The Bonus Tax: The Redistribution of Both Wealth And Talent

There is an interesting post over at the Business Insider Clusterstock blog regarding the bonus tax bill that recently passed in the House and is now on its way to the Senate. The bill was written mainly in response to the recent AIG bonuses that Congress wrote into the previous 1000+ page bill that no one read (or had time to read). Apparently, some members of Congress have finally gotten around to reading the bill they passed - or at least their constitutes did - causing outrage, both real and opportunistic. The bonus tax would essentially apply a 90% tax rate to bonuses paid at firms which have taken over $5 billion from the Government TARP program. While I cannot really disagree with trying to spend bailout money wisely, attacking the bonuses in this way after the same body passed them just weeks before seems not only wrong, but reactionary. In addition, you have to wonder why Congress decided on the 90 percent number. If the bonuses are unacceptable, why not 100 percent? Is 10 percent OK for poor performance, while 20 percent is an outrage? Furthermore, why are only big companies affected? Is it just the size, or is there some other guiding principal? In case you are interested, the companies that reach the $5 billion bailout threshold and are potentially affected by the bill include some of the usual suspects, along with a few others who want to get out of the lineup as quickly as possible:

• AIG
• Bank of America
• Citigroup
• General Motors
• GMAC Financial Service
• Goldman Sachs
• JPMorgan Chase
• Merrill Lynch
• Morgan Stanley
• PNC Financial Services Group
• US Bancorp
• Wells Fargo
  

While it looks like the bill will fail in the Senate, since it seems to be unconstitutional (kind of a sticking point), it certainly gives you an idea of which companies are likely to be the targets of future hostility against wealth creation. It also gives you an idea why more and more companies and states are looking to pay back TARP money as quick as possible, and reject any future stimulus and TARP-type funding. Investors can certainly expect the companies on this list to have difficulty going forward as their best talent moves to companies not affected by any future legislation impacting companies on the government dole. Their competitors, on-the-the-hand, are going to have a field day snatching up talent that is trying to escape lower paying government wages, along with the restrictions placed on such businesses.

A few weeks ago in a post I made a comparison of how both baseball and the markets had a steroid problem, although with the markets the steroids were in the form of leverage, loose lending standards, poor risk management, complex derivative products, unrealistic valuations, and unethical behavior, among others. Another comparison is unfortunately coming to bear. As with baseball, as long as the markets and the government continue to focus more on the juicers, and less on the solutions for fixing the current problems, both will continue to suffer and fail to reach their objective - reminding us of the opportunity that the markets have for making our lives better. Even though daily 450 foot home runs are a thing of the past, hitting a natural home run is still a thing of beauty, and something to be encouraged, both on the field and in the markets.