My Problem with the Whole AIG Mess

Here in the real world “bonus” means “something you wouldn’t normally get, but because of some special, good, circumstance, you have it.”  Like a “reward.”  So, when I hear that people at AIG got bonuses for running the company into the ground, I am appalled.

But someplace I read–and of course I can’t find it now–that companies hand out bonuses as a tax dodge.

And I suspect this is true.

But what I don’t get is–whose tax dodge is it?  Is this a way for the company to pay less tax or a mutual way for the company and the employee to pay less tax?

Because it sounds like it’s not actually that beneficial for the employee, but I don’t know enough about it to make a judgment.

But here’s why I ask.  Say I’m a company and you’re my employee and I say “I’m going to pay you a salary of $100 a year (sorry, we have to keep the numbers small, because I’m an idiot), but I’m going to pay you a bonus every year of at least $100.  So, you’ll actually be making $200, but to the Feds, it’s going to look like I’m only paying you $100.”

Now, do you pay tax on the whole $200?

And do you have any way of opting to receive the whole thing as salary?

Here’s why I ask.  Because yes, I find it appalling and infuriating that people at AIG got this “extra” money.  But it seems clear to me that this wasn’t actually “extra” money.  It was part of their promised income from the company and they had little or no way of saying “No, just pay me everything as salary.”

So, if this is a way that companies and employees dodge taxes–by looking like you make x when really you make x + y–then I have no problem with making sure y is taxed as part of your regular income, though I’m still not sold on taxing it at 90% (and this may be the only time in the history of Tiny Cat Pants that I take the side of rich people).  There are already tax laws and tax rates on the books that should be applied.

BUT, if this is a way for the companies to dodge taxes and it is of no benefit to the employee one way or another–if the IRS doesn’t care if the company says you made x but they paid you x + y because the Feds want their cut of x+y no matter what–then I strenuously object to taxing y at 90% because this punishes the employee, but has no effect on the corporation who was doing the hinky tax dodge in order to cheat us (as the American people who do pay our taxes and as the Federal Government).

You see what I’m saying?  If I pay you $100 and give you a $100 bonus because I promised you $200 and giving you half of it in this way gets me off the hook with the Feds in a way I really shouldn’t be getting off the hook, having the Feds take $90 from you doesn’t even begin to address the problem, even if it makes most folks feel good.

So, can anyone explain to me what’s going on?

22 thoughts on “My Problem with the Whole AIG Mess

  1. In an ideal world, companies give bonuses as a form of profit sharing. Rather than paying corporate taxes on retained earnings, you distribute the profits to employees before the end of the year to bring the company’s bottom line as close to zero as possible. Then the employees are responsible for paying (or dodging) the tax at their individual rates.

    This is not an ideal world, unfortunately.

  2. I’m not sure that it is a tax dodge. If it’s a cash bonus then employees still need to pay tax on it, and the co. still needs to pay FICA on it (I believe). It’s still compensation.

    Now, if it’s a bonus in the form of stock options (which would be worthless if the company went bankrupt), you only need to pay tax when you cash in the stock. But I don’t think AIG was handing out stock options, for obvious reasons.

  3. As someone who received a bonus for the first time ever in her career (Woo! Let’s hear it for the for-profit world!), I can tell you that it is part of my official compensation and damn near 50% of it was taken by the IRS immediately. I don’t know if this is helpful information or not.

  4. All I know is that healthy sense of skepticism I’ve always held for the corporate and government worlds has dwindled down to pure skepticism without a light at the end of the tunnel.
    Why are the union guys around here who were promised the world having to deal with VEBA issues that deny healthcare access to retirees after working three decades at tire plants, but we should honor bonuses for AIG Execs.
    I know they are different, I do, but for folks who have no money, there is a sense of classism that goes so deep that it’s hard to see the details.
    B., I don’t know either. I just know that life has never been fair.
    My grandfather used to say 40 years ago, “Mr. Right died a long time ago.”
    I used to not believe him. I do now.

