A Look at a World with 90% Tax Rates

For lawmakers who believe that 90% tax rates would be an effective way of punishing the financial malefactors who continue to flourish as the rest of us founder, take careful note: Not only will you punish the innocent as well as the guilty, you could also extinguish the innovative spark we’ll need to eventually make this moribund economy catch fire.

The U.S. House of Representatives voted Thursday to impose a tax rate of 90% on bonuses earned by wage earners of $250,000 or more who are working at banks that received more than $5 billion from the Troubled Assets Relief Program (TARP). The Senate is expected to vote this week on similar legislation, possibly extending the tax to institutions that have received more than $100 million under TARP.

OK, we get it guys: You don’t like American International Group Inc (AIG).

Still, unless you just like 90% tax rates (probably true of about half the House Democratic caucus), you are punishing the innocent along with the guilty. Banks like Wells Fargo & Co. (WFC) and U.S. Bancorp (USB) have received more than $5 billion from TARP, but have yet to record a net annual loss.

The Saga of a (Highly Taxed) British Banker

For those who think taxing the rich at 90% may seem like a good idea, I can give you some practical experience of what happens when you do. Anyone who has paid a 90% tax in the United States is both quite old and quite rich - under the 1954 code, repealed in 1964, you had to be earning over $200,000 to pay tax at 90%, real money in those days, equivalent to over $1.5 million now. However, in Britain, 90% income tax rates lasted until 1979, and kicked in at 20,000 pounds, about $150,000 today. I never quite made that much, being in my 20s then, but I was paying 75% marginally, and it made a HUGE difference to my lifestyle and to those of my fellow bankers.

So, apart from making me feel poor, what did the high marginal rate do for me, as a young merchant banker?

Well, for a start, there were none of these 90-hour weeks you hear about on Wall Street. What the hell would have been the point? We got to the office each morning around 9:45 - not 6 a.m. - and we left at 6 p.m. (5:15 was the “official” quitting time, but we wanted to appear as keen up-and-comers, and figured the extra 45 minutes each day was time well spent).

Our workday was over, but we weren’t exhausted: Every evening, in fact, I’d catch a bus to the British Museum Reading Room, which was open until 9 p.m., and get two-and-a-half hours of work done on my book about great conservatives in British history. Had the book been a best seller (it took me 25 years to find a publisher … although it did get wonderful reviews), the 90% tax rate might have been justified, I suppose, but modest sales were what I saw.

Then there was lunch. Don’t think now of the quick sandwich at the desk, or even the half-hour at the gym. When merchant bankers did lunch, they did it properly. All banks had in-house dining rooms, where the food was of excellent quality and the wine was superb. You had to invite a client, of course, but there was no requirement that you ever actually did any business with that client, although usually one would spent five or 10 minutes over a very nice port, discussing the market - just in case.

Some of my colleagues found the wine so superb they were quite incapable of rational thought afterwards … but that’s why lunch started at 1 p.m., and not noon, so the firm got at least an hour or two out of them beforehand. Personally, I loved the haute cuisine, which is why I am the shape I am today - do you think I could sue?

The best lunches were the ones where I got Sir John Colville, one of our directors, to host - he had been Winston Churchill’s private secretary, and as soon as the main course was served and the wine poured, he would begin: “When Winston and I were at Casablanca …”

Lucky if you were back at your desk by 4.30 in the afternoon on those days, I can tell you - but it was worth it.

So if Congress wants to make bankers pay taxes at 90%, that’s what they’ll get: Lots of very good lunches, but not many deals. The bankers will be more dyspeptic, and the economy will be poorer, but what the hell: Civilized conversation and an in-depth knowledge of the better claret vintages will once again be the order of the day on Wall Street.

Why Not Spread the Pain?

It does, however, seem more than a little unfair to restrict the benefits of the 90% tax rate to bankers alone. We could, for example, extend it to members of the U.S. House of Representatives and the U.S. Senate. This wouldn’t be, heaven forbid, on the salaries they earn as congressmen and senators - the American public needs their finest efforts during that period. Instead, this new tax rate would levied on the period up through 10 years after they retire from Congress, on the lobbying income they pick up as “beltway bandits.” And here it’s clearly a case of addition by subtraction: The less productivity we get from lobbyists, the better off the country will be.

You could also extend the 90% tax rate to U.S. Treasury Secretary Timothy F. Geithner: Why should he not get the full joy of paying the taxes he imposes (and there’ll be no forgetting about those tax payments this time around, Mr. Treasury Secretary!).

U.S. Federal Reserve Chairman Ben S. Bernanke could pay those higher taxes, too. And if that made him less eager to continue inflating the money supply after his current term ends in January 2010, well, everything has a downside!

Even President Barack Obama might enjoy them. Again, not on his presidential salary - but he’s such a magnificent speaker, and so young, that you have to believe he will break all records for speaking fees once he leaves the White House. Indeed, 90% of his post-presidential earnings for a decade-long stretch might even make a noticeable dent in the budget deficits he will leave us.

