Bonus Tax: Is It the Right Thing to Do?

In January of 1914, Henry Ford did something that the New York Times reported as “one of the most remarkable business moves of his entire remarkable career.” At that time, he announced that he would be giving the employees of his company $10 million of the profits of his 1914 business, with payments to be made semi-monthly, to 26,000 employees. In addition, he announced that company policy would ensure that no employee was discharged except for cause, and even then given an opportunity to make good before being discharged. Finally, he guaranteed a minimum wage for each employee, unheard of at that time. The announcement by Mr. Ford was so “remarkable” that it made front-page news. It was a demonstration, on the part of a captain of industry, that even corporations have an obligation to ensure social justice, that no single entity (or set of individuals) has a right to unjust enrichment at the expense of the rest of society.

Fast forward to 2010, when the same newspaper has reported on 2009 financial institution bonuses in the six-, seven-, and even eight-figure range. The bonuses, which rival those of the “boom years” of the 1980s, are based on performance at the financial firms. For example, Goldman Sachs reported that it experienced one of the most profitable years in its 141-year history in 2009. The prosperity of these financial giants and their officers and top performers remains in sharp contrast to the state of the rest of the country in which unemployment remains high, and many more families are suffering under the burden of high mortgage payments, high taxes, and ever-increasing bills.

Despite the outrage expressed by the President and many others over the pay practices and continuing excesses of the financial institutions, there seems to be little legislative or executive support for the idea of a bonus tax. In July of 2009, a bonus tax was introduced in Congress and promptly went into extinction. The idea of a bonus tax was resurrected in December (after the British succeeded in enacting their own bonus tax) when many became aware that the financial institutions were still intent on distributing their bonuses in roughly the same amounts as they had in the past. The resurrected proposal, which would add a new Section 4999A to the Internal Revenue Code, would impose a 50 percent excise tax (a windfall profits tax) on certain compensation paid by Troubled Asset Relief Program (TARP) recipients in excess of $50,000 in the nature of bonuses during 2010 to their employees or former employees. Revenues generated through the tax would fund a new direct lending program administered by the Small Business Administration (SBA).

In the current political environment, with the financial institutions still occupying a position of strong influence in many political arenas, it hardly seems likely that a bonus tax would succeed absent the support of the financial community. Despite many valid legal arguments that the financial institutions may have against a bonus tax, it seems that the strongest argument for their support may not be a matter of law, but a matter of justice.

Taking a page from Mr. Ford’s book, the financial firms can show an awareness of their social responsibility by backing a bonus tax. There is a biblical commentary that for those to whom much has been given, much is required. In this case, very much (including government assistance) has been given to (though, admittedly, repaid by) the financial institutions. Those at the upper end of the economic spectrum need to have a sense that their prosperity has come only through the efforts of many and on the backs of the taxpayers, not only as a result of their own efforts. A financial institution does not exist on its own; without the sustenance provided by the taxpayer monies, the financial institutions would hardly even be in a position to distribute the six-, seven-, and even eight-figure bonuses that they are handing out. A sense of responsible fiscal stewardship would dictate that the financial institutions recognize the importance of the taxpayers to their operations, and give back some of what has been given to them.