The following is an excerpt from OpinionJournal.com’s “Best of the Web” written by the editor, James Taranto.
The 102% Tax
“The House passed legislation Thursday that would significantly curb Wall Street bonuses this year, as lawmakers from both parties echoed popular outrage over big payouts to employees of American International Group Inc. after the ailing insurance giant took billions of dollars in taxpayer money,” The Wall Street Journal reports. “Significantly curb” is an understatement:
The House measure was approved on a 328-93 vote and would impose a 90% surtax on bonuses granted to employees who earn more than $250,000 at companies that have received at least $5 billion from the government’s financial rescue program. The bonus tax, if approved by the Senate and signed into law, would be retroactive to Dec. 31, 2008.
The text of the bill makes clear that the 90% tax on bonuses would be in lieu of the ordinary income tax and alternative minimum tax, although those levies would still apply to all other income.
Yet some employees would end up being taxed on their bonuses at an aggregate rate exceeding 100%. Bonuses are also subject to the Medicare FICA tax of 1.45% (not counting the employer’s portion), bringing the total federal take to 91.45%. Employees are also liable for state and local income taxes, which would not be deductible from the bonus tax. For an employee living in New York City, the state and local rates are 6.85% and 3.648%, respectively. Add it all up and the tax liability comes to 101.948%.
The Journal notes that “companies could escape the tax by repaying enough government aid,” which sounds like a plus for the taxpayer but isn’t necessarily good policy:
Some Wall Street firms have formally applied to repay the government ahead of schedule, and the new tax is spurring talk among others. But regulators have been leery of allowing firms to repay, in part because it could complicate efforts to promote stability in the financial system.
This last point is crucial. The purpose of bailing out financial insitutions–whether or not it was a wise policy–was to promote stability, for the benefit not of those insitutions but of the economy as a whole. Congress’s lust to punish employees of financial firms, regardless of whether they individually were guilty of wrongdoing or mismanagement, only promotes instability. “It’s like they’re throwing a grenade at the problem, hitting the good and the bad at the same time,” Wall Street recruiter Gustavo Dolfino tells the Journal.
As for President Obama, he is trying to have it both ways:
Obama issued a statement that aides said was intentionally lukewarm. In it, he said the House vote “rightly reflects the outrage that so many feel” over the bonuses, but it didn’t mention the substance of the bill. In an appearance later on “The Tonight Show with Jay Leno,” Mr. Obama said he understands the frustration. “Everybody’s angry,” he said. “But I think that the best way to handle this is to make sure that you close the door before the horse gets out of the barn. And what happened here was the money’s already gone out, and people are scrambling to try to find ways to get back at them.”
But privately, there’s concern within the Obama administration that the angry political atmosphere now surrounding the federal bailout program will scare away private participants the government needs to help bolster the financial system.
In endorsing Obama last year, the Washington Post described the next president as “a man of supple intelligence, with a nuanced grasp of complex issues and evident skill at conciliation and consensus-building.” This would be a good time to employ those talents. A show of leadership, including a firm pledge to veto any punitive tax legislation that reaches his desk, could help calm the storm that threatens to make the current crisis much more destructive.
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