What's REALLY Wrong With Taxing the A.I.G. Bonuses?

It’s hard to find a corner right now that hasn’t been occupied by the debate over the A.I.G. bonuses – why they happened, who is responsible, when the Obama administration found out about them and, most importantly, what our elected officials can do to get the money back.

A.I.G. CEO Edward Liddy, facing mounting public criticism and pressure from Treasury Secretary Timothy F. “Timmy the Scapegoat” Geithner, has “asked” the recipients of the $165 million in bonuses to return half of it. Why anyone in their right mind would return a bonus to an employer that publicly pronounced that it was legally obligated to pay the bonus is just one of many questions without an answer that this mess has wrought. It’s not as though these executives can’t afford a battalion of thousand dollar per hour corporate lawyers to protect their money.

Democratic leaders in Congress have floated a Plan B for recovering the bonuses: Selectively tax them. Tax just the bonuses paid to just the A.I.G. executives. The money would flow back to the Treasury which would, if past is prologue, dole out the money again to A.I.G. so that it can continue to pay the salaries of the very executives who were paid the bonuses to begin with.

Brilliant! That’ll teach those greedy, money-grubbing executives!

Except that the Constitution forbids selective taxation. Article I, Section 8 of the Constitution states that “the Congress shall have power to lay and collect taxes, duties, imposts and excises… but all duties, imposts and excises shall be uniform throughout the United States.” Meaning that the IRS can’t single out any person or class of persons and require them to pay what amounts to a “special” tax that the rest of us aren’t required to pay. The Equal Protection Clause likewise acts as a bulwark against precisely that sort of targeted governmental action against individuals.

They teach this in law school. Like, where the President used to work before he became all famous and stuff. “I was a constitutional law professor,” President Obama said in 2007, “which means unlike the current president, I actually respect the Constitution.”

So that’s what was really wrong when the President ordered Timmy the Scapegoat to find a legal way to “block these bonuses and make the American taxpayer whole.”

President Obama knows full well – far better than most – that there is no legal way to get these bonuses back. Unless, of course, the A.I.G. executives decide out of the generosity of their hearts to donate their legally protected earnings to the American taxpayer. (Wonder if they could claim a charitable deduction on their 2009 returns?)

But the President sure sounded good when he directed Timmy the Scapegoat to add A.I.G. bonus recovery to his short list of responsibilities. “Under the circumstances, it’s hard to understand how derivatives traders at A.I.G. warranted any bonuses at all, much less $165 million in extra pay,” the President said. Never mind the fact that the economic recovery bill restricted bonuses at companies receiving taxpayer money, except for bonuses granted by contract before February 11, 2009 (of which all of the A.I.G. bonuses were – way to go, Senator Dodd!).

You can’t let a boring, old constitutional article get in the way of a nifty, populist sound bite.