The Obama administration tipped its hand today – they are planning a new tax of some form on the banking sector. But the details are deliberately left vague – perhaps “not completely decided” would be a better description.
The NYT’s Room for Debate is running some reactions and suggestions. The administration is finally getting a small part of its act together – unfortunately too late to make a difference for the current round of bonuses.
We know there is a G20 process underway looking at ways to measure “excess bank profits” and, with American leadership, this could lead towards a more reasonable tax system for finance. In the meantime, my point is that taxing bonuses – under today’s circumstances – is not as bad as many people argue, particularly as it lets you target the biggest banks.
By Simon Johnson
The Baseline Scenario 
This is just news cycle theatre – to counteract next week’s billions in bonuses dominating the news.
Obama/Geithner/Bernanke will be shamed as 10% UE is compared to billions for Wall St.
It’ll come to nothing. Already, transaction and bonus taxes have been taken off the table. By the time, an actual law is passed, it’ll only apply to healthy community credit unions. You know, the little people.
Sadly, we’ve learned that this administration has no bite whatsoever.
No reforms. No indictments.
First of many trial balloons this Administration seems to be so fund of.
I am curious to see how many of the banks that are going to pay out sizable bonuses will also reinstate their dividends to pre-crisis levels.
What? Dividends are based on the profit left after bonuses are paid out? Banksters come first, ahead of shareholders???
Who in their right mind still owns bank shares? Only people managing other people’s money (pension funds, mutual funds, hedge funds)…
Ya, that’s really good strategy. A really great strategy. It’s the Rahm Emanuel book on how to lose friends and help your enemies. Put it out there like a piece of bad meat on a long pole like you’re afraid to touch it, watch the Republicans club it to death, then go “Well it’s just not politically feasible now…. strange, eh?”
http://www.despair.com/corruption.html
Just where was the money lost in a bank holding company group of subsidiaries? Similarly, where was the post loss recovery made within the same group of subsidiaries? Above all, any policy decision must understand that there is a vast difference in market markdowns of loans that do wind up as realized losses versus those that do. Here is an example. Bank X has pool of loans that were marked down by 50 %. That same pool is presently performing contracted cash flow at 90 %. In short, the marked down pool of loans will run off to maturity at a cash flow value approaching it’s current 90 % cash flow. Of course, the tendency will be for people antagonistic to the bank or banking to project future losses to justify the 50 % write down. That is marking down a future event which turns accounting into a poor kind of astrology.
Just how would any bank excess profits tax be applied? Excess profit’s taxes can and will be managed down to peanut’s. Why? If Congress is as stupid as the populists make them out to be, the law would simply be defeatable by inconsistency. Surely, the accountants and lawyers should be able to run circles around any law created by a dysfunctional Congress.
If Obama wants a tax to raise revenue let it be a simple asset tax or something measuring the government’s loss if his people are not very creative as seems to be the case that is emerging. Failing that, if the recipients of bonuses in finance are the dirty dogs that caused it all tax total payroll including the doorman and the wash room keeper. They were all in it together. They all got bonuses… that is the dirty word it seems. Surely we are not that bankrupt at thinking the problem out?
Why not tax realized losses? After all, it is realized losses within the consolidated bank holding company group that would cause the government not to get it’s money back plus a high profit. The tax would be a percentage of all realized losses during the year from assets held by the bank corp group when the Federales were forced to invest in them. Simple cause and effect. What caused the government angst soothes the government later to make up for their troubles.
Now bust them up straight forward and openly . Get real people who understand financial statements in real life to do the future regulation of financial statements. Get others to regulate acts contrary to the public interest. the two are not the same.
If current economics were different, say, they were more reflective of the early 1980s or 1990s, then discouraging would-be employees of the largest financial firms would not seem so counter intuitive. But being that is not the 1990s nor the 1980s, steering people away from (lucrative) banking positions through taxes their bonus earnings would not necessarily contribute to “our biggest banks to become smaller” and believe it or not, people have to support themselves and their families (though, more applicable to the bottom 2/3rds of a company’s payroll) and currently, it’s an employer’s market thus making it even more challenging [mistakenly referring it in another comment forum, as “an employee’s market” I think]
Geithner’s argument against taxing is somewhat correct – that taxing bonus would only be passed onto the end user – us consumers, eventually. However, one can also easily argue the obvious – that there are built-in costs in operating a (small) business however, there are provisions in the tax code to mitigate some of those “burdens” associated with running a company. In fact, any savvy accountant could probably write-off most half of a small business’ losses but due to greed, businesses could chose to close shop, or move overseas (putting themselves on the Gray List in the Cayman Island), or even try and evade taxes altogether, rather than taking a hair cut or contributing their fair share to society.
