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A tale of two taxes

Given the choice between a financial-transactions tax -- which would levy an infinitesimal fine on each, well, financial transaction -- and a tax on Wall Street's bonuses, I'd take the former in a heartbeat. Unlike a tax on bonuses, the transactions tax can raise some real money -- a $100 billion a year isn't a crazy estimate -- and that can be used to do some real good. Beyond that, there are strong arguments that a transactions tax would slow down Wall Street's high-speed trading, and that would have some benefits.

The tax on bonuses, by contrast, is a bit more about repairing an injustice. You see this quite clearly in Simon Johnson's post on the subject, which wonders how much bonus bankers "deserve" after the damage they did to the global economy. Emotionally, I'm with Johnson: They deserve to go door-to-door apologizing to every American. But in practice, I'm more interested in helping the people who need help than punishing the people who deserve scorn.

By Ezra Klein  |  January 12, 2010; 7:03 AM ET
Categories:  Financial Regulation , Taxes  
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Why choose? Why not both?

Posted by: franklynch2 | January 12, 2010 7:57 AM | Report abuse

I had the exact same thought as franklynch2. Is there any reason it has to be one or the other?

Posted by: Coatlicue | January 12, 2010 8:09 AM | Report abuse

From the standpoint of the FY10 budget proposal the president sends the Congress, my sense is he oughta propose both, and be willing to sacrifice the bonus tax later.

This came up yesterday, and I'm really frustrated with the idea that Treasury Secretary Geithner is pushing back against these ideas. Sometime right before the President delivers the State of the Union, he oughta ask for Geithner's resignation not primarily because of this, but it really should be the final straw.

This guy doesnt evoke any confidence in this government's financial reform proposals on Capitol Hill, and everytime he goes there to testify or goes on TV for an interview he has to relive the events of the fall of 2008. Its time to turn the page on this horror show from 2008/09 and that wont happen with Geithner still in the chair.

Posted by: zeppelin003 | January 12, 2010 8:15 AM | Report abuse

Everything you write about economics is from the perspective of the recent highschool graduate. Don't you even understand the importance of the stock market for middle aged people? no, I guess not.

Posted by: truck1 | January 12, 2010 9:21 AM | Report abuse

There are several problems with the bonus tax. For starters, many employees at the banks add real value. Even, as hard as it can be to believe, in 2009. If a loan officer made a tidy sum for the bank, or a risk manager successfully implemented an improved risk management process on time and under budget, should they really be punished because the the mortgage origination group and the trading desk took crazy amounts of risk several years before?

Second, while the pro-bonus tax article suggested that bankers will leave the large banks for the community banks, that's probably not true. A decent portion of the payouts that get everyone so upset go to traders and investment bankers - community banks don't have trading desks nor investment bank divisions (and would you want them to get into that game)? Frankly, a lot of the biggest risk takers - the ones that the average citizen really wants to tax - are going to go to / start their own hedge funds. Or if you go after hedge funds, then perhaps they will go to London, or Hong Kong, or Nassau.

Finally, think of the incentives for risk taking here. On one hand you say 'hey banks, I'll back stop you if losses become too high' and on the other hand you say 'by the way, as a consequence, I'm going to take, say, 70% of your bonuses in tax'. This is another way of saying - you can't lose big, but you really need to win big if you want to take home serious money. Swing for the fences!

The banks are already starting to implement compensation reforms, partly because of popular/government outrage, but also because they don't like paying bonuses for huge losses either.

Part of the problem with banks is that there is so much in the way of government subsidies, both direct and indirect. Deposits are insured. Large banks going concern status is effectively insured. Using debt financing is more attractive because interest is tax deductible. The government wants everyone to be a home owner, and there are subsidies, tax credits and the mortgage interest deduction to further that end. Its a system which promotes available and cheap credit, much of which goes to marginal borrowers who probably shouldn't have access to credit.

Posted by: justin84 | January 12, 2010 9:29 AM | Report abuse

Dear Mr. Klien,
I agree; good for you for saying it. (Banishment is the appropriate "readjustment" for the bank CEOs and board members.)
Taxing "passive wealth" could raise scads of money and hardly take a dime out of the economy.

Posted by: geraldsutliff1 | January 12, 2010 9:49 AM | Report abuse

I'll ditto the above. When I hear these things proposed as either/or I often say why not both. And why can't we tax cadillac insurance plans and levy a tax on people making $2 million a year? Make each tax half of what it was but get it on the books so it can be tweaked up or down as needed. and seriously, we do have a deficit you know, a little extra revenue wouldn't hurt.

Posted by: flounder2 | January 12, 2010 9:57 AM | Report abuse

The answer to "why not both?" is that Ezra probably opposes the bonus tax but lacks the guts to say so, so he attempts to distract us by saying that the transactions tax is more important. Guys like Ezra and Tim Ferholz at TAPPED seem allergic to doing anything tangible to address the misconduct of a largely worthless financial class. Whether that stems from a class issue (ie, some of their friends went to Ivy League schools and then Wall Street) or from the aversion many intellectuals have to anything resembling populism is an open question.

Posted by: redscott | January 12, 2010 10:51 AM | Report abuse

Excellent post. Reminds me that as a middle class investor, I need to write my Congressman and my Senators in support of the transactions tax.

I strongly oppose an industry-centric bonus tax but I'd cheerfully support a bill that eliminated the corporate tax deductions for salaries and benefits that exceed $5 million a year... including actors and sports figures.

Posted by: commeca | January 12, 2010 11:08 AM | Report abuse

ezra sez: "But in practice, I'm more interested in helping the people who need help than punishing the people who deserve scorn."

You've been eating at the Obama table too frequently.

There is nothing to prevent both from happening except the (sometimes hidden) desire to please the banksters who supply election money or avoid a necessary but messy war (with claims of class warfare).

There's heat in the kitchen, and you and Obama can't be chef if you can't take the heat.

There is increasing evidence in polling data that letting the banksters off the hook, while catering to their desires for lower regulation and support for risk-increasing moral hazard isn't playing well with the public.

Remember that Truman called for a Fair Deal? The voters now know that we have an unfair deal going that rewards the upper 5% of income earners at the same time that jobs are stagnant and earings are flat over 10 years or more. This cannot be sustained, and therefore it won't. Oligopolies cannot persist in a democratic system without use of force.

Posted by: JimPortlandOR | January 12, 2010 11:25 AM | Report abuse

The transaction tax is infinitesimal for the transactions pof most people, dwarfed by differences in price caused by speed of execution and differing costs of trades among brokers. The "middle aged" won't notice it unless they run hedge funds or are very frequent traders of large sums.

Who will feel it are those frequent traders of large sums, like the investment banking houses and leveraged hedge funds, precisely the people making the outlandish amounts of money. This is a better way to raise money than the bonus tax or even an accross-the-board millionaires' tax, because it has the added bonus of perhaps reducing the amount of trading a bit.

People complaining about this either don't understand it or are making a whole lot of large trades.

Posted by: Mimikatz | January 12, 2010 11:36 AM | Report abuse

When the bankers go door to door to apologize, with them apologizing should be the politicians who created the housing bubble through the Community reinvestment Act, Fannie Mae and Freddie Mac.

Posted by: tartanmarine | January 12, 2010 11:47 AM | Report abuse

This is a totally petty complaint but I see the "A Tale of Two [Blank]s" headline formulation far, far too often in journalism, especially political journalism. I give Monty Python's "A Sale of Two Titties" a pass, but everyone else has to stop.

Posted by: HerooftheBeach | January 12, 2010 1:18 PM | Report abuse

Do we REALLY want the best of the best to leave the banking industry in the US?

Seems like a good way to kill off our standing overall in the world.

Posted by: Obaama | January 12, 2010 2:32 PM | Report abuse

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