Monday, March 16, 2009

Frank, Obama "Galt" AIG UPDATED

Barney Frank (D-MA) and Barack Obama have condemned AIG's plans for $165 million in bonuses. Assuming those bonuses are going to "over paid" executives making $250k or more, that $165 million would've netted the IRS a tidy $57 million in income tax.

Unemployment seems to be up. Let's hire $165 million worth of $30k/yr employees and see how the tax revenue works out! Here are the numbers:
  • $30,000 annual salary
  • $2,295 employee FICA contribution
  • $2,295 employer FICA contribution
  • $500/mo health plan ($6000/yr)
  • $5,450 standard deduction
  • $3,282 income tax
  • $38,295 per employee cost
  • $7,872 per employee federal tax
The per employee cost implies that we can hire about 4,300 people. This cohort will garner the government about $34 million in revenue. The loss in government revenue may only be $23 million, but it's much worse than that. Since about %60 of the $34 million is to FICA, our cohort has created a significant future obligation for the US government.

Perhaps that $165 million will be spent in a way that will garner more taxes, but that does not seem likely. In effect, Barney Frank and Barack Obama have "galted" the AIG bonuses by reducing the government revenue on that money. Who knew we would have friends in such high places!?!

Personally, I have mixed feelings about the AIG bonuses. Megan McArdle captures my sentiments well: "...the AIG retention bonuses raise a question the government is going to have to ask again and again before all this is over: do we want to make a point, or do we want to make money?"

I think the economic crisis and ensuing turmoil will reveal that our "progressive" tax system is quite brittle. Tax revenues are going down and our politicians will continue to raise taxes on the top quintile. That will cause some employees to increase their compensation by asking for more vacation time or a four day work week while maintaining or decreasing their salary. Given the high unemployment, many people will choose to be underemployed. This will also reduce government tax revenues.

Note: In my example, I'm ignoring the earned income tax credit. I assume all employees are single. If we hire married people, both the health plan and the standard deduction go up, reducing the per employee tax burden.

Update 4/2/2009: I didn't realize this because it has not been widely reported, but many (most?) of the AIG employees receiving these bonuses, have opted to take a 1$/yr salary (Don Surber noticed). I heard this from a banking friend. Bill Whittle alludes to it in his Tone Deaf 2 post. Obviously, that changes all the math above.


Anonymous said...

A fine quote from our elected officials:

"We have a right to tax," the Connecticut Democrat (Sen. Chris Dodd) told CNN. "You could write a tax provision that's narrowly crafted only to the people receiving bonuses."'

Maybe AIG officials could offer to return their bonuses on the condition that Senator Dodd returns the money he received from Fannie Mae/Freddie Mac?

dsm said...


That's perfect. You sorta expect the congresscritters that have been there the longest to know the constitution. Then they propose a bill of attainder, and all you can do is laugh.

Anonymous said...

Glenn Beck did a great job a couple weeks ago when he "interviewed" the CT Attorney General. "What law did the AIG workers break?" that would cause the attorney general to investigate. Not sophisticated enough to link it here but I'm sure it's on Fox News--the national Fox. Most of you have probably seen it by now. Just confirms to me that our greatest danger may be left wing stridency AND incompetence. And that doesn't even include the huge Constitutional issues involved. But, hey, since when did the leftie extremeists care about that?? WEM