Amanda Ripley

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Why the Brain Craves a Tax on Banker Bonuses

9th Dec 2009 posted in General

U.K. Chancellor of the Exchequer Alistair Darling is right to impose a 50% tax on banker bonuses, as announced earlier today. I know, I know: It could lead to an exodus of “talent,” as everyone in the financial “talent” industry likes to tell us. (Although that is less likely if more countries sign up for such a tax, reducing the number of alternative options for banks in search of relocation.) And I know that clever banks will find a way to slither out of some of the taxes. I don’t care. Fairness matters. Even if we can’t get fairness, it’s important to make every effort. That’s how the human brain works, something the Obama administration doesn’t seem to understand.

The best explanation I have heard about the brain’s need for punishment came from social psychologist Jennifer Lerner, the head of Harvard University’s Decision Science Laboratory. We spoke last year for a story I was working on. The economy was imploding, and she predicted, right from the very beginning, that voters would not forgive Obama for the bailout unless and until they perceived a sense of justice:

People often care more about fairness than they do about financial outcomes. Anger and a desire for fairness and punishment [are] very human phenomena. I’ve yet to see a public leader addressing this desire. And there is, in my view, unlikely to be widespread support for these policies unless the anger and punishment is addressed.”

Since we spoke, the U.S. Congress considered a 90 percent tax on bonuses at companies that got more than $5 billion in aid. The measure died in the Senate after President Obama said the U.S. shouldn’t “govern out of anger” and AIG employees promised to repay their bonuses.

What happened instead? Well, Obama appointed Kenneth Feinberg to be the country’s pay czar, a nice idea that hasn’t yet produced any surge in fairness. Goldman Sachs, Morgan Stanley and JPMorgan Chase’s investment bank combined will hand out $29.7 billion in 2009 bonuses, up 60 percent from last year, according to Bloomberg, and since they repaid the government aid they received last year, those banks aren’t subject to Feinberg’s review.

So while Obama refuses to govern out of anger, the anger has not gone away. That’s not how anger works. A recent Washington Post poll suggests that, in the void, anger has found a new target—in Obama:

“Republicans and GOP-leaning independents are overwhelmingly negative about Obama and the Democratic Party more broadly, with nearly all dissatisfied with the administration’s policies and almost half saying they are “angry” about them. About three-quarters have a more basic complaint, saying Obama does not stand for “traditional American values.” More than eight in 10 say there is no chance they would support his reelection.”

Cut back to Prof. Lerner, who saw all this coming a year ago:

“The anger is not likely to go away without some feeling of it being resolved. The angrier people get, the more they will continue to blame. The problem is unlikely to die out on its own….Most policies in the United States are informed by an economic analysis that assumes people behave in order to maximize their monetary outcomes. That assumption is being increasingly eroded from this new field of decision finance….There is no council of psychological advisers in Washington, just a council of economic advisers.”

Granted, angry Republicans are unlikely to be overjoyed by a new tax on rich people. But I think it could be one (of several) steps that would ameliorate the ambient anger with an injection of fairness. There is a sense among many Americans that Washington is allowing its own institutions and certain industries to take risks and spend money without consequences or limit. And there is some truth to it. I say, write a smart tax to hold the bankers accountable and give our brains a sense of fairness—in a civilized, reasoned fashion. (Also, we should totally start up a Council of Psychological Advisers!)