The Best Bonus Buster

Author: Dan Gerstein

Want to make Wall Street pay? Pass the Half Tax.

If there is one issue that can bring Democrats and Republicans together today, it is Wall Street pay. Both the left and the right have been howling with new heights of outrage since it was reported last week that the big financial firms that owe their existence to taxpayer bailouts are on track to make record payouts of $140 billion this year. And, sadly, neither side seems to have a clue about how to stop this insanity, other than to preen, posture and symbolically sic federal paymaster Kenneth Feinberg on the few worst examples.

That was surely evident from the mass display of impotent finger-wagging on the Sunday talk shows this weekend. Several top Obama aides and congressional barons strongly condemned the big banks for taking our tax dollars with one hand and giving millions of strapped Americans the fiduciary finger with the other. They repeatedly called Wall Street's conduct "offensive" but failed to offer any new sticks to back up their tough talk. The best they could do was cite Feinberg's exceedingly limited powers to restrict excessive payouts to the top executives of TARP recipients (which he used last week to slim part of Bank of America ( BAC - news - people ) CEO Ken Lewis' outlandish exit package).

More tellingly, when the rubber began to hit the legislative road last week during the House Financial Services Committee mark-up of its regulatory reform bill, the compensation issue was conspicuously missing; it will stay MIA when the mark-up wraps up Wednesday. Instead, the Committee is just going to roll into the bill the modest "say on pay" provisions the House already passed in July. These measures will start giving shareholders more power to block excessive payouts in the future (though not nearly as much as their sponsors claim). But most experts say they won't do a thing to prevent Wall Street from getting away with their indefensible bonus binge now.

This is a failure of imagination in Washington as much as leadership. Republicans are ideologically predisposed to rule out just about any public limits on harmful market habits and seem content to just throw rhetorical red meat to their tea party populists. Democrats, on the other hand, keep falling back on the same blunt policy instruments--most notably arbitrary caps on private pay--that even make many in the frustrated middle queasy and that are easy pickings for Wall Street lobbyists. The worst example of this was the poorly conceived bill the House passed in response to the AIG ( AIG - news - people ) bonus scandal, which was widely considered to be unconstitutional and died a quick and deserved death. (In a nod to that failure, The Wall Street Journal reported last week that Feinberg is now tussling with AIG's new leadership over another $243 million in retention bonuses.)

In the interest of filling this vacuum, and bringing some semblance of balance back to our economy, let me suggest a simple but change-making solution: the Half Tax.

Here's how it would work: 1) Take all those executives and traders who work for firms that got direct federal assistance (TARP or otherwise), and apply a 50% surtax to any additional income they get paid in 2009 above what they made in 2008 (bonus or otherwise); 2) Include equity payments as well as cash to capture all bonus outlays and tax them at their declared value this year; 3) Exempt any employees making below $250,000 (consistent with Obama's middle-class tax cutoff); and 4) Sunset the surtax in two to three years (when banks would no longer be freeloading off the bailouts).

To make sure this plan is as much about helping Main Street as it is checking Wall Street, all of the revenue raised would be locked into a new Housing and Unemployment Recovery Trust (HURT) fund. Those HURT dollars could only be used for two critical forms of middle-class assistance and economic stimulus: 1) subsidies to underwater homeowners who are at imminent risk of foreclosure; and 2) extension of unemployment benefits to people who have lost their job in this recession.

Here's the logic behind it: They owe us. Not as a matter of morality, but of equity. Most of these bankers and traders would not have their jobs, let alone their fat bonuses, without the intervention of the government that put trillions of our tax dollars at risk. We put up all the capital, we should get some of the upside; going 50-50 seems eminently reasonable, given our exposure as investors of last resort. That's also why the tax should apply only to income gains. The goal is not to punish or confiscate, but to begin restoring some accountability to our "heads we win, tails you lose" financial markets.