The Bonus Question

Bonuses for bank employees will be announced in coming days. Simon Johnson is calling for a Supertax on them:

The administration should immediately propose and the Congress must at once take up legislation to tax the individuals who receive bonuses from banks that were in the Too Big To Fail category – using receipt of the first round of TARP funds would be one fair criterion, but we could widen this to participation in the stress tests of 2009.

The supertax structure being implemented in the UK is definitely not the right model – these “taxes on bonuses” are being paid by the banks (i.e., their shareholders – meaning you, again) and not by the people receiving the bonuses.

Essentially, we need a steeply progressive windfall income tax – tied to the receipt of a particular form of income. This is tricky to design right – but a lot of good lawyers can get cranking.

It's being leaked that President Obama plans to announce a new fee on banks, instead. Politico has those details:

Top administration officials tell Morning Money that President Obama’s budget, to be unveiled next month, is likely to include a fee on banks designed to recoup some of the cost taxpayers incurred in the bailout, which specified that the U.S. government should be made whole. This will stop short of a financial transactions tax, and the administration has decided that a tax on compensation packages would be too easily evaded. The officials said the final approach has not been locked down.

But the real problem is the bailout itself.

It's unclear if the big investment banks such as, Goldman Sachs, made any legitimate money in the private sector last year or whether it was a combination of bailouts and friendly bond trading with the Federal Reserve.

You can't reverse time and fix the mess completely. The best solution is the one proposed by Janet Tavakoli. That is for the investment banks to give back the money they received from the government and reverse the trades where the government bought who knows what kind of securities, then the firms should be left to sink or swim on their own without any new taxes or fees. Otherwise, we continue to march down the road to more and more control of the economy. New taxes are not the answer and, of course, new fees which end up choking off the competitors of Goldman and JPMorganChase are not the answer.