Might as well throw the long bomb and go for the clearance transaction fee that John Kerry proposed in 1991 to fund the S&L bailout (I know, Tim Geitner would gut himself Samurai-style before that ever happened but its fun to imagine).
Kerry proposes a clearance transaction fee (CTF) on the exchange of money through the two systems which transfer funds between banks internally and abroad, the Fedwire system and the Clearing-house Interbanks Payments System. About $800 billion a day passes over the first, and $900 billion a day over the second. A tax of a few pennies on every hundred-dollar check would raise immense amounts each year.
http://findarticles.com/p/articles/mi_m1132/is_n10_v43/ai_12056595/pg_2/
I believe Edgar Feige’s Automated Payment Tax (though covering more than just wholesale wire transfers) is along the same lines.
http://en.wikipedia.org/wiki/Automated_payment_transaction_tax
It’s about time. Either the predatorclass gives back or we (America) are doomed!!!
The predatorclass den of vipers and thieves will be fine either way. What little costs are extracted in taxes from the predatorclass will have absolutely no impact on the predatorclass living standards, – but will have manifold increase the living standards of poor and middleclass Americans.
Without a thriviing middleclass, – America does not exit… predators!!!!
It sounds like a joke.
Where it comes to things like this, if you don’t believe in something but feel compelled to venture upon it anyway, in the end you’ll fail, look incompetent and feckless in the process, and probably give enemies a chance to hijack the process to actually worsen the situation.
We’re already seen that with health racketeering and the finance racket “reform” in general.
Now they’re supposedly going to enact a politically motivated kludge even as they seek to further entrench the underlying structure (which the phony reform bill will try to do)?
I bet they either backpedal completely or let the thing be so watered down as to be pointless in itself. Not to mention whatever concessions “in return” the lobbyists and Republicans will be able to tack on.
Maybe they’ll run a mini-reprise of health “reform”, where ALL the alleged reform is stripped out while only the reactionary measures are left in.
By now I expect nothing different from this government in general and the is administration in particular.
Of course anyone who really wanted reform would reform the structure.
In this case, the measures needed are a permanent Tobin tax on sector activities, and rational marginal rates for higher incomes.
Geithner’s argument against taxing is somewhat correct – that taxing bonus would only be passed onto the end user – us consumers, eventually.
Most of the banking bonuses in 2009 come from Trading (especially Proprietary Tradign) and M&A Advisory. Who is the end user here?
It is the same “eventually” as in “eventually we are all dead”.
Simon: “In the meantime, my point is that taxing bonuses – under today’s circumstances – is not as bad as many people argue, particularly as it lets you target the biggest banks. ”
So, in your previous post about windfall profit taxation you were indeed referring to bonuses only.
I disagree, as the TBTF=TBTE banks would have been bankrupt in Sept./Oct’08, absent the overly generous taxpayers’ money. Hence, all the employees and executives still have a job, and income, thanks to the bailouts. Hence, ALL their income/bonus/perks is a windfall, and should be taxed.
+
Simon: “…particularly as it lets you target the biggest banks.”
One of the root causes of the crisis was/is lack of transparency. The tax code lacks transparency too: way too many exemptions and complications. Just as many financial products and constructions lacked transparency on purpose (misleading soft-touch ‘regulators’, enhancing hidden bid-ask spreads, etc.), the tax code lack transparency on purpose: it allows the oligarchs to hide their true wealths, and reduce their effective tax rate (Buffett stating that his effective tax rate is lower than his secretaries’; GS tax rate 1%!).
We need TRANSPARENCY in the tax code too!!
Hence, no deductions, just more tax brackets, and higher marginal total income (salary/bonus/perks) tax rates!!
Otherwise these fat cats and other very, very high ‘earners’ (who consider themselves under-compensated according to a commenter here at another post) will find plenty of loopholes to prevent paying an extra dime.
During the last (and the one before that and before that) oil price spike there were calls to tax oil companies on “excess profits.” No definition of “excess profits” emerged and no tax on “excess profits” was enacted. Perhaps in part because the “excess profits” belonged to individuals, public institutions and retirement plans not oil barons, cartels and energy trusts.
the cost of doing business in products and services are eventually passed onto the consumer (either as ‘savings’ or as an ‘expense’)
Simon we need people like you hollering as loud as possible for us here on Main Street. Please do what you can to get these bank taxes passed.
