Should the US Adopt a “Bonus Tax” Like Europe is Enacting?

by Darwin on December 14, 2009

I was rather dismayed but not surprised when I saw the news that the United Kingdom was enacting a “bonus tax” which is to be a one-time tax on bonuses of bankers in excess of $40,000.  As the circus spread its influence, France signaled that it will enact a similar policy and Germany’s chancellor referred to the idea as, get this – “Charming”.  Not to be outdone in the game of punishing those rich greedy bankers, I wonder what the pay czar has in mind within the US aside from the current mandate of enforcing pay caps on the upper echelon of US banks that received government assistance.  Aside from the fact that a one-time tax such as this is really nothing more than a punitive measure and would take in only marginal revenues in a single tax year, it sends a horrible message and it would be oh-so enticing to extend it or make it permanent once lawmakers see just how good it felt to punish those nasty bankers.

While this would have sounded outlandish and far-fetched years ago (OK, well, that also was under a Bush presidency so it would be silly to even imagine but…) given what’s transpired in just a year of this new administration, I wouldn’t be surprised at all to see a “bonus tax” on all US workers.  I mean, the administration was actually mulling over the prospect of oversight of all bankers’ pay even if they didn’t need TARP funds a while ago until they shifted gears a bit to focus on something of substance – umm, the economy and double digit unemployment?

Imagine a Bonus Tax for Every Industry

With your typical American coming nowhere near a $40,000 bonus if they get one at all, the reality is that most Americans wouldn’t bat an eye at an attempt by Congress to enact harsh taxes on these “fatcat” bonuses right?  Just like few on main street really care that the top 2% of Americans are going to be forced to fund healthcare for millions of Americans or that Congress is mulling over a “war tax” the rich should fund as well.  The obedient American has been conditioned to seek more and more handouts and freebies to “get theirs” without really questioning why they’re getting it, whether they should be getting it or at what net cost.  Cash for this, Cash for that, homebuyer tax credits – this is all borrowed money that our children will someday have to pay back – and our generation should be ashamed for robbing them of their future.  But we’re not.  Let’s consider how a Bonus Tax would hit other non-bank industries:

There are millions of middle-class commission based jobs that rely heavily on bonuses.  This ranges from business-development type professions in every industry from contract manufacturing to environmental consulting.  Sales reps are often start with a marginal salary  with the potential for big bucks by way of a bonus structure for closing the deal.  This type of low salary/high bonus combination drivers out mediocre and complacent performance and rewards aggressive, results-oriented cultures.  Of course, when this goes too far, there are pockets of unethical behavior, win-at-any-cost attitude and other examples of a system gone awry.  But, in the majority of cases, this is a system that has worked well for companies and employees alike and has been in place for decades with wild success.

Why Does Everyone Hate Bankers So Much?

There’s a poll that the major pollsters like to circulate every so often asking which group Americans dislike the most.  The usual suspects are politicians, big tobacco, energy companies, big pharma and Congress.  The honors seems to rotate around every so often, but each time Congress has the top slot, you can rest assured there will be a new villain in the picture.  A while back, it was the Auto executives being forced to drive a car out to Washington to testify because they were vilified for flying a corporate jet, but as the public grew tired of throwing barbs at Detroit, Congress needed to shift gears and go back to the bankers.

Sure, large banks screwed up.  So did small ones. So did lenders, underwriters, lax regulation, lax oversight where regulation actually existed, and so did the lawmakers that forced “a home for every American” even though it’s plainly evident that many Americans never should have, and never should be homeowners.  Let’s not forget all the Americans that falsified income statements during the lending process as well.  There’s plenty of blame to go around, but Congress is doing a full-court press to direct the ire of the public toward bankers – while they’re paying back the money they borrowed.  I don’t know, maybe Congress is angry that they’re losing the control of the banks they so desired when they imposed said standards and now that the banks are looking to sever ties with Uncle Sam, it’s a renewed attempt to villify them.

Will the Bonus Tax Come to Be?

I’d like to think not, but nothing surprises me anymore.  While Wall Street firms are major contributors to both parties and money talks, I have to imagine that they’ll stop at actually enacting anything like this and just talk tough so they have good sound bites to share during the next election cycle on how tough they were on bankers.  The outcome would be a further distribution of wealth – a complete destruction of wealth, really.  All the professions that rely on the risk/reward cost structure that drives performance and entrepreneurship would see their model turned upside down and it would really curtail the type of innovation we see today in America.  But this seems the be the goal, so who knows?

What are your thoughts on a Bonus Tax?

Disclosure: I don’t work in banking and I don’t recieve a large cash bonus as part of my compesation.  I just think this is wrong.

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Don't Mess With Taxes
January 4, 2010 at 1:27 pm


1 Evan December 14, 2009 at 10:17 am


I think this bonus tax is akin to the Estate Tax. For Politicians it is the perfect tax:
– It will affect approximately 1% of the population
– Those it does affect can’t complain publically because they have so much
– Most of America won’t think about the consequences because it doesn’t affect them

All that said I think it is almost un-American – literally penalizing those that make too much money (as decided by a Czar – who the hell thought it was a good idea to call these guys Czars when people are already called Obama a Socialist).

2 Financial Samurai December 14, 2009 at 11:25 pm

Darwin – If the public hated bankers, they wouldn’t give Citigroup and BOA ML $40 billion in the past 3 weeks, to pay back TARP, which came from us, so they can pay themselves BIG BUCKS for 2009!

Feel free to check out my post “The Public Loves Wall St. Again”.

The sad thing is, companies will just relocate out of France, UK, Germany, and thousands of support jobs will be lost.

Might as well tax all people involved in the financial crisis, and that includes consumers who took out passive loans in the first place and couldn’t afford them.

BTW, highlighted one of your posts in my wrap. Does my trackback system work?

3 Roger December 15, 2009 at 8:00 pm

Hunh, seems like a pretty crummy idea. Reminds me of the quotation attributed to Tocqueville: “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing.”

Methinks that both parties here in America (and in other developed countries, apparently) try to shovel out too much largess; Democrats in the form of increased social spending, Republicans with defense spending. (As well as tax cuts that aren’t accompanied by spending cuts; if you want to be the ‘fiscally conservative’ party, you have to be willing to do the tough part of cutting spending on popular programs along with the easy part of saying ‘Lower taxes’.) It’s just a matter of time before the s*** hits the fan, it seems.

4 Brad Castro December 16, 2009 at 8:47 pm

There’s always a way around. How hard can it be to outsmart Congress, after all? The median functional IQ of a member of the House of Representatives is around 70 (my estimate, of course, but I am rounding up.)

Why couldn’t the industry simply change the pay structure so that “bonuses” are eliminated in favor of renegotiated annual salaries that incorporate much of the same performance incentives as the bonus structure?

Sure you’d have wildly fluctuating salaries from year to year, but you’d also avoid punitative taxation.

I propose we impose a special tax on any member of Congress who introduces an earmark to a piece of legislation. That might not bring in much revenue, but maybe it would cut down on the expenditure side.

5 Paul Kamp December 17, 2009 at 11:50 am

Roger’s Tocqueville quotation rings true – as long as Congress feels the people are angry at bankers, they will toss this idea around. However, just like previous moves () towards bonuses, I don’t think this one will go the distance either. Still, it’s pretty pathetic to see populism gripping congress so completely…

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