Britain is doing it, France is doing it. Should the US impose a windfall tax on bankers’ bonuses too? Let me set out what I understand to be the case for the prosecution. I invite readers to comment on whether you think it stacks up or not.
1. People on Main Street are furious about Wall Street bonuses.
2. This anger is justified because the bonuses are based in large part on windfall profits. These profits derive from taxpayer-backed interventions that stabilised the financial system, paving the way for a recovery in financial markets and collapse of risk spreads.
3. All banks benefited from this bailout – not just the ones that took or still have Tarp funds. Even the strong gained hugely from Fed liquidity and government actions to ensure none of their weaker counterparties failed (including but by no means limited to the AIG case).
4. In an ideal world, these interventions would have been structured up front in a way that ensured the value created did not leak out to banks and bankers. But they were not.
5. This is understandable given the pressures on decision makers mid-crisis. However, this means we have to consider the cost/benefits of acting retrospectively.
6. If policymakers do not act to address justified public anger, there will be long term costs.
7. People have lost faith in economic institutions such as the Fed and Treasury because they believe these institutions are working in the interest of Wall Street rather than the general public.
8. This is likely to lead to bad policies, including reforms that undermine the powers and independence of the Fed, high rates of tax on high incomes earned in normal competitive markets and the wrong type of financial regulatory reform.
9. It is also the worst possible starting point for a serious debate about fiscal consolidation, which at its heart is a debate about national burden-sharing.
10. The best way to lance the boil is to recoup the value created by taxpayer-backed interventions through a windfall tax.
11. Having imposed a windfall tax the Treasury and the Fed would be in a better position to resist bad policies, e.g. punitively high rates of tax on high earners on an ongoing basis.
12. A well-designed windfall tax with measures to limit avoidance might raise roughly $30bn. (Math follows: with $140bn in planned bonuses and one third successfully diverted to avoid the tax, a UK style 50 per cent surcharge on bonuses net of 35 per cent income tax would yield $30bn.)
13. This sum is small relative to the deficit but it is not trivial. For instance, it could finance a one-time $5,000 per job hiring tax credit for up to 6m jobs. Suppose nine out of ten of these jobs would have been created anyway. That is still 600,000 extra jobs.
14. Any resulting increase in banks cost of capital due to a political risk premium is likely to be small because: a) the tax relates to a truly one-time event; b) it falls on employees not shareholders; and c) past windfall taxes e.g. on the UK privatised utilities did not result in large increases in the cost of capital.
Well… what do you think?