I'll Agree With... Half of That

Josh Marshall comments on what we both think is ill-advised tax policy, in the "90% clawback tax" on bonuses to employees of TARP recipients that have received more than $5 billion in federal money. It's a politically easy response to public anger, taking the place of more sober policy that should have been put in place from day one. And let's not forget that Congress is once again "the gang who couldn't shoot straight" - both parties were complicit in the "hold no one accountable" approach to the bailout. Perhaps some of their new found rage should be directed inward.

Marshall writes,

First, what's to stop the companies from just folding the 'bonuses' into straight salary income? In which, the whole thing goes out the window?

Actually, I think that would be a good thing, given how often we hear the argument that due to the pervasive nature of oversized bonuses in the financial industry, and how they routinely equal or exceed the recipient's annual salary, they really should be thought of as part of the recipient's salary. If this forces industry-wide salary renegotiation, I doubt that the new salaries will in fact be as inflated as that theory suggests. And our legislators will no longer have the excuse that we have to let the absurd salaries and bonuses slide for fear that financial industry employees will quit en masse. To the extent that these companies pay what should be salary in the form of bonuses to gain a tax advantage, all the better that the bonuses become salary.

Second, this cuts a pretty broad swathe. You don't want CEOs who drove their companies into the ground pulling down multi-million dollar bonuses from companies that wouldn't even exist any more without big taxpayer handouts. And the folks at AIGFP who played a big party in driving the whole economy into the ditch with their reckless and possibly criminal behavior shouldn't big reaping big rewards of taxpayer money for their behavior.

But it's not clear to me why a couple, both of whom work in the financial services industry, and make $150,000 each should essentially have their entire bonuses taken back in taxes.

Well, color me weird, but if you have a $300,000.00 household income from a company that would be out of business but for a huge taxpayer bailout, I don't have enormous sympathy for the notion that you should get a six or seven figure bonus simply for showing up at work. That ties into my earlier argument - if in fact those salaries are inadequate or aren't competitive, renegotiation is a good thing.

If I understand his point, though, it's less about that couple's specific circumstances and more about "why them?" That's fair - we're vesting the sins of the employer (and the sins of our political leaders) on employees who may simply be hard-working, honest, diligent bankers. (Yes, and there are also lawyers who fit that description. Go figure.) They may have nothing to do with their employer's situation, or may be the people who have kept it from being a lot worse, and we're singling them out for a reactionary, confiscatory tax. It seems like the worst form of hypocrisy for any modern Republican to vote for a 90% income tax on anybody, even without the angry declaration that the money being taxed is an undeserved windfall.

I do take issue with the conflation of the bizarre pseudo-retention bonuses (a retention bonus you may get even if you've quit) at AIG, as compared to a long-term retention bonus (e.g., a loan that is forgiven over six to ten years, issued selectively to people who you truly do want to retain) that can help keep key employees in place, or performance bonuses. (I'll grant, what passed for performance in the financial industry over the past decade included conduct that, in retrospect, would not warrant bonus pay.) I also think this is a bad way to make public policy.
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Update: Marshall partially explains the difference in our perspectives:

I know a number of people who work or in a few cases worked at the big investment banks here in the New York. And while the size of the bonuses would float to some degree with how well the bank did in a given year, and presumably how well they performed, to a great degree it was locked in income. And the great bulk of these people's incomes came from their bonuses.

That's all well and good, but to me if the bonuses are in fact salary they should be negotiated and paid (and as Marshall notes, taxed) as salary. Marshall shares a reader comment that is also instructive:

Most Wall Street firms began as partnerships, not as publicly-owned corporations. Partnerships apportion their profits at the end of their fiscal year; that practice has remained the norm, even though shareholders (or, in the case of AIG, taxpayers) now own these corporations.

And that's really the nub of the problem. Most Wall Street firms have gone public; at the same time, many public banks have entered the Wall Street game. But corporate governance, compensation, and accountability haven't kept pace. In essence, these firms offloaded most of their risk to shareholders, but continued to be run in an insular fashion, and to divert the great bulk of their surplus revenues to their workers and executives. In the bubble years, enough cash rolled in that the complaints were muted - executives and traders took it home in wheelbarrows, and the share prices still went up.

He argues that the Wall Street compensation system reflects the desire for "the rewards of ownership with the security of employment". I agree with the comment's conclusion, that the compensation model is unsustainable, but that a special "feel good" tax isn't a solution.

The real solution lies in ensuring that corporations are run in the long-term interests of their owners, not to line the pockets of their executives.

The need for that solution reaches far beyond the financial industry....