Punitive Tax Rates of 90% Could Cause More Problems Than They Cure
By Martin Hutchinson
Contributing Editor
Money Morning
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 Anyone who has paid a 90% tax in the United States is both quite old and quite rich – under the 1954 code, repealed in 1964, you had to be earning over $200,000 to pay tax at 90%, real money in those days, equivalent to over $1.5 million now.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 was what I saw.
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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 congressman 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!
[Editor's Note: When it comes to banking, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson, who brings to the table the kind of high-level expertise that our readers have come to expect. In February 2000, for instance, when he was working as an advisor to the Republic of Macedonia, Hutchinson figured out how to restore the life savings of 800,000 Macedonians who had been stripped of nearly $1 billion by the breakup of Yugoslavia and the Kosovo War.
Experiences such as this have imbued Hutchinson with special insights in such areas as banking, the financial markets and fixed-income investing. Just last month, the financial Web site Seeking Alpha named Hutchinson to its "leader board" because of his quickly developing online following. And, in Money Morning, Hutchinson cut through the controversy about the health of the U.S. banking system, analyzed the Top 12 U.S. banks, and told readers which ones were "Zombies" and which ones were "Gems." The article was one Money Morning's most popular pieces of the New Year [If you missed the story, please click here to check it out. The report is free of charge].
Fans and followers of Hutchinson’s work will soon be able to subscribe to a new product that focuses on income investing that will feature more of his – insights and essays. That should debut in about a month or so.
Hutchinson also writes regularly for our monthly newsletter, The Money Map Report, in which he and other Money Morning colleagues also make investment recommendations for subscribers. To find out more about The Money Map Report – including a special offer that includes The New York Times bestseller, “Crash Proof” – please click here.]
News and Related Story Links:
- Money Morning News Analysis:
Timothy Geithner, Career Finance Official, is Obama’s Nominee for Treasury Secretary. - Academica Press LLC:
The Great Conservatives. - The New York Times:
Sir John Colville, 72, Secretary to Churchill. - Money Morning News Analysis:
Could Tax Problems Trip up the Confirmation of the Best Candidate for Treasury Secretary? - Wikipedia:
Sir John Colville. - Money Morning Special Banking Rankings Report:
The Top 12 U.S. Banks: From Zombies to Hidden Gems.
Comment by Barbara on 24 March 2009:
I think it is a great plan you have designed. Why wait until Congress, the Treasury Secretary and the President retire to tax them 90%? Why not go after those Fannie Mae lobbying payments and campaign donations NOW?
Comment by Carl Kirsch on 24 March 2009:
It would be better to have higher taxes, easier deals and less days. In the 1950’s with higher tax rates the American life style was a lot better and some people were rich as always.
I do agree that higher taxes should be for all in the higher income brackets including are wonderful representatives. The Bush tax program which clearly was imbalanced and deficit when proposed which any one could see was voted in by the same congressmen.
Raise taxes, balance budgets and fix the failing infrastructure of the US. It would take a brave politician to propose this simple solution.
Comment by Alexander Treutler on 24 March 2009:
This silliness is getting out of hand.
A bonus is not a commission.
Simple. Period. Bonuses are always discretionary. Else it is called commission. Or if guaranteed, it is called a salary.
Bush’s right-wing ideologues never saw a legal contract they couldn’t break, from the United Nations to Detroit auto workers.
Solution: pay a bonus of ten bucks. Case closed.
Comment by John on 24 March 2009:
First of all the Banks are a catalyst to move money in the economy they do not create anything. They should be treated like all other services if they can’t make a profit “get out of the business”, instead of taking bailouts from the tax payers.
One thought is to lower interest rates on credit cards.
Comment by A.M. Deist on 24 March 2009:
You say: “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.” Based on how we got where we are, maybe we would be in much better shape if we cut all those deals that are supposed to help America. Capitalism has put America in the same place the world was at when Noah started building the Ark. Were God to look at American Society today, he or she would certainly want to destroy the world and start over again.
Comment by Al on 24 March 2009:
As a physician, I see the effects several times a day of the ravages of stress on patients who are working 10 or 12 hour days with no breaks – just nose to the grindstone. With my average 13 hour day, I suffer those effects as well. If a 90% tax rate is what it takes to develop humane working conditions again in this country, I’m all for it. It does seem like there might be a better way, though…
Comment by Econ101 on 24 March 2009:
“In Germany, they came first for the Communists, And I didn’t speak up because I wasn’t a Communist;
And then they came for the trade unionists, And I didn’t speak up because I wasn’t a trade unionist;
And then they came for the Jews, And I didn’t speak up because I wasn’t a Jew;
And then . . . they came for me . . . And by that time there was no one left to speak up.”
