UK bonus tax both cynical and justified

December 10, 2009

(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.


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.)


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Nail. Head. Hit.

Posted by SpanishBill | Report as abusive

This is sheer ignorance. Firstly, money has not been gifted to banks, it has been loaned and invested, so the State will receive a return.

Secondly, the “bonus tax” is not a tax on income of recipients, it is a levy on banks. This will supposedly impose a disincentive on banks to give bonuses, but in reality the primary driver to giving bonuses is a commercial one; if one bank doesn’t give such bonuses, a competitor bank will, so this will not affect payment of bonuses.

Anyway, there is no logical correlation between a levy on bonuses and risky behaviour. The problem is a regulatory one.

The Bush administration deregulated the financial sector in USA, where all these junk instruments were synthesized, whilst in Europe, where banks were allowed to buy them and book them on their balance sheets at unrealistic values and ratings, regulators were asleep on the job.

USA is taking steps to rectify financial regulation; I don’t see UK doing the same.

All these banks are public companies and the issue of executive compensation is a regulatory issue. In no other industry, e.g. steel industry or transport, would directors and executives be allowed to take, for example, 25% of corporate profits as bonuses. The risk-reward equation in the banking sector is perverse and defies the standards set in all other sectors.

The fact is, bank directors and “deal makers” are not risking their own capital; they are playing with other people’s money. When they lose a bet, they don’t have to put their hand in their pockets. In fact, they still pay themselves bonuses! Bankers get away with it because they directly control capital, they have crooked politicians in their pockets and they’re all part of the funny handshake mob.

It is scandalous and it flies in the face of standards set in other sectors, but again, it comes down to regulation.

However, regulation is a global activity, so if an institution in one country won’t pay attractive bonuses to a talented trader, a competing institution in another city may do so. Therefore regulation must be tightened in all the major international financial centres in a concerted fashion.

Regulation does not stifle the free market; on the contrary, it allows a free and orderly market to flourish.

The key is to persuade politicians to put this regulation in place, while they are in power, before they retire from politics and become consultants to banks.

Posted by Lexicon | Report as abusive

You are quite right, but talking of cynicism wait to see how those beneficiaries of the best education on which money could be squandered devise their ‘avoision’ tactics.

Back in the 1970’s, an era of pay restraint policy, banks created bogus managerial rankings and large overt pay rises were substituted by ‘promotion’ – with accompanying large pay rises. The authorities didn’t feel a thing.

In politics something has to be ‘seen to be done’ but in this case placating the mob is likely to prove ineffectual.

We still have not seen any concrete proposals that would expose the bankers themselves (as individuals) to the same degree of risk to which they commit their employers’ shareholders. Would they (the bankers) voluntarily risk their own capital in the same way? They wouldn’t be so daft.

Posted by EdMartin | Report as abusive

I don`t really care about any of those sell side terminal jockeys and treasury carousel players who caper and fret around at the four UK majors, because let`s face it, they stole the money fair and square, so it`s shame on everyone else for providing them with the means and opportunity.
No, these dolt heads don`t perturb me in the least; but what does send me into an apoplectic ranting frenzy is the knee-jerk reaction of each and every Brit politico, no matter which party or persuasion, to attempt raising a new tax as the panacea for all ills and every occasion.
Come on people, can we not try just a teeny weeny bit harder?

Posted by Shortsqueeze | Report as abusive

Fad taxation never solves anything. There’s far too many bloody taxes as it is for any that ought to make sense to make sense to regular citizens. The fad ones just engender disregard for the whole point of taxation to begin with.

The feel-good tax at issue in this case doesn’t even really discourage questionable practices it is presumed to penalize. All it does is add another brick in the wall between helping people in general learn sensible ways of making a living, keeping them more likely than not hyper-aware of “pretty good ploys to avoid paying taxes”.

Being born in Britain these days ought to come with a free god-accountant. Not being a banker, I have to pay for mine. After taxes, that is.

Posted by HBC | Report as abusive