Saturday, January 16, 2010

Taxing bonuses is flawed policy and bad precedent

You’d be hard pressed to find anyone passing the hat for “Big Finance” these days. But why do people assume that financial institutions are inherently evil while government is inherently good?

The mortgage bubble and resulting financial problems weren’t a free market problem. They resulted from government manipulation. Yet in many minds government is seen as the savior while banks are the drunks at the Baptist picnic. For that reason alone Rep. Peter Welch’s Wall Street Bonus Tax Act will garner some degree of support.

Welch’s bill (H.R. 4426) promises a 50-percent tax on excessive bonuses paid at banking institutions that received bailout money. It’s a classic leftwing tactic. Welch plays the class envy card, reminding financiers that they owe their reemergence to “hardworking Americans.” However, I would remind Mr. Welch that most “hardworking Americans” opposed TARP--the plan that provided the funding--from the outset. Yet Congress passed it anyway.

Hundreds of institutions became beneficiaries. Some have repaid the money; some haven’t. But banks had to practically beg the Treasury Department for permission to repay their TARP debt. And political connections played a role in the distribution of TARP funds from the start.

A University of Michigan study claims that banks in congressional districts where the representative sits on the finance committee were 26-percent more likely to get bailout funds. That figure is even higher if a bank’s executive is on a Federal Reserve Bank board.

Such backdoor shenanigans in Congress are nothing new. Representatives exchange favors with the well-connected every day. Therefore, how can anyone believe that in taxing bonuses Rep. Welch has any interest at heart other than his own?

I’ll win no popularity contest if I’m perceived as defending banks and their bonus packages. However, my goal isn’t to exonerate or condemn banks. I’m here to defend the free market process. There is a better method than congressional meddling for determining which financial executives deserve bonuses. There’s also much to fear when Congress uses the tax code to control compensation.

First, Rep. Welch only wants to tax “excessive” bonuses. Who is he, or the federal government as a whole, to decide what is and isn’t excessive? Basically, “excessive” means beyond a necessary or proper limit, which is an arbitrary concept at best.

What may seem excessive in one circumstance can be quite routine in another. Once Congress seizes the right to determine appropriate compensation for bank executives it has established precedent to set “proper limits” on salaries for anyone. Who will be next? Barbers? Truck drivers? Play-by-play announcers? Should healthcare reform include wage controls in the medical field? Don’t bet the farm that it won’t.

Such authority in the hands of government isn’t just dangerous to our liberty, it is fatal.

Does that mean I favor bonuses for bank execs? That depends. As stated, there is a better way to set wages. I prefer to see the free market, not pandering politicians who are seeking reelection, determine compensation.

If you’re unhappy with the bonuses paid at your bank you can do business elsewhere. If you stay, then bonuses must not bother you that much. In addition, government bean-counters shouldn’t force, cajole, or lure banks into nonsensical lending practices. Banks should operate on sound financial principles, not politically correct notions about social justice.

Good practice and due diligence are rewarded in the free market. Wise and prudent banks will prosper while depositors and investors will flee foolish institutions in droves. Government manipulation serves only to protect the irresponsible, defer risk and send the entire system tumbling like a house of cards.

Government’s market interventions have proven destructive. Allowing government an inroad to wage controls promises a similar, or worse, result. If Congress can punish banking executives for their compensation the door is wide open to do likewise to everyone.

No comments: