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Beyond Clawback: Using the Tax Code More Expansively to Address AIG Bonuses

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The much-reviled US tax code contains within it thousands of special treatments and exclusions that enable small subclasses of people to enjoy deductions, credits or even exclusions from paying taxes.

There is ample precedent, therefore, for the Congress to define subclasses for special tax treatment.

Congress can find that payments from US taxpayers to financial institutions to prevent bankruptcy in the public interest were not designed to satisfy contractual obligations that would have been abrogated had the company died its natural death. From such a finding, it can, in keeping with precedent defining subclasses for special tax treatment, set a very high tax rate, say 85%, on all income of those who received at least a certain level of income from these institutions.

While they are at it, Congress could also clawback similar categories of income received last year, and even add certain subclasses of people who received huge bonuses in the 3 years leading up to the company's need for taxpayer bailout funds. Those banks that took bailout money at the behest of the Treasury, but would not have become bankrupt had they refused, ought to be excluded.

This is not, nor should it appear to be, a witch hunt. If it were, or appeared to be, the taxes could be viewed as punishment rather than recovery, and thus potentially subject to the prohibition against ex post facto laws in the Constitution. In Calder v Bull, [3 U.S. (3 Dall.) 386, 393 (1798)], the Supreme Court determined that that prohibition applied only to criminal laws.

Clawback from those who caused those institutions to go 'broke back' requiring taxpayer bailout and from those who never would have received any money had their institutions died natural deaths are both legitimate recovery.

And, it is very important. Public support for fixing the financial system is vanishing. The egregious bonuses are a constant reminder of how the wealthy are able to jigger the system to benefit themselves.

To show those days are over, the President and Congress should act through the tax code.