-Pastor Martin Niemöller
Excellent plan, but I think it should be imposed upon the congress now to reduce their “productivity” NOW. The congress created this crisis over a period of years and simply want to dictate to the American people how to live. It must be stopped.
Guietner didnt pay taxes until he had to. Barney Frank and other members of congress have ethics violations but nothing comes of it because they control the process. The congress is the most corrupt gang of thieves in the United States.
“Those who would give up Essential Liberty to purchase a little Temporary Safety, deserve neither Liberty nor Safety.”
- Ben Franklin
Comment by Truthpeeler on 24 March 2009:
Spoken like a true neocon. Your missives are getting worse by the day. You didn’t even mention the President’s dismissal of congress’ punitive tax rates. No doubt because you’re either deaf or afraid to print anything that might be seen as pro-Obama. Too bad.
Comment by JG Damrath on 24 March 2009:
Re:Punitive tax rates.
Precisely on target!! Destroys incentive in a magnificent twist of unintended consequences brought about by our “dullard” elected weasels in the houses of horror in DC.Most of these geniuses navigate from A to B in their elitist deliberations–forget the rest of the thought process.(Huh, there is something beyond the end of our noses??) However, they do have a plan and does not bode well for the USofB formerly USofA but now B for Broke.
T’would be an elixir for the soul if,— as you put it–”the beltway bandits” and ALL other members of the chambers would be subject to “like rewards” for their undying efforts to “Help” the country.(Translation– line their ruddy pockets). –Never going to happen ( 1st law of the scoundrels code).
Comment by Norberto Velazquez on 24 March 2009:
Sounds like a not so profesional reply of anger from the punished ones… I think that making a good salary justifies that you work hard for it. Now, outrageous bonuses like that should only be earned by people that do GREAT THINGS, like curing cancer, or finding the way of producing technology that will help us deal with the energy chrisis, etc… Now come and tell me that “Great Things” is to lend money like crazy and charge outrageous interest so your stockholders can become richer. That is actually called GREED. The 90% tax rate may be something that could backfire later, and a bad idea, but why didnt you write an article that proposed how to get that money back without imposing a 90% tax? Or do you think it is OK to re-distribute taxpayer dollars to officials that almost brought a company to the groud?
Comment by nizar mecklai on 24 March 2009:
I am on principle opposed to INCOME TAX especially Personal Income Tax as I feel people spend a lot of time devising schemes to avoid paying such tax, instead of devoting their time and energies to develop ideas, products and services.
Likewise the current Malaise is because the legitimate compensations of Stock Options has been abused by some CEOs etc. by falsifying records in order to gain undue profits.
Instead of punitive 90% taxes etc. we need to establishfundamental principles e.g. 1.do not allow ANY corporation to grow so big as to THREATEN the system should it collapse viz. Citibank, AIG etc. This would encourage COMPETITION and GOOD ETHICAL CONDUCT. 2.ensure that all compensations are paid in CASH with NO PERKS 3. MANAGE consumption through Value Added Taxes etc. 4. Control SPECULATION on the Exchanges through demand for upto 100% MARGINS, instead of fluctuating interest rates.
Comment by Frank Hendriksen on 24 March 2009:
This is truly a nonsense article. We’re not talking about taxing working people at this rate, just the bonuses paid by companies that receive bailout money. So doing this will eliminate the “90 hour” work week. There’s lots of research that shows that working long days is NOT the same thing as being productive. Maybe those long work weeks were a factor in the dismal performance of these bankers! These people are welfare recipients on a large scale…..
Comment by Gary on 24 March 2009:
You are totally out of touch with the working Americans you supposedly are providing advice to. Whether a few “innocent” bankers and financialists are hurt by this tax is irrelevent to most of us who do real work for a living. This tax would make a point that cannot be made in any other way-personal greed cannot be allowed to ruin our economy. Bonuses for any failed organization is insane. And keeping these ripoff artists in their jobs so they can fix it is also insane.
Comment by Chris Hahin on 24 March 2009:
If these bankers who created this problem cannot survive on $500,000 per year, which is taxed at 32%, leaving them $325,000, will they really do a better job with an extortion “bonus” to clean up the mess they already created? The prescription of taxation may not be the best resolution. At present, the Treasury Dept is seeking to ability to seize “non-bank” financial service companies that affect the entire financial system of the United States like AIG. By becoming owner of the failed corporation and having a majority of its board members, the Treasury can simply void such contracts, begin searching for replacements of those who complain about recoupment of their bonus, and you will see how quickly those complainants find methods to resolve the crisis they helped to create.
