In his pre-budget report, British Chancellor Alistair Darling said that he will now levy a 50% tax on banker bonuses. The new tax will be effective from today until April 5.The tax will hit virtually all financial companies, including subsidiaries of foreign banks . Thus a Goldman banker working in London will suddenly be faced with a much higher marginal tax rate that his associate in New York. This will either generate much transatlantic resentment, or expect a comparable move to the replicated by the IRS with the President’s blessing, who has already lost control of the unemployment picture, so the last thing he can do to regain some popularity is to take Main Street’s outcry direct to the southern tip of Manhattan.
“We hope it will be a disincentive for banks to pay bonuses,” said one Treasury official.
windfall tax – which politicians argue is justified, as banks have
generated excess profits as a direct, or indirect, result of the
bail-out of the banking system – will apply to all banks and building
societies, including groups that operate in the UK under a European
Union branch system.
The banker response did not come as a surprise:
Bankers reacted with shock to the measure. “This is extreme
victimisation,” said one senior investment banker. “A lot of people
have been working their tails off, never seeing their families to try
and fix the problems of the past and now they are being discriminated
against. It just makes me want to quit the job.”
Didn’t the AIG General Counsel say the same thing? Alas, the same gambit did not work out too well for her.
The government is convinced that banks are unlikely to consider
shifting headquarters away from the UK as a result of a one-year tax of
this kind. But there is a widespread expectation in the City that the
windfall tax will prompt London-based bankers to ask for their
contracts to amended to attach them to other financial centres, such as
Zurich, Paris and Frankfurt.
“It is completely naïve to think
this will have no effect,” said one banker. “The Treasury, the FSA, the
Inland Revenue and politicians are all being very aggressive across the
board. The UK is making itself business unfriendly. A huge number of
colleagues will get themselves relocated.”
Yet even as the likelihood of a copycat tax in the U.S. is increasing, the question is do the domestic trading desks now drop the market and show the administration who is really in charge? Because even the President’s working group can not survive a concerted attack from every single financial entity in the world. And bankers are nothing if not efficient at marking their territory in the protection of take home pay. If that requires a 200 point drop in the S&P, so be it.