Britain to Levy a One-Time Tax on Banker Bonuses

By LANDON THOMAS Jr. for The New York Times, December 9, 2009

The chancellor of the Exchequer, Alistair Darling, announced a one-time tax on bank bonuses Wednesday, part of the government’s effort to shore up the still-weak British economy.

Banks will be charged a 50 percent tax on 2009 bonuses of more than £25,000, or $40,800. It will be imposed on the pool of bonuses paid by a bank, rather than individual payments, and it will be paid by the bank — not by the recipient of the bonus. It will take effect immediately and will affect banks’ 2009 profits.

The levy represents the most direct attack on bank bonuses anywhere in the world. All banks in Britain – including the London-based subsidiaries of foreign banks — will be affected, whether they took government funds or not.

“Last year banks made £80 billion in losses,” Mr. Darling said during a pre-budget speech to Parliament that was frequently interrupted by howls of protest from members of the opposition Conservative Party. “But if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer.”

The tax measure was the highlight of a push by Mr. Darling to persuade voters in Britain, as well as investors at home and abroad, that the Labour Party has the ability to tackle Britain’s budget deficit, which at 13 percent of gross domestic product is among the highest in Europe.

In his speech, he said his government aimed to more than halve the deficit by 2013 through tax increases and sharp spending cuts.

His strong words on cutting the deficit come against a backdrop of increasing investor unease about the ability of governments everywhere to address deeply imbedded debt problems.

In Greece, where a new Socialist government is struggling to prove it is serious about reducing a deficit that in proportion to its economy is similar to Britain’s, the cost of insuring Greece’s sovereign debt continued its recent rise Wednesday.

The same was true in Dubai, where there is an increasing fear that other government-controlled entities beyond the troubled conglomerate Dubai World will have to restructure their debts.

“The markets will be skeptical” of the British measures, said Simon White, a partner at Variant Perception, a research house based in London. “The numbers are minimal compared to the scale of the deficit.”

Mr. White pointed out that the current yields on government debt, commonly known as gilts, do not reflect the real levels of risk related to Britain’s public finances.

The British government has paid out £1 trillion in support of its hobbled banking sector, a sum that underscores the financial sector’s large contribution to the overall economy.

When times were good, the Labor government paid little heed to the rich sums being earned in the City of London, the financial district, given the large tax contribution that financial firms made — 43 percent of corporate taxes in 2007.

But the collapse in bank profits has led to a precipitous drop-off in tax receipts at a time when public expenditures are being extended to combat a recession that is among the longest in Europe.

In his speech, Mr. Darling outlined a raft of austerity measures, such as capping public sector pensions and wage increases that will hit core members of the Labour Party constituency in order to appease the increasingly restive holders of government bonds, who are likely to sell their gilt holdings at the slightest sign that the government is not committed to cutting its deficit.

The move to tax bonuses largely contradicts a core plank of the Labor Party’s policy crafted by politicians like Peter Mandelson, the powerful business secretary who along with former Prime Minister Tony Blair fought hard to make Labor a business- and finance-friendly party.

Now, Prime Minister Gordon Brown has reverted to a style of class-based electioneering.

For example, in a move that harkened back to the hard-left politics of the Labor Party in the 1970’s, he derided the private school background of David Cameron, his conservative rival.

The tax on bonuses, however, is not without precedent. In 1981, the British government under Prime Minister Margaret Thatcher imposed a one-time tax on bankers, who were making large profits thanks to the high interests rates that prevailed at the time.

Twenty-eight years later, it is a Labor government taking the same approach, although now it is the low interest rates coming from aggressive central bank action that has led to what many see as unseemly banking profits.

To a large extent the levy underpins a quite broad understanding here – even among those generally sympathetic to the industry — that bank profits this year were largely subsidized by the government due to historically low interest rates.

“I think banking has become a truly parasitical business,” said Andrew Hilton, who runs CSFI, a research center that focuses on financial issues. “Bankers these days borrow money at 30 basis points and lend it to the government at 300 basis points and then they go play golf.”

In a speech this week before a group of bankers and lawyers, Mr. Darling said that bankers needed to be able “to look their neighbors in the face” and explain why they deserved such sums at a time when their fellow citizens are suffering.

At the center of the bonus debate is Royal Bank of Scotland, which after a recent capital injection is now 84 percent owned by the government. This week, the British Treasury announced that it would reserve the right to veto an increase in the bank’s bonus pool to an estimated £1.5 billion and that no executive at the bank paid over £39,000 would receive a discretionary cash bonus. Instead, they are to receive deferred stock.

The Treasury has said that these steps are justified, given the large taxpayer stake in the bank. But for many within the bank, and shareholders as well, the veto threat is seen as political meddling that will impair the bank’s competitiveness because top-flight bankers might leave — a predicament similar to the one facing Citigroup in the United States, which also took billions of dollars in U.S. government funds to shore up its finances and has yet to pay it back.

Short sellers have targeted shares of R.B.S. lately, driving them down about 14 percent in recent days.

This week, Robert E. Diamond, the head of Barclays investment bank and traditionally one of the highest-paid bankers in London, warned that a bonus tax could spark an exodus and hurt the City’s reputation as a leading financial center.

But with even the traditionally banker-friendly Conservative Party lashing out at the bonus culture and anti-banker sentiment growing, political momentum for the tax seemed almost unstoppable.