The 90% Tax

Every American who believes in limited government, the freedom of contracts, and the protection of citizens against arbitrary government taxation, should support the 90% tax on TARP-funded bonuses

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The greatest threat we face is rent-harvesting by large companies. Large companies have begun using their political influence to survive. GM and Chrysler are welfare argencies. AIG and Citi are zombie financial institutions. These companies are now farmers of corruption, harvesters of unjust enrichment.

Some degree of political corruption, favoritism, and lobbying has always made things move smoother in Washington. This is to be expected. But in spite of this, it once was possible for large companies with political friends to go bankrupt.

Enron is gone, because Enron is bankrupt. Enron is bankrupt because, even in spite of having personal connections to President Bush, at the time we still lived in a market economy. It was once possible for large companies to go bankrupt.

That is no longer possible. Welfare agencies like GM and Chrysler, and zombie institutions like AIG and Citi, now exist to convert political influence into operating capital and stock-holder value. At least as far as these politically powerful branches of the federal government go, the market economy is completely broken. They now operate in the world of political favoritism, where their lobbyists and connections help them burn through the Treasury’s cash.

Supporters of GM, Chrysler, AIG, and Citi, private companies that can only keep operating because of generous and limitless hand-outs from the federal government, argue that these institutions are too important to fail. Very well. We have lived in a world of companies that are too important to fail all of our lives. In fact, we have a word for such companies: utilities.

Unless we want these raids on the Treasury by big business to continue, we have to turn these zombie companies into utilities. Further, we should do so in a way that prevents anyone of the corporate officers and employees whose buy-in was vital for the raid on the treasury (the CEO, the high-ranking officials, high-paid employees who, if they had left, would have crippled the company, etc.) from benefiting.

In an ideal world, we would simply pass the ‘Utilization Act of 2009,’ in which AIG, Citi, GM, Chrysler, and the rest would be turned into utilities, the common-stock zeroed-out, all contracts renegotiated, and so on. Of course, we don’t live in an ideal world. The next best thing is to so cripple the ability of these zombie utilites to operate in the free-market that they become wards of the state, utilities who cannot function independent of the government and who lose any ability to earn a profit beyond what is given to them by the government.

In other words, those welfare offices (GM and Chrysler) and post office savings institutions (AIG and Citi) should be run along the lines of the Department of Health and Human Services, where the employees and officers are public servants who are remunerated and a public scale.

The 90% tax on bonuses paid from TARP-funded companies is a good step. So would a 90% tax on salaries paid from TARP-funded companies. And a 90% tax on capital gains from TARP-funded companies. The 90% tax on AIG bonuses is as good as we can get now to a Utilization Act, and may lead to further crippling of these companies in the future.

We have had 90% tax rates before. We have these so-called ‘retroactive taxes’ (meaning taxes that are collected for the tax year they are written in) all the time. There is no constitutional objection to the 90% tax on zombie bonuses. This 90% tax is not an enemy of the free market, but a friend of the free market.

The tax on zombie companies — this de facto Utilization Act — helps protect real contracts. All contracts rely on a functioning price system, a functioning market economy, to mean anything. But AIG, Citi, GM, and Chrysler do not live in the world of contracts. They live in the world of political favoritism. If AIG/Citi/GM/Chrysler get away with this rent-harvesting of the Treasury, it will encourage others to do so. Allowing these zombie institutions to get away with it make contracts meaningless, because only the politically weak are held to them, while the politically powerful can expect bailouts to save them from any inconvenient debt.

The tax on zombie companies – this de facto Utilization Act – helps protect us against arbitrary taxation. Whatever ‘taxes’ AIG ever paid has been more than made up for in federal bailout money. Taxes, in a TARP-funded world, are a simple accounting fiction. They may drive the politically weak to bankruptcy, of course. But for the politically powerful, like AIG, Citi, GM, and Chrysler, they do not matter. If you have political friends, you make money. If you don’t, you don’t. In the world of zombie companies, taxation is always arbitrary, and what the IRS says you owe has no relationship to whether or not you will receive or send cash to the federal government at the end of the year (if you are politically powerful).

There is only the defense of limited government the power of contracts, and the protection of the citizens against arbitrary taxation. In order to protect our economy, our contracts, and our tax system, Congress must impose the 90% tax on AIG bonuses.