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.

12 thoughts on “The 90% Tax”

  1. “If AIG/Citi/GM/Chrysler get away with this rent-harvesting of the Treasury, it will encourage others to do so.” (tdaxp)

    This is extremely important, and the other side of a point that I make regularly. Free market capitalism is the only way this country will survive. Its the fairest way to distribute resources in a diverse polity. If resource distribution becomes overly political, then life becomes political instead of economic. This brings us closer to warfare. Here’s what I call the resources distribution continuum.

    war—-politics—-economics

    If we allow politics to trump economic activity this is will bring us closer to war. By allowing economic entities to become political, we then give the green light to everyone else to rely on politics for resources. There are various “groups” in the United States who rely on politics to receive resources. They rely on politics becuase they either aren’t good at economic activity or find it easier to get resources with politics. Once politics stops working, war is the next step.

    In pre-modern times tribes fought other tribes for resources. Animals fight for resources. Politics removed the need for fighting. Conflict over resources could be resolved through politics instead of war. Politics is more efficient than war. Less resources need to be used to attain other resources in politics compared to war.

    Economics is more efficient than politics. Corporations must remain economic and not become political. When the main drivers of economic activity become the main drivers of political activity we devolve and become closer to war for the method of resource attainment. We must allow corporations to fail becuase it keeps us from relying on politics, which brings us closer to war. Economics are not perfect, but its better than politics, and much better than war.

    When corporations rely on politics to get resources its called “lobbying.”

    When minorities rely on politics to get resources its called “civil rights.”

    When working and middle class whites rely on politics to get resources its called a “hate group.”

  2. I too am upset over the bonuses that were paid to the AIG employees, however, AIG was obligated under contract to do so. I don’t like it but a 90% tax on those bonuses is not the answer. It might even be unconstitutional as a punitive punishment without due process. These people could potentially sue the goverment and win punitive damages that will also come out of the taxpayer pocket. To take this sort of action also puts a mark of uncertainty on all contracts the government ‘might’ not like in the future, and the market hates uncertainty

    The bottom line is this: Haste makes waste.

    Our government was in such a hurry to prop up these institutions that they didn’t dot all the ‘i’s’ and cross all the ‘t’s’. They could have made the renegotiation of all contracts a prerequisite for receiving bailout funds (the UAW played ball), but they didn’t. They could have let the companies go into bankruptcy where those contracts may also legally be renegotiated and picked up/bought up the pieces afterward, but they didn’t. Instead, the government felt the political ‘need’ to be ‘seen’ to be doing something immediately and as a result are wasting millions and millions of tax dollars to no good effect.

    This is the law of unintended consequences. It’s disgusting, but unavoidable at this point. To regain the initiative and stop over-reacting to the consequences of their hasty actions, our leaders need to admit they were wrong and screwed up (they won’t) instead of trying to justify and rectify their actions after the fact (they will, and will make it worse in the process).

  3. Agreed, the bonus tax is one of the stinkiest loaves ever found in the congressional underwear.

    On higher marginal tax rates, and their hidden benefits to society…I’ve posted on that before.

  4. Neither Aherring’s nor sonofsamphm1c’s comment addresses the argument presented in this post. As such, those comments should have been posted elsewhere, such as in the Open Thread.

    Seerov,

    Excellent point. No class of beggars is as politically correct as AIG, Citi, GM, Chrysler, and the other zombie institutions. That is why they are able to convert their political power into cash and operating capital.

  5. Sorry Dan, you put up your opinion that “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” and I disagreed. In my opinion these companies may be using political influence to obtain government funds but a punitive tax isn’t a viable solution to the problem. That particular aspect of the AIG situation can’t be changed and isn’t good for anything but a learning-what-not-to-do-again experience. Intentionally crippling these companies isn’t going to solve anything, the government has done enough damage in propping them up. The market should either reward them for adapting to the changed situation or they will fail and be replaced by somebody who can.

