Yet another example of why Congress should

not be running American businesses.  By Hans A. von Spakovsky

The proposed AIG bill, which would confiscate the bonuses and compensation of company employees, offers yet another example of why Congress should not be running American businesses. It also illustrates that many U.S. lawmakers lack a basic understanding of the way our economy works, how businesses sell their goods and services to make a profit, and how individuals make decisions about their own careers.

The controversial legislation would impose confiscatory tax rates on employees of all companies — AIG and others — that received funding from the Troubled Asset Relief Program (TARP). It would levy a 90 percent tax on any compensation beyond an employee’s base salary of $125,000; that includes retention and performance pay and even deferred compensation.

By coincidence, I have personal experience with the issues at play in this debate. In the mid-1990s, I was the in-house counsel for the U.S. division of a large Canadian insurance company. It was one of the oldest and most profitable insurance companies in Canada. But the executives running the company were dazzled by the idea that they should be managing a financial-services company instead of a boring and staid insurance firm. So they started a trust company in Canada that eventually got into such major financial difficulties (because of bad commercial-mortgage investments) that the entire company was pulled into receivership — including the very profitable U.S. insurance division. At the time, it was the largest insurance failure in North American history.

This should sound familiar to everyone who has been following AIG’s travails. For more than a year before my company went into receivership, employees knew about its worsening financial condition. And as anyone but a member of Congress would have expected, key employees started leaving. It was much easier, and much smarter, to grab a job with another company while still working and receiving a paycheck. The other option was to continue working for a failing company and run the risk that you would suddenly lose your job without notice when the company shut down. That would leave you looking for a new job without any income.

When the firm hired by the receiver to run my employer came in, it had no choice but to offer retention and performance pay to keep the remaining employees — people who were needed to run the company. I was one of those employees. Without the incentive of bonuses and retention pay, why would I have stayed at a failed company? I wouldn’t have stayed — and neither would any of the other employees who were rehired by the receiver. Retaining those employees was important because they were the ones (like me) who knew the company, knew its products, knew its customers, and knew its problems.

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