The announcement in the pre-Budget report this week that banks will have to pay a 50% extortion tax on bonuses above £25k means people will now be taxed marginally at a rate of more than 60% if you add national insurance. Sure the employee is not the one paying the tax but the consequences will be identical: for banks to keep the same profitability bonuses will have to go down. We have seen those tax rates in the past and the consequences have always been the same: people stop producing. I have to admit that I would have expected that from France rather than England. But then again, Gordon Brown has shown with the non-domiciled fiasco that he does not really care about the Economy and is not afraid to sacrifice the City on the altar of his socialist convictions.The last thing you need in an economy that's struggling is to penalize those who create value and therefore jobs. As usual this move will end up being another marvelous example of the unintended consequences principle...
- Granted this is only a one-time tax. But I would be surprised if it does not subside one way or another. We all know that temporary taxes always find a way to stay. The increase in alcohol duties that were voted last year to compensate for the reduction in VAT has not been repelled now that the VAT has gone back to where it was last year! If that tax remains in place, thanks to the recent tax rate increase from 40% to 50%, the new marginal tax rate will climb to 70%. You can be sure then that it's just a matter of time until Atlas Shrugs. Who will complain when producers disappear to more hospitable countries or just retire?
- It has been proven time and time again that in order to succeed firms need to be flexible and adaptable. One of the most effective tools available has been bonuses. If you work hard you get a reward, if not you don't. If times are good you get a big bonus, if not you don't. No hard feelings. No firing. Now firms are pushed by regulation and public option to scrap incentive pay, increase salaries and get rid of bonuses. How is that good? Are we trying to emulate the public service? Are we so delighted by the NHS and the Post Office that we want to use them as a benchmark? How is forcing companies to guarantee remuneration when revenue is variable a good thing? Let's not be surprised when unemployment explodes next downturn because we have removed the flexibility from the system. Or if the just recovering economy tumbles again because hiring has turned out to be too risky and expensive.
- Because the tax applies not only to cash but also to restricted stock, options and any other kind of deferred incentives, most firms will think it twice before putting those incentives in place. The firms will have to pay the tax even if the award is never awarded because the employee leaves for example. We all know that to improve performance it is paramount that firms align their employees to the company. What better way than use profit sharing through share distribution and reward those who are loyal to the firm by using long term incentives. Clearly this new scheme is pushing the street in the other direction. Will everyone complain next that guaranteed cash compensation generates the wrong behavior?
- People tend to forget that government tax is reliant on businesses to be successful, not only because no profit means no tax but also because of the increasing stake that the state has now in banks and financial institutions. As a matter of fact, the whole £500m of expected income from the bonus tax was zapped within a few of hours of the announcement when £650m was whipped off the value of RBS.
- Well, maybe the idea was not to raise money but to punish those responsible for the crisis. But you know what, even this collective punishment fails to hit what the public opinion assumes the real culprits are. Indeed, this tax will not hit any of the short-sellers from the hedge funds (those are not banks) nor the bankers from now defunct Lehman Brothers or Bear Stearns since they are now most probably working at Nomura, Barcap and others on 2 year guaranteed bonuses (those are not part of the tax envelope and can't legally be clawed back anyway).
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