The dangers of populism

During the last couple of weeks, our country seems to have fallen victim to an out-of-control populist bonfire. In lieu of the now infamous AIG bonus conundrum, every Washington politician equipped with a tongue, seized the opportunity to mercilessly pillory the AIG employees who were beneficiaries of these bonuses. Even Barack Obama proved vulnerable to the temptation by decrying AIG's "recklessness and greed."

But the populist fires turned into an all-out lynch mob when Obama issued his intransigent vow to "pursue every single legal avenue" in order to prevent the employees from receiving their bonuses. On cue, Congress hastily pushed through a 90 percent tax on the bonuses of employees earning more than $250,000 in annual salary (and working at institutions that had received more than $5 million in TARP funds).

The bonus-confiscation law is absurd and destructive on many levels. First, the absurdity. The tax is an ex post facto tax, which means that, not only bonuses awarded this year, but also ones from years earlier, are subject to the stratospheric rate.

Therefore, people who have already invested their money are left scrambling to come up with the funds to pay back the government. It is important as well to keep in mind that Wall Street's bonus culture is drastically different from the rest of the country.

The initial anger about Wall Street bonuses arose from a report earlier this year by the New York Comptroller General in which it was identified that $18 billion went toward bonuses in New York's financial industry in 2008. This number taken alone might seem ludicrous and over-inflated, but it only tells part of the story. Equally relevant is the fact that this bonus pool fell by 30 percent in 2008 from its 2007 high.

Also, these bonuses were not just for greedy, fat-cat CEOs, but rather, comprised the entire industry (from the lowest-level to the highest-level workers). On Wall Street, the primary method of compensation is not through annual salary. Employees receive most of their benefits for work through yearly bonuses.

Still not convinced? Consider the destructive consequences. The economic repercussions of this populist-fueled tax are potentially devastating. Our economy will actually suffer from its passage. The tax, in essence, shows that business contracts in America are no longer unconditionally respected. The sanctity of such contracts has always been one of America's greatest competitive strengths in the global business environment -- providing a nice counterpoint to our high corporate tax rates and litigious culture.

Worse yet are the negative incentives the tax creates. Jonathan Clements, an employee at Citigroup who will be affected by the tax, crunched the numbers regarding the disincentive to work he faces from its passage. He rightly points out that he and any employee at one of these institutions has zero impetus to work once their yearly income reaches $250,000. Clements reveals that his income will reach this level in October of this year. For every dollar he earns beyond that threshold, his bonus will be taxed 90 percent (so each additional earned dollar leads to a 90-cent reduction in his bonus - resulting in a net gain of 10 cents on the dollar). To avoid this, he plans to ask Citi for an unpaid sabbatical for the rest of the year.

Thus it can be seen that this new tax law will encourage much of Wall Street to stop working entirely once they reach $250,000 for the year. In such economically turbulent times, we need Wall Street's best and brightest to be working hard and to have a real reason to do so. Like it or not, our economy will never turn around without their efforts.

Most importantly, the tax creates yet another point of contention between Washington and Wall Street. This is problematic because each side needs the other right now (e.g. cooperation over TARP funds, Geithner's newest asset plan which relies heavily on private sector participation and general investor confidence in governmental policy, etc.).

Can the schism be mended? If so, it starts with real leadership from the top. Obama can no longer afford to be a sideline critic like the rest of his populist brethren on Capitol Hill. He should know as well as anyone that our country -- and the success of his presidency -- depends in large part on the timely rebound of Wall Street.

Contact reporter Jarrett Dieterle at jarrett.dieterle@richmond.edu