UK bonus tax both cynical and justified
(James Saft is a Reuters columnist. The opinions expressed are his own)
A cynical election maneuver it may well be, but Britain’s plan to impose a punitive tax on bonus payments is also reasonably well crafted and in broad terms justified.
Facing a monumental budget deficit and an election in months, British Chancellor Alistair Darling announced a plan to slap a 50 percent payroll tax, payable by banks, on their bonus payments in excess of 25,000 pounds to a given employee.
Banks can pay what they like to whom they like, but every pound a banker gets above the threshold means an additional 50 pence for the public purse. The tax will only raise about 550 million pounds, compared to a public sector borrowing requirement of 178 billion, and will expire in April, leaving delayed bonuses subject to a new higher 50 percent personal tax rate previously announced.
So, you can say it is politically motivated, that it is too small to matter and that it is subject to evasion, but these counsels of perfection ignore that it, in its own small way, will make British banks less risky, less liable to need government help and more likely to lend. It is also, given the past two years, something very like fair. Crucially it encourages banks to retain money to rebuild capital.
Banks within an insurance-based system with fiat money are inherently creatures of government; good banks outperform bad banks, the same goes for bankers, but all exist and profit because of forces greater than themselves.
There can be no denying that all banks in Britain benefited from government action to bail out the sector; it is patent that many would not have survived. It is further true that having been allowed to live and fight another day, all banks in Britain are now able to make better profits than they otherwise would because of the current alignment of government policy and the perception and reality of socialized insurance. This has all been done at great future cost to the British taxpayer.
So banks are in receipt of a subsidy. You can argue that the subsidy is good or bad policy but you cannot say it isn’t there.
DUBAI, ERR FRANKFURT, ERR ZURICH HERE WE COME
Banks with slender capital are fabulously profitable when times are good, but disastrously, for taxpayers particularly, liable to keel over when things turn sour. A policy which encourages banks to build up their capital rather than pay it out in bonuses has some big advantages. You can view the one-off tax as partial recompense for the bailout. Further, to the extent it encourages banks to build capital it will make them less liable to again become charges on the public purse.
Finally, it just might speed up the capital regeneration exercise that must happen before banks can again effectively play their role as capital intermediaries. Taken on its own terms, the big risk in the current bailout, not including inflation or a run on the pound, is that banks make themselves well by arbitraging short and long term interest rates but starve the economy of credit by lending mostly to the government, choosing in essence the safe, sure and slow way of capital formation. That leaves many in the rest of the economy without the credit they need to retool and invest.
Could it be that some of the money that otherwise would have gone out the door in bonus payments will end up being loaned out to businesses in the Midlands serving export markets? Restaurants in Mayfair and Ferrari dealerships will suffer, of course, but it’s not a bad rebalancing for an economy which has been dangerously dependent on financial services.
Many argue that the tax will make this rebalancing happen all too quickly; that banks will flee Britain for new homes where they are better treated. This is possible, but there is a dwindling list of candidates. Given recent ructions Dubai is less of a candidate, not to mention the fact that defaulting on debts can land you in jail. Frankfurt too seems unlikely to take things easy on banks and bankers. Perhaps this is an opportunity for Athens. More likely perhaps is New York, or better yet Washington, the true financial capital of the world and a place where taxing bonuses is still not discussed in polite society. The fact that the tax expires in just months also makes relocation in reaction less likely.
It is fair to say that this does little to address Britain’s fundamental problem of what services to cut and what meaningful new revenues to tap to address its fiscal horror show. Nor does it do anything to address the fundamental problems of too-big or too-interconnected to fail.
But, for a dreary December, it’s a start.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)