Totally Taxing Bad Bonuses

Giving bonus to employees of failing corporations is wrong. If it were not for our government keeping the companies in business, the employees would not even be drawing a salary. This is exactly the kind of thing that proponents of non-intervention fear: that by keeping failing companies in business, we are perpetuating bad business practices. In this they are right.

Should the government rescue failing business that are likely to bring down scores of other businesses if they fail? Should bankruptcy be the safety net for insolvent financial institutions, or should the federal government step in and save them? Good questions, but let’s put these aside for now.

Bonuses should never be given to reward bad behavior. AIG and others have been doing just this. The very people who sold the policies that are bringing the company down, are the ones being rewarded.

One could argue that the bonuses are really just part of an employee’s compensation, like salary. I don’t buy it. The very term bonus means something in addition.

One could argue that in AIG’s case, bonuses are contractually obligated. Perhaps management cannot void the contract, but Congress can. It took an act of Congress to keep AIG afloat, and an act of Congress can nullify those contracts just as quickly.

Congress seems to be doing a good thing: tax those bad bonuses into oblivion. Make a law that says this is not O.K. But they are not going far enough. They are taxing 90% of bonus over $200,000 issued by companies receiving at least 5 billion dollars in bailout money (per the bill that just passed the house).

Five billion! That is a lot of money. But what if a company only received, say a five million dollar bailout? That is more money than most people make in a lifetime. Companies who receive bailout money are in danger of failing without it. Otherwise, why did they need to get bailed out? Bonuses from any company being bailed out should be taxed, not just companies receiving at least $5,000,000,000.

And how did they decide only bonuses over $200,000? So a failing company gets taxpayer money just to stay in business, and it is ok if they give out $10,000 bonuses? $1,000 bonuses? To the employees who got them into that mess? To employees who would be taking unemployment otherwise?

Any company who receives bailout money should not be giving out bonuses, period. You get one dollar in bailout money, and your employees should get no bonuses, and shareholders should get no dividend. And if companies want to give out bonuses anyway, the government can and should take the whole bonus in tax.