Comment by This Will Work on 24 March 2009:
Tax the “poor” 90% and anyone who walks away from a mortgage.
Bottom line is that if everyone paid their bills then none of this would have happened. Whether the banks help make liar loans or not, the people signing for the money are the ones taking on more debt than they knew the could afford, or flat-out lying. Otherwise they were stupid. Tax the stupid 250%.
This simple plan would fix everything.
Comment by Poonie on 24 March 2009:
Living under a rock, are you? What possible metric would result in bonuses being paid at all? “Let’s see, Bob, you only lost $100,000 in your department this year, so here’s $1,000,000. Keep up the good work!” Geez, imagine what the bonuses would be if these companies actually made a profit.
Moreover, innovative thinking resulted in a bunch of people trading putrid assets and calling it a business. If we as taxpayers are going to assume most of the risk then most of the profits belong to us. That one U.S. Senator had it right – most of these so-called leaders should kill themselves.
Comment by Ken on 24 March 2009:
The thought of NOT taxing big companies that are taking MY tax dollars (which could be better utilized for myself and feeding my kids) and giving them away as bonuses in this present economy is not only ridiculous, but borderline insanity. It isn’t about the innocent and the guilty. It’s about how big business has already put the economy in this position by its greed and mishandling of money. Yet, it’s wrong to hold them accountable and force them to give my money back for intentionally mishandling it again? How easily we forget the money spent on private jets and “business trips” while the rest of the nation struggled with unemployment. I personally know people who haven’t had work in almost a year, yet their tax dollars buy CEO’s of some of these companies meals and air-fare? Only in America.
Comment by Aileen Murphy on 24 March 2009:
I believe that Congress, the Administration and the general public need to calm down for just a little while and take the time to think things through, rather than rush to so called solutions to calm the public and the investors.
First of all, we have found out that there are 13 banks that received TARP funds, but completed fraudulent applications to obtain those funds. To receive the funds, each bank had to certify that it did not owe income taxes. As it turns out, 13 banks did owe income taxes but certified otherwise. The very first step is to reclaim all of the TARP money given to these 13 banks that lied. Period. Not if, ands or buts or claims of the bank being “too large to fail”. This would be a fair solution and a fair way for taxpayers to get back some of their money.
Second, let’s think clearly about AIG. The bonuses that were agreed to were retention bonuses, not performance bonuses. Now, the retention bonuses may have been promised to those that did well performance-wise in the past, so realistically, AIG would want to retain those individuals. But as everyone knows “past performance is no indication of future results”. The bonus receivers should not be the ones that are punished, unless there was something in the bonus contracts that they did not live up to. If that is the case, then the money should just not be given based upon non-compliance with the contracts. But, hopefully, someone thought about looking at that aspect of this situation. Assuming all is on the up an up for the bonuses, then the money should be given, but not be taxed in any different way. The problem lies with AIG. It appears that AIG has not used the TARP money for the intended purposes. For that reason, the $165 million paid for bonuses should be given back to the Government by AIG from the TARP money it received (assuming that AIG was not already taken care of by the first solution noted above).
Third, if any of these solutions will cause AIG or any other banking entity to fail, so be it. Both solutions are not based on punitive measures. Rather, they are based on contract law.
If we as a country want to continue to boast about our values, following these two steps will show that we mean what we say.
I believe that no entity is “too big to fail”. Other entities will come to the rescue and fill in any gaps caused by the demise of the entities that fail based upon the two solutions noted above. Maybe even new individuals with fresh ideas and better skills will come forward. The work will still have to be done. It will just be done, hopefully, by individuals who have better skills and are ethical in all dealing with their employees, the shareholders, investors and all government entities to whom they will be accountable.
Comment by gene on 24 March 2009:
ask not for whom the bell tolls…
Wake up, this is just a convenient first shot at taxing away wealth. There will be more “justifiable” outrages to demand taxing other groups at these rates and the definition of “rich” will keep going lower until in the end all of us are paying 90% marginal rates for any income over $50,000 (ted kennedy’s definition of rich). The outrage will be nothing more than the fact that you earn the money. BO has said often that if you have money you are expected to spread it around and this will be his primary means of spreading.
