Thursday, December 10, 2009

UK Bonus Tax Angers Bankers, Emboldens Foreign Governments

Yesterday's announcement by the UK government that it intended to levy a 50% tax on bankers' bonuses has taken the bonus discussion to a whole new level. For a while, it seemed as if we were stuck in a cycle of banks preparing to pay record bonuses (and somehow not being able to keep their traps shut about it, despite all the populist anger) and regulators and legislators responding by telling them that they were bad and greedy people. Other than the Pay Czar, who really only controlled pay for a select few and a few firms, nobody was willing to take a hard line. But a 50% windfall bonus tax? Alistair Darling has just put his foot down. And UK bankers are pissed!

Emboldened by the UK, France has stepped up to the plate and plans to impose a similar tax. Both France and the UK are pushing for an EU-wide windfall bonus tax, just to make things fair. While the US has yet to follow suit, the WSJ is hinting that some sort of similar restrictions might take place. In a front page story on comp, the WSJ claims that the Pay Czar is poised to enact much tougher rules for pay at companies receiving large amounts of government assistance. After capping salaries of top employees, he is moving on to the next tier and planning to impose $500,000 salary caps on hundreds of employees at the firms. He is expected to allow firms to pay more if they can show "good cause," but which managers are going to step up to the plate for their employees when their own pay is getting capped? We're talking about a bunch of greedy folks, aren't we?

Generally speaking, I am strongly opposed to windfall taxes. I don't think a government should pick and choose specific people or industries to penalize whenever they get angry about something and need to raise extra bucks. A few years back when oil companies were making a killing due to high oil prices, legislators in the US wanted to impose windfall taxes on oil companies. Fortunately, that never went anywhere. The key difference here is that banks have disproportionately profited from significant government subsidies that were enacted by governments around the world at a huge cost to taxpayers. To add insult to injury, the bailouts and subsidies were the result of recklessness, greed, excessive risk-taking, and a huge dose of stupidity that caused a massive bubble (for which bankers were highly rewarded for years,) followed by an extraordinary crash (during which bankers didn't have to give any of that money back.) Now banks are rushing to pay back TARP specifically so they can reward their employees again with large payouts, even though it isn't entirely clear whether some of the banks will be able to survive another downturn in the economy.

The UK bonus tax is aimed at the employer, not the employee, and only on bonuses above 25,000 pounds. Consequently, it provides a disincentive for the firms to pay out large individual bonuses as it will affect the capitalization of firms that pay out a large percentage of their revenues every year. The most likely outcome, assuming that a similar tax is enacted in most global banking centers, will be less of a catastrophe than predicted by the banking industry. The tax is only for one year so firms are unlikely to move their headquarters to more tax-friendly locales in far off places, particularly if every government is doing the same thing. Pay will probably be deferred, and certainly some firms firms will find other clever ways around the restrictions. A few angry bankers might leave for hedge funds. But mostly, there will be some grumbling from those affected by the tax (in the UK, we're talking about roughly 20,000 bankers according to the Treasury) and probably predictions of the apocalypse from the opinion section of the Wall Street Journal. But we'll be back to business as usual in a matter of months.


Joshua said...

As a bank employee, I urge you to stop focusing on bonuses for the next 3 months and please focus more on Tiger Woods!

K10 said...

Believe it or not, I've been trying really hard not to talk about bonuses. Just so hard to avoid since it is all over the financial headlines. But I vow not to talk about them again for the next three months. And I'll work on a Tiger Woods post. He makes me want to start a celeb mockery blog...

Anonymous said...

I spose telling a banker that the government is robbing them doesn't make sense because they don't see the error in them robbing taxpayers.

Whats the golden rule? (no pun intended)

DO unto others as you'd like to have done to you.

SO rightfully, bankers are getting taxed as they've taxed the whole system with their greed.

Serves bankers right.