Britain Bites Into Banker Bonuses

Great Britain's minister of economics and finance announced today that the government intends to levy a heavy tax on banker bonuses. While similar threats have been made in the U.S. by various politicians, Britain means business. I am struck by the magnitude and scope of the tax it seeks to impose, and the implications it could have.

Here's the news blurb, via Bloomberg:

Chancellor of the Exchequer Alistair Darling said the U.K. will force banks awarding bonuses above 25,000 pounds ($40,800) to pay a one-time levy of 50 percent.

The tax will be paid by the banks, not employees. So presumably, that means it will be automatically deducted from annual bonus awards. The measure is projected to bring in around 550 million pounds ($900 million) to the British government.

My first observation is that 50% is an awful lot. That's the same as Britain's new top tax rate (incomes above 150,000 pounds) to be imposed for 2010, recently raised from 40%. And this tax is over-and-above regular income taxes.

My second observation is how incredibly low the threshold is for having to pay. Pretty much every bonus awarded to investment bankers, at every level, will feel the tax. Even analysts straight out of college sometimes have bonuses that exceed $40,800.

Interestingly, Darling says that imposing this tax on all banks makes sense because:

"There is no bank that has not benefited either directly or indirectly from this help."

Tell that to Barclays and HSBC. Yes, they might have had some indirect help, since the government stabilized the financial system broadly. But those banks made better decisions that led them not to need a bailout like some of their rivals. Yet, its bankers are still being seriously penalized.

Is the U.S. likely to follow suit? I doubt it. This is probably one of those things that most Americans believe can happen in Europe, but would never happen in the states. I think that's right. This measure is just too extreme to fly in the U.S. Besides, you'd see a lot of politicians lose quite a few political contributions if they took this kind of punitive action against all of Wall Street.

So who's the real winner from this move? New York City. Even though the British government claims that this tax is a one-time event, bankers there will not soon forget when the government cut their bonuses by 50%. After all, if the government did this once, it could do it again. Any Americans who thought it sounded like a good idea to work in London instead of New York must be questioning their logic. I'll be interested to see what kind of brain drain this causes in London.