The $200,000 Insult: Come to Chicago
Kenneth Feinberg, President Obama's compensation czar for bailed out banks, appears to have taken some genuine steps to rein in excessive executive compensation at the basket case banks that received the most TARP money. He cut cash salaries by 90 percent in some cases and reduced overall compensation for the top executives at the seven institutions that received the most government money.
This is a good first step, but it is only a first step. The pay caps involve only a relatively small number of people in an industry where hugely bloated salaries are the norm. Even in these cases it is too early to know that the pay caps will actually prove to be binding. After all, Wall Street's main craft is evading regulations and taxes. It is entirely possible that those clever Wall Street boys will find a way to get around whatever pay restrictions Mr. Feinberg puts in place.
Whatever happens to the pay of this small group of executives the real problem goes much deeper. The Wall Street folks view the wreckage from last year as a minor distraction and are eager to get back to business as usual. This attitude was best expressed by "a person close to A.I.G.'s board," who said of plans to restrict pay at the AIG division that wrecked the company to $200,000: "that's insulting ... why wouldn't anybody quit?"
Of course, this "insulting" pay package would still give our AIG executives more pay than 99 percent of the work force. They would be getting more than three times as much as the average teacher, firefighter, or nurse. They would be getting more than five times as much as the average factor worker and more than ten times as much as minimum wage worker.
Furthermore, if anyone among these other groups of workers mess up so badly that they bring down their employer, they lose their job. They don't get to go somewhere else because a $200,000 paycheck is "insulting."
Wall Street badly needs fixing. Fortunately we have the tool to do the job. It's called a financial transactions tax (FTT) - a modest tax on trades of stock, futures, options and other financial instruments. Such a tax could easily raise $100 billion a year, while cutting the financial sector down to a manageable size.
An FTT is not an alien concept. We actually had a tax on stock trades until 1964. The United Kingdom still has a 0.25 percent tax on stock trades that, relative to the size of its economy, raises the equivalent of $40 billion a year in the United States.
If we follow the lead of the UK, we will a great revenue source that will barely touch most of the population. Investors who buy and hold stock for 10 years will barely be affected, as is the case of a farmer hedging her wheat crop. However, someone who buys stock at 2:00 with the intention of selling at 3:00 would pay a substantial price.
There are many other good arguments for an FTT, including that it is the fairest way to fix the damage to the budget caused by the recession and the bailout, but an FTT will not get an airing in a Congress where the banks continue to wield enormous power. Congress will only consider an FTT, as opposed to more regressive proposals like a national sales tax, if the public demands it.
The public will have an opportunity to express their outrage at the banks and the need to rein them in at the Showdown in Chicago beginning on October 25. If this protest proves successful, and there are hundreds more like it around the country, then Congress may start thinking more clearly about measures to change Wall Street culture and to get back our money.
We could use a special tax surcharge for program trading. Maybe "FTT + 5."
October 22, 2009 10:32 AM | Reply | Permalink
Yes on the transaction tax, no on demonstrations in Chicago.
Demonstrations tend to go off the mark and distract, rather than focus, needed attention. Better would be a good media strategy.
October 22, 2009 10:36 AM | Reply | Permalink
I confess I love the Showdown idea. That's the kind of thing the teevee news covers. Well...at least they covered the Tea Parties. Some of those folks may well be there, too. I say Good Show to those who go!
October 22, 2009 1:37 PM | Reply | Permalink
So your idea is that we present a "mirror image' of the teabaggers?
Not a particularly useful thing.
Better a well-designed, well-orchestrated media campaign to put light (and heat) where they belong.
October 22, 2009 2:50 PM | Reply | Permalink
I would expect that the signs would be better!
;-}
From which event was your "For What Noble Cause?" sign?
I would hope that some visibility that people object to Washington's policies re: Wall Street would be welcome to folks who really can't grasp the issues. I hope MSM does well by the event.