Comment by howard hillman on 25 March 2009:
This is really meant for Martin:
Excellent article! I “entered” Wall Street with the Chemical Bank (1960) and had the pleasure of dining as described and had many friends from the UK who kept trying to tell me that the US was crazy to work as hard as we did ….and it also didn’t make sense in the UK to have high salaries but glorious perks due to taxes.
Great, FABULOUS idea to tax post US office speaking fees!
Comment by VentureShadow on 25 March 2009:
Hutchinson missed the forest for the trees. The 90% tax is not on employees of all firms, or even all bankers. It is only on the failures. It is not just a tax–it is a punishment, and punishment is well deserved. As with all punishments it has real shortcomings and it can backfire. Does AIG deserve punishment? They sure do, and lots of it!
Comment by Investor on 25 March 2009:
Thoroughly useless drivel.
Comment by OilFieldTrash on 25 March 2009:
You know, the more I read what you have said, the more I agree with you about the days gone by. The era that you are talking about was a productive era. The greed was not so great a mind-set by the up and coming financial management group because it did no good to get into that top tier. Your money was actually going to go back into the system, not on to your yacht, or your summer house, or to your yearly at the Met, or all of those other little things that separate the ultra rich from the middle class and poor. As you put it, there was no reason to do the 30 minute power lunch, so why not take a customer to a well deserved long lunch at the shop, talk a little business and enjoy life, rather than plot that next big M&A that is going to allow you to screw the other guy out of his market money. Today corporate America skims 10% of the profits of the companies off of the top. One of the most important votes that I will make going forward is to limit perks and compensation bonus to company officers. Not take them away, rather make them reasonable. I believe that every stock holder should do the same. Reduce this greed! This is one of the reasons that we are loosing market share abroad and at home (read GM, Merrill Lynch, AIG, GE), this is one of the reasons why we can not compete across several markets today. Sure, the Google-heads can produce (but can you say BIDU) however many industries just do not have the completive advantage that we use to hold, so we throw manufacturing out the door and go to services (fast becoming an India market BTW).
Why not go back to that era. Rather than just taxing the bonus boys that are living off of our Grandchildren’s money via Tax supported bonuses, let’s just tax every body’s money above $250,000 at a 90% rate. I truly believe that the bygone days that you talk of produced more solid solutions than the days that we are seeing today.
But seriously though, maybe for just one or two years, while we try to struggle out of the soon to be 10% unemployment, watch the TV as people are evicted from their houses, see the street population grow in our papers these folks can suck their voracious appetite for their next big killer bonus back and look around at the environment that they also have a responsibility to fix. I would not mind it if the Congress folks (especially the one that have more money than sense) would forgo their salary for a while. They might truly develop real empathy for their real constituency.
Comment by valter on 25 March 2009:
Can I ask when people responsible of the financial and economic crisis will be called to pay the bill of theirs ‘mistakes’(euphemism) instead of receiving premial bonuses?
And to have bonuses deriving from the ‘brilliants results’ of their jobs…? and not from bailout’s money deriving from jobless tax-payers???!!
Thank you
Comment by Kevin Beck on 29 March 2009:
I think it is unfortunate that we get the government that we pay for. The world would be better off if Washington, DC actually believed in something worthwhile, like capitalism. What we have had for the last 75 years is hardly capitalism, so we cannot blame it for our current problems as one reader suggests. I agree that if banks cannot make a profit doing what they are supposed to do (finance productive business and consumers), then they shoudn’t be in business. And I also agree that excess taxation would result in an excess of productivity not occurring. However, in the case of our good old Federal government, this might be the best of all worlds. But for those who are actually productive, this would be a disaster.
Comment by Searcher on 29 March 2009:
Please explain “retention bonus.” Is it a reward for past performance? Is it an inducement to retain the beneficiary based on past performance? If the bonus is paid and the beneficiary leaves employment, is the bonus to be returned pro-rata, or otherwise? Is the bonus and terms of award a point of an employment contract for a specific person, or merely a compensation ‘policy’ applied to a defined group?
Comment by m gross on 2 April 2009:
Anyone who made successful deals for a solvent company will remain unaffected by this 90% provision, no matter how large their bonuses.
The ones affected are persons who received outrageous bonuses from companies who were forced by their insolvent circumstances to beg and receive aid from the taxpayer.
You do not need a degree in economics to tell the difference between the two, altho having one may make it more difficult. Once taxpayer aid has been received, there is a reasonable legal argument that contractual bonuses need not be adhered to due to force majeure. Any attempt to suggest otherwise represents spin or insensitivity. The latter appears to be de rigeur on Wall Street.
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