Thursday, December 10, 2009

Britain Imposes 50% Tax on Bank Bonuses

New York Times article "Britain Imposes 50% Tax on Bank Bonuses" (December 9th, 2009) reports on an impossibly foolish decision by the British government, but fails to note the monstrously poor idea this is.

To the howls of London bankers, the British government said Wednesday that it would return money from banks to taxpayers by placing a 50 percent tax on banker bonuses of more than £25,000, or about $40,700.

The one-time windfall tax would affect not only British banks but also the London subsidiaries of Wall Street giants, whose rapid recovery from the financial crisis and plans to award bonuses that could rival those of the bubble years have stunned many Americans.

In addition, other reports offer Chancellor of the Exchequer Alistair Darling's perspective that this decision would cause the bank to reinvest its profits back on itself, or to inefficiently pay executives.

All this law should do is intertemporally displace bonus decisions, assuming such a decision has yet to be made, or if made, may be taken back.  It will be almost trivial for the banks to avoid paying this tax. The move has no economic consequences; it is only a knee-jerk political reaction from someone who should know better.

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