I rarely see teevee news, but I watched a bit recently, and even some of the anchors were announcing that there was 'some dissatifaction" among the Left also.
October 23, 2009 7:42 AM | Reply | Permalink
Yeah, that'll totally happen, Old Grouch.
There's a word for your fantasy: Fail.
October 26, 2009 12:09 PM | Reply | Permalink
House Bill 1068 :
(a) Imposition of Tax- There is hereby imposed a tax on each covered securities transaction an amount equal to the applicable percentage of the value of the security involved in such transaction.
‘(b) By Whom Paid- The tax imposed by this section shall be paid by the trading facility on which the transaction occurs.
‘(c) Applicable Percentage- For purposes of this section--
‘(1) IN GENERAL- The term ‘applicable percentage’ means the lesser of--
‘(A) the specified percentage, or
‘(B) 0.25 percent. link
...which bill sponsored by 14 Democrats and zero (0) Republicans apparently died in the Ways and Means Committee in Feb., 2009.
October 22, 2009 11:24 AM | Reply | Permalink
How can they pass this up? This tax is not even going to hurt it's intended "victims," except at the margins. It's good policy, and, if presented right, it's GREAT politics ("well, we've decided that the Wall Street fat cats who have received billions in tacpayer bailouts should start paying that money back - with interest").
October 22, 2009 11:42 AM | Reply | Permalink
Presenting it right is the problem. That's one area where the Dems have a lot to learn.
Maybe a "securities and commodities trading user fee"?
October 22, 2009 11:54 AM | Reply | Permalink
Hey, hey, LBJ,
We demand a financial transactions tax today!
October 22, 2009 12:11 PM | Reply | Permalink
Great idea.
Make this happen please.
Make it raise $200B / year but not give anything back to Wall Street in exchange and cut their salaries as proposed and extend those cuts down the Wall Street payroll ladder.
Do these things and I'll give my first paycheck of the year to your favorite charity for five years running. My paycheck ain't shit so no big deal.
October 22, 2009 12:40 PM | Reply | Permalink
"After all, Wall Street's main craft is evading regulations and taxes."
-------------------------
Wall Street will also evade a financial transaction tax, just like the financial firms in the UK evade the stamp duty tax as they call it. The UK firms are exempt or they trade the CDF's, leaving only the ignorant poor and middle class paying the tax. If the US firms are unable to bypass the tax or cannot get an exemption, the cost of transactions will be passed onto the middle class anyway. Take that Wall Street.
The UK is talking of repealing the stamp duty tax as removing it would result in greater revenue, but that is unsurprisingly meeting resistance from the exchequer that collects the stamp tax. The Independent Budget Office of New York City says a much smaller percent transaction tax on just the NYSE and AMEX exchanges would be net negative because of a reduction in capital gains, and from income tax loss from hundreds of thousands of jobs lost, with 80% not even related to finance. There would be a few million jobs lost if all US exchanges were taxed.
Yes, it would shrink the financial activity down to 10% of what it is now, back to the 1980's, just like some predict. Spreads on stocks would return to $0.53 per share as I have found the average was in 1986. That alone would cost an investor 2% upfront on a $25 stock. With reduced compounding, an individual would have a return at least a quarter less over a working lifetime.
Sweden tried the financial transaction tax by the demand of the people against the wishes of their government. The people were also fed up with their financial industry at the time. Six miserable years later the people did not want the tax anymore. Nothing like shooting yourself in the foot. Take that Wall Street.
By the way what do stocks, commodities and exchange traded derivatives have to do with this crisis? The unregulated debt derivatives that caused much of this crisis were not even traded on the highly regulated exchanges. I will not be surprised if this continues, but at least my retirement will be taxed to punish Wall Street. I do not want my retirement taxed, can you tell?
120 million investor class voters are gonna be rather upset. And then we will call it the Dean Baker Financial Transaction Tax.
