The Bonus Tax: The Redistribution of Both Wealth And Talent

There is an interesting post over at the Business Insider Clusterstock blog regarding the bonus tax bill that recently passed in the House and is now on its way to the Senate. The bill was written mainly in response to the recent AIG bonuses that Congress wrote into the previous 1000+ page bill that no one read (or had time to read). Apparently, some members of Congress have finally gotten around to reading the bill they passed - or at least their constituents did - causing outrage, both real and opportunistic.

The bonus tax would essentially apply a 90% tax rate to bonuses paid at firms which have taken over $5 billion from the Government TARP program. While I cannot really disagree with trying to spend bailout money wisely, attacking the bonuses in this way after the same body passed them just weeks before seems not only wrong, but reactionary. In addition, you have to wonder why Congress decided on the 90 percent number. If the bonuses are unacceptable, why not 100 percent? Is 10 percent OK for poor performance, while 20 percent is an outrage? Furthermore, why are only big companies affected? Is it just the size, or is there some other guiding principal? In case you are interested, the companies that reach the $5 billion bailout threshold and are potentially affected by the bill include some of the usual suspects, along with a few others who want to get out of the lineup as quickly as possible:

• AIG
• Bank of America (BAC)
• Citigroup (C)
• General Motors(GM)
• GMAC Financial Service (GMA)
• Goldman Sachs (GS)
• JPMorgan Chase(JPM)
• Merrill Lynch (MER)
• Morgan Stanley (MS)
• PNC Financial Services Group (PNC)
• US Bancorp (USB)
• Wells Fargo (WFC)

While it looks like the bill will fail in the Senate, since it seems to be unconstitutional (kind of a sticking point), it certainly gives you an idea of which companies are likely to be the targets of future hostility against wealth creation. It also gives you an idea why more and more companies and states are looking to pay back TARP money as quick as possible, and reject any future stimulus and TARP-type funding. Investors can certainly expect the companies on this list to have difficulty going forward as their best talent moves to companies not affected by any future legislation impacting companies on the government dole. Their competitors, on the other hand, are going to have a field day snatching up talent that is trying to escape lower paying government wages, along with the restrictions placed on such businesses.

A few weeks ago in this post I observed how baseball and the markets had a steroid problem, although with the markets the steroids were in the form of leverage, loose lending standards, poor risk management, complex derivative products, unrealistic valuations, and unethical behavior, among others. Another comparison is unfortunately coming to bear. As with baseball, as long as the markets and the government continue to focus more on the juicers, and less on the solutions for fixing the current problems, both will continue to suffer and fail to reach their objective - reminding us of the opportunity that the markets have for making our lives better. Even though daily 450 foot home runs are a thing of the past, hitting a natural home run is still a thing of beauty, and something to be encouraged, both on the field and in the markets.

Comments

[Jim Bond:]

"Their competitors, on the other hand, are going to have a field day snatching up talent that is trying to escape lower paying government wages, along with the restrictions placed on such businesses".

What is wrong with that? Seems resonable to me. However, we are talking about thousands of high paid people out looking for jobs THAT ARE NOT THERE, certainly not at their pay scale. Even so, the ones that do trade places will presumable help those companies that did not self destruct. I am all for it, even if they are foreign companies. Welcome to the global economy.

But wait, aren't these the same people that were are the epicenter of the global economic meltdown? That doen't look so good on the resume.

Mar 22 08:44 AM

[s651:]

The Bremmer article is great but I don't see why you are so sure about the Senate not passing a similar bill. Half of the Republicans in the House supported the clawback on bonues at all TARP recipients. A similar margin in the Senate would assure its passage.

Mar 22 09:26 AM

[SAF:]

More stupid laws on the way.

Mar 22 09:29 AM

[http://seek...:]

As you know when somebody dies, first stops his or her heart and there is a little chance to bring that person back if brain still functioning but if brain dies, than that person is announces died because there is no way back.
People have to understand that banks like Goldman Sachs, Morgan Stanley etc. are the heart of America without them financial life in America will stop and people who works for them, are the brains of this country and if you destroy them, you will destroy America so fast that no terrorist would even dream about it. That bonus tax law in any form is an atomic bomb that will destroy brains of people who work their: brains are the most valuable asset of those companies. Who are those people who received bonuses? They do not get big salary like in some companies people do but instead in the end of the year they get bonuses depending of their performance and this time they received very little compare how much money they brought for their company because of difficulties in economy. These people have nothing to do with housing, mortgage problem etc. and the recession and anything what is going on with country right now.

