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Washington's bonus tax fantasy

By David Ellis, staff writer

NEW YORK (CNNMoney.com) -- The government's plan to tax Wall Street's bonus bounty is shaping up to be nothing more than a pipe dream.

Hoping to ride the wave of populist outrage against financial firms like Goldman Sachs, lawmakers have been hard at work hatching legislative schemes aimed at reining in bonuses at firms that received billions of dollars in taxpayer aid.

There are separate proposals from two Democratic members of the House Oversight Committee - Rep. Peter Welch, D-Vt., and Rep. Dennis Kucinich, D-Ohio, - that would tax bank bonuses at a rate of 50% or more.

And just last week, two Senate members - Sen. Barbara Boxer, D-Calif., and Sen. Jim Webb, D.-Va., jointly proposed the "Taxpayer Fairness Act," which would enact a one-time, 50% tax on employee bonuses above $400,000 at firms that accepted $5 billion or more in bailout money.

Even state lawmakers have piled on what has become a political football. Earlier this month, a group of Connecticut state lawmakers proposed their own version of a bonus tax, suggesting a "surcharge" on any bonus of $1 million or more paid to employees that got money from Treasury's Troubled Asset Relief Program, or TARP.

But experts think these various proposals have about as good of a chance of passing as Wall Street does in scoring another bailout from American taxpayers.

Any federal bonus tax proposal would have to survive a gauntlet of congressional committees, where it would likely become altered entirely or run aground on questions of legality.

Lawmakers have typically been averse to passing laws that impose penalties retroactively, said Bert Ely, a principal at Ely & Co., a financial institutions and monetary policy consulting firm in Virginia. And by this point, most Wall Street bankers have earned, if not spent, their year-end bonus.

"Some people would raise a question as to whether it would even be constitutional," he said.

And while President Obama has proposed his own "financial crisis responsibility fee" on the largest banks in his 2011 budget, the administration has consistently shown throughout the crisis its reluctance to impose excessive limits on banker pay.

Last year, it reacted coolly to a House bill that would have clawed back the bonuses paid at AIG (AIG, Fortune 500) through a 90% tax.

Given the level of public distaste for big banks these days however, American taxpayers would likely welcome any bonus taxes.

Despite the turmoil in the industry, the taxable bonus pool for the financial services industry is still expected to be about $30.4 billion this year, down from $32 billion in 2009, according to the New York State Division of Budget Estimates. In 2008, even as the markets were unraveling, that number was nearly $52 billion.

But with bankers' year-end bonuses steadily shifting from cash into stock options and company shares that vest over several years, it remains to be seen whether U.S. lawmakers would even have much to tax.

Last week, both Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) each awarded their respective CEOs bonuses in the form of restricted stock and options in an effort to tie employee pay to company performance and tame public outrage over outsized compensation packages.

Bankers will ultimately pay some sort of tax on shares and options earned last year, but that could be years from now, well after many of these one-time bonus proposals would have expired, said Bob Scharin, senior tax analyst in Thomson Reuters tax and accounting business.

"Obviously if they get cash, that is taxable right away," he said. "If they get stock, the general rule is they don't owe taxes until the restriction lapses."

Most policy experts characterize the latest round of bonus tax talk as nothing more than lip service by lawmakers who are nervous about proving their worth to constituents ahead of this year's mid-term elections.

After all, there is probably nothing more politically favorable these days than expressing outrage about Wall Street, said Douglas Elliott, a business and public policy fellow at the Brookings Institution, a liberal think tank.

"There is a lot of political benefit to attacking the banks, but the forces are aligned strongly enough against a bill passing," he said.  To top of page

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