With those two influences considered, let's say the cash bonus pool declines by around 25% to around $15 billion for 2010. Now consider that many firms pay out their bonuses in the performance year already. Again, conservatively, let's say 60% would have paid out in 2011, and all of those pay earlier to avoid the tax hike. That's $9 billion.
Finally, let's assume all these bankers make more than $250,000 in salary, so the entire bonus pool will be taxed at the 35% rate instead of 39.6% rate. That means the shift would cost the government $414 million. Obviously the bankers would have that money to spend instead or invest.
Tax Cuts Will Be Extended Anyway
There's little doubt that populist outrage would result if this move really costs the government $405 million in revenue, but it probably won't. At this point, it looks fairly plausible that the Bush tax cuts will be extended for everyone anyway. So if banks do ultimately pay early, then it would probably amount to an unnecessary hedge against political risk.
Searching for a Silver Lining
Although it might be hard to find a silver lining here for Americans working outside Wall Street, there are a few ways to look at this move in a positive light.
Tax Cut Extension a Little Less Costly?
First, the move deadens what now looks like the inevitable impact of extending the Bush tax cuts to the 2% of the wealthiest Americans. Wall Street surely isn't the only sector of the economy mulling early bonus awards if the tax cuts aren't extended. Any industry where bonuses are awarded early in the year must be considering a similar strategy, as it will boost employee morale at no cost to the firm. So the estimates that the extension will cost $60 billion are probably a little bit off: they don't account for efforts to shift future pay into 2010. Looking at just Wall Street alone, it's likely that the cost will have been close to a half billion dollars lower. Of course, this only applies to 2011.
Stimulating Manhattan and the Market
Bankers will use the extra money they make in two ways: they'll spend more and invest more. In terms of the first action, that's very good news for Manhattan. You can expect retailers and boutiques on the island to benefit with better sales. Because most working on Wall Street are also pretty savvy about managing their money, anything they don't spend won't end up under their mattress. Instead, they'll invest in stocks and bonds. That should raise asset prices, which benefits the broader economy.
A Win for Fairness?
Finally, the question of fairness should be considered. The bonuses in question were earned during 2010. Is it fair that this aspect of compensation be taxed at a new rate for 2011? Most Americans don't have compensation paid in large part through a bonus, so almost all of their pay for the year was taxed at the 2010 rate. Should bankers face higher rates just because the timing of their pay differs from that of many other industries?
Of course, none of this analysis begins to approach the question of whether or not bankers deserve giant bonuses for 2010. You can decide that for yourself. But to the extent that banks move to pay bonuses early to avoid possible 2011 tax hikes, it's hard to argue that they're acting unfairly. There may even be some short-term benefits to the economy that result.
