The controversial tax on banking bonuses

The Chancellor of the Exchequer (Britain’s finance minister), Alistair Darling, knows his government accounts are not healthy.

The gap between what the government is spending and the money they are bringing in (the budget deficit) is 180 billion pounds – the biggest ever during peacetime. And Britain is now the only G20 country (Group of 20 wealthiest) still in recession.

So in spending the economy out of recession, Darling has decided to make the wealthy pay for more of it.

Earlier this year, he and Prime Minister Gordon Brown decided to change the top tax rate in Britain to 50%. This means, as of next April, any income earned over 150,000 pounds will be split with the government.

A few days ago another tax decision was leaked. For one year, Darling has decided to specifically tax banks and bankers with an extra ‘windfall tax’ on their profits and large bonuses. The decision is expected to be announced in today’s pre-budget report.

An extra 10 percent tax on profits of all banks, foreign and British, would bring in 2 billion for the year, while it has been suggested that the tax on bonuses is likely to bring in about 1 billion pounds.

Needless to say, the bankers are not happy about it. Bonus can be anything from the tens of thousands to millions, and can sometime be all an employee receives.

The entire board of directors at the Royal Bank of Scotland (RBS) has threatened to resign if the tax is enforced. However, they are soon to be 84% owned by the taxpayer so they are the least justified in threatening a backlash.

Many in the banking community say the tax should be aimed only at RBS and Lloyds – the two majority-owned by the government – and that the rest should not be involved. However, the government has suggested that many other banks received financial help from the taxpayer, and all have benefited from the support given to the industry since it looked like collapsing last year.

So it appears Darling will apply the tax to all banks based in Britain for one year.

But the men in pin stripes won’t give up easily. Accountants warn that the bankers may find either a legal or accounting way out of paying it. Some have already suggested using the Human Rights Act as a tool against applying tax to one group of people. As yet there has been no case like it to suggest what the outcome might be.

But the main threat is that banks or their employees may choose to leave Britain altogether.

Reportedly over a thousand bankers and 18 hedge fund operators have left London for tax havens like Switzerland already this year as a result of the 50% tax rate announcement.

The British Bankers Association has warned that more may leave or, worse, Britain’s reputation as a financial centre will be damaged, resulting in less banks and talented people arriving. Currently, 10% of the country’s GDP (output) and 1 million jobs come from the finance industry.

Darling and the Labour government know this. He claims the tax will be fair but not too onerous. And given it’s only for one year, and most of those affected may be a bit older, he’s hoping other factors outside income, like family and lifestyle, will stop people from leaving.

Besides, the government will get an extra few billion to spend, and it shows the public they are not letting the highly unpopular bankers enjoy rich bonuses at their expense.

In fact, the opposition Tory party agrees with the concept. They’re not going to risk siding with banks and losing public support on what is a highly emotional issue.

The Treasury spokesman for the third major party in Britain, the Liberal Democrats, Vince Cable, believes that the banking system is probably too big now for the British economy anyway, and if “some of [the bankers] go, they go.”

He also agrees with Darling that the government cannot be held to ransom by the banks over this issue, and that the tax should be considered a ‘fee’ for the guarantee or ‘insurance’ that the government continues to provide the industry.

All will be revealed in the report today. It may be that bankers are forced to put their money where their mouth is and decide whether they will leave. The British public certainly won’t lose much sleep over it, however the government will hope any exodus isn’t too damaging to Britain’s economy or reputation.

By The Casual Truth

Photo – Chancellor of the Exchequer, Alistair Darling.