There was broadscale outrage yesterday with the revelation that Wall Street bankers collectively walked off with almost $20 billion in bonuses — associated with their stellar 2008 performance. Barack-O even chided them for gross irresponsibility — sucking money from taxpayer and digging our nation’s financial hole deeper.
It is ironic that Obama’s criticism comes at a time that he’s planning to dig our financial hole deeper by taking current and future taxpayer money and throwing it irresponsibly into a trillion dollar, pork-laden grab bag of whacky, non-stimulating social programs. Nonetheless, he has a point.
Now, if he really wants to fix the problem, here’s some free advice
First, require all companies to publish — as an appendix to their proxy statements — a list of all employees who get annualized W-2 compensation over, say $250,000. Companies are already reporting their 5 most highly compensated execs. It would be easy to expand the list since the numbers are already compiled and reported to the IRS. If companies push back on the idea, then — privacy be damned — simply post the information to a government web site.
Hopefully, sheer embarrassment and activist shareholder pressure would dampen some of the excesses. Failing that, the transparency would at least provide a centralized target list for outrage and “clawbacks”. At an absolute minimum, these publicly identified, highly compensated folks would get “punished” by being hounded endlessly by annoying boiler room investment hawkers.
More substantively, change the income tax codes. For corporations, eliminate the tax deductibility of any annualized compensation exceeding $250,000 per individual. If companies feel the need to pay people more, that’s fine. They just do so on their own dime — not on the back of other tax payers.
For individuals, go pre-Reagan and re-introduce a couple of very high income tax brackets with draconian marginal rates. For example, leave the current brackets where they are (35% starts at $357,700), but add a bracket that starts at $500,000 with a marginal rate of 40%, a million dollar bracket at 50%, and a $5 million bracket at 75%. Business incomes — like family farms — could be exempted, and individuals could continue to income average so they don’t get blasted in isolated windfall years. While individuals might clamor for still higher compensation to cover their added tax burden, their claims would likely be throttled by the corporate provisions which would disallow corporate tax deductibility.
This multi-part plan has a couple of related benefits: (1) Obama fulfills his pledge to fill the tax coffers bysoaking the rich, (2) it becomes very expensive for companies to over-compensate employees, (3) it makes uber-compensation less valuable — at the margin — to individuals, and (4) it can be implemented Monday morning.
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Related point: Wall Streeters argue that they have to pay high levels of compensation to retain their talent pool. Aren’t these the smart men and ladies that cratered firms and threatened our entire economy? I say: let ’em walk. Try recruiting randomly from the jury pool. Results can’t be worse.
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January 30, 2009 at 9:26 am |
Disagree about the steep progressive taxation. It appears the author is using this crisis as justification for squeezing the rich(defined arbitrarily regardless of income source or localle). This has happened multiple times in the past (1968 AMT legislation, Carter era 70% marginal tax rates) and proven through the years to be horrible tax policies. Its a bad idea and just another means of ‘spreading the wealth’.
Note 1: The AMT was enacted because about 12-18 millionaires did not pay Fed income taxes because of large deductions (mortgage interest, local taxes, etc). The law was poorly written and didn’t index salaries for inflation. Currently the AMT ensnares a large number of upper-middle class folks that are far from wealthy. (and also causes tax filings to be much more complicated)
Note 2: Reagan dropped the top marginal tax rate from 70% to 30-35% during the early 80s. In ~1980 the top 1% of tax filers paid about 4-5% of total Fed income taxes. When Reagan left office the top 1% paid about 12% of all income taxes. The widely held notion is that if you allow high achievers to take on risk, work harder and keep their wages they are incentivized to do so. But taking ~70% of each marginal dollar gives them little incentive and seems rather like old Europe.
January 30, 2009 at 10:23 am |
Brian-
1) The core problem of the AMT is explicitly due to it’s complexity and that it wasn’t indexed to inflation. Additional marginal tax classes have neither of those properties.
2) The right read your data is that between 1980 and 1988, average income for the top 1% of tax filers went up by nearly an order of magnitude (70->35%, 1%->5%), even while median real incomes went up about 10% over that time period. In your view that’s a good thing. In Ken’s (and my) view that creates a societal tension that causes outrage at the wage differential. It’s especially so, when bankers don’t take personal risk but create systemic risk with their bets that impacts not just them, but the overall economy.
Marginal tax rates should marginally decrease the motivation of bankers to go for high risk, high leverage deals, because the upside is more limited. That’s what we, as a matter of policy and society, should want from our bankers – a measured, prudent, long-term view of the risk/reward equation. Leave the crazy risk opportunities to VC companies and startups.
January 30, 2009 at 11:34 am |
I never thought I’d see the day when the Professor would argue in favor of more progressive taxation. Just like oil going from $70 to $147 to $40 within a year, everything these days seems to be getting turned on its head.
I don’t think the 50% or 75% marginal rate goes far enough – I think the bankers getting bonuses in ’08 should be rounded up (along with Albert Belle and Craig Esherick, and other figures that are being unjustly enriched) and forced to take Day Porter positions at Big Vanilla.
January 31, 2009 at 7:51 am |
If you increase taxes, Barack-O will just spend the money on a “pork-laden grab bag of whacky, non-stimulating social programs”. Surely the money is better left in the hands of irreseponsible twenty-something ex-business-students who will spend it on a champagne-laden grab bag of expensive cars and mindless consumerism!
January 31, 2009 at 4:13 pm |
All I can say is…
I love HOMA!
February 2, 2009 at 11:59 am |
I personally think capping compensation will only push talent overseas. Many of the members in Gen X and the Millennials who are drawn to finance are mobile and would welcome the chance to have a global career. If you have massive cash reserves in places like Dubai and Singapore, an unfriendly regulatory and political environment in the US and talent willing to relocate you can see a perfect storm that will level Wall Street.
February 3, 2009 at 11:52 am |
My comment about the AMT was to provide an example of tax policy decisions that have unintended consequences (it was only meant to soak the rich, not the working class)
But overall, I’m not in favor of using tax policy to influence social policy. I’ve met many smart and many wise people; but none wise enough to tell me how to live my life. When you put a limit on how much I can legally earn that is just what you are doing. My point about the top 1% and their contribution to tax revenues was an example of allowing people to work harder, take more risks, make more income while also paying more in taxes. It seems counterproductive to yoke an individual to the lowest member of society just so the low performer feels better about themselves.
Yes these Wall Street guys made terrible mistakes and they don’t deserve bonuses for 2008. They can return to prudent decisionmaking without changing the tax code. What was proposed was essentially returning to the Nixon/Carter era tax rates which will only curb tax revenues and increase the burden on the middle class.