You know what I’m talking about: the legislation approved by the U. S, House of Representatives last month that would impose a ninety percent (90%!) surtax on certain employee bonuses. Regardless of the politics behind it, as a matter of tax policy, this is about as bad as it gets. If this is the way our elected representatives are going to conduct themselves in setting tax policy and adopting tax legislation, there is no hope for tax reform, and the damage to our tax system that will result from such actions will be severe and permanent

Why is the Additional Tax on Bonuses Received from Certain TARP Recipients (that’s the official title of the legislation) such bad policy? Let me count the ways. First, here is the House Ways and Means Committee description of the legislation:

The bill would impose a 90 percent tax on bonuses paid after December 31, 2008, by companies that have received over $5 billion in TARP funds, Fannie Mae, and Freddie Mac. The tax would also apply to bonuses paid by entities affiliated with these companies. Three-fourths of the TARP funds that have been spent went to companies that would be covered by this bill. This tax will not apply to any bonus that is returned to the company in the same taxable year that the bonus is paid. The bill would not affect taxpayers with adjusted gross income below $250,000 or employees of companies that have received $5 billion or less in TARP funds.

This tax targets a particular subset of transactions. Those transactions are targeted because they are politically unpopular. The legislation imposing the tax was introduced and passed after transactions that are subject to the tax had already occurred. The new tax is not part of any plan to raise revenue for a necessary government function. Congress is using its power of taxation to retroactively confiscate payments to unpopular people. Are these the kinds of policies we want our representatives to promote through their exercise of the power of taxation?

It’s true that Congress has long used the tax code to reward favored interests and punish disfavored ones, but never (at least in my lifetime, anyway) has it been done so blatantly, so punitively, so hypocritically, in such naked disregard of the profoundly negative effect such actions will have on the economic well-being of this country.

Why do I say that this Congressional action is hypocritical? Because Congress knew, or should have known, that the legislation they passed to create ‘T ARP” (the Troubled Asset Relief Program) included a provision that specifically allowed the very bonus payments they are now so outraged about, that’s why. What’s more, Congress and the Secretary of the Treasury, who is tasked with overseeing “T ARP,” knew about these bonus payments before they became public, yet did nothing until after they became public (at which time they were shocked, shocked, to learn that bonus payments are going on here).

And what, you may ask, is the harm to the economic well-being of this country that will result from this kind of taxation? As I have discussed in this space before, the complexity and unpredictability of the tax code already results in the diversion of huge amounts of time and effort that could be put to productive use. This kind of taxation opens a whole new world of complexity and unpredictability to our tax system. Even worse, in my opinion, is the obvious drag on economic activity that will inevitably flow from the realization that any transaction that could turn out to be unpopular will be subject to retroactive political punishment If there is a possibility that Congress will decide after the fact that the government should confiscate the proceeds of transactions that were perfectly legal at the time that they were made, is that going to promote economic activity, or not? This is a tax policy direction that the country simply can’t afford to take, no matter what the motivation.