Congress Moves to Slap Heavy Tax on Bonuses

Acting with lightning speed, the Democratic-led House has approved a bill to slap punishing taxes on big employee bonuses from firms bailed out by taxpayers. Video by AP
By Shailagh Murray, Paul Kane and David Cho
Washington Post Staff Writers
Friday, March 20, 2009

Congress moved yesterday to levy punitive taxes on bonuses paid by financial firms receiving government aid, threatening to undermine federal efforts to rescue the financial system by driving away participants in the programs.

A quickly assembled House bill was approved 328 to 93. It struck hard at Wall Street's compensation system, which has come under fire because of the $165 million in bonuses distributed last week by American International Group to executives of the troubled unit that helped lead the insurance giant to the brink of collapse. Under the legislation, those who received bonuses of more than $125,000 would surrender 90 percent of their payments to a special income tax.

But the bill's reach would extend to bonuses paid to tens of thousands of employees at the nation's nine largest institutions that have received at least $5 billion in assistance under the $700 billion financial rescue package Congress approved last year. The measure also applies to Fannie Mae and Freddie Mac, the mortgage giants the federal government took over in September.

Because virtually all Wall Street employees receive bonuses -- in many cases making up the majority of their compensation -- firms would rather back out of the government's rescue programs than be subject to such harsh tax measures, industry officials said. The banks could still survive, but without federal assistance they would not have enough capital to restart lending, which is considered central to reviving the economy.

Senate leaders aim to act next week on an even tougher bill that would affect all large banks that have received more than $100 million in asset relief payments. Collecting the tax is not necessarily the intent of the measure, lawmakers and aides said yesterday. Some AIG employees have returned their bonuses, and some Democratic leaders said they may forgo the tax effort and turn to other measures already in the works to limit executive compensation at recipient firms.

"It will have a chilling effect on participation in any government recovery effort," warned Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, an industry group. "It harms middle management and the rank-and-file sales force, thereby weakening the very firms we are working to strengthen."

Lawmakers said they were aware of the potential consequences but were unfazed. "Frankly, bonuses for what?" said Sen. Olympia J. Snowe (R-Maine), a co-sponsor of the Senate bill. "They have to engage in more financially prudent behavior."

"Let's take a step and say we want our money back," House Speaker Nancy Pelosi (D-Calif.) said moments before the vote. "Here's one way to get it."

But other lawmakers said they want the legislation to go forward regardless of whether AIG bonuses were returned. The actions signaled that many on Capitol Hill have run out of patience with the administration's handling of the financial rescue.

Some lawmakers said even a return of all the bonuses would be unlikely to prompt Congress to drop the measure. House Democratic leaders described White House officials as "active observers" who had asked to see language of the bill as it emerged earlier in the week, but had not engaged in negotiations.

President Obama struck a somewhat neutral tone after the vote, noting that it "rightly reflects the outrage that so many feel over the lavish bonuses that AIG provided its employees at the expense of the taxpayers who have kept this failed company afloat." He continued: "I look forward to receiving a final product that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated."

Although leading Democrats thought the bill's chances were threatened when House Minority Leader John A. Boehner (R-Ohio) condemned it, about half of the GOP House members backed the measure. The lopsided House tally sent shock waves across the financial sector. Officials predicted dire results, saying the brightest talent could flee institutions that remain wobbly as the firms themselves leave the rescue program prematurely.

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