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

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    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.

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

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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.

"The dire state of the public finances meant that there was little scope for the significant sweeteners that would normally be enacted ahead of a general election," writes Howard Archer, an economist with IHS Global Insight, in an analysis. "However, there are headline-grabbing policies taxing bankers and the rich, which the government hopes will obviously appeal to most voters but which in actual fact will raise relatively little extra revenue."

The tax is estimated to raise £550 million, which would go toward job creation and lowering Britain's national debt, which will reach £1.4 trillion in 2015.

Even opposition leader and Conservative party chief David Cameron supports the tax, pointing out that past windfall taxes haven't crippled British bankers.

3. Bankers oppose it

The howl of outrage from bankers focuses around two things.

First, they charge, it's unfair. One banker even raised the possibility of a lawsuit, claiming protection from the nited Kingdom's Human Rights Act. Taking 50 percent off of a multimillion pound bonus doesn't strike most as a human rights violation, but the claim is there.

Second, and echoed firmly in the US, is the argument that such a measure would force the banking elite to take up residence in other, tax-friendlier places.

"Viewed from abroad, those foreign banks which reward their UK staff with contractually-agreed bonuses are likely to be the hardest hit," Angela Knight, chief executive of the British Bankers' Association, told Reuters. "London may well look to them now like a significantly less attractive place to build a business."

Whether legions of bankers jump ship over a one-time tax will be determined in time, of course, but London as a hub of international commerce probably won't disappear because of it.

See also:US begins crackdown on CEO pay. Will it work?

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David Grant is a Monitor correspondent. What do you think of the "super tax"? Let us know on Twitter.

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