Taxing Progressively

A Banker Bonus Dilemma for Reformers

Would a stiff tax on banker bonuses blunt Wall Street profiteering — or let the vast majority of America’s wealthy off the hook?

By Sam Pizzigati

“Wall Street,” the New York Times observed earlier this month, “is confronting a dilemma of riches: How to wrap its eye-popping paychecks in a mantle of moderation.”

The wrapping isn’t working. President Obama has already called the latest round of banker bonus payouts “obscene” — and America’s biggest investment bank, Goldman Sachs, hasn’t even yet reported its 2009 bonus total.

JPMorgan Chase has. On Friday, the bank announced a $9.3 billion set-aside for the 24,654 employees in its investment banking operations. The bulk of that will go to the bank’s top execs and traders. In 2008, 1,626 JPMorgan personnel collected bonuses over $1 million. The firm’s top 200 averaged $5.6 million. They’ll do better in 2009. The bank’s earnings over doubled for the year.

By this week’s end, the nation’s biggest banks and securities firms will almost all have reported their bonus totals for the year. The overall compensation payout, estimates the Wall Street Journal, will hit $145.9 billion. That’s 18 percent over pay at America’s financial giants in 2008 and 6 percent more than pay in 2007, the previous record year.

pay comparison

These over-the-top totals are creating dilemmas for more than just bankers. Politicians who’ve been pocketing generous banker campaign contributions for years are now desperately trying to figure out how they can look “tough on Wall Street” — and not upset their personal gravy cart.

And real reformers face a dilemma, too. That dilemma: With Wall Street having gone arrogantly rogue, how best to react?

Would a bonus tax be the best riposte? In Britain, authorities have already moved in that direction. They’ve placed a one-time 50 percent tax — on banks — for any bonuses they shell out over £25,000 per individual, about $40,000.  

A growing group of lawmakers in Congress are backing similar proposals. Rep. Peter Welch from Vermont last week introduced legislation that would fix a 50 percent tax on bonuses over $50,000 at banks that accepted aid under the federal TARP bailout program.

Rep. Dennis Kucinich from Ohio, meanwhile, is pushing a bill that would put a 75 percent tax on all large banking industry bonus payouts, “whether the bank has received or repaid TARP funds or not.” 

But taxing banks on their big bonus payouts, other progressives believe, may not be a comprehensive enough answer. In the UK last week, over 100 members of Parliament “demanded curbs on the pay and perks of all top earners,” not just those in the banking sector.

The UK one-time 50 percent tax on banker bonuses, the MPs charged, “has done very little, if anything” to dampen down the corporate “culture of excessive pay.”

Taxing only banker bonuses, progressives like these are arguing, leaves untouched the enormous windfalls that have been pouring into power-suit pockets elsewhere in the economy.

Banker bonus taxes, for instance, don’t touch hedge fund managers. In the go-go subprime years, the New Yorker magazine detailed last week, these hedgies worked hand-in-glove with top investment bankers.

At one point, hedge fund kingpin John Paulson and bankers together assembled “bundles of the most absurdly toxic mortgages.” The banks then sold these bundles to “hapless investors,” collecting fat fees in the process, and Paulson promptly bet — with credit default swaps — that those toxic bundles would crash. They, of course, did.

In 2007, Paulson scored nearly a $4 billion personal profit.

To forestall the crises that chases after such grand fortune inevitably engender, the Washington, D.C.-based Institute for Policy Studies last week urged Congress and the White House to consider broader steps than taxes on just banker bonuses. The progressive think tank is calling for a 50 percent surtax on all individual income over $2 million.

“In the current economy,” the Institute explains, “all super incomes — not just banker bonuses — represent windfall profits made possible by the sacrifices working Americans have made to stabilize the nation’s financial system.”

Even with a 50 percent surtax on income over $2 million, adds the Institute, America’s richest would still be paying taxes at a lower overall rate than their counterparts during the Eisenhower years.

The Institute also wants Congress to limit the tax deductions corporations can take on executive pay — to $500,000 per executive, or 25 times the pay of a company’s lowest-paid worker. To discourage speculation — and drain the pool of cash available for executive bonuses — the Institute is pressing as well for a “financial transaction tax,” a modest levy on securities and currency trading.

The financial transaction tax notion has won broad support among European governments, but U.S. Treasury secretary Timothy Geithner has repeatedly dissed the idea.

The Obama administration, instead, is now pushing a “financial crisis responsibility fee” designed to recoup from big banks, over the next 10 years, the $117 billion the bailout TARP program seems likely to end up costing.

But Wall Street doesn’t seem particularly worried about this new proposed fee. The share prices of big bank stock actually rose after the White House announced the new fee plan, perhaps because the new tax, if enacted, would only tax away about 5 percent of bank profits.

The feds, says financial analyst James Kwak, should be moving to recover much more from banks than the $117 billion TARP tab — since TARP represents “only a small part of the government response to the financial crisis.”

JPMorgan Chase CEO Jamie Dimon, in the meantime, is loudly opposing the White House bank fee — and every other attempt to end excess on Wall Street.

“Using tax policy to punish people is a bad idea,” he pronounced last week.

But not all Wall Streeters remain unrepentant. One former financial superstar, the 71-year-old Citigroup co-founder John Reed, says Wall Street won’t regain any serious public trust until banks scale back their bonus outlays for good.

As of yet, Reed has seen no scaling back. Nothing he has seen, Reed acknowledges, “gives me the slightest feeling that these people have learned anything from the crisis.”

“They just don’t get it,” says Reed. “They are off in a different world.”

A world that pays well. More unconscionably well than ever before.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

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