So there you have it - a look at what the world might be like with 90% tax rates. If Congress goes ahead and implements them, I have an obvious stock tip, too: Put your money in one of the new tax havens, where relatively low taxes attract investment and entrepreneurship from all over the world - including such global economic powerhouses as France or Sweden!

Original post

Comments

[Fueled By R...:]

Y, what's good for the goose is good for the gander. How about a 90% retro-active tax on Chris Dudd's (et al) "friend of Angelo" mortgage? Or a tax on all the bonuses the ex-Fannie and Freddie execs got for the wonderful jobs they did running those companies. And don't leave out the Republican side of this share the wealth exercise either. Safe to say, gravity is a myth; Congress sucks!

Mar 24 09:28 AM

[GoldMoney:]

Apparently, this guy didn't get the recent memo. To summarize, the bankers profits of the last 20 years were all an illusion and society is now having to bail them out to the tune of trillions of dollars. We'd all be better off (well, except for bankers) if people like this guy *stopped* working. Don't give me this crap about deals and innovation. The real innovators don't get sweet frack all from bankers. Their money comes from VCs and friends and family.

Bankers enjoy the wonderful privilege of being able to create money out of thin air and enjoy terrific profits in the process, at least until they screw up royally at which point society pays their debts through inflation. They lend the newly created money to idiots who make massive one way bets on real estate. Maybe you should focus on being grateful for the privileges and entitlements that life has given to you, probably through family connections, instead of simply expecting more and more and more until you break the back of the economy with your greed, ignorance, fear, bloated lifestyle, and selfishness.

It must have been so horrible making a six figure salary and being forced to work 8.5 hour days and eat haute cuisine. You poor little man with your six figure salary at the beginning of your career. You must have felt oh-so-poor. Even a manicure wouldn't have shaken your feeling of poverty.

You certainly look and sound like a person who is capable of providing enormous spark to the economy. Why don't we just give people like you all the money in society, and then print three times that amount and give it to you as well. Oh wait, we just did that. Now we just sit back and wait for you geniuses to come up with more scams to blow another bubble, right? Then it will all be good since you will be able to shake the gnawing, grinding, relentness poverty that you are subject to.

Poor, poor little man.

Mar 24 10:54 AM

[Alex Filonov:]

I love it. Especially wine with corporate lunch. My resume is ready for any company which has it on offer. Salary requirements are very modest, and I don't request 1 million a year retention bonus...

Mar 24 11:04 AM

[Karen Consumer:]

I believe the 90% tax rate was on $125,000 single people and $250,000 married couple. But I think that's too narrow minded for them to set a limit. Better for anyone of any income that gets a bonus to pay 90%, why punish only Wall Street types when you can crush creativity and hard work across the board?

I vaguely remember learning in high school history class (and this was a public school mind you) that communists paid workers exactly the same regardless their work product. It worked so well for them, evidently the administration thought it would work well for us as well.

Mar 24 03:08 PM

[Michael Waz...:]

Martin, thanks for such a nice read! As someone who grew up in the Soviet Union, I know Reds when I see them. And I know firsthand how much lack of monetary motivation hurts productivity. I am also quite immune to all the BS American voters where buying in heaps recently... So, the idea to divide ("spread"?!.) other people's wealth remains popular with the so called "intellectuals" and of course a great rabble-rouser... I sure hope the current craze will run its course soon. My wife and I did not come to this country, (12 years ago, with $300 and two suitcases) to take part in building socialism!..

Mar 24 07:06 PM

[Tony Petroski:]

It's fascinating to watch a congress pass wildly unpopular legislation--the bailouts, and then do what they can to make it difficult for the bailouts to work. They've now given the institutions big incentives to pay back the bailout money thereby defeating the original purpose. The 90% tax was in the playbook, but was meant to be dropped on the public much later during some other government-generated crisis. Now that congress has overplayed its hand, it's going to be much harder to convince the public that taxing the "rich" into oblivion is the way to prosperity.

I recall reading George Gilder's "Wealth and Poverty," in which he pointed out that all the Bentleys plying the streets of England were not a sign of wealth--they were the toys that rich folks bought as they spent their wealth rather than invest it only to have most of the profit confiscated. Folks, we've been down this road before. Jimmy Carter paved the way for Ronald Reagan. Obama and his fellow socialists on the Hill are paving the way for a more sensible president and congress.

Mar 24 07:57 PM

[Ronald Pires:]

I'm with you, Alex. And port for lunch? What a novel idea. I thought that wasn't allowed until after dinner.

Mar 25 04:13 PM

[ArtfulDodger:]

No doubt 90% of the Dumborats would love to see 90% tax rates again. Yes, that's where FDR and Woodrow Wilson had them at the end of their administrations.

Don't think it's not possible again; the leftists in charge today are more leftists than those in charge back then.

Apr 09 12:38 AM