Nearly Blanket Beating Up on Banker's Bonuses

Regardless of what you think the relationship is between banker bonuses predicated on short-term performance and the financial crisis, one thing necessary to make punitive measures to deter massive bonuses stick is that various financial centres need to coordinate their activities. That is, bankers can perform a bit of regulatory arbitrage by transferring their employment location to less heavily taxed locations. It's the new tax haven/paradis fiscaux spin: bankers go not to where tax rules are relaxed but where those on bonus rules are. We begin with yesterday's moves by the fabulously furry eyebrowed Alistair Darling--the man has his own Eyebrows Appreciation Society--hit the City of London's finest with a 50% on banker's bonuses. From the FT:

Bankers in the City of London reacted with fury to UK government plans to levy an immediate 50 per cent supertax on banks’ bonus pay-outs, saying the move played into the hands of rival financial centres. In his annual pre-Budget report, outlining government spending and revenue plans, Alistair Darling, the UK finance minister, announced a 50 per cent levy on discretionary bonus pay-outs to curb big bank bonuses that have provoked public anger. He said banks that had been battered by the financial crisis should be rebuilding their capital rather than paying out generous bonuses to their staff.

Mr Darling justified the exceptional levy by arguing that banks had generated excess profits as a direct, or indirect, result of the government’s bail-out of the banking system. The windfall tax will apply to all banks and building societies, including groups that operate in the UK under a European Union branch system. The levy, to be paid by banks, will come on top of the marginal tax applied to individuals’ bonus pay-outs. “We hope it will be a disincentive for banks to pay bonuses,” said one Treasury official.

The UK Treasury estimates the move will raise £550m and affect 20,000 bankers, although some bankers suggest it could raise up to £4bn if – as seems likely – banks press ahead with bonus pay-outs regardless. The first £25,000 of bonuses will be exempt.

Bankers said the new tax – on top of the 50 per cent top rate of tax, due to be introduced in April, and an earlier squeeze on UK-resident non-domiciled individuals – could damage the City as a global financial centre. “I can’t tell you how many people have called me from London asking to move,” a senior Wall Street banker said. “The question all the banks have now is: who the hell wants to be in the UK? Some businesses will definitely leave.”

One investment banking chief said the “contract between government and business is broken”, warning that up to 40 per cent of the City’s activities were “mobile” and would move overseas to more welcoming jurisdictions, such as Switzerland and the US. Angela Knight, chief executive of the British Bankers Association, said: “Viewed from abroad, London may well look now like a significantly less attractive place to build a business.”

The assumption among the bellyachers, of course, is that other financial centres will not follow suit in punishing those doing "God's work." Perhaps unsurprisingly, France has now joined in the bonus-bashing party with its own fifty percent levy on this heavenly profit-making. German Chancellor Angela Merkel is said to be sympathetic and is keen on applying an EU-wide levy along similar lines:

President Nicolas Sarkozy is to follow Britain’s lead and impose a one-off tax on bonus pay-outs by banks operating in France. The French government intends to include the 50 per cent tax in the budget bill going through parliament. It will be levied on bonuses above €27,000 (£24,400, $40,000) and will be paid by the banks, bringing Paris in line with London.

France and the UK want similar one-off taxes to be adopted across the European Union.

A senior French official told the Financial Times that the French government had been considering such a tax for some time but had been deterred from doing so by the threat to the competitiveness of Paris as a financial centre. “There is no obstacle to doing it now if it has been done in London,” the official said.

On Thursday German chancellor Angela Merkel joined the clamour on bankers’ bonuses saying it would help the financial sector learn from its mistakes. “The Germans always said that we want the banks and the people who work in these banks to share the burden resulting from this crisis. We should not place the burden squarely on the taxpayers’ shoulders,” Ms Merkel told reporters.

“We have committed ourselves to a transaction tax in the financial market. I think that would be a more sustainable solution to the problems,” she said. “But still, I think the idea that arose in the City of London ... to have a one-off tax on managers’ bonuses is a charming idea that maybe will produce a learning effect,” she said.

Switzerland is no longer quite the same place it was before, so refugees from EU-wide Darlingization may not quite find comfort there. The EU can apply quite significant pressure should it feel the need. So, the real major financial centre really we're waiting to fall in line is the United States.

UPDATE: I neglected to mention this Wall Street Journal op-ed co-authored by Gordon Brown and Nicolas Sarkozy discussing the rationale for taxing bonuses and getting the US to do the same.