The U.S. House of Representatives voted Thursday to impose a tax rate of 90% on bonuses earned by wage earners of $250,000 or more who are working at banks that received more than $5 billion from the Troubled Assets Relief Program (TARP). The Senate is expected to vote this week on similar legislation, possibly extending the tax to institutions that have received more than $100 million under TARP.

OK, we get it guys: You don’t like American International Group Inc (AIG).

Still, unless you just like 90% tax rates (probably true of about half the House Democratic caucus), you are punishing the innocent along with the guilty. Banks like Wells Fargo & Co. (WFC) and U.S. Bancorp (USB) have received more than $5 billion from TARP, but have yet to record a net annual loss.

The Saga of a (Highly Taxed) British Banker

For those who think taxing the rich at 90% may seem like a good idea, I can give you some practical experience of what happens when you do. Anyone who has paid a 90% tax in the United States is both quite old and quite rich – under the 1954 code, repealed in 1964, you had to be earning over $200,000 to pay tax at 90%, real money in those days, equivalent to over $1.5 million now. However, in Britain, 90% income tax rates lasted until 1979, and kicked in at 20,000 pounds, about $150,000 today. I never quite made that much, being in my 20s then, but I was paying 75% marginally, and it made a HUGE difference to my lifestyle and to those of my fellow bankers.

So, apart from making me feel poor, what did the high marginal rate do for me, as a young merchant banker?

Well, for a start, there were none of these 90-hour weeks you hear about on Wall Street. What the hell would have been the point? We got to the office each morning around 9:45 – not 6 a.m. – and we left at 6 p.m. (5:15 was the “official” quitting time, but we wanted to appear as keen up-and-comers, and figured the extra 45 minutes each day was time well spent).

Our workday was over, but we weren’t exhausted: Every evening, in fact, I’d catch a bus to the British Museum Reading Room, which was open until 9 p.m., and get two-and-a-half hours of work done on my book about great conservatives in British history. Had the book been a best seller (it took me 25 years to find a publisher … although it did get wonderful reviews), the 90% tax rate might have been justified, I suppose, but modest sales was what I saw.

Then there was lunch. Don’t think now of the quick sandwich at the desk, or even the half-hour at the gym. When merchant bankers did lunch, they did it properly.  All banks had in-house dining rooms, where the food was of excellent quality and the wine was superb. You had to invite a client, of course, but there was no requirement that you ever actually did any business with that client, although usually one would spent five or 10 minutes over a very nice port, discussing the market – just in case.

Some of my colleagues found the wine so superb they were quite incapable of rational thought afterwards … but that’s why lunch started at 1 p.m., and not noon, so the firm got at least an hour or two out of them beforehand. Personally, I loved the haute cuisine, which is why I am the shape I am today – do you think I could sue?

The best lunches were the ones where I got Sir John Colville, one of our directors, to host – he had been Winston Churchill’s private secretary, and as soon as the main course was served and the wine poured, he would begin: “When Winston and I were at Casablanca …”

Lucky if you were back at your desk by 4.30 in the afternoon on those days, I can tell you – but it was worth it.

So if Congress wants to make bankers pay taxes at 90%, that’s what they’ll get: Lots of very good lunches, but not many deals. The bankers will be more dyspeptic, and the economy will be poorer, but what the hell: Civilized conversation and an in-depth knowledge of the better claret vintages will once again be the order of the day on Wall Street.

Why Not Spread the Pain?

It does, however, seem more than a little unfair to restrict the benefits of the 90% tax rate to bankers alone. We could, for example, extend it to members of the U.S. House of Representatives and the U.S. Senate. This wouldn’t be, heaven forbid, on the salaries they earn as congressman and senators – the American public needs their finest efforts during that period. Instead, this new tax rate would levied on the period up through 10 years after they retire from Congress, on the lobbying income they pick up as “beltway bandits.” And here it’s clearly a case of addition by subtraction: The less productivity we get from lobbyists, the better off the country will be.

You could also extend the 90% tax rate to U.S. Treasury Secretary Timothy F. Geithner: Why should he not get the full joy of paying the taxes he imposes (and there’ll be no forgetting about those tax payments this time around, Mr. Treasury Secretary!).

U.S. Federal Reserve Chairman Ben S. Bernanke could pay those higher taxes, too. And if that made him less eager to continue inflating the money supply after his current term ends in January 2010, well, everything has a downside!

