UK bonus tax will do more harm than good
A windfall tax should meet two tests. It should raise a meaningful amount of cash, and be clearly viewed as a one-off. The UK government’s new levy – 50pc of bank bonus pools for bonuses over £25,000 – fails on both counts.
True, banks and bankers have invited some sort of punishment. Governments and central banks committed trillions of dollars to help stabilize them after their reckless behavior helped cause the financial crisis. Huge compensation pools seem like rank ingratitude.
The windfall tax not only answers calls for social justice; it also encourages banks to change their ways. By targeting bonus pools, the government has given banks a hefty incentive to use their swollen profits to rebuild capital reserves or pay dividends. Banks that insist on paying out large bonuses – and incurring the tax charge – will face awkward questions from shareholders.
The government clearly expects banks will take the hint. It estimates the tax will raise just £550m – a long way short of 50pc of the £6bn that the City of London was expected to pay in bonuses this year, according to the Centre for Economics and Business Research.
Yet even this figure may be optimistic. Loopholes are hard to avoid when a complicated tax is drawn up in a hurry. Investment banks could follow the example of Barclays , the UK bank, by raising basic salaries with back-dated effect. Or they could choose to pay their most mobile bankers through foreign subsidiaries. Another possibility is to defer bonuses until April 2010, when the windfall tax expires.
Of course, waiting to pay out might not work. Some variation of the windfall tax could easily become permanent. But the sudden emergence of this tax further undermines London’s reputation for fiscal transparency and predictability.
Two years ago, the Chancellor of the Exchequer launched a poorly-planned attack on “non-domiciled” residents. Alistair Darling’s latest wheeze will merely reinforce the impression that the UK’s tax policy is driven by short-term political whims. The opposition Conservative party’s silence on the subject will do little to ease these concerns.