Or the margins, protected by the government, get squeezed.
You do not think that the financial industry has perfect competition, do you?
“This is just news cycle theatre …”
It is worrying indeed that a week before the bonus bonanza the WH announces such an empty ‘proposal’. It could indeed be only a timing issue, just like the Christmas Eve unlimited Fannie/Freddie losses for the taxpayer announcement.
See a.o. http://www.huffingtonpost.com/2010/01/12/bank-lobby-ready-to-battl_n_419896.html
“But a tax, he (president of American Banksters Association) said, would be a hit on banks that will decrease their ability to lend.”
So, they’ll threaten to reduce lending!!
Also, from same article:
Scott Talbott, chief lobbyist for the Financial Services Roundtable, (already exposed on this blog as highly dishonest and hypocritical): “We look forward to seeing the details of the complexity of the formula, ….”
Exactly! see my comment below: we need TRANSPARENCY.
They look forward to a complex formula, because they know how to abuse a complex formula.
Again, don’t tax the banks, tax the fat cats (income/bonus/perks), and keep it simple!!!
And such a simple solution, partly because it is simple, should have been included in the WH announcement. The fact that it didn’t might suggest merely news cycle theater indeed.
The Tobin Tax is a tax on foreign exchange that will tap the huge profits banks make with these transactions and Gordan Brown, France, and Germany have mentioned it but the question is how to use the money. Some ideas are to use it to pay for expenses related to global change. This will take all of the largest economies to agree on so it is still several years away.
I suspect that the banks need their bonuses to pay off their own personal trade loses and rather than taking responsibility for their actions we may see more childish behavior as they try to keep as much money as they can.
“I disagree, as the TBTF=TBTE banks would have been bankrupt in Sept./Oct’08, absent the overly generous taxpayers’ money.”
You do realize that this is true because of the need to mark mortgage related to market, and there was no market for those assets at the time? I suspect, but unfortunately haven’t seen any analysis to support, that using today’s prices, those firms were not in any danger of bankruptcy at the time. If anyone is aware of good information on that question — whether the asset prices during the panic bear any relation to post-panic valuation — I would love to see it.
AJ: “You do realize that this is true because of the need to mark mortgage related to market, ….”
That was indeed part of the problem.
Another part was the huge amounts of money being taken out of those banks and IB’s.
When the BoE recently admitted that they had secretly given 62 billion pounds loan to 2 banks, it was also said that at that time ATM’s in the UK were 15 minutes away from ‘total collapse’.
Hence it was not just a mark to market problem.
P.S. at that time I commented on many blogs that we should account ‘mark to intent’: If a bank has a MBS with the intent to keep it to maturity, and it has the finances in place to keep it to maturity (i.e. not leveraged to the tilt), then it is not a market participant (does not want/need to sell it), hence should not mark to market.
Also, for all we know the markets are rigged, so why mark to market?
Also, the mark to market prices are only valid for a small amount of securities. If a big player would try to sell the total amount of securities, he could never obtain the market price for the whole lot. So why account them all in the books for that price?!
However, the banks/IB’s have given the executives and ‘talented traders’ billions of bonuses in the 2002-2207 era, based on the same illusionary mark to market paper profits. They didn’t complain at that time, as far as I recall.
“City bankers will suffer little or no impact from the bonus supertax imposed by the government last month, according to a Financial Times poll of leading investment banks.”
“Most banks, polled in an anonymised survey, said they would absorb all or part of the cost of the one-off 50 per cent tax by inflating their bonus pools, even at the risk of irritating the government and their own shareholders.”
http://www.ft.com/cms/s/0/caffc078-fc97-11de-bc51-00144feab49a.html?nclick_check=1
It’s good that the Extortionist-In-Chief has his garden gnomes anonymously sabotaging his own shell game, as it would not work. That would be insufficiently counterproductive.
First, I agree with many as to what will happen, most likely just threats and no action, but there is a bigger issue that should become a part of this debate. That is taxing these bonuses as capital gains and not as income, thus saving the earners billions in taxes (15% vs 37%). That aside, there need to be several things done to limit these bonuses such as you have suggested, a long time frame (say 10 years to get full vesting), increased FDIC fees (especially since the activities of the TBTF’s have led directly to crippling the small to mid-sized banks in many ways), removal of all FED guarantee programs and higher borrowing rates at the FED trough for banks above a certain size. But, yes, tax the crap out of the bigs.