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9 December 2009

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UK Banker Bonuses over 25,000 Face 50% Tax

British Chancellor Alistair Darling spent 50 minutes addressing the House of Commons in a pre-Budget report today covering a great many items. However, the one that made the most sense was a 50% tax that banks in the UK must pay on any bonuses to employees that exceed 25,000. The Treasury anticipates that will affect 20,000 UK-based bankers, but not really. It's a bank payroll tax, so it will not be deductible in computing profits for tax purposes. The only problem is that 50% is not sufficient.

The tax is a thing of genius, going into effect immediately and lasting until April 5. On April 6, the top UK income tax rate rises to 50% from 40%. So, the banks can defer the bonuses and stick their employees with the tax on the 6 billion in bonuses they are rumored to be paying out, or they can pay it themselves. Naturally, if they stick it to the over-paid bankers, said bankers will likely walk. If the banks eat the loss, their share price will drop.

The bankers' lobby is obviously annoyed. Angela Knight of the British Bankers' Association said that the tax would make London a "significantly less attractive place," and that the foreign banks with contractually agreed bonuses would be "hardest hit." Richard Lambert over at the Confederation of British Industry said the move was a "serious mistake" and the levy represented a "jobs tax."

On the other side of the coin, Brendan Barber, general secretary of the Trades Union Congress, said, "Those who did most to cause the crash and did best from the boom make their proper contribution through a fair tax system." This isn't entirely accurate, as many of those who screwed things up are in Parliament, not regulating things properly.

Actually, the Chancellor stood up for shareholders, who are the ones the bonus brats are harming most. He said, "There are some banks who still believe their priority is to pay substantial bonuses to some already highly paid staff. Their priority should be to rebuild their financial strength and increase their lending. So I am giving them a choice. They can use their profits to build up their capital base. But if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer." Actually, a 90% rate would ensure they strengthened their balance sheets.

Mr. Darling, of course, is a politician facing a general election within the next six months. His populist move here is designed to hold Labour voters in line. He might have done it, but he has also ensured that the well-heeled bankers will contribute hefty sums to the Conservative opposition. At best, an above-average economic policy will yield minimal, if any, political gains.

Copyright 2009 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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