Tax News

CCH (cch.taxgroup.com) reports:

  President Obama raised concerns about House legislation (HR 1586) that would tax bonuses received from certain companies receiving Troubled Asset Relief Program (TARP) funds. Obama, in an interview on CBS's "60 Minutes" on March 22, cautioned that, as a general rule, legislation should not be designed to target "a handful of individuals" and that the tax code should not be used "to punish people."

  Obama said the administration would like to consider alternative approaches that are both legal and constitutional and that do not "hamper us from getting the banking system back on track." At the same time, he said that financial institutions must realize they cannot operate the same as they did before the economic crisis, particularly when they are using taxpayers' money.

  The House on March 19 passed legislation to impose a 90-percent tax on bonuses paid to highly paid employees of companies that received more than $5 billion in federal TARP funds (TAXDAY, 2009/03/20, C.1). Obama initially spoke favorably about the House bill. In a written statement, the president on March 19 said HR 1586 "rightly reflects the outrage that so many feel" over the excessive executive bonuses awarded by companies receiving TARP funding.

  The Senate is expected to take up legislation, the Compensation Fairness Bill of 2009 (Sen 651) during the week of March 23. The bill would impose a 35-percent excise tax on both employers and employees for bonuses given out in 2009. The president, in evaluating final legislation, believes it should not reward failure with bonuses but must also ensure that the financial system is not harmed, White House Press Secretary Robert Gibbs said at a press briefing on March 23. Obama has said that he recognizes and shares the public's outrage over the excessive bonuses received by AIG executives and that sparked the House and Senate legislation. However, during the March 22 interview, Obama cautioned that "we can't govern out of anger."

  Administration officials and congressional lawmakers also backed away from the idea of using the tax code to punish employees of American Insurance Group that received million in bonuses under TARP. During appearances on Sunday television talks shows on March 22, lawmakers like House Financial Services Chairman Barney Frank, D-Mass., said that people are worried about taxation being used as a response to the seeming extortion from AIG employees who threatened to leave their jobs. Frank suggested on CBS News's "Face the Nation" (FTN) that the U.S. government, which owns 80 percent of AIG, should file a shareholder suit to reclaim the bonuses. However, Senate Finance Committee ranking Member Charles E. Grassley, R-Iowa, said that his constituents cannot understand how bonuses could be paid to people who caused the nation's financial problems. He supports legislation to raise taxes on the AIG employees. "It looks to me like Congress's best leverage is taxes," Grassley said on FTN

  Speaking on ABC's "This Week," Jared Bernstein, chief economist to Vice President Biden, said Obama believes the House bill may have gone too far, and may raise concerns of constitutional validity. "Using the tax code to surgically punish a small group, that may be a dangerous way to go."

  House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., speaking on "Fox News Sunday," said that he and members of his committee believe that, if a firm takes federal bailout money, it should not pay excessive bonuses to its employees. However, Rangel added that he did have concerns about punitive taxation. "To use the tax code in what may appear to be a penalty to taxpayers is wrong," he said. Before deciding on the legislation, the committee weighed its options, such as the criminal court system, indictments or bankruptcy. "It wasn't an easy decision that the members of the Ways and Means Committee made," Rangel said.

  By Stephen K. Cooper and Paula Cruickshank, CCH News Staff