The bank-recapitalization supertax

By Felix Salmon
December 10, 2009
Peter Thal Larsen has an interesting take on the numbers associated with the UK banker supertax, and how a 50% tax on a £6 billion bonus pool can generate only £550 million in revenue:

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My colleague Peter Thal Larsen has an interesting take on the numbers associated with the UK banker supertax, and how a 50% tax on a £6 billion bonus pool can generate only £550 million in revenue:

The government’s estimate assumes that banks will reduce their bonuses. It is also a net figure – it takes into account that the government will collect less income tax because the bankers will receive lower bonuses.

So if you assume the bonus pool covered by the tax is £3 billion, then £1 billion of that goes to the government. But because bankers aren’t paying tax on that £1bn, the government also “loses” £400m. Which gives you a net figure of £600m – close to the government’s estimate.

Now, it’s not certain that the bonus pool would have been £6 billion had the tax not been imposed. But if that’s an accurate figure, and if Peter’s numbers are also right, then total bonuses paid to UK bankers will fall, as a result of this tax, from £6 billion to just £2 billion — a massive 67% drop.

What’s happening to the other £4 billion? £1 billion is going to Treasury, which gives the government a net revenue increase of £600 million. But the other £3 billion is being kept by the banks, and I can promise you that they’re not going to give it away in dividends. Instead, it will go straight into retained earnings — the purest and strongest form of capital there is. It might even help prompt the banks to lend more.

I also like the idea that fully 1/3 of the UK bonus pool will be spent on bonuses of less than £25,000. You can be sure that’s not going to be true in the US. The more I look at this scheme, the more I think that it would be great if we tried something similar here.

Update: Peter’s own take on the supertax is here.

Update 2: Peter clarifies: it turns out he reckons fully £3 billion of the £6 billion bonus pool is exempt from the tax, £2 billion because it’s in the form of bonuses under £25,000, and another £1 billion because it’s in the form of guaranteed bonuses, which are exempt.

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Felix, just to clarify my maths on this: the best estimate for the City of London bonus pool is £6 billion.

Of this, maybe £2 billion falls under the £25,000 tax threshold and so will get paid out as normal. Another chunk – maybe £1 billion – is in the form of guaranteed bonuses that are exempt from the tax. So half the £6 billion will get paid out as before.

It is the remaining £3 billion that is subject to the supertax. The Treasury’s estimate appears to assume that the banks will cut this by a third, to £2 billion. But because the supertax on this will cost them £1 billion, the net cost for the banks is the same. It’s just that the bankers get less, and the government gets more.

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