Taxing Bonuses Bad Policy
There’s a consensus emerging among the bloggers I read that taxing AIG bonuses, in addition to being Constitutionally questionable, is just a really bad idea. Let’s leave aside the conservative die-hards and libertarian types, who might be expected to think that, and concentrate on those on the leeward side of center.
Nate Silver offers some (presumably) hypothetical examples:
A senior engineer at General Motors, who shepherds the production of a new hybrid vehicle that will turn out to be a best-seller, shouldn’t get a bonus for that. Really?
Jamie Dimon at JP Morgan, who has managed his company’s assets adeptly and kept it mostly off the taxpayer’s dole, is no more deserving of a bonus than an AIG crook. Really?
An mid-level investment banker at Morgan Stanley, who works her butt off to persuade her bosses to facilitate a deal for a new wind-power company that turns out to be a big economic and environmental winner, should have her incentive compensation taxed at 90%. Really?
An administrative assistant at PNC, who is volunteering to work 70-hour weeks because of cutbacks in the company’s staff, deserves a Christmas Bonus — unless her husband happens to be a lawyer earning $250,000 per year, in which case it should be taken away. Really?
Kevin Drum hits the nail on the head, noting that the House version of the bill, which has passed, “taxes away bonuses from anyone with a household income over $250,000. That’s a couple of mid-level analysts. This is likely to hit tens of thousands of fairly ordinary workers who had nothing to do with AIG’s troubles and who simply don’t deserve this kind of treatment.”
Indeed, I know such a couple. They’re 30-something’s with two kids and mid-level executive jobs. The wife’s at CitiBank, in a division that not only didn’t contribute to the company’s collapse but is actually quite profitable. Should she be denied the bonus to which her contract entitles her?
My visceral reaction is that, Yes, CitiBank is essentially a ward of the state and we shouldn’t be spending taxpayer dollars in this way. But that doesn’t really make sense.
I opposed bailing out CitiBank and, indeed, bailing out anybody. I’d have preferred bankruptcies and having private investors swoop in and buy up the remnants of the companies. Our elected representatives decided that we couldn’t afford to take the risk that doing that would turn a recession into a depression and went in the other direction.
The point of the bailouts was to keep these companies afloat and get them back into doing what they do for the economy. In order to do that, they need quality employees. And the fact that many of these companies were mismanaged — which ones, we really don’t know, since it’s likely that prudently managed ones got caught up in the panic — doesn’t mean that its workforce is incompetent.
Now, it may be right, as Matt Yglesias argues, that we’d be better off if talented people left failing firms and joined better firms or created their own startups. But the people who are now trying to tax bonuses are the same people who decided to bail out and thus prop up these firms. That’s working at cross purposes.
The fact of the matter is that, in many businesses, “bonuses” are just deferred compensation. (AIG’s case is different: The bonuses were for retention, rewarding those who stayed on a sinking ship to bail water.) My wife and I are both employed by companies that have a bonus pool to incentivize their workers to remain with the firm through bonus payout time and to give them a stake in the growth of the institution. If the metrics are met, we expect to be paid our bonuses every bit as much as our salaries.
Photo by Flickr user SEIU International under Creative Commons license.