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The New Economy

UK bonus tax proposal: Three reasons it won't happen in US

By Correspondent / December 9, 2009

Chancellor of the Exchequer Alistair Darling leaving the Treasury Building to unveil his pre-Budget report, containing a so-called "super tax" on bonuses paid to bankers, Wednesday at the House of Commons in London.

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The pre-budget report from Alistair Darling, Britain's chancellor of the exchequer, held one explosive proposal: a one-time "super tax" on banker's bonuses.

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The tax would impose this year a 50 percent penalty on all bonuses over £25,000 ($41,000), a fee levied on the banks instead of individual bankers. Americans can be forgiven for wondering if such a tax would work in the United States. Given the anger towards US bankers because of the forced bailouts and huge bonuses, the proposal has a certain populist appeal. But a bonus tax on this side of the Atlantic faces three big hurdles:

1. Super-tax sharply different from US proposals

In the US, "pay czar" Kenneth Feinberg laid down a number of proposals for limiting banking pay — but only at banks that received government bailout funds. In addition, the Federal Reserve is reviewing the executive compensation policies of the nation's top 28 "large, complex banking organizations." To get out from under the pay restrictions, some banks (including Bank of America and JPMorgan Chase, for example) have repaid the federal government. The upshot? Goldman Sachs, for example, is on pace to offer an average bonus of $717,000 per employee, the largest in the firm's 140-year history.

In Britain, the "super tax" would hit all banks regardless of whether they took bailout funds. That means the Royal Bank of Scotland, which accepted $75.8 billion in taxpayer support, gets a tax haircut at the same level as groups like Barclay's, which survived the worst of the global economic plunge on its own. The tax also applies to foreign bank branches in Britain and would apply for this year only. In 2010, it would disappear.

2. The tax wouldn't raise much

With national elections coming in June 2010, Mr. Darling's move was largely a political one, analysts agree.

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