Outrageous pay on Wall Street? Tax ‘em

Moshe Adler, in his very incisive Times Op-Ed article on Jan. 4, correctly points out the hypocrisy and lack of correlation between production and compensation among high-paid executives. He offers three prospective solutions: a law to set a maximum ratio between highest- and lowest-paid workers, one to set the minimum ratio of income between labor and shareholders, and for lawmakers to make the minimum wage a true living wage.

Though good ideas, they are impractical for capitalism as we know it in America. So let me offer a more palatable alternative, more likely to be adopted and easier to regulate: a new tax bracket.

The current top income tax rate in the United States is 35%, but few pay that amount because of various shelters and deductions. In fact, the wealthiest among us were given a huge break in taxation in 2001 with the Bush tax cuts. In that year, Bush introduced a $1.3-trillion tax break skewed to benefit top brackets.

Here is what happened in the intervening years: From 2001 to 2009, unemployment went from about 4% to roughly 10%, the poverty rate increased, a home foreclosure crisis ensued and the number of Americans relying on food stamps increased from about 17 million to more than 30 million. I bring these facts up not to tar the Bush presidency as a failure but to point out that lowering taxes is not a panacea for our fiscal woes. Indeed, sometimes raising taxes (to meet a specific goal) is a legitimate strategy.

Washington has raised taxes to address past crises. In addition, many countries have top tax rates far in excess of ours (including most countries of the European Union, where the top rates hover near 60%). A study by the accounting firm KPMG pointed out that many Asian nations have similar high rates, with Japan at 50%. Moreover, during World War II, our rates topped out at 94% for incomes higher than $200,000 (a princely sum in those days) and stayed above 80% until 1963. Even as recently as 1986, the top rate was 50%. In all those years, from the 1930s to today, with many ups and downs, little if any correlation between the nation’s economic health and taxation has been demonstrated. We could employ the taxation strategy of generations past to create a disincentive for the payment of excessive compensation.

Low-tax (and “no-tax”) aficionados point out that most taxes are already paid by the top earners, while the rest of us pay little, if any, in taxes. True, but the bottom 50% of U.S. income earners has no money to pay for practically anything, let alone survive day to day with subsistence income. I am not suggesting a general tax increase but rather a new tax bracket, perhaps labeled “excessive compensation,” which might start at $5 million and go up to even the previous high of 94% for incomes around $100 million.

Perhaps no aspect of our latest economic meltdown has been as repulsive to the American public as the unearned compensation -- bonuses included -- paid to the top executives of Wall Street firms. Exacerbating this situation is the fact that the largest of these firms were essentially “saved” by government intervention, yet the top executives of these companies seemed to thumb their noses at U.S. regulators and carry on the practice. According to an Oct. 14 report by Bloomberg, “JPMorgan Chase & Co., the second-largest U.S. bank, set aside $8.79 billion for compensation and benefits for its investment-bank employees in the first nine months of 2009, enough to pay $353,834 to each. . . . New York-based Goldman Sachs . . . allocated 49 percent of first-half revenue, or $11.4 billion, to pay employees. Morgan Stanley set aside 71 percent of first-half revenue, or $5.91 billion.” More than a third of Wall Street finance professionals expected their 2009 bonuses to increase, according to a survey by eFinancialCareers.com.

In some cases, the U.S. has equity positions in these firms, and as shareholders, regulators have discussed capping bonuses. To some, this kind of intervention in capitalism is too intrusive. Besides, some of these banks and security firms have paid back the money loaned to them by the federal government’s Troubled Asset Relief Program, and are therefore free to make their own bonus decisions. The aforementioned “excess compensation” tax, which wouldn’t affect the rates already in place for the vast majority of us, is the best solution.

Using taxes to promote social policy is frequently frowned upon, but it is not unique and is often effective. In the case of obscene Wall Street bonuses, I think it would work just fine, and may be a more practical and easier to implement system than the laws Adler suggests in his Op-Ed article.

Myles Spicer is a retired advertising agency owner living in Palm Desert.