I will bring an example: only one trader who works for one of those banks was paid as much bonus as his annual salary and he made for his company many million dollars. All his gross pay is less than one percent of what he brought for company with his trade. He paid 42 percent in taxes from all his earnings (Federal, State, Local Income Tax, Medicare, Social Security and plus tax that he owed on tax return form 1040).

More than third of his bonus is paid with stocks that means he can’t touch that money in three years. So after taxes and paying his expenses: rent, food, phone, cable, TV, gym etc. there is left almost nothing. So my question is where he supposed to take money to give back 35%, 90% or whatever money now in taxes, when it is passed several months after he received it and spent some of that money for expenses and has to pay his rent etc.. His grandmother who lives in another country is in critical situation and needs money for bypass surgery and everybody thinks he made that “big” money and in his family he is the only one who can afford it and he loves his grandmother so will have to pay that too rather than let her die but from his savings because as you see there is nothing left for himself and not too much savings either: he had to pay off last year his big college loan.

Now if he loses his job, I am not even sure if he will get unemployment or public insurance with this “Big” income either. Who will take care of him?

Only one person like him pays with his taxes annual living of roughly 5-6 people who does not work at all year long or for years and those people have nothing to do but sleeping for 12 hours a day, watching TV, making 8 children at once and having a public insurance....

Now see what life stile that trader has:
He gets up early at 6AM, goes to work, comes home at 8PM sometimes 11PM and goes to his computer to see what is going on in the world because he has to know everything and goes to bed at midnight. Only 6 hours of sleep! He works hard on weekends; few days of vacation....Can you buy any condo or house with that money that is left in NYC or close place or even pay a rent? Who will give you a mortgage! Only maybe he can buy house somewhere that has more than an hour commute if he can afford a down payment in few years and if he also travels two hours (back and forth), than he has to get instead 6 hours sleep but 4 hours sleep. How someone who needs to use his brain for work, can even stay alive with 4 hours of sleep?

No time for entertainment, no time for the gym and he is very young man who also has dreams: some day get a condo or house, get married, have children etc. that’s why he works so hard, become some day a millionaire, ah.. that American dream... now it is only dream...that does not seem will ever come true.

Isn’t it better to become for him a Mean street and do and easy job like consulting work, and have time for the gym, TV, traveling etc. instead being a Wall Street? Who will revive then economy? Those 5-6 families that can live all year without any work, make 8 children at once, enjoy the life because of that trader from Wall Street is paying high taxes and supports them? I do not think so...

That bailout is given to keep alive those companies and revice the country but not destroy them. Now you decide if you are doing a right or wrong thing by having that bonus law, getting as I understand revenge for something what happened in AIG and putting in a stressful situation brains of this country, by devastating them, making lives miserable. How in the world people who uses their brain supposed to do their jobs now?

Mar 22 10:06 AM

[Paul Killinger:]

Hopefully, should any of this reactionary legislation actually become law, the Supremes will nip this nonsense in the bud. If not, it will enable the Obamanistas to begin their pursuit of the rest of us. Anyway, we can always hope we're pretty far down on their lists.

Mar 22 10:07 AM

[petyaczar:]

Look, lets call the confiscatory tax on those who make more than Congressmen what it is. REPARATIONS and be done with it.

Lets pass a law that makes ANY politician who fails to deliver on campaign promises, subject to a CLAWBACK, and said politician(s) would have to repay ALL salaries and benefits, and LOSE their office and ALL pensions, benefits, including healthcare AND the right to act as a political lobbyist for 20 years.

These politicians are the root cause of this problem. We must get rid of them replacing them with real Americans from the real world at the next opportunity.

IMO

Mar 22 10:54 AM

[Rob Viglione:]

Increasing political hostility to wealth and productivity will have dire long-term consequences. Many people I know are actively getting capital out of the country, while others develop escape plans for themselves.

This is not the America we have come to believe in. The social contract with our government is fast eroding.

