Half Back

The New York Times is reporting today that the beleaguered multinational insurance company, A.I.G., which has already received 175 billion dollars of bail out money, will continue with its pre-bail out plan of paying its various executives a total of 165 million dollars in bonus. While nobody seems to like this (except, of course, the bonus receivers), the problem is that, despite the fact that the federal government now owns about 80% of the company, A.I.G. is contractually obligated to pay out the money.

No doubt this is going to produce a lot of righteous indignation, but what it will not produce is any real discussion about one relatively simple means of preventing speculators from a defunct financial company taking billions of federal dollars and then running off with fat bonuses--sharply raise the marginal income tax rate on the highest earners.

Given that the discussion around taxes for the last twenty five years or so has been exclusively devoted to the problem of lowering taxes, the idea of raising them is not going to get a lot of immediate traction. But let me start by putting our current situation into some historical perspective. First, some quick data on American income tax rates for the highest earners. The table present here shows marginal income tax rate for the top income tax bracket for selected years. While the year selection may look random, I chose them on purpose to point out an important feature of earlier income tax system: in times of crisis (like World War I, the Great Depression, and World War II) the marginal income tax for top earners was increased sharply and a new category of "super rich" was created in the tax code.


Now, notice what happens when we get to the most recent three years of American tax history: the top marginal rate has remain unchanged, and the top bracket has barely budged. In every other major crisis, whether economic or world war, the country has asked its wealthiest individuals to pitch in.

For some reason, however, in the current crisis, we dare not raise the possibility of taxing the rich--instead we just sit around growing frustrated and indignant as billions of dollars are poured into failed business, who then turn around and hand that money their under-performing employees.

The defenders of the bonuses say that they have to pay them, that they are simply victims of the marketplace, because if firms don't pay out bonuses they wont be able to retain top talent. But here, again, is why raising the top marginal tax rate is such a good solution: since everybody getting a bonus would pay the same tax rate on that bonus, there would be no competitive advantage or disadvantage given to any one company in terms of retaining talent.

So what would be a good tax rate? Well, in my world I would like to see those numbers that we saw around World War II, how about 94% for people making over one million dollars a year? Too socialistic? Okay, then how about a return to those free-wheeling days of the early Reagan administration, when people earning just over $85,000 a year faced a 50% marginal tax rate? Adjust that for inflation, and let's conservatively call that 50% on anything over $200,000.

That would be a good start.