Bandwagons can be wonderful – and terrible – things, depending on what side of the debate you’re on.
In the case of Britain’s bank bonus “supertax”, it already looks as though London’s move to slap a harsh tax on discretionary bank bonuses has emboldened not just the French but other leaders and policymakers. In Lex’s words, the war on greed is “going global”:
Nicolas Sarkozy, the French president, is following the UK example with a one-off tax on bankers’ bonuses. German Chancellor Angela Merkel calls it “a charming idea”. In the US, Kenneth Feinberg, the Treasury department’s pay tsar, wants to clamp down on pay at companies that received state help. Even Jeffrey Immelt, General Electric’s chief executive, has rounded on executive “meanness and greed”. Having “saved the world” at the start of the banking crisis, the UK government is leading the way in whipping its bankers.
The Times’ Anatole Kaletsky neatly sums up the issue in a Friday column. The good news, he notes, is that Alistair Darling saved the economy on Wednesday. The bad news, however, is that “he saved the wrong economy.” Kaletsky continues:
Switzerland, Luxembourg, Ireland and Hong Kong will all be quietly celebrating as they look forward to welcoming a second influx of bankers and financial institutions, after the first wave of tax exiles from London sent by Mr Darling’s previous Budgets and mini-Budgets. Many British voters will, of course, be delighted about this relocation of greedy casino-bankers — almost as delighted, in fact, as the burghers of Zurich will be to receive them.
But, he warns, “there are likely to be serious consequences from what can be fairly described as the all-out war being waged by the Government against the banks”.
To put this war in the proper perspective, he says, consider three figures mentioned by the Chancellor on Wednesday: the first is the estimated yield of £550m from the bank windfall tax. The second is the direct contribution of financial companies to Britain’s tax revenues, which amounts to 25 per cent of the total yield from corporation tax or £11bn – that is even without counting the much larger sums paid by their employees in income tax, stamp duty, VAT. The third figure is the estimated £10bn final cost to the Treasury of all the bank bailouts since the collapse of Northern Rock. He continues (our emphasis):
The upshot is that the Treasury is risking serious damage to a leading British industry in pursuit of a one-off benefit worth only £550 million. The special bonus tax is not, of course, a simple revenue-raising measure, but a punishment. But the question is whether the costs of administering it outweigh any possible benefit.
Bloomberg’s Matthew Lynn meanwhile aptly describes the bonus supertax in football terms (our emphasis):
The bankers no doubt saw it coming. They’ve been lectured, harassed and demonized all through the past year over their role in plunging the world into the deepest recession of the last half-century. That doesn’t make the UK’s planned tax on bank bonuses any less of a spectacular goal against your own team. It attacks the wrong target with the wrong weapon. All it will do is drive the global banks out of London and wind up putting the government in an even deeper fiscal hole.
That’s not to say Lynn is entirely opposed to bonus taxes. There are good arguments, he notes, for finding ways to curb bonus payments at RBS, along with other institutions that have had to be bailed out by the British taxpayer at great expense. He adds:
But attacking the bonus payments at the London offices of Goldman Sachs or UBS makes about as much sense as a Las Vegas croupier throwing the highest-rolling player at his roulette table out of the casino. It’s the casino that will suffer, not the gambler.
The British, says Lynn, “seem intent on getting rid of that money-making machine just because they are angry at having to rescue RBS. In fact, they should “carry on hosting the capital markets casino, and raking off a fat cut”.
If the US, German, Swiss or Japanese governments want to stop their bankers from taking crazy risks, they are perfectly entitled to do so. But there is no reason for the British government to do it for them, particularly when there is so much easy tax revenue to be collected by letting them carry on.
Lex overall takes a more tempered view, nothing that “some bankers, poor darlings, feel persecuted by the baying mob”. Indeed, an inflated sense of entitlement “is a failing common to much of the public too”. And, by the way, it adds, warnings about a mass exodus of wealthy, be-bonused bankers out of the UK are greatly exaggerated:
… some London-based bankers, furious at the windfall tax, will doubtless move – although the idea that a whole industry can decamp to an Alpine tax haven is absurd. Client meetings remain local. Large swathes of the industry need the City’s soft infrastructure of lawyers, accountants and other networks… There is also London’s time zone. The rise of the Brics, their deep wells of money and lighter regulatory touch will inevitably see London lose some of its pre-eminence as a financial centre. But that is a slow process, the work of years, not a snap decision.
In the end, says the FT’s Gillian Tett in her Friday column, the flurry of furious warnings that London-based bankers will leave the City following Wednesday’s tax bonus news misses the bigger point. There are good reasons, she concludes, “to think that London’s role in global finance is being undermined. But that reflects more fundamental, structural factors – that go well beyond the bonus news.”
Adds author and City veteran Philip Augar in an FT comment article: “The one-off bonus tax is not in itself a tipping point and the City’s touchy response is driven less by the government’s current policies than by fears that worse is to come.” He concludes: The banking crisis has not shifted core beliefs in Westminster, but the City’s reaction to the bonus pool tax shows that it has not shifted attitudes in the Square Mile either. At a time when a financially-induced recession has caused output to drop by 4.75 per cent, left hundreds of thousands out of work and inflicted tax rises on us all, the City appears still more concerned to protect its own pay packet than to play a responsible role in society. Not only is its outcry against the bonus tax unnecessary, it is also inappropriate. “Plus ça change, plus c’est la même chose” observers in Paris and Brussels might be fairly thinking.
Related links:
What if a 50% bonus tax came to the US? – DealJournal
Bonus tax shows UK and France moving closer – BreakingViews
Banks look to absorb supertax cost – FT
Editorial comment: Entente fiscale – FT