Saturday, November 21, 2009
A windfall tax on bank bonuses?
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

You'll need to log on to the FT site to read the two articles but an interesting little spat has broken out at the paper over whether the government should introduce a windfall tax on bank bonuses. His argument was that the bonuses are a direct result of taxpayer support for the banking industry and so taxpayers are entitled to get some of their money back.

The FT's Lex column disagrees. Today it writes: "In 1360, notes the Bank of England's Andrew Haldane, a Barcelona banker was executed in front of his failed institution to discourage others from excessive risk-taking. In the UK, the mob is today once again baying for blood. Some want to buy it off with a one-off windfall tax on bonuses. "Try it: millions will love it," Martin Wolf, the Financial Times' chief economics commentator, wrote yesterday. Slim chance. If there had been any interest in this populist gimmick, it would have featured in this week's Queen's Speech. Even this desperate Labour government knows better.

"Any windfall tax on bonuses would be a futile gesture: it would almost certainly be revenue-negative for the government and, if implemented unilaterally, damaging to Britain's most competitive industry. Not only would the remarkable number of high earners who are non-doms escape any punitive levy; but to the extent that a new marginal tax rate of, say, 80 per cent on income over 150,000 was seen to be unfair, it would also be avoided. If the risk of it being repeated were high, it would encourage the most productive professionals to leave these shores."

I like the image of Martin Wolf being part of an angry mob. The Treasury has been cool on the idea of any kind of windfall tax though it is angered by the return of big bonuses and not sure what to do about it, apart from giving the Financial Services Authority new powers of intervention in remuneration. If all goes according to plan for the banks, bonuses in 2-3 years' time could be very big indeed.