Sen. Schumer threatens huge tax on AIG bonuses

WASHINGTON (Reuters) - Senate Majority Leader Harry Reid and fellow Democrats on Tuesday warned American International Group Inc that its employees should return bonuses or face a massive tax bill that would return most of the money to the federal government.

"We expect that you will report back to Congress on your efforts to recoup these payments in short order," Reid and nine other Senate Democrats wrote in a letter to AIG CEO Edward Liddy, who is to testify before Congress on Wednesday.

In a speech on the Senate floor, Democrat Charles Schumer, a signee of the letter, noted AIG lost nearly $100 billion last year and is now being propped up by U.S. taxpayer funds. He said providing performance bonuses to employees of the insurance giant "defines 'Alice in Wonderland' business practices ... it boggles the mind."

Schumer called on the AIG employees to return the bonuses.

"If they don't we plan to tax virtually all of it," he said.

Other lawmakers also said they will introduce legislation to impose steep taxes on the bonuses.

Although AIG is being kept alive on a government bailout of up to $180 billion, it is now paying out $165 million in bonuses. Word of the bonuses has touched off a firestorm of criticism in Congress and from the Obama administration.

"In these perilous economic times, it is unconscionable for the American taxpayer to find out that the very employees responsible for running the company into the ground have now received 'performance-based' awards that are hundreds of times as large as the average American's yearly salary," the senators wrote.

(Reporting by Richard Cowan and Thomas Ferraro; Editing by Bill Trott)