No one likes bankers these days.
Last week, the British government said it will levy a 50 percent tax on bonuses paid to bankers in excess of £25,000, or about $40,700.
The one-time tax is being touted as a band-aid for Britain’s budget woes. Moody's recently warned that, if the British government doesn’t deal with its deficit problem soon, its creditworthiness will suffer “inexorable deterioration.”
But the bonus tax is not really intended to raise much revenue. Its purpose is to appease a British public that blames bankers for its economic misery, just as the American public does. Alistair Darling, the chancellor of the Exchequer, who has championed the measure, conceded in a speech before Parliament that it would raise only about £550 million ($900 million), a paltry sum compared to the roughly £1 trillion ($1.65 trillion) the government committed to stabilize Lloyds Banking Group, Royal Bank of Scotland and other British banks that found themselves in troubled waters during the crisis.
While the tax may satisfy voters who want to kick bankers in their wallets, actual bankers probably will feel little pain. Given that the tax applies only for a single year, banks can easily avoid it by deferring compensation into the next year. Or they could take other measures, like increasing base pay, to provide their employees with the same amount of money without being hit with the tax.
David Charters, a London-based financial executive and author of the novel "Trust Me I'm a Banker,” commented, “I don't think this proposal will bring any benefit at all, except perhaps to accountants and tax experts who make their living advising how to get around it.”
The proposal’s gaping loopholes most likely were put there deliberately. A serious smack at British bankers would most likely succeed only in driving them out of the country. Established financial centers like Paris and Frankfurt, as well as upstarts like Amsterdam and Warsaw, would cheerfully welcome refugees from the City of London.
Gordon Brown, Britain’s prime minister, knows this. In a Wall Street Journal opinion piece that he wrote jointly with French President Nicolas Sarkozy, Brown called for governments worldwide to impose the bonus tax. This improbable step would prevent financiers from playing governments off against one another. Sarkozy apparently is smart enough not to actually lead the charge for punitive taxation until somebody else lines up to follow him. Brown, on the other hand, forged ahead with his bonus tax, but wrote it so loosely that bankers who read between the lines can get the message: “We need to throw raw meat to the voters. We don’t really mean anything by it.”
With elections due to be held by next spring, Brown’s Labour Party is trailing in the polls and appears likely to lose the power it has held for 12 years. The bonus tax is a last-ditch effort to prevent this. After reading Darling’s presentation of his economic proposals, George Osborne, the Conservative Party’s leader on economic issues, said, “We were promised a pre-budget report, and what we got was a pre-election report.”
Would an industry-specific tax on incomes pass legal muster in the United States? Nobody can be sure, but I think there is a good chance it would run afoul of the Equal Protection Clause of the 14th Amendment. Originally written to protect the rights of freed slaves, the 14th Amendment might be interpreted by the courts to prevent Congress from singling out another unpopular slice of the population, like bankers (or maybe, someday, lawyers) for punitive or confiscatory taxation.
Last spring, the U.S. House of Representatives passed a bill that would have imposed a 90 percent tax on bonuses paid to executives at companies that received substantial amounts of bailout money. Its target was mid- and high-level employees at A.I.G., many of whom had nothing to do with the financial gambles that led to the company’s near collapse, and who were contractually entitled to large bonuses. Because the Senate had the good sense to bury the proposal, we have not had a chance to see whether the courts would permit Congress to simply seize income or property from a small, unpopular group whose members have broken no laws.
At the time, Rep. Joe Wilson, R-S.C., called the bill “an unconstitutional joke.” Democrats, meanwhile, sounded a lot like their counterparts in the British Labour Party. House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., who introduced the bill, said its purpose was “to stop the thievery at the taxpayers' expense.”
England and America may indeed be “two nations divided by a common language,” as playwright George Bernard Shaw once said, but when it comes to lashing out at scapegoats, insecure politicians on both sides of the pond understand one another perfectly.