Darling, I love you

OK, that’s way too strong. But Alistair Darling’s new super-tax on bank bonuses sounds like a good idea, on first read. Or as Justin Fox puts it, why the heck not?

Are we afraid that the best and the brightest will leave high finance and pursue other occupations? That strikes me as a good thing: everything we know suggests that the rapid growth in finance since 1980 has largely been a matter of rent-seeking, rather than true productivity. (As Paul Volcker says, it’s hard to come up with any clearly productive financial innovations of recent decades other than the ATM).

Or are we worried that it’s just unfair to discriminate against high-earning bankers? Bear with me while I stop laughing. More seriously, the whole sector has just been bailed out at immense taxpayer expense. Some payback seems entirely reasonable.

So, the details need analyzing. But on the face of it this looks entirely reasonable.

Comments are no longer being accepted.

Roy Fuchs December 9, 2009 · 3:19 pm

Alternative A: I get a bonus of $50,000 and pay a tax of 50%.

Alternative B: I get no bonus.

Which one makes me better off?

Lyle December 9, 2009 · 3:20 pm

And if the UK does it the US can also because the only financial center left is Hong Kong, Dubai having imploded in the meantime. Also few recognize that if you raise individual income taxes on americans they pay no matter where they live in the world unless they are willing to renounce their US citizenship and pay an immediate tax on all latent capital gains. I don’t know but would hope they would also be permanently barred from entering the US as undesirable aliens.

Derring Do December 9, 2009 · 3:27 pm

We said almost exactly the same thing this morning, after reading about Darling’s plan (after the hints yesterday.) We also mentioned that no one in the States would have the, er, guts to propose something like this.

As Mr Fox says, “Why the heck not?” Encouraging through lower pay many of these B&Bs to go into some other form of work strikes us as a very good thing. Maybe one of them could take a real cut and go head up GM.

david December 9, 2009 · 3:28 pm

Yes. And please explain to me why this was not put in place circa one year ago?

rickstersherpa December 9, 2009 · 3:37 pm

Dear Dr. Krugman, I believe you just don’t understand modern capitalism, that the looting can only go one way because we at Goldman Sachs are doing God’s work.

I can’t wait to see the libertarian e-mails scorching you on this, the same folks who constantly complain about Obama’s bailouts, as the will keep me laughing for hours over their absurdity.

Les December 9, 2009 · 3:47 pm

I support this. Remember, after WW II, they did not lower taxes like they had after WW I. The highest rate was 90% until JFK. What happened? The middle class never had a larger piece of the pie.

Mark December 9, 2009 · 3:47 pm

@Lyle There are plenty of other financial centers where to go (Singapore, Hong-Kong, Paris, Tokyo, Zurich, Amsterdam to name just a few), it is just that this tax being temporary (limited to this year only) banks have no incentive to leave the country, their bonus for this year is already (half) lost and next year’s won’t be affected.

Common wisdom in the UK is that it won’t raise much revenue (Banks will just postpone this year’s bonuses or decide not to distribute them and keep the funds as additional capital)

robob18 December 9, 2009 · 3:52 pm

The sad sad spectacle of 5 people threatening to resign from the AIG GSE if they were forced to live on only $10,000 / week cash salary tugged at the heart-strings – and at the holidays, too !?!

We are faced with chicken-capitalists (same as chicken-hawks of war) that do not respond to unanimous voices as varied as Congress, or Paul Volcker, nor the NYTimes editorial pages and the Wall Street Journal edititorial pages, nor George Soros, nor Warren Buffett.

The chicken-capitalists have forgotten that the only way to make an economy really grow is to circulate the money – for so long it has been demagogued as socialist wealth re-distribution that it has been forgotten to actually be a basic tenet of capitalism that even Thomas Paine recognized.

The chicken-capitalists will indeed kill capitalism (with the un-helpful credit agencies assistance of assuming taxpayers will bail the banks out again if necessary) unless we find someone in government to stand up for capitalism and channel Geraldine Fitzgerald’s couple of classic lines from the movie Arthur !

Artie Gold December 9, 2009 · 3:53 pm

“Are we afraid that the best and the brightest will leave high finance and pursue other occupations?”

Ding. Ding ding ding!!! Ding ding!!!!

When finance serves to create something real — and makes some money for itself in the process — that’s a good thing. When it primarily merely tries to stay a step ahead of regulators and game the system…well, we know where that leads.

We ought to. We’re here.

William December 9, 2009 · 3:54 pm

How much of the taxpayer bailout money has been paid back?

LM December 9, 2009 · 3:55 pm

Using tax code to pick winners among different professions strikes me as the utmost arrogance of the ruling elite. Who are you to know the social value of each sector? Maybe you think you are smarter than Chairman Mao?

PM December 9, 2009 · 3:56 pm

Reasonable?

It’s NOT fair. 100% of the bonuses from certain institutions were derived from the largesse of the taxpayer, so why should ONLY 50% be given back to the taxpayer?

I vote for a 100% tax–call it a reclamation tax.

