Fair. Balanced. American.

Monday, January 11, 2010

A great legislative issue for Democrats this year

Former IMF chief economist and now professor at MIT, Simon Johnson lays it out:
The administration should immediately propose and the Congress must at once take up legislation to tax the individuals who receive bonuses from banks that were in the Too Big To Fail category – using receipt of the first round of TARP funds would be one fair criterion, but we could widen this to participation in the stress tests of 2009.

The supertax structure being implemented in the UK is definitely not the right model – these “taxes on bonuses” are being paid by the banks (i.e., their shareholders – meaning you, again) and not by the people receiving the bonuses.

Essentially, we need a steeply progressive windfall income tax – tied to the receipt of a particular form of income. This is tricky to design right – but a lot of good lawyers can get cranking.

And we should be honest about the distortionary effect that even proposing such legislation will have on incentives. It will send a signal that income generated by working at big banks is less secure – all employees of these banks should be looking over their shoulders; sooner or later, the Internal Revenue Service is coming. This is particularly relevant for 2010, which looks set to be another bumper year for the financial sector.

At this stage, tilting the playing field towards smaller participants in financial markets is not a bug, it’s a desperately needed feature.
Best outcome: Bill passes the House, passes the Senate with the bare minimum, most Republicans opposed.

Second worst outcome: Republicans cave, bill passes unanimously. But shaming Republicans into voting for something that's actually good for the country is a net positive, even if it's out of fear of the populist anger that they've been alone in milking until now.

Worst outcome: Bill fails because Lieberman or some other corporate Democrat filibusters. Republicans have already used this game plan, and it's effective. As usual, the media won't blame the legislative failure on the 40 Republicans who opposed the bill but the 59 Democrats who supported it.

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