Mar 22 03:35 PM

[henarl:]

First: If these AIG bonuses are "based on performance" Then how is losing a world record 60 plus billion in one quarter considered positive performance?
Second: If these AIG employees are the irreplaceable "brains" of the whole financial ststem, we're in real trouble.
Third: Congress should be damned thankful that none of their compensation is based on "performance".!
Finally: These AIG bonuses, while troubling, are inconsequential compared to the huge amounts passed thru to Goldman, et al that seemed to be perfectly okay with Congress because the public was kept in the dark about that at the time. Now Barney Frank & Company are reacting to populist outrage only for political reasons.

Mar 22 04:05 PM

[mediapro:]

The article is almost as humorous as most of the comments.

The one who wrote the violin music about the porr financial guy who has a bunch of unredeemable stock options, a taxed salary (OMG!) and a bleeding Grandmother lost in Europe was better than the afternoon soaps.

Let's get real folks. What these guys do, in the list of TARP companies provided in this article, is literally move money around for their living. Where's the equal outrage and concern for the working stiff who is now supposed to renegotiate his union contract to spare the poor Detroit idiots?

I for one am sick and tired of hearing the outrage over confiscation of ill-gotten gains while the smart people who populate this site can't seem to realize that the role of the financial sector is to provide capital for people who actually produce things.

The problem with our economic contstruct is that we are not doing enough to right the wrongs of a failed, simplistic, silly policy direction that we have suffered through for at least the past thirty years.

The introduction, ascendency and idolatry of Milton Friedman's brand of shock economics has done more to destroy the world's economy than any economic hypothesis in our lifetime. This is not just Reaganomics /Bushanomics, but the pitting of haves/have nots in a global play orchestrated through Milton's disciples within the IMF, World Bank, and governing neo-conservative world view since at least 1975.

Cutting taxes on the wealthy and re-distributing middle class income up to those captains of industry combined with wholesale deregulation and record deficits under Reagan, Bush I and Bush II, and conveniently leaving the $1 Trillion dollars of Iraq war spending off the books while the national debt ballooned from around $5 Trillion to $10.6 Trillion at last peek is an ingenious spin on what constitutes supply side stimulus, if not outright delusion.

Count the change left in your pockets, unless of course you are one of the few who benefitted from this latest episode of Shock Economics so popular with necons. I'll just ask you the same question Reagan used to ask: "Are you better off now than you were four years ago?"

If you're in the same boat as the rest of us, our "staying the course" has undeniably run the lot of us aground. If you have benefitted, then you're one of the lucky 2% that control 80% of America's wealth, completely comfortable that you'll ride out the storm until the next lunatic can covince most of the people all of the time into something completely counter to their own self interest.

Mar 22 07:35 PM

[User 187593:]

No they were not the epicenter of the meltdown. Those in place today are the survivors. The ones responsible have already been fired. JPM Chase, Wells Fargo, Northern Trust and the like are unintended victims in this witch hunt.


On Mar 22 08:44 AM Jim Bond wrote:

> "Their competitors, on the other hand, are going to have a field
> day snatching up talent that is trying to escape lower paying government
> wages, along with the restrictions placed on such businesses".<br/>
>
> What is wrong with that? Seems resonable to me. However, we are talking
> about thousands of high paid people out looking for jobs THAT ARE
> NOT THERE, certainly not at their pay scale. Even so, the ones that
> do trade places will presumable help those companies that did not
> self destruct. I am all for it, even if they are foreign companies.
> Welcome to the global economy.
>
> But wait, aren't these the same people that were are the epicenter
> of the global economic meltdown? That doen't look so good on the
> resume.

Mar 22 10:14 PM

[User 187593:]

What makes you think Stevens, Breyer, Ginsburg, and Souter won't vote to sustain? Kennedy is the wild card here.


On Mar 22 10:07 AM Paul Killinger wrote:

> Hopefully, should any of this reactionary legislation actually become
> law, the Supremes will nip this nonsense in the bud. If not, it will
> enable the Obamanistas to begin their pursuit of the rest of us.
> Anyway, we can always hope we're pretty far down on their lists.
>

Mar 22 10:18 PM

[User 187593:]

AIG bonuses were not based on performance. They were retention bonuses, paid solely on obligation to stay on the job and perform during 2008. Since the affected employees stayed throughout 2008 they deserve the benefits of their contractual commitments, which they fulfilled.


