The Impact of the AIG 90% Tax

Congress has just made a huge mistake and one that will cause any economic recovery to be delayed by one year or more.

What has Congress done? The house has passed a law that taxes 90% of all bonus payments to ALL firms who have received more than $5 billion in TARP money. This includes all the top banks, such as Goldman, Wells Fargo and Bank of America. In addition, the tax is on family income. Needless to say thousands of people who do work at these institutions will be impacted. For example, say two mid-level executives both earn $150,000 a year, then their bonuses will be taxed at 90%. So every bank under TARP now has an incentive to get rid of the TARP funds as fast as possible. Does anybody really think Goldman can operate under these rules? Their business model does not work under these rules. Thus, all banks have an immediate incentive to pay back the TARP funds NOW.

Up to this point the TARP has been designed to increase lending in the economy. You can argue if the program has been successful or not. But in order for the program to work, the banks have to use the money to make loans. The program was designed for only the 'best' banks to get money. But now Congress has put an extremely onerous provision: You can't give any bonuses! Congress has showed that agreements with the government are only good as long as the political will remains constant.

How will banks react? They will move to immediately pay back the government. To the extent possible, they will stop lending, stop dividends, stop everything to get back their bonuses. Wouldn't you? If you were the head of Wells Fargo and were faced with paying ZERO bonuses for almost all your employees wouldn't you stop everything and try to get out of this disaster? This will start a major run on the capital markets and stop lending. THE VERY OPPOSITE THING TARP WAS DESIGNED TO ENCOURAGE!

Because of the reduced lending, the economy may be faced with a much longer and slower recovery. Would you trust the government to put money into your company? With all the strings that will eventually be attached? If I were President of GM, I would rather face bankruptcy than Congress running my business!

The point is government intervention in the operations of corporations has been shown to be disruptive. The economy will suffer and unemployment will be significantly higher than all prior estimates.