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America's $700 bn plan to increase tax for participating banks

Source: PTI
October 13, 2008 17:06 IST
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The US administration's mega $700 billion bailout package could result in higher tax bills for the banks participating in the programme due to a provision aimed at cutting down outsized executive pay packages, says a media report.

Quoting Wall Street bankers and compensation experts, UK's Financial Times said the new rules, coupled with other measures to reduce executive pay, could dissuade companies from taking part in the rescue plan.

"Banks participating in the US government's $700-billion bailout package could suffer a significant rise in their tax bill because of a little-noticed provision designed to curb outsized executive pay," the newspaper said in a report published online on Sunday.

Under the new provision, companies that sell more than $300 million in bad assets to the US government would lose the tax breaks they receive on the multi-million dollar bonuses paid to their executives.

Further, the bailout bill reduces the amount of an executive's salary that is tax-deductible from the current $1 million to $500,000, the report said.

"The change could increase companies expenses and reduce their earnings by millions of dollars and prevent executives from collecting their large remuneration packages for as long as the company participates in the programme," it said.

The report added that the legislation states that pay restrictions, which apply to top executives but not to other employees such as traders, remain valid even if the executive resigns or retires.

"This means the rules would apply to deferred compensation, such as the large pension payments and severance packages often awarded to outgoing executives," the report noted.

The provisions are part of measures designed to defuse criticism that taxpayers money is being used to bailout millionaires on Wall Street, a key concern of several Washington politicians, especially among the Democratic ranks.

Quoting Wall Street executives, Financial Times said that the rules are misguided as they will burden companies, rather than their executives, with millions of dollars in higher tax payments.

"It is a crazy measure because instead of punishing Wall Street executives, it takes out on shareholders, who will end up paying for this... "It is a progressive tax on companies that pay executives more than $500,000," the report noted quoting a senior banker.

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