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 Anyone who has paid a 90% tax in the United States is both quite old and quite rich – under the 1954 code, repealed in 1964, you had to be earning over $200,000 to pay tax at 90%, real money in those days, equivalent to over $1.5 million now.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

“It’s the economy, stupid.”

And it was economic worries that were on the minds of most voters who entered the polling booths yesterday. Those on low-incomes had recently been hit by the scrapping of the 10p tax rate. Those better off have the memories of Brown’s stealth taxes. And, of course, the ever-present credit crunch is making all of us nervous.

Where now for Gordon Brown? If he leads Labour into the next general election, Labour will lose. That certainly seems to be the opinion of many in Brown’s own party.

Call me a conspiracy theorist, but I reckon Labour backbenchers deliberately bided their time on the 10p tax issue. Brown announced it last year in his final Budget as Chancellor. But it was only once it came into force — conveniently one month before elections — that the rebels kicked up a stink.

Few MPs in marginal seats are looking forward to fighting an election under the Flag of Gordon. They know that the struggling economy will give opposition parties some priceless ammunition over the next couple of years. Brown can’t really duck those bullets — he was Chancellor for ten years.

Expect further dissention in the Labour ranks. In fact, the only people who stand to benefit from Brown’s continued premiership are the Conservatives. If they’re clever they’ll keep the pressure on Brown moderate enough that he stays on.

But if he wants his party to stand a chance of retaining power, he won’t. The only reason he might stick around is if he’s extremely stubborn.

Oh.

Who will build those 3 million houses?

The Government has grand plans to build 3 million new homes by 2020. Trouble is, who’s going to build them? And if anyone does want to, will they be allowed to?

Today we read that private housing orders during the first quarter of the year were 29% down on those in the same period last year. The construction industry, as everybody knows, is in a slump. Homebuilders are building fewer houses.

I’ve said this before about mortgage lenders, but the same applies to homebuilders: private businesses make decisions based on what’s best for them. Not to hit some government target.

This is how it should be, of course. This is capitalism.

Recommended

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So at some point this policy will probably be quietly ditched. But as I’ve noted above, Gordon Brown may not be at the steering wheel for that particular U-turn.

What went wrong with Exxon?

On Tuesday Garry White wrote about the “earnings surprise” gravy train. Oil analysts are consistently underestimating the oil price, which means they also underestimate oil company profits.

This has created a great investment opportunity.

But yesterday ExxonMobil announced that its profits had missed consensus. That is to say, they were less than analysts expected.

So does that mean Garry was wrong?

“No,” says the man himself. “This says more about Exxon as a company than it does about the sector. This gravy train is still on the rails, my friend. Choo choo!”

Find out why a defiant Garry says: “There’s nothing wrong with my assessment!”

China’s next big investment…

As we all know, China’s growing rapidly. But to achieve this, it needs raw materials.

And where better to get them than mineral-rich Africa?

“This deal will net the Chinese up to 10 million tonnes of copper, and 400,000 tonnes of cobalt,” says an excited Manraaj Singh. “Not to mention how much it could make investors who get in now!”

Find out where Manraaj believes the next multi-billion dollar Chinese investment bomb is about to land…