In a recent post, I explained how the State of California had essentially done the same thing to me. I had done a Roth IRA conversion in 1998 in Illinois and was taking advantage of a one-time IRS offer to spread the income over 4 tax years. Like all but a few states, Illinois had waived its 3% state income tax on Roth splits. I would not have made the split knowing some other state would try to tax me down the line--like California did with its nearly 10% income tax. It was--and is--unconscionable for California to make a claim on that income, which was not earned in California, without my knowing how California was handling Roth conversions or not even having any intent to move to California at the time of the transaction. [The state revenue people claim that some judge ruled that since California did not chase people moving out of state having made the Roth conversion by California rules, they were entitled to tax the Roth conversion split from out-of-state residents moving to the state. That took a leap of logic and fairness, even in a state infamous for its activist jurists.]
I also think there's an equal protection issue: When a professional is taxed differentially simply because he works for a federal bailout company, it provides the competition with an unfair hiring advantage.
It's counterproductive; the Congress isn't helping AIG CEO Liddy spin off profitable tax-paying operations, by perversely providing the best and brightest managers a tax incentive to leave. That would essentially lower the attractiveness of a spinoff and hence the price Liddy could obtain on behalf of the American taxpayer.
Finally, it's bound to be ineffective as tax attorneys advise companies on ways around artificially high tax brackets, e.g., deferred compensation or shifting compensation towards more attractively-taxed base salary, or perhaps an external consulting relationship.
You would think that Bernie Madoff's ability to escape detection for so long in an industry subject to so many regulators would have tempered the demagogues from their johnny-come-lately tax schemes. As the Citibank CEO recently mentioned, the fact is the real villains of the bad housing market deals are already gone. Attacking the remaining managers does nothing to stabilize the banking environment, and the President and Congress need to focus on that, not inciting taxpayers to riot with populist nonsense.
