Friday, March 20, 2009

The Bonus Tax

The New York Times reports that the House has passed a bill to impose a 90% tax on bonuses that people receive from firms which have accepted more than 5 billion in bailout money. As far as I'm concerned, it's about time.

Here are the main arguments from the executives opposing the bonus tax.

1) You're punishing the little people, like the secretary receiving a $5000 bonus.

My answer to that? The tax only affects people in households making more than $250,000 a year. First off, I don't know any secretaries who make that much money. Do you? And even if said secretary is making that much, or is married to someone so that their joint income reaches that level, he or she hardly qualifies as "little people." $250,000 a year is a lot. The median wage in the U.S. ranges from about $32,000 a year in Mississippi to $50,000 a year in Connecticut.

2) If you tax bonuses that high, all the top talent will leave.

So what? All that the top talent has done so far is get us into this mess, then accept multi-million dollar bonuses and slink away. Maybe it's time for some younger, fresher blood to come in. Furthermore, the whole idea that you need to pay people an extraordinary amount of money is flawed. Look at teachers. There are some great teachers out there, who change lives. There are mediocre teachers, whose classes you sit through without learning much. There are awful teachers, the ones who make you want to skip class. They all receive roughly the same amount of money, sans bonus in many cases. And they're only getting about $40,000 a year in most cases. So - do we really need to be paying our corporate executives 10 or 15 million dollars a year?

3) People have already spent the money.

Then maybe they need to learn how to budget better, and live within their means. This may sound harsh, but I think that most of this country suffers from an inability to manage money. We buy houses and cars that we can barely afford because we feel the need to keep up with our neighbors. We take on over $100,000 in debt to attend law school with the expectation of making enough money after we graduate to pay it back (and I'm guilty of this too). There's being prudent - knowing what kind of debt you can take on and how you can pay it back - and being imprudent - buying a house whose mortgage you can't afford unless home prices continue to increase exponentially for the next ten years. Besides, the IRS has a payment plan.

You are, of course, free to disagree with me on any or all of these points, but I stand by my conviction that corporate culture needs to change, and the bonus tax is a great way to do this. And for the record, I don't believe in excessive law firm salary either - I think if we all started at $30,000 or $40,000 a year, whether in the public or private sector, lawyers would be, as a whole, more honest and more dedicated. They'd be doing the work because they wanted to, not because of the money.

23 Comments:

Anonymous Anonymous said...

I agree we should be pulling a most of this bonus money back.

However, a few thoughts:

1.) The bonuses we're talking about here are not like "traditional" merit or discretionary bonuses at all, but something more akin to salary.

NPR has a helpful segment on this point:

The Ins And Outs Of Executive Compensation
http://www.npr.org/templates/story/story.php?storyId=102064723

This doesn't change the bottom line for me, but I think it colors the debate just a little differently.

2.) Why can't we just deduct x million dollars from AIG's next bailout installment or something?

I'm all for getting the money back, but I'm a little freaked out by sudden, drastic, targeted and retroactive tax bills. Seems like a sloppy precedent at best, and scary one at worst.

Anyone want to summarize the Constitutional concerns?

3.) For those of us caught up in the "populist anger" thing, let's remember the AIG et al. folks are still human beings. :)

A nice piece here:

Scorn Trails A.I.G. Executives, Even in Their Driveways
http://www.nytimes.com/2009/03/20/nyregion/20siege.html

3/20/2009 12:49 AM  
Blogger Richard said...

I haven't read the NPR piece yet, but the fact that we use the word "bonus" for something that they treat more as a salary indicates that something is very, very wrong here. Bonuses are by definition supposed to be something you get for doing a GOOD job, isn't it?

Nate Silver on fivethirtyeight.com mentioned how these bonuses were given to the Financial Products division of AIG because when their morgage-backed derivatives started to tank, so did their pay [since they make the bulk of their money through bonuses earned by making a profit for the company]. These bonuses, then, are essentially "emergency salaries" that freeze their compensation to an earlier level so that these businessmen can maintain their standard of living.

I'm not saying that any sort of emergency compensation wasn't appropriate for AIG to make to these employees, but if these guys came in knowing the risks their pay comes with, shouldn't they also deal with the consequences for screwing up THAT badly? I mean. When I was a kid, I tried touching a stove and I got burned. Let these guys burn a little.

