A Bonus Supertax Still Misses The Point
Economist Simon Johnson has a post today on his Baseline blog calling for a supertax on banker bonuses in the U.S. Great Britain and France have created such excise taxes, though Johnson wants a U.S. version to directly fall on individual bankers' shoulders. I hate to harp on the same point again and again, but as I wrote on Friday, attacking compensation fails to directly address or solve the real problem: systemic risk.
If you're on board with Johnson's assumptions, his arguments make sense. His rejoinders to the common criticisms of a banker tax employ pretty simple logic: who cares if talent leaves the big banks -- all the better for systemic risk; the cash from these bonuses isn't rightfully the banks', as the bailouts made that revenue possible; and such a tax might seem incredibly drastic, but unreasonable actions (paying huge bonuses now) call for unreasonable responses (taxing them accordingly).
So imagine that the U.S. collects this tax. Let's say it's worth $10 billion per year. That a lot of money. What does Uncle Sam do with it? Use it to pay for healthcare? For the wars in the Middle East? For a future bailout fund? Herein lies the problem with a punitive excise tax: the government gets to spend the money as it pleases, which may or may not coincide with the actual problem it's created to address. In this case, that's bank risk.
Given the ridiculous level of national debt the U.S. has incurred up to now, additional tax revenue might not sound too bad, even if Congres does use the money as it pleases. But for any supertax to have any chance of actually alleviating the problem it's meant to correct, then that revenue must be placed, and left, in a superfund for the Treasury to pay for future financial crises. I find it hard to believe that Congress would let that happen. Given all of its many other priorities, the idea that it would really isolate all that cash from its general fund seems unlikely.
And to reiterate my point from Friday, I also think it needlessly involves the government too deeply into the business of deciding what people should be paid. If you ensure that these institutions will be stable, then you don't have to bother taxing compensation: their employees can be paid whatever they like without threatening the U.S. economy. And again, the way you do that is through higher capital and lower leverage levels. That takes care of the compensation problem, since these firms will have fewer profits to distribute to their bankers and traders.
I fully understand the outrage many feel about bank employees again collecting billions in bonuses as the rest of the economy continues to struggle -- after taxpayers saved the very firms distributing that cash. But that populist anger isn't reason to disregard sensible policy. Washington should focus on ensuring a more stable financial system and more reasonable compensation levels will necessarily follow.