Deficit Reduction: Speculation Tax?

Paul Volcker said two things on Fareed Zakaria’s GPS show on CNN recently: (1) Deficit reduction is critical for America (2) We need engineers, not financial engineers.

You know my point of view on the speculator versus value creator issue. I consider it Capitalism’s Fundamental Flaw that speculators make so much money while value creators toil in relative poverty, sacrificing many years of their lives to build something, to invent, to innovate. As a result, the finance industry has been attracting talented people. The lure of easy money has become a major problem.

So, I propose that Obama and Congress, as part of their financial reform strategy, impose a speculation tax, deductable at source, on banks that pay outlandish bonuses to their speculators. This tax can go as high as 90%. This would mean, if the banking industry decides to pay $50 billion in bonuses, $45 billion of that will go to the government as taxes to reduce deficits.

This will also serve the additional objective of rationalizing the compensation structures of speculators relative to the value creators.

I invite discussion on this topic. It is complex, controversial, and highly contentious.

Some supporting data from CBS News:

• Goldman Sachs, which earned $2.3 billion in 2008 and received $10 billion in TARP funding, paid out $4.8 billion in bonuses in 2008 – more than double their net income.

• Morgan Stanley, which earned $1.7 billion in 2008 and received $10 billion in bailout funds, handed out $4.475 billion in bonuses that year, nearly three times their net income.

• JPMorgan Chase, which earned $5.6 billion in 2008 and received $25 billion from the government, paid out $8.69 billion in bonus money that year.

• Citigroup and Merrill Lynch lost a combined $54 billion in 2008. They received a total of $55 billion in bailouts and paid out $9 billion in combined bonuses in 2008. ($5.33 billion for Citigroup; $3.6 billion for Merrill Lynch, which was subsequently acquired by Bank of America.)

And WSJ says:

Wall Street bonuses were up 17 percent to over $20 billion in 2009, the year taxpayers bailed out the financial sector after its meltdown, New York state Comptroller Thomas DiNapoli said Tuesday.

Total compensation at the largest securities firms grew beyond that figure and profits could surpass what he calls an unprecedented $55 billion last year, DiNapoli said. That’s nearly three times Wall Street’s record increase, a rate of growth that is boosted in part by the record losses in 2008 of nearly $43 billion, the Democrat said.