UK bonus tax will do more harm than good

December 10, 2009

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.

4 comments

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If “UK bonus tax will do more harm than good,” did you, Mr. Larsen, write any articles on how the “creative accounting” and the “creative financial instruments of global destruction” leading to the recession would also do more harm than good? You were around during the run-up to this disaster, were you not? I just love it how people criticize the reaction, but not the actions that got us there. Maybe some people made too much money off the backs of others (stock market).

Posted by JeffreyGold | Report as abusive

The whole compensation scheme has to change, otherwise we will have another crisis a few years later.
It is much better for the government to help in benefits and compensation reform, rather than coming out with drastic measures that do more harm to the banking and finance sector.

Posted by scheng1 | Report as abusive

Peter ,I think you are absolutely correct, if we are lkooking it things from a purely rational point of view
.However,this issue is seen from more of an emotional or “gut” level in the wider public.What has happened with the banks has really offended the public’s sense of fairness.It just does not sit well with people that tax dollars were used a year or so ago to help persons who are now collecting bonuses equal to more than the yearly income of many working stiffs.then to add insult to injury the public is told that this is a fair reward for the exceptional ‘talent’ of these persons.It does seem that someone somewhere is having a laugh at the expense of the general public.The bankers have displayed incredible insensitivity and a reckless short-sighted as they have put the politicians in a quandry by their greed and selfishness.Witness Obama’s loss of support in the U.S. Aside from the misinformation surrounding the healthcare issue,it can be traced largely to the bank bailouts.The banking sector as a whole seems to have forgotten that we live in democratic societies and that the politicians have to and will respond to public sentiment.

Posted by MHB | Report as abusive

Peter ,I think you are absolutely correct, if we are looking it things from a purely rational point of view
.However,this issue is seen from more of an emotional or “gut” level in the wider public.What has happened with the banks has really offended the public’s sense of fairness.It just does not sit well with people that tax dollars were used a year or so ago to help persons who are now collecting bonuses equal to more than the yearly income of many working stiffs.Then, to add insult to injury ,the public is told that this is a fair reward for the exceptional ‘talent’ of these persons.i.e. The self same persons who help get us in this mess in the first place!It does seem that someone somewhere is having a laugh at the expense of the general public.The bankers have displayed incredible insensitivity and a reckless short-sightedness as they have put the politicians in a quandry by their greed and selfishness.Witness Obama’s loss of support in the U.S. Aside from the misinformation surrounding the healthcare issue,it can be traced largely to the bank bailouts.The banking sector as a whole seems to have forgotten that we live in democratic societies and that the politicians must respond to public sentiment in order to survive. The bankers are their own worst enemies!

Posted by MHB | Report as abusive