3/20/2009 2:08 AM  
Anonymous Anonymous said...

as a prospective law student looking at this blog...i agree with most of what you said except for earning 30 -40 thousand in the private or public sector.....whaaaaat?
well, that would be good if law school was not so daaaarn expensive...but at this point if i did not know that i may have a chance of getting into a job that will help me pay off my loan...i would definately have to forgo my dream of being a lawyer.

3/20/2009 7:49 AM  
Anonymous Anonymous said...

7:49 (incoming student) -- Berkeley has a fairly generous LRAP (loan repayment assistance program) available for students entering public interest jobs.

See: http://www.law.berkeley.edu/194.htm

3/20/2009 8:37 AM  
Blogger Laura said...

Saying people should "budget better" doesn't make any sense here. Budgeting involves figuring out your predicted income and expenses. An unprecedented 90% "bonus tax" is not at all akin to having house payments or loan payments. The latter are expected (and therefore budget items), the former isn't.

3/20/2009 8:48 AM  
Anonymous Anonymous said...

Bekki,
On the whole I agree with your point. These bonuses were outrageous and we need to try and get them back.

But I can't agree with some of your logic. You say that if people have already spent the money they need to "budget better." Really? I can't imagine most people can, or should, budget for a retroactive 90% tax hit. Lets look at it this way. If I became outraged about student loans, and made disbursements retroactively taxable at 90%, would you be able to take the hit? I know I would not. Would it be a matter of budgeting better? In that scenario, You would owe perhaps $10k - $40k at the end of this year on money you had already spent.

Now of course, people will respond saying that the situations are completely different -- these are rich people after all. And while that is true, it does not change the fact that the money may have been spent. Many of these people may feel like they have worked hard and deserve these bonuses. While that may not be objectively true, its how almost every single one of us act. Everyone feels as though they have earned every dime they actually made. And they look around at their peers, and convince themselves that they are right. But to someone much poorer than them, they look ridiculous.

While there is no reason to be sympathetic to people who rake in millions, I think it would be bad precedent to twist our tax system towards such a punitive goal. We already use our tax system for way to much social planning as it is. At the end of the day the money may have been spent. If we feel as though they did something criminal, and therefore should be punished, we already have a criminal justice system for that. People should not be punished by Congress, without so much as the benefit of a trial.

And to anyone who thinks that a high tax rate is actually going to change corporate culture: you are sadly mistaken. If you tax it as a bonus, the company will just move it to base pay. If you increase taxes on base pay as well, the company will just move it to perks like car service. If you then start clamping down on perks, the company will start spending lavish amounts on their offices. And if you tax that, companies will start making their highly compensated employees "part-owners" so they earn money out of dividends instead. At the end of the day a punitive tax system is not going to change our underlying culture.

We need another solution. I just don't know what it is . . .

3/20/2009 9:01 AM  
Anonymous Anonymous said...

if anything, AIG handled this stupidly. It should have called them something other than "bonuses" and not paid them out in lump sums.

3/20/2009 9:18 AM  
Blogger Patrick said...

I've had a post on this simmering for a few days now, but it hasn't crystalized.

A few thoughts: the government is at least to blame as well. It takes two to bargain.

It's unclear whether a 90% tax would reach. Apparently many executives are not subject to US Income tax. If that's true, the tax starts to resemble an empty gesture of populist anger.

Anonymous' characterization of the "bonuses" as salary is correct: a guaranteed cash bonus . . . isn't a bonus.

Lastly, there is an institutional logic at work in the collusion between private and public big-wigs that is very, very disturbing. If I ever get my finger on it, I'll do a post.

3/20/2009 9:28 AM  
Anonymous Anonymous said...

My thoughts:

Why the f%#k is everyone so worried about $165M in bonuses when our entire economic system is melting down?? I agree with the above sentiments in principal, but really, can't we worry about this a little later? Our President, Treasury Secretary, Congress, and everyone down the line seems obsessed with this. I'd much rather they spend their time trying to open the credit markets or figuring out what to do with our insolvent banking system. There are far, far more serious issues.

3/20/2009 10:00 AM  
Anonymous Anonymous said...

I agree with 12:49 AM and Patrick in that imposing a 90% tax after the fact is the kind of government behavior that makes me very uncomfortable (that the gesture is motivated by "populist rage" makes it more disturbing) and that the real problem is that the goverment did not condition the bailout on renegotiation of the bonus payments. After all, the government was holding all the money, and so had some bargaining power. In the auto company bailouts, the unions were asked to renogotiate their CABs.

