12/16/2008 05:12 am ET Updated May 25, 2011

A Wall Street Windfall Profits Tax

Until oil prices dramatically dropped in recent months, there was a lot of talk in Washington about once again imposing a windfall profits tax on oil companies similar to the windfall profits tax that was imposed in 1980. President Carter had then lobbied for the tax on the grounds that the oil companies would "reap huge and undeserved windfall profits" due to the sharp increase in oil prices brought on by the OPEC embargo. The tax was imposed on the difference between the market price of oil and a statutory base price and, while the rate of tax depended on a number of factors, it generally ranged between 50 - 70%.

If Congress really wants to tax undeserved profits during the current economic melt-down, however, it should be looking at the finance industry. It is the greed, recklessness and irresponsibility of that industry that has caused our economic turmoil, exploding bail-out costs, rising unemployment and ballooning deficits. Why not tax the undeserved bonuses, severance packages, and capital-gain taxed carried interests of CEOs, hedge fund managers and the other masters of the universe who exploited deregulation and the good-old-boy "you scratch my back and I will scratch yours" milieu of the finance industry and reaped obscene amounts of undeserved profits?

For example, E. Stanley O'Neil, former CEO of Merrill Lynch and a poster boy for a windfall profits tax, led Merrill Lynch into substantial investments in the mortgage industry, including high-risk mortgages. When the mortgage industry came crashing down, Merrill Lynch was on the verge of collapse before being acquired by Bank of America. Nevertheless, O'Neil walked away with a severance package of $160 million on top of the $70 million he had made during his four year term as CEO. In other words, he received $230 million for a reckless strategy that failed and resulted in the takeover of his company. Would anyone other than O'Neil and his family seriously argue that he deserved that amount of compensation?

And how about hedge fund managers. They generally get 20% or so of the profits on funds they manage, which they pay only capital gains tax on. In other words, while most of we working stiffs pay ordinary income tax on our wages, they pay only 15% capital gains tax rates on their compensation, even while their risky investment strategies contributed to the collapse of our economy. Why not impose a windfall profits tax on their excess profits?

The Wall Street Windfall Profits Tax could tax only those profits that exceed a base compensation that Congress thinks is appropriate for corporate titans. Even if Congress set the base level at an amount that far exceeds what most Americans will make in a lifetime, the tax would still capture billions of dollars of excess profits. Congress should also evaluate the constitutionality of making the Wall Street Windfall Profits Tax retroactive to all profits earned in 2008 and earlier so that excess profits received this year and in earlier years would be taxed.

Not only would a Wall Street Windfall Profits Tax help raise critical government revenues, it would insert a small modicum of fairness in the system: Main Street would know that at least those who made the most obscene amounts of undeserved profits from their greedy, reckless and irresponsible conduct that is now causing global panic would not keep all of their undeserved windfalls.