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UK tax on £25,000 bank bonuses: Can it work?

Alistair Darling, the head of the UK Treasury, said Wednesday that a 50 percent tax will be levied on bank bonuses paid to execs. It will prove politically popular, but is unlikely to change the bonus culture.

By Staff writer / December 9, 2009

British Treasury boss Alistair Darling announced a one-time, 50 percent tax on hefty bank bonuses on Wednesday, in a reflection of both the increasingly ugly mood over the large annual payouts made to bankers and of the budget hole that the UK is falling into.

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Mr. Darling told Parliament that the measure, a tax on bonuses over £25,000 ($40,500), would raise about $890 million and slow the growth of Britain's ballooning budget deficit. The global financial collapse of the past two years has hit the UK hard, and Darling estimated that the British taxpayer remains on the hook for about $16 billion in bank bailouts. The banks, not their employees, would pay the charge. The employees will then be taxed as normal on their bonuses.

But his comments also reveal that the unpopular Labour government of Prime Minister Gordon Brown has a keen eye on the bankers that the general public in Britain, as in the US, blame for the financial collapse and is seeking to modify behavior. The public attitude is that bankers were paid huge bonuses for making what proved to be reckless bets on sub-prime mortgages and other assets, then were bailed out by the general public, and are now back to their old ways. The British government has estimated that senior executives and traders will earn at least $8 billion in salaries and bonuses this year.

"There are some banks who still believe their priority is to pay substantial bonuses,” Darling told Parliament. “I am giving them a choice. They can use their profits to build up their capital base. If they insist on paying substantial rewards, I am determined to claw money back for the taxpayer."

London is one of the world's great financial capitals, only really rivaled by Wall Street. "The City" as banker's call their domain, generates about $97 billion in tax revenue a year.

The measure has kicked up predictable squawking from executives, with Bloomberg news carrying a strong piece with executives predicting a banker exodus to more bonus-friendly climes. "They are killing the golden goose that is the financial system," a hedge fund salesman told Bloomberg. An investment banker said: "It seems both populist and discriminatory."

The move is clearly designed to be politically popular. But it's not likely to end the bonus culture as we know it. And since it's for one year only, it's reasonable to expect any effect it has on 2009 bonuses will be reversed next year. Banks might even quietly defer compensation for some of their stars and make up for it later.

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