Senators announce plan to tax bonuses

(CNN) -- Two key senators Tuesday announced a plan to impose a hefty tax on retention bonuses paid to executives of companies that received federal bailout money or in which the United States has an equity interest.

Sens. Max Baucus, D-Montana, and Chuck Grassley, R-Iowa -- the chairman and top Republican on the Senate Finance Committee -- said companies would not be allowed to restructure the payments to those executives through deferred compensation to avoid the tax.

The senators plan comes after New York Attorney General Andrew Cuomo confirmed in a letter to Congress that this year, after receiving federal bailout money, AIG paid 73 employees bonuses of more than $1 million each.

Cuomo also wrote that 11 of the employees no longer work for the company. The largest bonus paid was $6.4 million; seven other people also received more than $4 million each.

AIG is under fire for awarding the bonuses while being kept afloat by more than $170 billion from the U.S. government's financial bailout. Watch congressional reaction to AIG bonuses »

In a letter to congressional leaders Tuesday, Treasury Secretary Timothy Geithner said administration lawyers agreed the government could not force AIG to stop the bonuses. But, he said, the government would contractually require AIG to repay Treasury the $165 million in bonuses it paid out.

Grassley and Baucus said all retention bonuses would be subject to a 35 percent excise tax for excessive compensation to be paid by the company and an additional 35 percent tax to be paid by the individual.

"Millions of Americans are losing their jobs -- millions. And to some degree they're losing their jobs because of actions taken by some of these firms," Baucus said. "At the same time, they're giving themselves bonuses. I mean, give me a break. What are these people thinking? That's part of the problem. They're not thinking."

All other nonretention bonuses more than $50,000 would be subject to the same tax, the senators said.

"We're trying to address what I think taxpayers would say is salt in their wounds," Grassley said. "The taxpayers are bearing a great deal to get this economy going, help get these corporations turned around, and I think taxpayers are willing to help.

"But when they see the lack of sensitivity on the part of corporate directors -- by giving these bonuses and doing other outrageous things -- there's just so much that the taxpayers of this country are going to stand for."

The provisions would apply to bonuses paid out after January 1, 2009, so it would affect the AIG bonuses in question.

"We should not be here. We should not be in this position," Baucus said. "AIG should not have promised those payments to retain those employees and the Treasury should have blocked the issuance of the checks. It did not. And employees themselves should not have cashed them in. We should not be here, but unfortunately we are."

Senior Finance Committee aides said the senators had not yet worked out whether individuals would pay income tax on the bonuses as well as the proposed excise tax, or if a combination of the two would be used. Watch why Americans are angry »

"You'll have to wait to see when we introduce the legislation," one of the aides said.

"If our bosses had made a decision we'd tell you what it was," said another. See a snapshot of facts, attitudes and analysis on the recession »

On Monday President Obama said he planned to attempt to block bonuses to executives at ailing insurance giant AIG, payments he described as an "outrage."

Obama said he asked Geithner to "pursue every single legal avenue to block these bonuses and make the American taxpayers whole." Obama said he would work with Congress to change the laws so that such a situation cannot happen again. Watch Obama say he's outraged by bonuses »

The president spared Liddy from criticism, saying he got the job "after the contracts that led to these bonuses were agreed to last year."

But he said the impropriety of the bonuses goes beyond economics. "It's about our fundamental values," he said. iReport.com: Sound off on AIG

Under pressure from the Treasury, AIG scaled back the bonus plans and pledged to reduce 2009 bonuses -- or "retention payments" -- by at least 30 percent. That has done little to temper outrage over the initial plan, however.

In the House, Democrats are trying to shame AIG executives into forgoing the bonuses. They're also investigating possible legal avenues Congress can take to force the company to return money used for bonuses, a House Democratic leadership aide and a House Financial Services Committee aide said Monday.

The committee is trying to determine whether Congress can force AIG to renegotiate the bonuses, which the company says it is legally required to give employees under contracts negotiated before the company received its first infusion of bailout dollars in September, according to the committee aide. Who's insured by AIG? »

Both aides said it is unclear what authority Congress might have to force AIG to take back the bonuses.

Liddy will face intense questioning about the bonuses when he testifies Wednesday before the House Financial Services subcommittee on capital markets.

CNN's Ted Barrett, Dana Bash and Elaine Quijano contributed to this report.

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