  5. Okay, most of the outrage over the bonuses is that the money received was for operating expenses. That was supposed to be laid out clearly in the plan (but was conveniently overlooked. Grr). Because these bonuses were listed in hiring and employment contracts, they very easily had a loophole around the “no bonuses for bad behavior” part. So the money going to the bonuses is NOT profit money (ie Theirs), but, rather, save-their-ass money (ie Ours).
    I’m of two minds about this. On the one hand is my sense of “fair” and, well, these people get these bonuses at this time and that’s part of their compensation. On the other hand is my outrage of “Dude, that’s TAXPAYER money, and they’re the morons who screwed everything up and made it impossible for me to get student loans last fall, and so screw them!”

  6. CLC, I would disagree with you a bit. Some companies use bonus money as a way to incentivize performance and that performance can be at the individual level, not necessarily tied to company performance. For example, an NFL running back gets a salary but with a guaranteed bonus if he hits certain performance standards. The team performance is irrelevant in that case.

    And every bit of it is subject to taxes.

  7. (Sorry, this is a little long)

    Since I’m in sales, let me tell you that bonuses are part of my regular income. If I sell so much above quota, I get a bonus. I sell at a certain profit margin, I get so much extra a month, etc.

    It is a situation where, while it would be unwise to count on your bonus where budgeting your spending, (which saved my bacon when the financial meltdown in Sept freaked people out and folks stopped buying for a month or so) you know that if you are doing your job even at a somewhat middling level, you will bonus at least something.

    And yes, Uncle Sam usually gets their fair share of the check.

    Replying to Newsy’s point, if the Fed Gov’t had simply made AIG file bankruptcy, then payment structure, including bonuses, could be renegotiated. Instead, they decided to take ownership, meaning that all previous contracts on employment are still valid.

    But they didn’t do that. They wanted to make AIG their own little financial Amtrak. Therefore, they’re bound by the previously agreed upon contracts.

    And here’s the thing, since we (taxpayers) own AIG, we need it to succeed. Is it infuriating that many of the folks drove it, and by extension the US economy, into the toilet, but let’s consider what Congress did.

    They took the current CEO, Liddy, a guy pulled out of retirement, working for $1 a year, hired on only after everything came crashing down, trying to salvage what he can, and they continually ripped him a few days in a hearing over this thing where, agree or disagree with him, Liddy didn’t exactly have an easy choice to begin with and his doing his best, again… for essentially free.

    Then, they tax all bonuses (over $250,000 I believe) at 90%, which does get a lot of the irresponsible parties, but also hits some folks in other division of AIG not part of meltdown, who got their bonuses for making their divisions profitable.

    There will be innocent people — smart competent people — who through their work and knowledge are making their own divisions profitable, also caught up taxed at 90%. How long do you think those folks will stay at AIG trying to right the ship?

    So one will want to work at AIG.

    Or any other financial institute where the gov’t stepped in.

    Because who wants to deal with potentially being publicly yelled at by a bunch of grandstanding congressmen?

    Or potentially have their incomes after the fact (ex post facto?) taxed at 90%?

    So this thing is counter-productive, because the whole point isn’t to punish AIG, but to get AIG, or any other TARP recipient, financially sound again.

    But hey, it plays great on TV, right?

  8. i just wish the one’s who don’t deserve it (ie the one’s who are afraid for their lives right now) would just give it back without all this hoopla. personally i’m spending a few minutes a day throwing tomatoes at the building…it makes me feel better.

  9. The tax code requires that bonuses, gambling winnings and other such ‘found’ money be taxed at thirty-five percent. So it’s actually better for the government to have earnings broken into salary/bonus structures.

    My husband has worked on S/B structures for the last twelve years. The benefit to companies is that their payroll nut is smaller and the bonus compensation can be deferred if necessary.

    The problem–as Lee mentioned above–is that people count on the Bonus part. The best financial advice my dad ever gave me was to NEVER budget on bonuses. Live on the salary and use the bonus to build up savings , pay down debt or make special purchases. The ten years where we never got the bonuses were easier that way.

    Part of the economic downturn has been that more and more companies have moved to S/B comp packages and more people spend the bonus on credit cards before they see the actual check. Spending stalled because people either didn’t get the bonuses OR they thought they might not and so they got cautious.

