One of the commenters to a post early this week questioned why the bonus tax is iniquitous, so here goes:
- One of the principles of fair taxation is that it should apply to all tax payers equally. That doesn't preclude progressive taxation or even applying particular provisions to particular activities, but to discriminate against bankers and people working for banks smacks of vindictive victimisation.
- A further principle is that taxes should not be applied retrospectively, which is why the Budget sets out the tax rates to be applied for the financial year starting after the Budget. To create a new tax in the middle of the financial year to be imposed on bonuses to be paid for work already performed goes against that principle even if the bonuses have not yet been determined or awarded.
- The banking industry is very wide. Although there are many companies that might have acted recklessly before the credit crunch, most of those (Bradford & Bingley, Northern Rock, RBS, HBOS, Lehman, Bear Stearns, AIG) have now disappeared. The argument that the rest have all benefited from the bailout is largely incorrect. Many other financial institutions were not involved in investment banking activities. For example, the Australian banking system is very conservative, so that ANZ, Commonwealth Bank, National Australia Bank and Westpac, who have all in the past lost heavily through ambitious traditional bank lending largely avoided any exposure to losses on assets similar to those held by the British banks. Similarly, it is hard to see why Standard Chartered or HSBC who do most of their business in Asia and emerging markets should be penalised for the activities of banks exposed to the US and UK asset backed securities markets.
- The government says that it bailed out the UK banks and all the other banks benefitted as a result. To an extent that is true, but they only bailed out 2 UK banks and nearly crippled a third (Lloyds) in the process. On the other hand, they didn't bail out any of the foreign banks on whom they are imposing this tax. Those banks are in London for the international debt and foreign exchange markets. They are not in London to provide credit to the British markets, and many of them will have very few dealings with RBS, HBOS and the other failed UK banks. They are there to buy and sell international syndicated loans, letters of credit, to finance exports and projects, often in dollars and euros, not sterling, and in parts of the world where neither RBS or HBOS ever show their faces.
- Traders in banks are typically paid a far lower base salary than anyone would reasonable expect to be paid for the hours that they put in, and the better and more successful they are, the greater the percentage is paid in bonus. If the government doesn't like that balance they should regulate against it rather than tax the traders after the event.
- Believe it or not there are many people working for banks who do not use any capital. Typically they work in an advisory capacity, perhaps on mergers and acquisition, privatisations, PFI, project finance advisory work and private placements. The only risk to the bank is the overhead and base salary against failure to earn fees, yet the fees earned, entirely from the wits, knowledge and hard work of the bankers concerned can be substantial. To stop the bank paying these people bonuses is clearly wrong-headed.
- On the debit side of the balance sheet, the government failed in its supervision of 4 failed banks and 1 failed building society and they completely missed the fact that AIG was running a $800 billion credit default swap book unregulated out of its offices in Curzon Street that underpinned a vast part of the securities market. To turn round and blame all the remaining banks for the government's own failings is no more than we would expect from this clapped out administration.
So I am not surprised that the bankers are upset, but neither am I surprised that the government would use it as a smokescreen for a desperate Pre Budget Report.