The outcome of the UK tax on bank bonuses

The new UK tax on bank bonuses announced by Chancellor of the Exchequer Alistair Darling on Wednesday finally introduces some clarity into the debate about bank bonuses. There had been much speculation about what form such a tax might take. Now we know. Might there be some unintended consequences?

The new tax is not a supertax on the income of individuals receiving bonuses, but rather on the bonus pool in any given bank. The aim is to act as a discouragement to banks to prevent them redistributing some of their profits into excessive bonuses when those profits have been made possible by government intervention, both direct and indirect. Some banks may choose to increase the bonus pool to compensate but this would probably not go down well with shareholders. The tax is only effective for one year.

Some people have argued that this measure will push banks to operate overseas, or because they will not pay large bonuses that they will lose personnel. However, the tax is temporary and any such impact might be mitigated by similar measures elsewhere - for example France is to impose a just such a tax. Alistair Darling has not had the last word on bonuses.

Yet it is surprising that the UK banking sector hasn't just hunkered down for a while, sorted itself out, involved its stakeholders in setting new ethical codes, and consulted with shareholders about what banking should look like in future. It is this apparent lack of gratitude towards the taxpayer, and lack of appreciation of what bank actions have done to the wider economy and peoples lives, that stokes anger against banks in this country and around the world. That's not healthy for anyone.

Stephen Beer, 11/12/2009

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