Who should pay to bailout Wall Street? If we put aside the politics of what is happening and just look at the simple question of fundamental fairness, the most obvious conclusion is that those who benefited most from the financial sector’s irresponsible behavior — and those who stand to be rescued by any "bailout" — are exactly the folks who should now be asked to pay the costs of that bailout.

And yet virtually no one is suggesting the most obvious condition for whatever bailout our financial wizards are demanding:

The most important condition to put on any bailout proposal is to impose a tax surcharge on the incomes of the wealthiest Americans to pay the bailout’s cost.

Moreover, we should leave that tax surcharge in place for as long as it takes to recoup the total bailout costs, which are still undetermined. If, for example, Paulson gets another $700 billion, to add to the $800 billion increase in the debt limit Congress gave him last July, we’re up to $1.5 trillion that needs to be recovered.

Tying the surtax to full bailout repayment will provide a strong incentive for those who don’t like taxes to insist on bailout approaches that actually work and minimize taxpayer exposure. They’ll insist on effective oversight and accountability for any bailout approaches and actions, as opposed to the Bush/Paulson approach of giving Paulson a blank check to spend at least $700 billion with no accountability whatsoever.

I don’t dismiss the need for other measures, but it’s not clear why some of the ideas being discussed are as important to attach now as conditions on any bailout. More on that next.

For example, some Democrats want limits on CEO compensation and "golden parachutes." That’s fine; people are angry and it may be good politics. But the amounts involved are trivial in comparison with the offenses. Getting CEO compensation realigned with the correct incentives for responsible management of the financial system is worthwhile, but there will still be plenty of support for that next year, without spending political capital now.

It’s possible Paulson and Bernanke are misleading Congress about the crisis. But if we assume there is an immediate and severe credit/trust crisis that demands quick action, there are several issues that should be resolved immediately:

1. Will the proposed bailout plan work? Where is a coherent defense of the mechanism Paulson proposed? Major questions about how he would decide how much to pay to purchase the "toxic" assets and how that value would achieve the desired result haven’t been answered in public. There’s doubt that a "reverse auction" can function without a standardized commodity, which doesn’t exist. And there’s doubt that simply removing the toxic assets from the balance sheets makes the affected firms any more solvent, unless the plan is to just give them money. [Update: And if the point is to pump capital into these firms, Krugman asks, where's our equity share? Dodd agrees.]

2. How should the approach be tested? Congress may need to authorize Paulson to start acting now, but it needs a near-term accountability check with an off-ramp if it doesn’t seem to be working. Why Congress needs to commit the full $700 billion with no strings now has not been explained.

3. Where’s the rescue plan for homeowners? That was supposed to happen in the July legislation, but even the limited funding for that effort was tied to fees from Frannie/Freddie — now controlled/owned by the government. We need guaranteed funding and a designated institution — see, e.g., Ian Welsh’s post or others — to start getting that relief into the system.

4. Who will pay for the cost, and when? The massive hit on our national debt could effectively cripple any efforts to deal with any other national problem, from health care, to industry retooling, to energy transformation. The fairest answer is a tax surcharge on the super wealthy to cover the bailout. Can anyone think of a sound economic or fairness reason for not demanding this?

It’s important to recall that in other times of national crisis — WWII — we raised taxes to pay for what needed to be done. Reagan raised taxes to avoid unacceptable deficits, and so did Bush 41, despite promising not to. It’s George Bush’s turn to raise taxes to pay for the costs he and his irresponsible policies have imposed on all of us. Let him sign the tax bill to pay for his mess; he’s earned it.

5. Finally, what else does the economy need now? The Democrats have a list, including another stimulus package with unemployment relief, infrastructure funding, better financial regulation, and so on. These are essential for the long run; but the chances of getting these measures should improve after the election.