Outrage, yes; tax law, no

The Obama administration and Congress should immediately halt any effort to assess a punitive tax on bonuses paid this year by companies that received bailout funds from the Troubled Asset Relief Program.

The House of Representatives two weeks ago voted to slap a 90% tax on bonuses paid by companies receiving more than $5 billion in TARP funds to employees earning more than $250,000 in adjusted gross income in 2009.

The bill, which was prompted by legitimate public outrage over the $165 million in bonuses paid by American International Group Inc. of New York, is tantamount to a mob of angry politicians’ running down Wall Street carrying torches and pitchforks.

Thankfully, President Obama signaled opposition to the House’s tax bill on constitutional grounds. That in turn led to a cooling-off on the matter.

The House Financial Services Committee last Thursday, for example, adopted a more tempered alternative to the bill.

The Senate, meanwhile, likely will delay taking up the bill until after a two-week recess that begins April 3.

Of late, Mr. Obama also has toned down his anti-Wall Street rhetoric, probably realizing that he will need the help of the financial community to accomplish his goal of economic revival.

In another sign of a cool-off, New York Attorney General Andrew Cuomo said last week that 15 of the top 20 bonus recipients at AIG have agreed to return their money voluntarily. In total, AIG employees have agreed to return about $50 million of the $165 million in bonuses awarded this month.

Of course, it’s understandable that politicians, voters and radio talk show hosts are angry about the taxpayer-funded bonuses being doled out to employees of AIG and other disgraced financial services companies. It is unconscionable that some of the same executives who drove their companies to financial ruin — and then accepted taxpayer bailout money — would later reward themselves with multimillion-dollar bonuses.

But it is equally unconscionable that our elected officials would attempt to use an instrument as powerful and sacrosanct as the law to take revenge. In times of crisis, politicians have a responsibility to rise above the blood lust of their angry constituents — and even their own righteous indignation — and do what is right. And while it may feel good to impose a punitive tax, it is not prudent or ethical.

For starters, a bonus tax could keep banks from participating in the Department of the Treasury’s plan announced last week to buy toxic assets in order to unfreeze credit markets. If the Obama administration has learned anything in recent months, it’s that the cooperation of the private sector is absolutely vital to fixing the economy.

Also, while the bill passed by the House is aimed primarily at executives at AIG, it would undoubtedly punish the innocent families of mid-level managers working at AIG and other financial companies. The Senate is reportedly considering a broader version of the bill — one that would impose a 35% tax on bonus recipients regardless of their income level.

Without a doubt, any legislation aimed at imposing punitive taxes on executives at firms receiving bailout funds would face tremendous legal scrutiny. Already, questions are being raised about whether such a tax is even constitutional.

Indeed, various protections are in place at both the state and federal levels aimed at protecting citizens against unfair taxation. For example, the Constitution prohibits bills of attainder, which are laws that declare a person or group guilty of a crime and punishes them without the benefit of a trial.

Of course, a reasonable case may be made that the proposed tax is not retroactive since it would apply to bonuses earned this year and paid in 2010. No one, however, can deny the bill’s spirit, which is vindictive and small.

Let’s not take that path.