Senate floor. "Frankly, I think that's how we got into the current mess."

Republicans want hearings on the legislation and an investigation into the apparent loophole in the executive compensation provision of the stimulus bill.