AIG-Only Taxes Solve Nothing

As I argued yesterday, trying to break bonus contracts for AIG is a waste of time and money, both for the government and bloggers. It could also backfire bigtime, if departing AIG traders decide to blow up all the deals they created.

Instead of worrying about a measley $165 million, we should be worrying about how to pay for the trillions in total bailout costs. Rantin' Rick Santelli is exactly right this time:

the outrage seems to be about M's -- millions of dollars, right? $165 million, OK? But I would think that it should be looked at as a pretty big positive, because when you go from the M, maybe you should try to go to the B's, which is the billions of dollars, and maybe that's going to even enlighten for the T -- trillions of dollars. You know, 165 million is like worrying about 16 and a half cents, while 165 maybe necessitates a little more outrage.

So how do we pay for the trillions? By taxing Santelli's rich friends. Democrats are slowly coming to understand how tax policy can be used to solve the small AIG problem. Rep. Carolyn Maloney has a simple solution:

Entitled the “AIG Taxpayer Protection Act,” the Maloney legislation would instruct Treasury and the Internal Revenue Service to develop guidelines that tax at 100 percent any bonus that is not directly related to a commission for any recipient of government bailout funds in cases where the federal government is the majority owner of the company.

This 100% tax would recapture AIG's $165 million in bonuses, but that's all - because AIG is the only company whose majority owner is the U.S. Rep. Gary Peters (D-MI) has a similar idea.

Rep. Gary Peters (D-Mich.) introduced a similar bill late Monday that would create a 60 percent surtax on bonuses over $10,000 to any employee of a company in which the U.S. government has a 79 percent or greater equity stake in the company (AIG is the only firm meeting that test at the moment).

Rep. Earl Blumenauer (D-OR) is thinking more broadly: he wants a 100% tax on bonuses for employees of all TARP recipients.

But none of these ideas comes close to what we need to do: impose a surtax on all millionaires until the bailouts are repaid in full.

Update 1: As bailout costs produce huge deficits, budget hawks are once again looking to cut Social Security. A millionaire surtax would cut the deficits and protect the retirement program that is more important than ever, thanks to the crash in pensions, 401k's, and IRA's.

Update 2: Charlie Rangel is talking nonsense:

"It's difficult for me to think of the [tax] code as a political weapon," said Rangel, who spoke to a handful of reporters outside his office.

"Is this an indictment or a bill?" asked Rangel. "Are they naming people? I mean, are they naming the taxpayers?"

No, at best they're naming the only company that is 80% owned by taxpayers - AIG. AIG is jerking taxpayers around, so taxpayers have a right to jerk them right back. And it's perfectly legal.

Rangel said he sympathizes with the effort, but not the means it takes. "There's no way that good thinking Americans should reward people when they've been complicit in wrong doing," he said. "But as a former federal prosecutor, as I recall, it was the criminal code that you dealt with, not internal revenue."

Using the tax code could undermine citizens' faith in it as a fair instrument, according to Rangel. "There is some concern that I have that people will lose credibility in the income tax system and think of it as a political weapon rather than a revenue raiser," he said.

It's not being used as a political weapon in this instance, it's being used to correct a grotesque financial injustice.

But Charlie, if you really just want to focus on raising revenues, then you should enact a temporary millionaire surtax as I propose.