The real answer to the bonus question
If a 50 per cent tax on bonuses is not enough to stop bankers boosting their own pay, what does it take?
The banks have threatened to take their business abroad because of Britain’s tax on bonuses above £25,000, but they have chosen to make the payments anyway and to pay the tax too. Yet if they were thinking of switching operations to the US (home to most of the investment banks) they face the same opprobrium form the American politicians and public, plus a levy on their business.
Governments blame the bonus culture for the excesses that resulted in the banks being bailed out by the state. They thus understandably find it jarring that these financial houses have returned so soon – and so blatantly – to their bad old ways. They think banks should be punished for the behaviour that almost brought down the whole financial system, ought to pay the cost of the bail out plus the wider economic costs, and believe bonuses must be penalised to prevent banks causing these problems again.
Britain has gone for a direct tax on banks for the bonuses they pay; a transaction levy or Tobin tax has been proposed internationally; and the US is considering a levy on its big banks. Some taxes may be more efficient than others but they are all aimed at the same objective.
Yet the bankers continue to believe they are entitled to high pay, seeming not only to realise the widespread political and popular feeling against them and showing no inclination to keep a low profile even in the short term, but also showing no remorse for the damage they have done economically.
They reckon that because in good times they contribute so much in taxes or foreign earnings, governments dare not touch them. (They conveniently ignore the capital they have taken from governments in the past two years.)
So governments are caught between applying what they regard as a just restraint and risking breaking this golden egg. The G20 summits may have agreed on global action but for nations earning only small sums from financial services, the temptation to be lax on bankers’ earnings to attract banks to their country is great.
The UK Treasury is caught in the same dilemma that it has faced on shipping, gambling and the even duty-free supply of CDs or drink. If it imposes taxes at home the businesses (or their customers) threaten to go offshore. It is an equation impossible to resolve equitably. In this case, the banks will almost certainly win: they have made high profits, they are paying high bonuses, and if any leave London it will be Britain’s loss.
But the solution to the problem lies with the private sector. Why can banks earn such easy money to pay in bonuses? Clearly their fees are too high. If there was a genuine free market in financial services, competition would bring down spreads and the fees for advice, capital issues and dealing. If the clients were better at negotiating terms, the bonus problem would go away.