  10. the whole point isn’t to punish AIG, but to get AIG, or any other TARP recipient, financially sound again.

    that does seem to be the claimed point, yes. i can wish the point would be to break up any company that’s “too big to fail”, but it seems that would once again make too much sense to be true.

    (you say some divisions of AIG are profitable and some are not? well, to me, that suggests an obvious first thing to do that doesn’t seem to be getting done…)

  11. It’s my understanding that these were retention bonuses. That means that they are bonuses paid to current employees on the condition that they don’t quit. We had them when I worked at Rockwell.
    They told us that the company was planning to close in three months. If we agreed to stay (and not quit, knowing that our jobs were ending) until the end, then we got a bonus.
    So, AIG wanted to keep key employees. They made a contract with them to motivate them to stay.
    Bonuses are taxable, just like salary.

  12. This is part of the overall problem of corporate income tax in general, not just AIG specifically. High corporate income taxes are pretty counterproductive and although we may get a visceral satisfaction from soaking those fat corporate bastards, like most every other populist instinct, it ends up hurting the people more than it helps the country’s fisc. We can see this same type of thinking in Obama’s campaign rhetoric that he was going to raise capital gains taxes even though it has been consistently demonstrated that raising capital gains actually results in lower overall tax receipts.

    A corporation cannot retain earnings or it will be subject to corporate income tax and any distributions it then makes to its owners (shareholders – which is everyone with a 401(k) – which of course are not tax exempt, but tax defered – so pretty much most of the country ) will also be taxed as capital gains – so in essence if a company has a profit of 1 dollar it pays 35 cents in taxes ( if it has taxable income in excess of 350k, which really isn’t that much) and if it pays the remaining 65 cents as a dividend the receiver of that dividend pays another 10 cents in taxes. This probably harms everyone in the long term as it punishes, or at least discourages, re-investment of profit into the business, affecting corporate competitiveness, it actively incentivizes corporations to use their resources to maximize tax savings and it harms shareholders as their dividends are subject to, in essence, double taxation.

    Because our tax code is so convoluted and companies, like individuals, have an obvious incentive to not pay taxes, there are any number of dodges that can be done to reduce the overall tax burden. Paying bonuses reduces the corporations declared profits, thereby reducing the amount of tax it owes. A company does pay FICA taxes on bonuses, but that is taxed at a rate of 7.5% not 35%. The employee pays a matching 7.5% FICA tax on the bonus and the corresponding income tax so in essence the company shifts its tax burden onto its employees. This still does benefit the employee, because the employees tax burden, even with the bonus, is lower than the corporation’s tax burden. This is especially true for high income individuals as Social Security tax only applies to the first 100k earned annually. What this really provides, which announced salaries do not, is a way to strategically lower the tax burden. Bonuses are typically not paid until the end of the fiscal year or quater. A company can determine what their profit for the period was and pay out whatever bonuses are necessary to reduce the anticipated tax burden. Gaming how and when employees are paid is not just the big companies that do this, either. Small companies also game the tax system – deferring or delaying payments to principals to maximize tax savings.

    Along the same lines, high corporate tax is also part of the reason why most US companies with an overseas presence will defer or delay “repatriating” their overseas profits. Around 2004 or so Bush passed an “amnesty” which allowed US corporations to repatriate their overseas profits at a relatively low rate – the result was a huge upswing in stated profits and a huge increase in the tax receipts. This same process is seen in reverse in foreign companies operating in America, which for some reason, seem to have surprisingly low profits.


  13. High corporate income taxes are

    …not in use in the USA. so don’t even go there.

    (corporations should be taxed more harshly than individuals should, for a reason analogous to why capital gains income should be taxed more harshly than wages and salaries from actual, productive jobs. we’re not doing either one, and we’re suffering for it.)

  14. Well, Nomen, the federal corporate rate is 35%, plus a corporation pays state tax to each state in which it earns income, which in my state is 5%, plus they pay a multitude of hidden taxes in the form of fees, surcharges and whatnot. So, yes, in fact in America corporations do pay very high taxes.

    First, if you tax corporations more harshly, how are they to pay higher wages? Second, most everyone in this country is or will be subject to capital gains taxes, if you sell your home for more than its purchase price that is a capital gain, if you retire with a 401(k) any amount therein in excess of your contributions is a capital gain.