Regarding the fear that the "top talent" will leave, it is not just that these are "talented" people, but rather there is a need for the people who created these complicated deriviative products to stick around and unwind the swaps with the counterparties. As I understand the problem, it would be very difficult for someone to step in and untie the knots at this point.

3/20/2009 10:19 AM  
Blogger Matt said...

On the bright side, at least most Americans seem to agree about something for once.

I just haven't gotten beyond the fact that we're suddenly outraged by how much executives make when it's 0.1% of our tax dollars, but otherwise, we're okay with it.

3/20/2009 10:24 AM  
Anonymous Anonymous said...

Oh yes, nothing makes Americans band together like hating a group. That this is a group of wealth and privilege is just icing on the hate.

Though I share the general frustration with these payouts, I don't care for the pitchfork and torch waving by the mob.

3/20/2009 10:38 AM  
Anonymous Anonymous said...

the "bonuses" are miniscule in the context of the earmarks and pork in the stimulus bill. the people who trashed AIG are long, long gone. the people who are left are the ones who for the most part never lost a dime and have stayed on to right the ship. if they leave, it will crater even more spectacularly than ever. so the question for us taxpayers is whether we're better off venting and making the situation worse, or better off letting the execs receive market pay. i'm all for the latter, but realize that in a super-heated political atmosphere we're all about the emoting.

3/20/2009 1:27 PM  
Anonymous Anonymous said...

Also, this: http://xkcd.com/558/ :)

3/20/2009 2:13 PM  
Anonymous Anonymous said...

Just a comment on the end of the post. I don't mean to be snarky, but most of us who worked before law school were lucky to make that much in our first job. I made less than 20K and less than 40K with my master's degree. We aren't all entitled jerks.

3/20/2009 9:37 PM  
Anonymous Anonymous said...

You're out of your mind. Lemme guess, you must be a public interest law student that is envious of private firm salaries. With partners making millions, new associates would be grossly underpaid. Lemme guess, you probably want to stop partners from making that much money too, don't you. Lol. No chance.

3/20/2009 10:33 PM  
Anonymous Anonymous said...

Beyond the concern that the size of the tax is unprecedented, I think this just doesn't achieve anything. It adds administrative costs in terms of how the money is taken back (some bureaucrat(s) will have to be paid to enforce this measure) and how it is re-spent. Also, I'm not confident that the government will do a better job with this money than the people given the bonus money - even if they didn't deserve it, maybe they'd at least spend it and do something for the economy. This is ridiculous.

3/20/2009 11:33 PM  
Anonymous Anonymous said...

9:37:
If you made less than 20k in your first job that's your problem for picking a stupid field. I earned over 50k, not because I am entitled to it, but because I picked something others didn't want to do, and I worked hard at it.
20k rolf. Why bother going to college.

3/21/2009 12:20 PM  
Blogger Patrick said...

12:20, I'm sure you're a good person, but I hope like hell you never give counsel or advice to anyone I love.

3/21/2009 2:48 PM  
Anonymous Anonymous said...

Patrick,
12:20 here. I'm sorry, that was uncalled for and absolutely over the top. But I do think that college does not make sense if you come out earning just slightly above minimum wage.

3/21/2009 3:39 PM  
Blogger McWho said...

Teachers are a good example of someone that I hope bothers to go to college. They make about that sometimes.

Now, would it be a good idea to shell out 120k in private school money to get a teacher job? Maybe not.

3/22/2009 10:21 PM  
Blogger Patrick said...

. . . and the over the top, hyper-politik, elitist statement of the week award goes to . . .

[drumroll please]

The UC Berkeley School of Law!!!

[Regarding AIG bonuses] “Every first-year law student learns that a court can invalidate a contract’s ‘unconscionable’ terms, rescind it or reform it,” James P. Tutill, a lecturer at the University of California-Berkeley law school blogged over the weekend. “If these bonus contracts benefiting the very people who have destroyed incalculable amounts of wealth in the pursuit of their own personal greed don’t warrant revision, rescission or reformation, then our legal system is seriously deficient."

Never mind the rest of what a first year student learns -- doctrines like procedural versus substantive unconscionability, stare decisis, judicial restraint, or that in order to break the law, something must do more than feel wrong; it has to actually be illegal.

3/23/2009 7:04 PM  
Blogger Patrick said...

I should clarity two things. First, here is the source.

Second, I'm not making fun of Mr. Tutill. But at the same time, dude come on -- everyone knows this problem is a skosh more complex than a deft and fiery blow from the swords of courtly justice . . . especially first year students, m'kay?

3/23/2009 7:11 PM  

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