I am powerless to resist this topic. Over at TaxVox, Howard Gleckman has a great post that criticizes the idea of taxing away AIG's bonuses.
If Congress wants to limit bonuses for employees of bailed-out companies, it should just do it. But using the Internal Revenue Code is a truly terrible idea. And dipping into the Code to win political points is worse. Long ago, people were rightly outraged when Richard Nixon tried to turn the IRS into a weapon to punish his enemies. This gotcha tax is another variation on the theme, and nearly as inexcusable. Imagine, for instance, if a GOP Congress retroactively barred people from deducting charitable gifts to Planned Parenthood. Or Democrats imposed a 50 percent surtax on companies that that do security work in Iraq.
A couple of thoughts on this. One is explanatory: I'm not sure taxing AIG is a partisan issue in quite the same way as a law barring deductions for donations to planned parenthood. (There is plenty of partisanship, but most of it seems focused on a different question: Who let AIG get away with this in the first place?) But I still agree with Gleckman's point: fast, easy politics are what's motivating this tax law, and that set's a bad precedent.
On the other hand, I don't really agree with Gleckman when he says that "the purpose of the tax code is to raise revenue." Politics and social engineering have always inflected the tax code, and rightly so. A question like "how progressive should the tax code be?" isn't something you can answer by studying revenue; it's a question of fairness and redistribution that, by necessity, draws in one's partisan commitments. And taxes (as Gleckman acknowledges) are used to encourge or discourage behavior all of the time. We don't just tax cigarettes because we want money from smokers. (Though we might want some of that money from smokers, too.)
If there's a problem with the AIG tax law, it much be found elsewhere. And I think the best responses are: (1) The law is being pushed through quickly and we haven't had time to think about the unintended consequences; (2) It is retroactive, and we should want to discourage laws that are retroactive; (3) it targets an extremely small portion of the population, and we should discourage laws that are not general in application; and (4) it is, at least in part, motivated by a punitive impulse that isn't necessarily the best thing for our politics.
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