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Is That 90% Tax On AIG Bonuses Dead?

4876635Last week, as populist rage over the AIG bonuses threatened to boil over, the House passed a bill mandating that bonuses paid to executives with family incomes of more than $250,000 whose firms have received more than $5 billion in bailout money be taxed at the eye-popping rate of 90 percent.

With Treasury Secretary Timothy Geithner today unveiling the administration's trillion-dollar bank rescue plan, however, President Obama and his administration are hinting they oppose such a significant tax – and arguing that it is a mistake to "govern out of anger."

Asked about the tax on an interview that aired on CBS' "60 Minutes" Sunday, the president, who was a Constitutional law professor, said that "as a general proposition, you don't want to be passing laws that are just targeting a handful of individuals."

"Well, that's why we're gonna have to take a look at this legislation carefully," the president added. "Clearly, the AIG folks gettin' those bonuses didn't make sense. And one of the things that I have to do is to communicate to Wall Street that, given the current crisis that we're in, they can't expect help from taxpayers but they enjoy all the benefits that they enjoyed before the crisis happened…Now the flip side is that Main Street has to understand, unless we get these banks moving again, then we can't get this economy to recover. And we don't wanna cut off our nose to spite our face."

The core issue is this: As part of the bank rescue plan, the administration needs private investors to invest in so-called "toxic assets," the bad mortgages of uncertain value that are weighing down banks and slowing lending. The government is offering incentives to those investors to convince them to sign on to the plan, but in the wake of the AIG-propelled bonus tax legislation, private investors are worried that any profits they make from the deal could be highly taxed down the road.

"The deal is good, but it's not worth it if I'm buying myself into a retroactive tax or a Congressional hearing," one chief executive of a major investment firm told the New York Times.

Such fears appear to have a lot to do with efforts by the president and members of his administration to signal that the White House does not support the tax on bonuses. Doing so means walking a difficult line in which they seek to maintain their tone of populist outrage over the bonuses while also reassuring potential investors that they do not back government action to tax away too much of their profits.

On the most recent installments of CBSNews.com's "Washington Unplugged" and CBS' "Face The Nation," White House economic adviser Austen Goolsbee signaled that the administration is cool to the legislation.

Goolsbee argued on FTN that the president is "going to look at what comes out of the House, what comes out of the Senate, see what ideas we have." On "Washington Unplugged," he agreed with the notion that the tax could have a "chilling effect."

Meanwhile, Jared Bernstein, Vice President Biden's economic adviser, said the AIG tax bill "may be a dangerous way to go." And White House economic adviser Christina Romer pressed that there is a difference between "bad" agents like AIG and good ones like the potential private investors, who are "really doing us a favor."

The bill is now going before the Senate, where there is speculation the tax could be reduced to 30 percent. President Obama likely doesn't want the public relations nightmare of having to decide whether or not to sign the House version of the bill, which is why you can bet White House representatives are applying pressure on the Senate to come up with a version that the administration feels it can accept.

The Senate, where members serve longer terms and do not face as much pressure to respond quickly to the outrage of their constituents, is likely to accommodate the White House; after all, the chamber is populated largely by Democratic allies, and Republicans such as Sen. Judd Gregg of New Hampshire have also signaled their concerns about the bill.

"Let's not overreact in a way that basically has the Congress grabbing its pitchforks, and charging up the hill, and abusing what is a core authority of a government, which is the authority to tax its people," Gregg said.

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