    Before you tell me my comment is non-substantive or that I am trolling, my comment was directed at what I feel is the root cause of the problem, politicians feeling the pressure to ‘do something immediately’ rather than doing something that is well considered and effective, if anything at all. A 90% tax is one of those over-reactions they need to step away from as they admit their error. I thought this added a different viewpoint and that commentary was the appropriate venue for discussion even if (especially if) it was a disagreement. If you don’t want discussion or disagreement, turn off the commentary.

  6. Enron was compartmentalized. It could not trigger a global financial crisis. The energy markets were healthy.

    Bush succumbed to the realities of the financial crisis. Historians will eventually give him great credit for that. It shocked me. I didn’t think he was capable of it.

    The auto companies are a different matter. There is a lot of sentimentality involved. Some have offered a national security argument. I personally am not in favor of bailing out all three car companies. For national security, I can see keeping one.

    No executive wanted to be bailed out, or to have Uncle Sam as their partner. They had opinions, probably fairly informed, about what their demise would entail. Its easy to assign selfish motives to those opinions, but it’s also possible they simply believed a global meltdown, far far worse that so far seen, would be a calamity with severely negative consequences for the people of the world. Obviously, Bernanke and the Federal Reserve fully agreed with them.

  7. I don’t disagree w/ the context of Dan’s post. TARP recipients are, by my measure, semi-nationalized and so should be subject to whatever caveats and limitations the Fed pre-ordains. If you’re taking fed money to stave off economic ruin then you’ve turned in your “Wealth of Nations” membership card. The free market is no longer your domain.

    The problem for me is that Dan’s post here is based on his own well thought analysis and the 90% tax bill presented by our fearless leaders is based entirely on populist rhetoric, and a shallow, fallacious sort at that (hi Chris Dodd!)

    The method of the bill is fine but the ethos behind it is criminal. It’s a reactive measure brought about only by a political reaction to popular dissent not a proactive (ie Seerov’s crossing the I’s, T’s, or maybe reading the effing stim pack) measure. And it’s aim is punitive (get those AIG bastards!) and only conveniently (oh, and while we’re at it) preventative.

    Exempt AIG bonuses (which these idiots knew about and to which this bill is, in spirit, punishment via taxation for maintenance of political “veracity”) and I’m, principally, fine with this bill.

  8. Jay,

    The problem is that if we wait for a correlation of forces in which our onyl allies are those we like, we wouuld be unabel to do anything.

    One might as well refuse to support China’s bad to join the WTO, because one despises the Governor of Sichuan!

    sonofsamphm1c,

    No executive wanted to be bailed out, or to have Uncle Sam as their partner.

    This is unbelievable.

    Not only is it false on its face (in the early days of TARP, one could read regular reports of financial institutions joining up in the hope of having a better financial situation), it is false entirely (the CEO of AIG wants to have the federal government as his partner; the CEO of Citi wants to have the federal government as his partner; in the real world, “wants” means “compared to the alternatives,” not “would desire in an ideal case”).

    Its easy to assign selfish motives to those opinions, but it’s also possible they simply believed a global meltdown, far far worse that so far seen, would be a calamity with severely negative consequences for the people of the world

    There’s no reason to believe these are in any way contradictory sentiments.

    Citi does not wish the world financial system to collapse. Citi does not want its shareholders or officers to suffer from their bad decisions. Transferring wealth from the Treasury to citi is one way of achieving both goals.

    arherring,

    I recognize you disagreed. However, you did not address any of the reasons I gave for my position. Rather, you oepned a new, unrelated series of arguments.

    That said, you do raise an important point in your most recent comment:

    I feel is the root cause of the problem, politicians feeling the pressure to ‘do something immediately’ rather than doing something that is well considered and effective, if anything at all.

    The problem with this is that AIG, Citi, and the other zombies wield enormous political power. They are undead, and not extinguished, because of this political power. The window for a correlation of forces to be powerful enough to set a good example in this case is small and closing. As I wrote in the original post:

    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

    Just today, Treasury announced a plan to give another Trillion to the zombies and the speculators. This is not a sign of political weakness on the part of the zombies.

    Just today, a Republican senator sought a delay int he 90% tax. This is not a sign of political weakness on the part of the zombies.

    The choice is not between this de facto utilitization and an ideal policy. The choice is between this de facto utilization and the survival of zombie rent-seekers.

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