Banks whinge at windfall tax on bonuses

[David Guyatt]

http://www.bbc.co.uk/blogs/thereporters/robertpeston/

Will biffing bankers also biff Britain?



Robert Peston | 09:48 UK time, Monday, 7 December 2009 Comments (22)

With the exception of the Mayor of London, Boris Johnson, and a number of "Londonophiles" (probably not a real word, but you know what I mean), there is a wide perception that the UK economy became too dependent on the City and financial services.

Measuring that dependence is not enormously easy, however.

As a share of GDP, financial services contributes somewhere between 8% and 12% (according to which survey you believe).

More germanely perhaps, in the boom years before 2007 the City was directly responsible for about a third of all the UK's economic growth and a disproportionate share of tax revenues (whose best measure, perhaps, is the black hole that began to open in the public finances when a host of finance-related activities stopped yielding as much some two years ago).

But if the City became too puffed up and important to the UK's capacity to generate wealth, there are two ways of correcting that imbalance - which some might characterise as the "road to prosperity" and the "road to ruin".

The route to sustainable growth would be to build up other productive parts of the UK economy - manufacturing, the creative industries, tech, pharma and so on - as fast as possible.

Penury, of course, would stem from a rapid shrinkage in the City that was not counter-acted by growth elsewhere.

So the chancellor, Alistair Darling, will be acutely aware in calibrating his super-tax on investment bankers' bonuses that it should not lead to the wealth-generating City baby being thrown out with the stinking bathwater of excessive bonuses.

If top bankers were rational, they would not migrate to Zug or Hong Kong on the basis of a one-year super tax on their bonuses.

But a few will flee, because they are disgruntled by what they increasingly see as a hostile climate in the UK.

Which is why, as I mentioned in my note last night, the shadow chancellor George Osborne chose in the end not to take the initiative in proposing such a super-tax on bonuses, even though he has looked in detail at imposing a special levy on banks' distributed profits, or the combination of bonuses and dividends.

In fact George Osborne gave a very public nod in the direction of a bonus and dividend tax in his autumn speech to the Conservatives' annual conference.

And as a senior Tory said to me, he is not going to fall into the trap of publicly opposing such a super-tax as and when it is announced, because many traditional Tories are bonding with Labour voters in their visceral contempt for bankers and their bulging bonuses.

Osborne and Darling both believe that banks should not be paying big bonuses on the back of profits that they perceive as a gift from taxpayers (see my note "Banks face windfall tax" for more on this).

They want those profits retained in banks' balance sheets, to strengthen them.

That said - as the deputy governor of the Bank of England, Paul Tucker, has argued - there is a very strong case for banks (rather than bankers) to pay a levy (an annual one, probably) for the insurance we now know that they have to have from taxpayers: banks survived last autumn because taxpayers provided essential capital that the markets would not provide; banks should now pay for permanent access to this "capital-of-last-resort" facility.

But that's another story for another day. The government does indeed want such a charge to be imposed on banks, but won't go alone in introducing it. It is therefore swinging into international diplomacy mode to persuade the White House in particular that some kind of tax on financial transactions is good for the world.

For now what interests me is the behavioural impact of a one-off super-tax on bonuses.

As I've already mentioned, such bonuses will largely be paid in shares this year - for reasons of balance-sheet prudence ordained by the Financial Services Authority.

But if those bonuses are taxed at say 80%, it would be rational for the owners of the banks - the big investment institutions - to instruct banks' boards not to pay bonuses at all, because to do so would be to squander precious share capital.

In other words, such a super-tax might have the desired political effect of preventing bonuses from being paid.

But there might be almost no revenue from it for the Exchequer (even less than the few hundred million pounds expected by the Treasury).

Some would say, however, that the revenue implications are less important than the distributive and social justice of biffing bonuses.

Which may be so. But within any individual bank there'll be lots of individual shouts of "it's not fair".

Think about a typical trading desk at Goldman Sachs, for example: the British contingent, and the few others domiciled here for tax purposes, would pay the tax; but the non-domiciled Asians, Americans, French and Germans would not.

So if a bonus super-tax were introduced, we would be disproportionately hurting our own, as it were.