    We are absolutely not suffering the current economic downturn because we do not tax corporations or capital enough in this country. Despite what the AFL-CIO may have you believe, it is not Labor that made this country rich, it was and is Capital. Capital investment brought us the computer and the I-pod and the countless other things with which we while away the hours and it was precisely because someone or some corporation was able to profit from this Capital that the investment was undertaken. It is far to simplistic to say it is corporate greed that has driven us to this lowly state, it is not, or not solely. Nor will Labor or Government put an end to it.


  15. anon, you have no fsck’in idea what “very high taxes” look like. go stand in the corner until you can imagine a figure above, say, 75% in the highest tax bracket, or thereabouts.

    First, if you tax corporations more harshly, how are they to pay higher wages?

    why should they want to do that? they’re currently busy as beavers outsourcing everything they can to countries where they don’t have to, are they not?

    oh, except for executive-level white collar jobs. they sure don’t have any problems keeping THOSE in this country. funny, that. wouldn’t be any harder outsourcing the C-letter-O positions than computer programmers, i assure you.

    most everyone in this country is or will be subject to capital gains taxes

    oh, i see what your problem is — you’re living in Liechtenstein. or maybe Monaco. because in the USA, that would be obvious, total, utter, bullshit.

  16. There are many ways of motivating corporations to do something that don’t involve the Invisible Hand. I find it curious that you (who are usually so quick to point out that humans acting in groups and under the influence of collective belief in something that can’t be proven empirically are craven, stupid, and deluded) sprout newfound faith in Corporate Nature when those humans put on ties and meet in boardrooms. It’s a weird place to express faith, that’s all.

    The last thirty years, the US government has been motivating corporations by progressively creating some of the most pro-business tax and investment policies on the planet, raising barriers to collective bargaining, stripping the enforcement mechanisms out of workplace safety laws, providing a judicial wonderland where corporate abuse thrives has worked so very well, and making it easy to lobby for (hell, even write!) pro-industry law. That pile of carrots has done nothing but increase the earnings gap, making a few percent of Americans super-wealthy but leaving the overwhelming majority of Americans struggling. I suggest that the time has come to “motivate” corporations some other way.

    Jesus Christ. Read the damn papers. Alan Greenspan was stunned (STUNNED) to discover that corporations did not behave as economists predicted — that the individuals who comprise those bodies actually cared more about their own short-term profits than the returns to the stockholders or the long-term survival of their own companies. The whole line of “capital will act in an enlightened and socially responsible fashion when it’s properly motivated to do so” begs the question — what is the proper motivation? Historically speaking, the proper motivation has been a capital-worker-government interaction where the government has acted in regulatory ways to balance capital/worker interests. Sometimes it’s wound up being pretty good for workers (for example, the Federal Employers Liability Act) and sometimes it has sucked (Taft-Hartley).

    I will note that the times that the government has been most willing to be a mediating force, that’s the time when the wealth gap has shrunk *and* corporate profits have increased. I don’t find that an incidental thing. (And before anyone says “yeah, well, how do you like that Military-Industrial Complex thingie that provided the context for that shrinking wealth gap,” I’ll point out that we’ve been engaged in a hugely expensive war for nearly a decade and we’ve yet to see any economy-driving benefits except for the ballooning of corporate profits in a few sectors. There are ways to swing a foolish and unnecessary war to make it have widespread economic benefits, but the past administration bungled even that.)

  17. People don’t have to be in groups to be cravin, stupid and deluded; it’s just that collectivism increases the effect exponentially.

    I guess I missed all the stripping of safety laws during all the unending, boring safety-for-dummies classes I’ve been forced to attend.

    The few percent of Americans with 401k’s would still be wealthy if not for the bleeding hearts behind CRA, Fannie and Freddie, ACORN, and Barney Frank.

    There’s already plenty of regulations in place. The problem with them (See Madoff) is that the regulations aren’t being followed. Is more funding needed for enforcement? Eh, I’d say there’d be enough if the incestuous atmosphere could be reduced.

    The MIC is whole new set of stupidity. That would easily hijack the thread.

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