Here Comes the Windfall Profit Tax !

We previously discussed the reaction to GS bonus — I thought it was much ado about nothing, you thought it was an outrage.

Well, it looks like the outrage camp is catching the attention of both the media and the politicos. Even the usually staid, anti-tax WSJ is discussing a “windfall tax” favorably:

“A windfall tax is blunt, arbitrary and something supporters of free markets usually instinctively avoid. Even so, following news that Goldman Sachs Group has already set aside a $16.7 billion bonus pool for 2009, the case for windfall taxes on banks that pay giant bonuses is becoming unanswerable.

This year’s bank profits are windfalls in the purest sense. They aren’t the due rewards for exceptional skill but gifts from taxpayers. Many banks are earning huge, risk-free profits borrowing from central banks at ultralow interest rates and lending back to governments at much-higher rates. If this giant, hidden subsidy was being used to support new lending, fair enough. Instead, it looks destined for bankers’ pockets. (emphasis added)

As much as so many people have recoiled over the size of the bonuses, there is one group that is thrilled with the big NY firms as they dole out $26 billion in bonus checks: State and city governments, and their friendly neighborhood tax collectors:

“Before the financial meltdown slammed bank earnings and the Standard & Poor’s 500 Index of U.S. stocks dropped 38 percent last year, Wall Street’s compensation and corporate profits provided 20 percent of New York state tax revenue and 9 percent of the city’s taxes. New York banks lost $42.6 billion in 2008 and shed 30,000 jobs, according to the city’s Office of Management and Budget . . .

Bonuses in 2008 fell 44 percent from the prior year, to $18.4 billion, said New York state Comptroller Thomas DiNapoli. The reduction cost the state $1 billion in personal income tax revenue and New York City $275 million, he said. State personal income tax collections in the current fiscal year’s first six months declined $4.4 billion, or 21.6 percent, from the same period a year earlier, DiNapoli’s September cash report said.”

One must think local retailers, Co-op sellers and Ferrari dealers must similarly be feeling a small sense of relief. A silver lining, to say the least . . .

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Previously:
Much Ado About Nothing $23B: Goldman Sachs Bonus (October 14th, 2009)
http://www.ritholtz.com/blog/2009/10/much-ado-about-nothing-23b-goldman-sachs-bonus/

Looking at Wall Street Pay (August 1st, 2009)
http://www.ritholtz.com/blog/2009/08/looking-at-wall-street-pay/

What’s Wrong With Billionaire Fund Managers? (April 16th, 2008)
http://www.ritholtz.com/blog/2008/04/whats-wrong-with-billionaire-fund-managers/

Sources:
Windfalls Show That Bonus Tax Makes Sense
Simon Nixon
WSJ, October 20, 2009
http://online.wsj.com/article/SB125598361150394821.html

Wall Street 40% Bonus Rise Feeds Spending on $43 Steak, Co-ops
Martin Z. Braun
Bloomberg, October 20, 2009
http://www.bloomberg.com/apps/news?pid=20601109&sid=a25cbLmExCXs