Perhaps nothing in our economic system in recent times has been so offensive, so egregious, and so repulsive to the American public as the obscene bonuses paid to Wall Street bankers and investment companies. Exacerbating this situation is the fact that the largest of these firms were essentially “saved” by government intervention, yet the top executives of these companies seemed to thumb their noses at U.S. regulators and carry on the practice. Worse yet, the bonuses in 2009 not only continued…they increased!
Research from the Wall Street Journal has suggested that the major US banks and securities firms are set to reward their executives with a record remuneration high this year of somewhere in the region of $140 Billion. And the respected Bloomberg media service reported the following on October 14: “– JPMorgan Chase & Co., the second- largest U.S. bank, set aside $8.79 billion for compensation and benefits for its investment-bank employees in the first nine months of 2009, enough to pay $353,834 to each. New York-based Goldman Sachs, which is scheduled to report third-quarter earnings tomorrow, allocated 49 percent of first- half revenue, or $11.4 billion, to pay employees. Morgan Stanley set aside 71 percent of first-half revenue, or $5.91 billion.”
More than a third of Wall Street finance professionals expect their bonuses to increase for 2009, according to a survey by eFinancialCareers.com. About 36 percent of the 1,074 people who responded to the e-mailed poll said they are anticipating a bigger annual payout from their companies and 11 percent said it will jump by at least half. But “averaging” these bonuses among thousands of executives is only part of the story. The most offensive actions are those when the recipient receives tens of millions of dollars in bonus compensation; with at least one top executive scheduled to get the absurd sum of $100 million!
The question then becomes, if this indeed is egregious and outrageous, what is the best response. In some cases, the U.S. has equity positions in these firms, and as shareholders, regulators have discussed capping bonuses – but that kind of intervention in Capitalism is intrusive to some. Besides, some of these banks and security firms have paid back their TARP money, and are free to make bonus decisions on their own. So let me suggest a better solution: taxes.
The current top income tax rate in the United States is 35%; but few pay that amount because of various shelters and deductions. In fact, the wealthiest among us were given a huge break in taxation in 2001 with the Bush tax cuts. In that year, Bush introduced a $1.3 Trillion tax break, skewed to benefit top brackets. When Bush introduced his tax cuts he declared, “A warning light is flashing on the dashboard of our economy, and we just can’t drive on and hope for the best. We need tax relief now.”
As a result, here is what happened in the intervening years. From 2001 to 2009, unemployment went from 4% to over 9%; the percent of people living in poverty increased from 12% to 17%; foreclosures went from .48% to 1.19%; and Americans relying on food stamps increased from 17 million to over 30 million. The point of all this is not to reprise the Bush administration, it is to point out that lowering taxes is not a panacea for our fiscal woes; and sometimes raising taxes (to meet a specific, targeted goal) may be a legitimate strategy. To me, that is the strategy we should employ to gain back taxpayer dollars on obscene compensation.
If we did this, it would not be the first time we have utilized this technique to handle crises. To begin with, many countries have top tax rates far in excess of ours (including most countries of the EU, with rates ranging up to 59%). A study by KPMG international accounting firm also pointed out that many Asian nations have similar high rates, with Japan at 50%. Moreover, in WWII, our rates ranged up to 94% for incomes over $200,000 (a princely sum in those days); and stayed above 90% till 1963. Even as recently as 1986, the top rate was 50%. In all those years, from the 1930’s to now, with many ups and downs, there is little if any correlation between the nation’s economic health and taxation. But, in many of those years, tax policy was made to achieve certain objectives – and I suggest that we could employ that same tactic to create a disincentive for the payment of excessive (and generally unwarranted) compensation.
Low tax, and “no tax” aficionados quickly point out that most taxes are already paid by the top 50%; and the bottom 50% of earners pay little, if any tax. True…but the bottom 50% of our citizens has no money to pay practically anything, let alone survive day to day with subsistence income. Certainly, if a man is given a $100 million bonus, and 50% were taxed, he could somehow manage on the remaining $50 million (or at least get by till his next bonus arrives). I am not suggesting a general tax increase, but rather a new tax bracket perhaps labeled “Excessive income bracket” which might start at say $5 million, and go up to even the previous high of 94% for incomes reaching $100 million. Meanwhile, the money returned to the Treasury could pay for healthcare, education, or even deficit reduction.
Using taxes to promote social policy is frequently frowned on; but it is not unique and is often effective. In the case of excessive, obscene, and in some cases absurd Wall Street bonuses, I think it would work just fine.