Tax the bankers! But who are the bankers?
Posted by Morgan on 9th Dec 2009
Alistair Darling's pre-budget report was never going to please people as he had a series of very tough decisions that has to be made - tax more and spend less. His contribution to the festive cheer was a bit more banker bashing, which always seems to please to populous, and a 2% reduction in the Bingo levy.
So, where a bank bonus pool is credited with more than £25k for any one employee it will be subject to a one off 50% windfall tax.
He justified this by saying that every UK bank had benefited weather directly or indirectly from government support and that taxing the bonus pool may encourage banks to re-build their core capital rather than paying away profits in remuneration. It is difficult to argue with either of these points.
However, this policy does raise a series of other issues that are far less clear cut and may result in Mr Darling's policy being significantly undermined.
Firstly, who is a banker? Anyone who works for a UK registered bank would seem like a good definition. But I doubt it is so simple. There are banks of every size, colour and creed. Some banks simply operate a retail franchises, taking savings and making personal loans, others only provide advisory services or specialist products and then there are the large banks that do almost everything either directly or through a plethora of subsidiaries.
Many of these organisations could probably argue that they are not banks in the sense that they did not lend large amounts of money to poor credits or invest in toxic securities. For that matters many of them don't even carry out the basic acts of taking deposits and lending money. If you are an M&A adviser or a tax specialist at a boutique bank that does not lend money are you a banker? Equally if these people are deemed to be bankers, then surely those that provide similar services from within accountancy firms or specialist consultancies must also be classified as bankers? What about the people who sell insurance at Direct Line, surely they are in the insurance business, well actually they are part of the RBS group, so are they bankers?
Given that the Treasury rarely thinks through these things before they are announced I doubt there is a definition as yet. Maybe they will just put a question on the tax return - are you a banker?
Secondly, will this tax work? I doubt it, there will be means around this surcharge. It only applies until the 5th April 2010 so banks may opt to pay people in the next tax year. Alternatively, banks may only pay a £25k bonus but might make available interest free loans to be repaid from next years inflated bonus (the tax is a one off so should not apply in 2011,) employees will get shares or options in lieu of bonuses or may have contracts moved to offshore service companies, with Goldman paying UK staff in the USA or Deutsche paying staff through Germany or the Channel Islands. There will already be an army of top brains looking for ways around this soon to be legislation and I am sure they will find a way, at least for the top banker who are the ones that a) carry most responsibility for the crisis but b) can afford the tax structuring advise to avoid tax.
This process will be helped by the fact that the effective tax rate for bonuses is now 70%+. People will generally accept a marginally higher tax rate but if a £100k bonus is now worth less than £30k by the time it reaches your pocket then that will prompt bankers (or most other people if they were in the same situation) to look at ways around this situation.
Mr Darling estimates the new banker bonus tax will raise £500m. I bet it will be far less in reality but then again this is not about the money it is about moral values. I agree entirely that we should not reward those who almost created a systemic collapse of the financial system but the truth of the matter is that finance is so interwoven with every part of western society that it is impossible to accurately attribute blame on an individual basis.
I fully accept that in my banking career I contributed to the almighty debt fuelled asset bubble but I will now escape any tax penalty, whilst there are others who work at banks but contributed nothing to the credit crisis who will be taxed. Mr Darling had to take a stand and he is right to do so - it is a shame that he does not have sufficient sophisticated tools at his disposal to create a tax regime that will achieve the objectives that are so well supported by the British people.
At least we can all benefit equally from the reduction in tax on Bingo. Housey?