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Getting richer on Wall Street? The tax man hopes so

July 18, 2009|TOM PETRUNO

Odds are that your 401(k) account isn't nearly back to where it was before the markets collapsed last fall.

But for Goldman Sachs Group shareholders -- including many of the firm's employees -- it's now as if the meltdown never even happened.

With the banking titan's report this week of record second-quarter earnings, its stock rose above $150 a share, closing Friday at $156.84.

That recouped the last of its losses after the demise of Lehman Bros. on Sept. 14, 2008, which was the trigger for the global economic and market crashes.

How's that for justice? One of the biggest players in Wall Street's extended orgy of speculation that preceded the 2008-09 debacle is the first out of the valley.

But even as Goldman's $3.4-billion quarterly profit fueled another barrage of vitriol against the firm and the rich bonuses that will inevitably flow to its employees, there is a sad irony here: Goldman is giving America more millionaires, and more millionaires are exactly what revenue-hungry government needs.

One day before Goldman's earnings report, House Democratic leaders introduced their 1,000-page healthcare reform proposal. To help pay the cost of insuring the tens of millions of uninsured, the Democrats want to slap surtaxes on high-income earners -- including an additional 5.4% tax on adjusted gross income above $1 million for a married couple.

At the state level, the hunt for revenue has verged on desperation this year, as Californians know all too well. So far, seven cash-short states have boosted income tax rates to close budget gaps. New Jersey, the bedroom community for many Wall Street pros, added three new tax brackets for 2009, including a 10.75% marginal tax rate for incomes above $1 million.

Hawaii and Oregon both lifted their highest rates to 11%, topping California, which has a maximum rate of 10.55% on $1-million-plus incomes.

Of course, the idea of re-enriching the federally bailed-out financial class is abhorrent to much of the country, even if more of that wealth will come back to society through taxes.

Lawrence H. Summers, President Obama's chief economic advisor, said in a speech Friday that the administration wants the economy to become "less financial-engineering oriented" in terms of how its success is measured.

That may be a good long-term plan. But in the short run there's no faster route to generating wealth than via Wall Street, apart from a winning Lotto ticket.

The stock market's dramatic rebound in the second quarter, and the continuing improvement of conditions in the ravaged credit markets, helped power Goldman's big comeback. It handled more stock and bond trades for customers and also profited by trading with its own capital -- a specialty of the house.

In this case, what was good for Goldman was good for the rest of the nation too: Before business' mood could improve, stock prices had to show some faith in the future.

"The markets healed faster than a lot of people thought in the second quarter," said Brian Bethune, an economist at research firm IHS Global Insight. "This had to happen" as the set-up for the real economy's follow-through, he said.

Investor optimism resurged this week, driving the Dow Jones industrial average up 7.3% for the five days, to 8,743.94 on Friday -- just below the spring peak of 8,799 reached June 12.

For those who believe that higher income tax rates will be ruinous to the economy, stocks' rally in the face of the Democrats' surtax plan didn't send the desired message.

The Tax Foundation tried to rally the troops, noting that if Congress goes along with the surtax proposal, the combined top federal and state tax bracket would exceed 50% in 39 states.

Scott Hodge, the foundation's president in Washington, said that move would be "breathtaking" -- and he didn't mean it in a good way.

But after the wealth accumulation by the richest of the rich over the last two decades, while average workers' incomes lagged badly behind, it's hardly a surprise that Americans are in what Hodge concedes is a "redistributive" mood about income.

Though the rich garnered more, they also paid more in taxes, Hodge said. The foundation says the top 1% of income earners paid 40% of total federal income taxes in 2006 (the latest data available), up from 19% in 1980.

If nothing else, Hodge said, government should know by now that it's a mistake to depend more heavily on the often volatile incomes of the well-off, including small-business owners. California, with its extreme reliance on personal income taxes and capital gains for funding, stands as the best example of how not to structure a tax regime, Hodge said.

Larry Mishel, president of the Economic Policy Institute in Washington, sheds no tears for high-income earners facing bigger tax bills, asserting that a redistribution of income is overdue.

"We have a system that enriched the very rich," he said. "It doesn't work economically or morally."

But Mishel and others in his camp also have resurrected another tax idea that has been around for decades, and may be ripe for another hearing: a small tax, say 0.25%, on every financial trade.

Proponents say a transactions tax would serve two purposes: It would raise needed federal revenue and it would serve to discourage extremely short-term speculation in markets in favor of longer-term investing.

Historically, Wall Street has opposed a transactions tax on the ground that it would stifle financial creativity.

But given the mess that "creative" financiers have made of the markets, the public might be just fine with that sort of stifling.

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tom.petruno@latimes.com

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