On Mar 22 04:05 PM henarl wrote:

> First: If these AIG bonuses are "based on performance" Then how is
> losing a world record 60 plus billion in one quarter considered positive
> performance?
> Second: If these AIG employees are the irreplaceable "brains" of
> the whole financial ststem, we're in real trouble.
> Third: Congress should be damned thankful that none of their compensation
> is based on "performance".!
> Finally: These AIG bonuses, while troubling, are inconsequential
> compared to the huge amounts passed thru to Goldman, et al that seemed
> to be perfectly okay with Congress because the public was kept in
> the dark about that at the time. Now Barney Frank &amp; Company are
> reacting to populist outrage only for political reasons.

Mar 22 10:23 PM

[User 187593:]

This situation is not humurous--it is facisist. Congress is doing nothing less than targeting a specific group group for persecution (banking employees) just as the Nazis targeted jews. The reason I say employees is that the test is household income, not individual. Imagine a $40,000 secretary who received a $1,000 bonus, who is married to a $210,000 non-TARP company executive. That secretary willed be taxed at 90%. IT'S NOT JUST THE FAT CATS!!!


On Mar 22 07:35 PM mediapro wrote:

> The article is almost as humorous as most of the comments.
>
> The one who wrote the violin music about the porr financial guy who
> has a bunch of unredeemable stock options, a taxed salary (OMG!)
> and a bleeding Grandmother lost in Europe was better than the afternoon
> soaps.
>
> Let's get real folks. What these guys do, in the list of TARP companies
> provided in this article, is literally move money around for their
> living. Where's the equal outrage and concern for the working stiff
> who is now supposed to renegotiate his union contract to spare the
> poor Detroit idiots?
>
> I for one am sick and tired of hearing the outrage over confiscation
> of ill-gotten gains while the smart people who populate this site
> can't seem to realize that the role of the financial sector is to
> provide capital for people who actually produce things.
>
> The problem with our economic contstruct is that we are not doing
> enough to right the wrongs of a failed, simplistic, silly policy
> direction that we have suffered through for at least the past thirty
> years.
>
> The introduction, ascendency and idolatry of Milton Friedman's brand
> of shock economics has done more to destroy the world's economy than
> any economic hypothesis in our lifetime. This is not just Reaganomics
> /Bushanomics, but the pitting of haves/have nots in a global play
> orchestrated through Milton's disciples within the IMF, World Bank,
> and governing neo-conservative world view since at least 1975.<br/>
>
> Cutting taxes on the wealthy and re-distributing middle class income
> up to those captains of industry combined with wholesale deregulation
> and record deficits under Reagan, Bush I and Bush II, and conveniently
> leaving the $1 Trillion dollars of Iraq war spending off the books
> while the national debt ballooned from around $5 Trillion to $10.6
> Trillion at last peek is an ingenious spin on what constitutes supply
> side stimulus, if not outright delusion.
>
> Count the change left in your pockets, unless of course you are one
> of the few who benefitted from this latest episode of Shock Economics
> so popular with necons. I'll just ask you the same question Reagan
> used to ask: "Are you better off now than you were four years ago?"
>
>
> If you're in the same boat as the rest of us, our "staying the course"
> has undeniably run the lot of us aground. If you have benefitted,
> then you're one of the lucky 2% that control 80% of America's wealth,
> completely comfortable that you'll ride out the storm until the next
> lunatic can covince most of the people all of the time into something
> completely counter to their own self interest.

Mar 22 10:31 PM

[mediapro:]

Perhaps you missed the news item reporting that 20% of these "retention" bonus babies left the company AFTER they got their bonus money.

Still comfortable with AIG?

Actually, your point is well-taken in one sense. This isn't about bonuses paid to a batch of AIG FP geniouses. What this sorry episode has exposed is the incestuous nature of our economic structure. Merrell takes the B of A (taxpayer donated) TARP/Fed-structured buyout and pays BILLIONS in bonuses. AIG takes TARP and pays off BILLIONS to Goldman, Morgan and others sitting on their insured obligations that the worthless AIG'ers wrote.

This madness will only stop when we admit that w/o TARP and TALF money, these financial giants would be bankrupt midgets sitting on worthless assets enough to torpedo the companies should they ever write down those assets.

Nationalize the financial industry, GM, GE, and every other company that has brought this ruin upon our country!