October 22, 2009 2:58 PM | Reply | Permalink
i have to wonder how frequently you trade your retirement fund. i would recommend seeking advice from an investment professional but with a username like NOFTT i'm guessing i already know how your retirement is actually funded....
October 26, 2009 5:59 PM | Reply | Permalink
There is a very simple and fun way to prevent evasion of this tax. We just give workers 10 percent of the tax liability (plus penalties) for turning in their bosses for unpaid taxes. It's called doing well by doing good.
October 22, 2009 3:42 PM | Reply | Permalink
No, it's called being a gov't stoolie. Right inline with Obama's internet hotline to report people exercising that free speech thingy.
And if you think someone will work at AIG fro 200k when they could make 10 million in London, Zurich, Frankfurt, or Hong Kong you are an idiot. So they will leave, the tax base will decline, and those companies we invested so much in will likely collapse. Brilliant idea, you should work for Obama.
October 22, 2009 7:09 PM | Reply | Permalink
bulldog wants to bring 'stiches for snitches' to the white collar crime game.
October 26, 2009 5:11 PM | Reply | Permalink
I not only love the Showdown idea, I plan to be there for all of it and to write about it. This will not be a mirror image of the Tea Parties. It will be the long-overdue answer to the Tea Parties -- the Progressive Populist answer. If you need more reasons to come to Chicago, check this out: http://www.grassrootspolicy.org/node/168
October 22, 2009 4:51 PM | Reply | Permalink
So you think that it is a great idea to tax the money that I earn, then charge me a tax for investing it, then tax me again on any profit I make, then tax me again each time I reinvest it? This not only lowers the profitability of investing, it actually erodes your capital. It makes short term investing unprofitable and will seriously affect the profits of many firms and funds (you know, those funds where all your 401k money is). I think a better tax is to simply confiscate all property owned by anyone named Baker. It affects only a few people and could raise lots of money, so based on your logic, it's a good idea.
October 22, 2009 7:01 PM | Reply | Permalink
Um, what 401(k) money, moron?
October 26, 2009 12:52 PM | Reply | Permalink
'short term investing' needs to be made less profitable. it isn't investing at all, it's gaming. and it does not contribute constructively to the economy.
October 26, 2009 5:24 PM | Reply | Permalink
ah, thinman already made this point below.
October 26, 2009 5:25 PM | Reply | Permalink
well, since capital gains already enjoy lower tax rates than taxes on income one must actually work to earn, I don't see how a transactions tax is *that* unfair. And, if you want to argue it will discourage investment and the efficient allocation of resources: maybe we NEED people to think twice about making that trade. Since, you know, it may end up going foul and devastating the entire industry.
As far as AIG and compensation: people are complaining about legal salaries too, and everyone is waiting for the white shoe to drop: who will be the first to cut pay? People worry about losing the best talent. it's sort of a prisoner's dilemma. I'm sure the people in London and Zurich are ALSO clamoring for paycuts.
It's just a matter of timing.
October 23, 2009 11:29 AM | Reply | Permalink
When I read that a hedge-funder recently made over $2 billion in 14 months, I asked myself what the hell would one DO with 1,000 million plus 1,000 million (and counting) dollars?
Then I remembered reading that those in the top echelon of the financial world are not into the money, they're into winning, translated in two ways: making more than their peers and inventing more ingenious ways to make it possible.
So I see the question as how do we make 'winning' unattractive and since a radical change in a basic human behavior is not going to happen, we have to make 'winning' painfully expensive - the key word being 'painfully.'
October 23, 2009 2:43 PM | Reply | Permalink
The goal should be to make short term investing less profitable. Gaming the market doesn't lead to more efficient allocation of capital. A transfer tax would help to protect retirement funds that are invested for the long run against market manipulation by traders seeking short term gains.
October 24, 2009 8:57 AM | Reply | Permalink
indeed.
October 26, 2009 5:33 PM | Reply | Permalink