Democrats in Congress and perhaps even President Obama are making a colossal misjudgment by taxing the bejabbers out of compensation rewards to employees of bailed out financial firms.
The tax is a pre-emptive strike at a select few and can be viewed as prohibited by Article 1, Section 9 of the U.S. Constitution, “No Bill of Attainder or ex post facto Law shall be passed.”
Certainly, cooler heads can prevail and find other remedies to collect in some circumstances what constitutes ill-gotten gains rather than spending the time and expense fighting it through the U.S. Supreme Court.
The public is rightly outraged. They see a system rewarded for failure. If you thought the public was angry when the government gives money to the poor, they are pissed beyond rationality when the government doles it out in the billions to the rich.
The tax passed by the House and considered next week in the Senate is politically a dangerous precedent. What’s next? Taxing Ben & Jerry’s at a 90% rate because Congress deems eating too much ice cream is bad for our health?
Besides, what the Democratic-led Congress and a seemingly sympathetic president is doing is falling into a vicious trap ballyhooed for years by Republican conservatives: The Democrats’ solution to all problems is tax and spend. Not that the House Republicans aren’t co-conspirators in this bonus tax trilogy.
Perhaps one remedy is for the feds to deduct the compensation rewards of each bailed out company in future infusions of equity to keep those companies afloat.
If Congress and the feds become too punitive, any desire on the part of private investors helping the government regain stability in the market place will dry up, leaving us taxpayers in a worst situation than we now face.
I’m no fan of Congressional Republicans who vote no in lockstep against Obama’s recovery plans, but in this case Republican Sen. Judd Gregg’s statement is right on: “It is wrong to propose to use the taxing authority of the government in a manner that is arbitrary, punitive, and targeted on a single group of people who they have deemed as having acted improperly.”
The Senate bill which proposes a 70% tax on the compensated individuals and their companies was outlined by Democratic Finance Committee Chairman Max Baucus and Republican Charles Grassley as crafted to “pass muster” with the courts.
The Senate bill would apply to all employees at companies owing $100 million in bailout money. It would impose a 35 percent tax on the bonus recipient and on the company, which would apply to any amount above $50,000 for a merit bonus and to the full amount of any bonus paid solely to retain the worker.
The House overwhelmingly adopted on Thursday a bill that would impose a 90 percent tax on bonuses paid since Jan. 1 by companies that owe the government at least $5 billion in bailout funds. That tax would apply to employees with family income of $250,000 or more, and would have an impact on businesses like Citigroup, Bank of America and Wells Fargo.
Meanwhile, administration officials are backing down on the punitive tax proposals. They said instead that President Obama would assess the potential effect of the bill that emerged from Congress on efforts to stabilize the financial system.
For the first time as president, Obama must make the tough but right decision to veto the bill as it appears now and look ahead at the big picture. It’s one thing to rant about bonuses to those who drove their firms into financial ruin as was the case at American International Group. Obama’s mission is to convince Congress and the American people any future financial bailouts are not an act of rewarding failure but salvaging and regulating an industry that is the heartbeat of our world.
Wall Street firms reacted angrily to the tax proposals, with several saying they would explore ways to end their participation in the bailout program. Reports The New York Times:
The chief executive of Citigroup, Vikram S. Pandit, sent employees a memorandum Friday saying, “The work we have all done to try to stabilize the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees. It would affect countless number of people who will find it difficult, if not impossible, to pay back the bonuses that they earned.”
Other companies said they would probably refuse to participate in other Federal Reserve programs aimed at stabilizing the financial sector.
For private investment firms, the prospect that the rules can be changed at the whim of Congress introduced a powerful element of doubt in their calculations.
And from The Washington Post:
The stakes are especially high because the Treasury Department is moving ahead with a critical initiative that involves persuading private investors to buy troubled assets from banks. The administration, which could unveil more details of this plan as early as Monday, is deeply worried that investors will be afraid to participate, Treasury officials say.
The Treasury plan would include three primary components, drawing on resources from the Federal Deposit Insurance Corp., the Federal Reserve and private investors, officials say…
Fed Chairman Ben S. Bernanke said banks should structure compensation to reflect contributions to a company’s health and profitability. He said problems arose when employees were rewarded for short-term results that created long-term risks.
“Poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization,” Bernanke said in a speech to the Independent Community Bankers of America.
Many bank employees, particularly those who work in the capital markets and investment banking, get the majority of their annual compensation in the form of a lump-sum payment at year’s end, a practice that is designed to tie pay to performance…
Treasury and Federal Reserve officials are also preparing to partner with private investors to create funds that could buy toxic assets, which provided the financing for troubled loans such as mortgages and have been at the heart of the banking system’s troubles. The funds would borrow money at favorable rates from the Fed — without having to pay back the loans for at least five years and possibly as long as seven years — to buy the assets, freeing banks to lend once again, a source said.
Finally, the Treasury and Federal Reserve would expand a recently-launched program that provides financing to private investors to buy assets that back new consumer loans, such as credit card debt, student loans and auto loans. That initiative would be broadened to address toxic assets that have been sitting on the books of banks for months, not just new ones.
Yet, some bank CEOs just don’t get the cultural change imposed by Washington.
Bank of America chief executive Kenneth D. Lewis told employees in a memo that they deserved to keep their pay.
Vikram Pandit of Citigroup argued that most of those responsible for the bank’s mistakes in recent years had left the company, and that the remaining employees were playing a key role in helping the nation to recover.
Cross-posted on The Remmers Report