Bailouts and the optimal taxation of bonus pay

Little undermines the case for a market economy more than the perception that there is injustice in the rewards that it generates. In that sense, the recent financial crisis is a body blow, and has spawned a series of noisy but so far largely ineffectual campaigns for radical change from the Left (e.g., the Occupy Wall Street movement). But the greatest clamor for reform should come from those who support the market system. When push came to shove, it was the government that came to the rescue of financial institutions and public money that proved to be the cornerstone of the financial system. And there is a more than respectable case that a sizeable transfer of resources from public to private hands have enriched workers in the financial sector at the expense of citizens at large. And this is put into sharp relief by the observation that a good deal of the increase in inequality that has been seen in recent years is due to bonus pay in the financial sector and beyond