Even President Barack Obama might enjoy them. Again, not on his presidential salary – but he’s such a magnificent speaker, and so young, that you have to believe he will break all records for speaking fees once he leaves the White House. Indeed, 90% of his post-presidential earnings for a decade-long stretch might even make a noticeable dent in the budget deficits he will leave us.

So there you have it – a look at what the world might be like with 90% tax rates. If Congress goes ahead and implements them, I have an obvious stock tip, too: Put your money in one of the new tax havens, where relatively low taxes attract investment and entrepreneurship from all over the world – including such global economic powerhouses as France or Sweden!

Source: Punitive Tax Rates of 90% Could Cause More Problems Than They Cure

The new president didn’t actually say much on the campaign trail, but he said it well. He invited Americans to dream, actually to fantasize, about an unreal world in which their government will care for them using its own unlimited supply of money – money that comes from some mysterious place that too few people have even thought about, much less understand.

Voters are said to have turned to the left, to liberal candidates, in part out of a desire to change the economy’s direction. Their choices at the polls are said to reflect their concern over the economy’s descent into recession, loss of jobs, and the collapse of their retirement accounts. These are legitimate and understandable concerns. Unfortunately, voters have not done the hard work of learning about and understanding basic economics. As a result, they have set themselves up for their predicament to worsen exponentially.

I think it’s safe to say that we don’t really expect politicians to keep their campaign promises. We can only hope that the new president will conveniently forget to raise taxes on capital gains and dividends, raise the top income tax rates, impose a windfall profits tax on oil production, maintain or raise high corporate tax rates, collect more social security taxes, mandate higher ethanol production, expand regulation, and add new entitlements, just to recall a few of the proposals bandied about during his campaign. We can’t all ride in the wagon. Someone has to pull it.

The presumption seems to be that government has a big job to do in cleaning up this mess and it will need more money to do so. Wrong! Government is still the problem. Obama has promised to help the Blue Dogs (fiscally conservative House Democrats) achieve fiscal discipline, including honoring the pay-as-you-go (“PayGo”) rule against adding to the budget deficit. There are only two ways to do that… need I say more?

There are limits to how much tax you can extract from the populace before you are faced with open revolt. While Obama’s tax increases are ostensibly imposed on the rich, the pain of those tax increases will also be felt by the poor. Moreover, there is no way that straightforward taxation will be enough. Instead, we can count on more of the surreptitious, insidious, and brutally regressive tax of inflation to fill the gap.

This should have been a contest focused on the real, underlying issue facing Americans and the world: will we choose more or less government? Instead, the contest was over more government or much more government. It appears voters chose the latter. They know something is wrong, but like a drunk taking “a hair of the dog that bit you” to ease the pain of a hangover, Americans are hoping to cure their ills with another dose of the same poison that made them ill.

I have heard the new president described as a fall guy. In a way it’s too bad that he may mean well but will probably preside over economic hardship that persists for many years. At first the continuing debacle will be blamed on George Bush and a Congress with enough minority influence to have thwarted the grand plans of a thin majority. Inevitably, however, the inherent character of government and politics will be apparent in this new administration as well. The nation’s chief executives and legislatures of both parties have shared in contributing to today’s economic meltdown all the way back to the creation of the central bank in 1913. The Obama administration is backed by a now stronger congressional majority that is very nearly filibuster proof and no longer needs to worry much about mustering the supermajority required to override a presidential veto. Those who sent Barack Obama to the White House are anxious to see their fantasies made manifest. They may be patient for a little while, but not for long.

Hillary Clinton ultimately did a great job of helping to boost Senator Obama into the White House. Some say she’s now a shoo-in for a White House appointment, but she at least professes to be happy to continue being the best senator from New York that she can be. Probably a wise move.

Barack Obama came to office with the promise to deliver “Change We Need,” but we know that, since Texas Congressman Ron Paul left the race, no one has had the cojones to actually discuss the change we really need.

I wish the new president well and hope he will, miraculously, do the right thing. In my heart, however, I know he cannot. Leveling with Americans would be political suicide. In their own way, the Obama administration and a cooperative legislature may pave the way for a truth-telling politician in the future – an honest, uncompromising man or woman whose message today would be ignored and drowned out, even by the fading echoes of election night euphoria.

Times they are a-changing faster and faster, it seems. Staying in the loop on current economic events, one snapshot at a time, is easy – with Casey’s Charts. This weekly glimpse of the big picture is absolutely free of charge; PLUS, get your limited-time FREE bonus report “The Crisis in Pictures.” Click here for more.

Source: The Times, They Are A-Changin’