In efforts to rein in multi-million pound payouts across an industry bailed out by taxpayer cash, the English government said on Wednesday it would hit banks, not the bankers themselves (of course), with a 50 percent tax levy on any bonus of over 25,000 pounds ($40,840). The tax, which will raise about 500 million pounds and is effective immediately, will apply to all bank and branches of foreign banks operating in Britain.
With this tax forms, part of the Labour government’s efforts to win votes ahead of an election that has to be held by June, Darling is balancing the need to curb a record budget deficit while supporting voters struggling in the U.K.’s longest recession since at least 1955. Darling’s Labour government is on course to lose an election that must take place in less than six months. He’s hoping a hard line on bankers’ pay, a sensitive issue for many voters, will give it some momentum in the polls.
It is interesting the UK government seems to be confident this isn’t going to do damage to London as a financial centre, especially when you know how much it costs to live in this city comparing with the other financial places in Europe. In fact, many bankers working there came for only one incentive: MONEY and it is certainly not the charming weather of London that will keep those bankers from leaving the country. Chancellor of the Exchequer Alistair Darling’s “populist and discriminatory” tax on banker’s bonuses risks driving business away from London, and more generally from the U.K.
Finance minister Alistair “Santa” Darling said he offered a choice: banks can build up capital instead of paying bumper bonuses. “This should be a time for banks to rebuild their capital base and become stronger,” he said in parliament. But industry executives warned there were risks the efforts to control “fat cat” pay could cause a brain drain and damage the recovery of banks, including bailed-out lenders. The government provided more than 1 trillion pounds to prop up lenders including Royal Bank of Scotland during the credit crisis, but the legitimate efforts to control excessive and unjustified remuneration policies in the banking sector has to be balanced with the risks that continued uncertainty over compensation policies will drive away talent. “Despite the Chancellor’s protestations, changing the tax on bonuses to banking staff will be seen as a windfall tax on banking profits. This increases the costs of those banks operating in the UK,” said Rod Roman, financial services partner at Ernst & Young.
Debate has raged for months in Britain over how far lawmakers and regulators should interfere on remuneration. Critics of an industry blamed for causing the credit crisis say there should be a steep tax on the windfall that banks and their staff will gain from taxpayer support, including indirect liquidity support that has helped drive profits higher.
This political decision, motivated by a short term benefice in the pools is likely to see long term repercussions.