Colin Prince December 9, 2009 · 3:56 pm

@Roy Fuchs

Looks like it “…would be paid by the banks rather than employees”

Doug December 9, 2009 · 3:58 pm

I have to agree with one of the comments on the linked article…why not just increase taxes on the rich? That has the same effect in this circumstance, but covers a lot more bases. Leave the current system alone, just add one more tax bracket starting at say $200,000 annual income for singles, $400,000 for marrieds, that jumps up to 60% from the current 35%. Let’s close a few dozen loopholes while we’re at it (what difference can it possibly make if income is ‘salary’ or a ‘bonus’???) and call it macaroni.

European & former banker myself December 9, 2009 · 3:58 pm

Very nice.

Will this apply equally to many American investment bankers, who’ve abandoned the sinking ship that is Wall Street and moved overseas to places like London to make their money?
I sure hope so.

Besides keeping their paychecks they’ve gained free healthcare and low cost higher education for their children over there on the old continent. These people also benefit from European labor laws that e. g. limit working hours and allow them to enjoy longer, more frequent holidays.

Time to tax ’em. Hard.

Scott December 9, 2009 · 4:02 pm

I’ve got an idea, lets stop giving the banks tax money first.

Why is it that the left is so at ease with subsidizing a business and then demonizing and taxing the hell out of them when they make too much money? Oh, I know, because it gives bureaucrats jobs managing the money.

And you can bet as long as the government is willing to bail them out, bank executives will find a way to get the bonuses they want, tax or no tax.

Rocky the Heretic December 9, 2009 · 4:10 pm

Thank you for mentioning the idea that the FINANCE SECTOR, as a whole, OWES THE REST OF US the cost of their bailout.

It seems so obvious, given the sector-wide character of the irresponsible behavior that landed us in this coal-pit, that the sector as a whole should assume the cost of the remedy. The reasoning could be extended to require repayment of the stimulus money as well, which would not have been needed absent the financial crisis of their manifestly negligent making.

Which politicians would dare argue against this? None, which of course is the best explanation of why no one has made a serious proposal along these lines in the first place. Since it is unanswerable, and populist (horrors!), and would cost the Dems campaign money from Wall St., it is …. taboo.

Thanks again.

C. Kennedy December 9, 2009 · 4:11 pm

Good idea but is it constitutional in the US to impose a tax on specific employees of one specific industry?

Paula December 9, 2009 · 4:12 pm

The people who get these bonuses should consider themselves lucky, even if they do have to pay hefty taxes on their “earnings.” They don’t contribute any more to society than those in most other occupations, and yet they get paid much, much more. Mr. Fuchs has it right.

Greg December 9, 2009 · 4:15 pm

Too targeted. The Brits are free to do as they wish, but I really don’t like the idea of Congress going in and picking one industry to extract money out of because they’re out of favor. This sounds like a bad, bad precedent.

Next we raise taxes on oil execs? Abortion doctors? Grants for climate research?

This kind of meddling is short sighted, populist point scoring.

HEDGG1979 December 9, 2009 · 4:15 pm

I thin there is overproduction of Paul Krugman blog posts and NYT articles. His very biased, sometimes insulting, often arrogant and annoying blog posts are generating a serious negative externality. Additionally, his time would be better used writing papers (like Krugman 1979 and Krugman 1980 that got him the Nobel prize). That’s where he has comparative advantage. Krugman is not allocating his time so as to maximize social welfare.

What is the policy response to this problem?

Congress should increase the tax Krugman pays for writing in the NYT. Say, a tax per piece written. Or a higher tax on the income derived from writing these pieces. The tax will increase the cost Krugman faces bringing his private cost closer to the social cost. Darling and Congress, while you’re figuring out how to tax people’s income and change their allocation of time and effort, you should consider Krugman’s allocation of time and effort. Clearly Congress knows better than Krugman how he should allocate his time. Clearly we need him back in the Journals and off the popular press.

Tax Krugman!

robob18 December 9, 2009 · 4:17 pm

Heck, let’s just be plain -.

If St. Ronnie were here today he would have to update his mis-nomer about a ‘welfare queen’ in a Cadillac:

//www.nytimes.com/2007/11/19/opinion/19krugman.html

and properly adjust the scenario to Wall Street with AIG and GS welfare queens pulling up in their car services to the Welfare Towers.

Only difference is the form of payment is no longer food stamps or Section 8 assistance and, of course, the huge multiple of normal New York state un-employment benefits being artificially subsidized by the tax-payers.

Marcelo December 9, 2009 · 4:17 pm

I’m not sure. The wall street gamblers will find a way to circumvent it, since it is so specific…It would be better to have a higher top marginal income tax rate (more general) and a fat capital gains tax for short-run gains.

Dennis in CA December 9, 2009 · 4:19 pm

When is the paradigm shift going to occur, when we stop talking about the size of Wall Street bonuses and start discusssing the length of the prison terms? If what happened on Wall Street doesn’t fit the legal definition of fraud to a T, then Willie Horton was just a missunderstood victim of the penal system

Brian in Chicago December 9, 2009 · 4:23 pm

Also important, I think, is the need for a strong incentive or device to prevent bankers from walking away with money that they didn’t “earn” in any way demonstrable or defensible.

High income taxes force businesses to use money in better ways that won’t be subject to the tax but should benefit the business and the shareholders. Furthermore the money/capital remains on company books where it is more likely subject to seizure when malfeasance is uncovered.

You can count me as a big fan of the cause for steering future generations away from these institutions of piracy.