The EU Plan to Tax Bonuses

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Dec 11, 2009 9:52 am

An irreverent Wall Street Blog
by Bill Singer
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The EU's Tax-And-Spend Plan: Noah's Umbrella
Written: December 11, 2009

God did not
instruct Noah to build an umbrella.

However, an
umbrella is just what the European Union (EU) seems intent on building in
response to the next global financial storm. 
In response to the devastation caused by the Great Recession and its
aftershocks, the EU is set to call for a global financial transaction levy. 
Such a measure may also be added to calls for taxes on bankers’
bonuses, such as Great Britain’s proposal to take back 50% of such bonuses
in excess of about US$40,000.   

caused much of the present carnage, there seems some fairness in asking the
world’s banks and brokerage firms to chip in their fair share towards the
rescue effort. Nonetheless, my concern isn’t so much with the levy proposed
by the EU but with the use of the funds so derived. 
Europe has a penchant for doing things on a grand scale amid much
high-minded assurances – but before we accept the Old World’s wisdom too
blindly, we should recall that such proffered idealism comes from nations that
started disastrous wars, sat idly by in the face of ethnic cleansing, and gave
the world centuries of brutal colonialization.

In my
September 2009 Forbes column: We
Need a Wall Street Fraud Fund, , 
I stated:

proposal I urge is the creation of a Fraud Fund through which defrauded
investors would be able to obtain full payment for their losses. And please
note that I'm limiting this fund to repaying victims of fraud, not those who
made foolish bets or lost money after taking a calculated risk. Victims of
fraud--particularly fraud that should have been detected earlier by Wall
Street's regulators--deserve more from Wall Street than its pity.

I would
create a multibillion-dollar restitution fund for all Wall Street victims of
proven fraud. You could impose a fee on all trades and public offerings, and
add an annual fee on all Wall Street firms. As to Sen. Schumer's proposal, I
would redirect it. I would take all of the SEC funding he has included in his
proposal and earmark those dollars for the Fraud Fund. After all, what would
most defrauded investors prefer? Would they prefer knowing that the SEC has
spent its fines and fees on expanding its ranks or that those same dollars are
now the ultimate guarantor of America's financial markets? I think restitution
will trump lousy regulation every day.

As such, my
initial concern about the EU’s proposal is that the collected funds will be
earmarked for government (and international organization’s) coffers – and
will likely be foolishly spent on White Papers, blue-ribbon panels, seminars,
and, worse, will inevitably serve as payoffs to cronies and corrupt officials.
Sadly, this is an international affliction. 
As I noted in my Forbes

more dollars into the hands of incompetent cronies and clueless regulators
fuels corruption and never solves the underlying problems. This mess was never
about funding. It was about incompetency. Putting more incompetents on the
payroll doesn't engender solutions. Funding more dubious regulatory
initiatives doesn't accomplish reform.

Sadly, I have no confidence whatsoever that the EU will spend wisely the funds
it collects from a Tobin Tax or a financial transaction fee or a punitive
Bonus tax.  To the contrary, such
revenues will likely be nothing more substantive than a boondoggle for corrupt

Mr. Sarkozy
who is a leading proponent of the EU plan, flails against his whipping boy of
the so-called Anglo-Saxon financial history. 
He makes some valid points, but, on the whole, his thesis is a tad
strained, if not demagogic.  On the
other hand, let me remind Mr. Sarkozy of his own nation’s dubious past: When
the next financial crisis comes, and it will, those proposed EU taxes will
likely have been spent on building the economic equivalent of a Maginot Line,
whose defenses will prove illusory and quickly overwhelmed. 

Amassing an
international rainy-day fund administered by bureaucrats and economists will
result in no more efficient response than that witnessed during Hurricane
Katrina.  A one-time levy to fund
an international Fraud Fund, along the lines of the one that I proposed in my
Forbes column, would seem to be a far more prudent first step than what I see
coming from the EU.  Let careless
and foolish financial institutions fail BUT
ensure that restitution is readily available to compensate all victims of
any provable fraud.  

Singer of and
is a veteran regulatory lawyer; an outspoken critic of ineffective regulation;
and a staunch advocate for the rights of smaller firms, individual registered
persons and defrauded investors. Bill regularly appears as a commentator on
television and radio, and is frequently quoted in the press.