The Legality of AIG Tax Cuts: The Debate

Rather than rehash all of the different legal arguments for and against the tax on AIG bonuses I;ll refer you here.

Its a debate between me and another blogger Jonolan, a true right wing conservative. Its more or less a good debate. While I personally think his arguments are lacking, he probably thinks the same of me, these are typically the arguments being used in the debate.


Dean: You shouldn’t get rewarded in a capitalist system for doing a crappy job

Apparently Howard Dean is now a paid contributor for CNBC. Good idea? Well it only took him his very first appearance to offer a perfect explaination of the American outrage over Wall Street’s bonuses:

(h/t) Think Progress

DEAN: I think you guys are looking at this the wrong way. I don’t think people resent Wall Street because they’re making millions of dollars. Everybody wants to be rich in this country. I think people resent Wall Street for making millions of dollars while the folks who are reading the newspaper are out of work. You shouldn’t get rewarded in a capitalist system for doing a crappy job. That’s what the issue is.

(emphasis mine)


Is the House’s AIG Tax Illegal? Nope!

There are two arguments that opponents of the House’s bill taxing AIG bonuses cite as evidence of its unconstitutionality.

1. The House law is a Bill of Attainder.

2. The House bill is illegal because its retroactive

This might be good politics  but its bad legal reasoning.

The major problem with the argument made by critics is that its based on the legality of the substance, instead of the legality of process. (Which a bill of attainder would fall under.)

Let’s say I file a tax return with the government and they write me a check for $500. A month later they realize they made an error and the check was supposed to be for $50. Can they legally take away that $450? Yep. This is essentially the same process the government is using in its decision to tax AIG bonuses.

Politics aside, this is the fundamental legal issue regarding AIG’s taxed bonuses. Can the federal government recoup misallocated funds ex post facto.


Retroactvity or Ex post facto

The Supreme Court has consistently ruled in favor of retroactive tax laws. The most recent example occurring in the unanimous 1994 Supreme Court case United States v. Carlton. Here’s a relevant passage from conservative Justices Scalia and Thomas:

United States v Carlton:

The reasoning the Court applies to uphold the statute in this case guarantees that all retroactive tax laws will henceforth be valid. To pass constitutional muster the retroactive aspects of the statute need only be “rationally related to a legitimate legislative purpose.”

Bill of Attainder?

But what about the bill of attainder issue? Does the House bill unfairly punish a small group of individuals? Nope. Here’s why.

When drafting the House bill media outlets reported it as a tax on AIG bonuses. But you know as well as I do that the MSM, often…um misreports news. Edward McCaffery, a tax law professor at the University of Southern California explains:

The measure doesn’t single out employees at AIG and instead uses general language affecting all companies receiving more than $5 billion in federal bailout money. Bonuses for employees at Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley would be affected.

The House took additional steps by allowing corporations that pay back federal funds to pay the bonuses minus the 90% tax. Thus, if AIG REALLY wanted to pay these bonuses they could just return the federal bailout money.

Are all of these laws and language sneaky legal wording? Yes, most laws are. Do I feel bad for AIG. No. These executives, don’t deserve the bonuses as you pointed out. If we can legally recoup them, which 90% of the evidence points to then the government should use ever legal option it has to recoup taxpayer money.

White House Toes The Corporate Line on AIG Bonuses

White House: AIG bonus tax may be ‘dangerous’:

Vice President Joseph R. Biden’s senior economic adviser, Jared Bernstein, said on “This Week” on ABC that he thought President Obama might be concerned about “using the tax code to surgically punish a small group of people.”

No no no no no

The tax on AIG executive bonuses isn’t a punishment. Its not using the tax code to unfairly target a small group of individuals.Nor is it the knee jerk public policy that some critics of the bill argue.

Lets be clear here. AIG executives took billions of dollars from taxpayers in order to stop the firm from going bankrupt and then diverted hundreds of millions of dollars to their personal bank accounts.

It’s not their money. They are not entitled to it. And if they had any morals or human decency they would return it.

Is Obama Doing Too Much? No, He’s Doing Too Little

One of the newest political theme’s gaining traction lately is the ” Is Obama is doing too much” message. The idea behind this being that with the economy being in such poor shape, Obama should drop everything he’s doing and focus on fixing the economy?

So is it true?

In a sense no. In another sense hell no.

Click below to read more

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Majority of House Republican’s Vote Support AIG Bonuses

Yep, you read that right.

Unsurprisingly the House just passed their bill to rescind AIG’s bonuses by taxing them at 90%. Here’s the vote breakdown:


Yea: 243
Nay: 6


Yea: 85
Nay: 87

Yes, you read that right. There were 87 Republicans, including minority leader John Boehner, who believe AIG executives should keep their bonuses. Or in more blunt terms, the majority of house republicans believe that taxpayers should give a handout to wealthy executives who essentially committed fraud.

I don’t think I need to spell out the implications of this vote for anyone. Let’s just remember this the next time republican’s rally against , wasteful government spending, burdening taxpayers, or opposing “handouts” to the poor.

Is AIG Legally Obligated to Pay Bonuses? No One Seem’s to Think So. Not Even AIG

Thus far the major argument in support of allowing AIG to keep their bonus is that the major insurer is legally obligated to do so. But wait! Not so says the majority expertise opinion. Two of the most knowledgeable people on this issue, Lawrence Cunningham, a law professor at George Washington University and Laurence Tribe a law professor at Harvard, both are quite confident that recinding the bonuses is in fact quite legal.

Even AIG’s framing of the bonuses as “retention” bonuses implies as much. Not to mention that AIG’s Chief Executive Edward Libby has asked those receiving bonuses larger than $100,000 to return at least half.