On Mar 22 10:23 PM User 187593 wrote:

> AIG bonuses were not based on performance. They were retention bonuses,
> paid solely on obligation to stay on the job and perform during 2008.
> Since the affected employees stayed throughout 2008 they deserve
> the benefits of their contractual commitments, which they fulfilled.
>

Mar 23 05:45 PM

[mediapro:]

So, what's new with these tax cheats and persons that have enough money to hire tax cheating lawyers?

Any wonder why the average Joe is outraged? While the wealthy shelter their income through "legal" and nefarious means such as foreign "tax havens" offshore accounts, shell businesses, and illegitimate deductions posing as business expenses, the working stiff paying his/her honest taxes for an honest wage looks that who gets rewarded under our current system and who gets the shaft.

1. Reinstate Glass-Steagall. None of these shops (Citigroup, B of A, etc.) should have ever been allowed to dally in businesses about which they knew nothing. AIG has (had) 111,000 employees. It's an insurance company. How can it effectively manage its core business while allowing these geniouses to manipulate the financial markets with CDO's and CDS's?

2. Eliminate bonus structures altogether. Why are salaried employees and small businesses hit time and time again, while big business always seems to 'bend' the rules and still come out on top? Think of it this way, if I’m an average corporation and I pay a qualified employee 100k as their salary, I am required to withhold taxes, insurance and a host of other items – in addition to setting aside money for federal programs. However, if I pay that individual 60k, and a bonus 40k, the situation looks much better. The employee has to handle withholding taxes on the 401k and I am only required to deal with the payroll effects of 60k.

3. Fix the tax code. Just a few examples:

A. Our effective cost per gallon of gas is ~$10.00 when one factors in the roughly $30 billion dollars in tax subsidies ANNUALLY provided to the oil and gas industry. This is the most egregious, downscale tax imaginable. Moreover, the oil and gas companies simply need to bid and secure future leases and INTENT to drill for the largess we reap upon them every year. This ponzi scheme against the American taxpayer is one of our dirtiest tax secrets.

B. Add to that tax subsidy the protectionist import rules on sugar, milk, etc. Removing sugar tariffs alone and replacing this supply with a much more efficient cane sugar ethanol source could end the corn producer/fertilizer manufacturers stranglehold on the taxpayer's neck.

C. For people who don't count the payroll, FICA, SUI, etc. automatic worker payroll contributions while conveniently ignoring the "bonus structure", offshore accounts, shell businesses, and other manipulative uses of the tax code by those who can afford tax attorneys, don't be so quick to condemn the extra pittance through earned income tax credits, adjusted rate schedules for wage earners and such put into the pockets of those who actually contribute a day's labor for a fair wage vs. the incredible sums paid to those who move money through the system. Look where that system of rewards has put us.

C. Finally, would someone please explain to me why there is a ~$106 K cap on wage contributions to Social Security?

While we are all arguing about the validity of the clawback option, we are missing the larger point of just how egregiously the average Joe has been pummeled by a tax system that redistributes wealth from the working middle class up to the 2% Captains of America that continue to rape this country and its resources.




On Mar 22 03:35 PM Rob Viglione wrote:

> Increasing political hostility to wealth and productivity will have
> dire long-term consequences. Many people I know are actively getting
> capital out of the country, while others develop escape plans for
> themselves.
>
> This is not the America we have come to believe in. The social contract
> with our government is fast eroding.

Mar 23 08:57 PM

[mediapro:]

If you want Facism, look in the rear view mirror. Facism is shredding the First and Fourth Amendments in an ill-defined "War on Terror". Facism is committing extreme rendition on American citizens. Facism is the right to go through anyone's emails, phone conversations, etc. on the suspicion of it being related to terrorism.

Even a staunch conservative like Bob Barr had enough of the putrid actions during the previous Administration. His performance during the much-too-late Impeachment inquiry last year spelled out in exquisite details the Facists who almost managed to destroy this country.


On Mar 22 10:31 PM User 187593 wrote:

> This situation is not humurous--it is facisist. Congress is doing
> nothing less than targeting a specific group group for persecution
> (banking employees) just as the Nazis targeted jews. The reason
> I say employees is that the test is household income, not individual.
> Imagine a $40,000 secretary who received a $1,000 bonus, who is married
> to a $210,000 non-TARP company executive. That secretary willed
> be taxed at 90%. IT'S NOT JUST THE FAT CATS!!!

Mar 23 09:03 PM