Wednesday, January 13, 2010

Was Flipping the Bird to the Treasury a Good Idea for U.K. Banks?

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Referencing of course the ongoing drama involving the City and the British government, RE: a 50% bonus tax. This had the intention of reducing oversized banker bonuses, but recently it has been noted that most banks will simply take the hit of the 50% tax and pay their employees anyways. Evidently, some banks chose to go heavier on deferred stock bonuses, which only incur the much lower capital gains taxes rather than the lofty 50%.

For the budget deficit ridden U.K., which estimates the tax may generate as much as 2 billion pounds, this provides quite a nice little windfall for them. Obviously it's not accomplishing what they hoped it would, but for taxpayers incensed by high flying bonuses for companies they feel they saved from the brink of destruction, it's a decent consolation.

This is of course what the banks have chosen as the short-term fix to what might prove to be a long term problem. As it were, the banks don't have the option to move over night as they please (for the lack of flexibility in office space leases for one thing), so they really could only answer the question "to pay or not to pay".

In terms of extending the time frame out a little farther, banks have much more freedom in terms of choosing where to do business. As I look at it, since they went ahead and took the hit of the bonuses, the tax is going to stay in place as long as people are willing to pay it. So as a bank, you either have to do one of two things: move your office, or hope that enough other people move their offices such that the government drops the tax to retain jobs.

Could it have been different? I'm of the opinion that was the City to have laid low for a little while until the public outcry died out, potentially the tax might have been dropped. But as it were, I don't think there's any incentive to drop the tax since government officials likely figure that they have a captive market, willing to pay the necessary amount as a cost of doing business.

That being said of course, human capital is much more mobile than businesses. So perhaps paying the taxes was the only option they really had to retain top performers.

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