Tuesday, April 07, 2009

Be Grateful Not to Work for AIG

As March Madness fades into April Apathy, one wonders what will next draw the attention of a sizeable portion of the American public. Will it be the latest apologies by our President, or will it be the looming tax deadline of April 15? My guess is that most American pragmatists will opt for the latter. For those, be grateful that you are not one of the current villains of America, the AIG bonus recipients.

I frankly never thought I would feel sorry for a Wall Street big shot who received in a bonus a multiple of what I make each year as a humble grad school prof. Yet, given the death threats some bonus recipients and their families have received from certain frenzied and pathetic members of the public, and the "encouragement" the AIG "bonus babies" have received from New York's Attorney General Cuomo (who apparently had little legal basis for demanding the return of the bonuses), one cannot help but feel some sympathy, particularly for those AIG executives who had absolutely nothing to do with the AIG practices that led to its demise and need for a bail-out. Particularly galling, of course, is the fact that the Democrats' stimulus package specifically permitted these bonuses in a bill that was not circulated for consideration prior to its vote (can any thinking person in light of this lack of order and courtesy to fellow congressmen trust the government in any way with our economic well-being?). My focus of today, however, is on the tax implications for the bonus recipients.

AIG is, of course, a corporation, and as a corporation, it withholds from employee compensation such items as social security taxes, Medicare taxes, state income taxes, and federal income taxes (in fact, if AIG does not withhold taxes, goes bankrupt, and there are insufficient funds to pay the tax withholdings, the members of the Board of Directors are personally liable for them!). Therefore, following the normal course of business, AIG withheld from the recent bonuses the appropriate tax withholdings given to its executives. Assuming that the executives receiving a million dollar bonus were in the highest federal income tax bracket, were residents of New York City, filed joint tax returns with their spouses, and had $357,700 in other income (a reasonable assumption to make in light of the size of the bonus!), AIG would withhold as much as $320,362 in federal income taxes, $14,500 in Medicare taxes (there is no cap on these unlike social security taxes), $77,700 in New York State income tax, and $36,480 in New York City income tax. That leaves a little more than half a million dollars in the bonus (still a good paycheck!) for the executive, spouse, and family.

New York Attorney General Andrew Cuomo pursued these bonus recipients and according to his office's press release, nine of the top ten bonus recipients (15 of the top 20) had agreed "to give the bonuses back." But give it back to whom? AIG? The government?

Please remember that having received and paid tax on the money, the AIG executives are free to dispose of it (spend it, invest it, donate it) as they see fit. What they do with the money, however, has consequences. Spending the money, of course, pleases the sellers of goods and services, and generates even more taxes for some government entities (the State and City of New York, for instance, with their respective sales taxes of 4 percent and 8.375 percent). Donating the money, however, raises other issues. If the entity receiving the donation is a charitable organization (church, school, etc.), the donation is tax deductible subject to certain limitations. If the receiving entity is not a charitable organization, the person making the gift cannot deduct the amount given from his income.

AIG does not, of course, qualify as a charity since it was not organized for charitable or educational purposes (the fact that AIG is currently a "non-profit" and a subject of US Treasury "charity" does not count). It also is not yet an arm of the government (donations to government are also tax deductible). Therefore, "giving the money back" to AIG is a donation to a non-charitable organization, meaning that the donation is not deductible and therefore the government can keep the income taxes generated by the bonus.

Lawyers or accountants more clever than me perhaps can structure this "donation" in such a way to minimize the inherent problems discussed above. Better yet, high priced lobbyists perhaps can add yet another provision to the Internal Revenue Code that is already the size of a big city phonebook. This legislative fix may be in the works, since the House AIG bonus confiscation bill excludes from income any amount if waived by the employee, although there remain problems with this as noted by the Wall Street Journal. Nevertheless, it is unjust to even incur the expense of a high-priced tax attorney, accountant, or lobbyist to fix this mess caused by the negligence of Congress. In situations like this, the wisdom of Ronald Reagan becomes clearer and more necessary each day, particularly his statement that the "most terrifying words in the English language are: I'm from the government and I'm here to help."

No comments: