Notes on a scandal

When I say scandal, I'm not talking the normal stuff that gets splashed all over the television "news", like sexual imbroglios and such... I'm talking about the fact that when you and I work, we pay 35% of our income in taxes - while the so-called titans of Wall Street only pay 15% on their hundred million dollar pay packages (if they end up paying anything at all).  Unfair you say?  Scandalous, I say.  Even more so now that you and I will be on the hook with our future tax payments to clean up the mess that those jackasses created.

From Ezra Klein:

Fedwatcher Tim Duy makes some good points:

I have to imagine the employees of Bear Sterns and Lehman Brothers are currently thinking that they clearly did not take on enough risk over the past several years. Lehman employees, in particular, were fed into the moral hazard grinder that was operational for a scant two days. How unfortunate. Which leads me to my most significant concern about Fed policy over the past year – the inconsistency. Facilitate the liquidation of Bear Sterns by backstopping $29 billion of questionable assets. Then, recognizing the moral hazard created by that move, let Lehman collapse. Then, recognizing the consequences of vanquishing moral hazard, effectively purchasing AIG. At this point, the endgame should be clear to policymakers – a taxpayer bailout. The bad assets need to be consolidated and eliminated. Congress needs to be working on a mechanism to make this happen, a new RTC. Any Congressional action needs to include a reevaluation of the state of financial regulation...I think we are now all realizing where we are headed. We are moving into the endgame, when Congress socializes the losses after privatizing the gains.

You should read his whole post. But the conclusion illuminates a basic unfairness we should recognize: The resolution to the past decade or so of rocketing wealth in the finance sector will be that all those guys remain jaw-droppingly rich while taxpayers pay off hundreds of billions of their bad bets. Making it all the more galling, the very traders who forced us into this mess will escape not only the bill, but they'll be exempted from even paying their portion of the tax bill.

The the tax loophole that allows employees of private investment companies to classify their income as "capital gains" and thus pay 15% in taxes rather than 35% remains unclosed. Maybe one of Congress's policy responses should be to muster some nerve and equalize tax treatment. Forget moral hazard: I'd settle for some simple fairness. If they're going to rely on the tax system as an insurance plan, there's no reason they should be exempted from buying in.

Still think this is an issue that is too obtuse?  Think of it this way, that extra 20% that those CEO's don't pay is amplified to a huge extent by the fact that they somehow get paid such an obscene amount of money.  Drop my taxes by 20%, and I might get to keep an extra $15k.  That's some real money to me, but to the government, that's just one flip of the afterburner switch on an F-16 in Iraq.  But raise the income tax rate on a CEO making a paltry $100 million a year from 15% to 35%, and voila, the government just got 20 million dollars!  Now we're starting to talk about real money here.

We're also talking about priorities.  Would we rather that CEO buy himself another four or five beach houses, or pay for child health care for the entire country?  If you think I'm joking, you're wrong...

A study released a few weeks ago by the Institute for Policy Studies in Washington found five major elements in the tax code that encourage overpaying executives. These cost taxpayers more than $20 billion a year.

That’s enough money to deworm every child in the world, cut maternal mortality around the globe by two-thirds and also provide iodized salt to prevent tens of millions of children from suffering mild retardation or worse. Alternatively, it could pay for health care for most uninsured children in America.

Now you might think that there isn't that much money sloshing around out there with the super-rich.  Once again, you'd be surprised.   Richard Fuld, the longtime chief of Lehman Brothers, which I might note was recently liquidated. He took home nearly half-a-billion dollars in total compensation between 1993 and 2007.  That's right.  Half a BILLION dollars to run a company into the ground.  Nice work if you can get it.

Three decades ago, C.E.O.’s typically earned 30 to 40 times the income of ordinary workers. Last year, C.E.O.’s of large public companies averaged 344 times the average pay of workers.  Some may say they "earned" it.  It sure is hard to say how.

Once again, it comes back to the tax side of it.  Is there any reason why you and I should be subsidizing the disgusting wealth of these people?  Because that is what we are doing when we give them preferential tax treatment. In the case of Mr. Fuld of Lehman Brothers, you and I subsidized his personal wealth to the tune of about $100 million, give or take.  I guess he shouldn't quit his day job...

Comments

[corey]

[this is good] Hear, hear! I could not agree with you more. I have been railing against CEO pay packages (and other high-flying financial executives) for a couple of years now. Every December I am further disgusted by the amount of money they receive in bonuses and the knowledge that they will pay less, percentage-wise, in taxes than we do. It's a sick, sick system that needs reform in a huge way. Like throw out the whole book and create a flat tax, or a use tax, or only have sales taxes, or SOMETHING OTHER than the current tax system. It's so unfair, it's preposterous.