The move by UK Treasury head Alistar Darling to install a 50 percent tax on the bonuses awarded to bankers is largely a politically motivated decision, and in the long run will do absolutely nothing but add some pounds to the British Treasury.
Parameters of the tax would be on bonuses reaching above £25,000 levels. Projections are it would raise close to $900 million. The one-time tax would only be active for a year.
As in other countries, concerns are there will be a stampede out of companies by high-level executives and traders, who will find greener economic pastures waiting eagerly for them with banks and financial institutions not under the thumb of their federal governments.
What politicians and governments refuse to acknowledge is the market would have taken care of the issues if they would have been left alone. But as typical of all politicians, they smelled opportunity for political capital to be built up for themselves, so couldn’t refuse bailing out the huge banks and financial institutions, citing excessive bonuses which resulted in reckless practices as the reasons behind it.
Because the governments decided to step in and interfere, they’ve created a much larger problem than was originally there. If banks would have been allowed to fail, nothing would have been lost other than the particular bank that failed. It isn’t like deposits transferred to a different bank would be lost. That’s the farce of all this.
I’ll go on the record right here saying this will do absolutely nothing to change anything in the British banking bonus culture, and will just take away a tool from banks to keep and attract top employees.
No matter what Darling does, there will be ways to get around it, with the obvious being workers leaving the British banking industry. Other ways to deal with it would be to simply wait out the one-year period and commit to offering the compensation at that time. There are numerous ways this can and will be done, so it’s ignorant at best for Darling to impose this tax for no purpose other than using it as an excuse to tax business even higher than it is.
In the end, the market penalizes banks or any business for that matter, which performs poorly. If bonuses were really the cause of the financial and economic crisis, the industry would have sorted itself out and discovered what works best operationally to generate a profit and remain healthy. Once the government interferes, the ability to learn from market forces is lost and the same mistakes will indeed be made over and over again as the large banks now know the government will step in and bail them out with taxpayer dollars.
If the market had been allowed to discipline the banks, they would have adjusted accordingly and real and lasting change would have come about from competition and the desire to survive. If the bonus culture was really behind the mess, banks would have had to change it in order to compensate. Now they don’t have to because of the government interference, and so have in essence not had to learn anything, but will go on doing business as usual. This wouldn’t have happened if competing solely in market conditions.
The tax on bank bonuses by Darling are really a waste of time and resources which will do nothing at all change the corporate bonus bank culture in Britain. To me it borders on the nonsensical to even do it in the first place.
