Bonus tax: The UK government has made a mistake in suggesting its bankers’ bonus tax might be extended. One can understand why. If it hadn’t, banks could just have postponed their bonuses until, say, the middle of next year. Unfortunately, though, this has muddled the message. What should have been a one-off tax is now possibly a two-off. And that will have an adverse impact on behaviour, possibly driving bankers to move elsewhere.
That particular damage is done. However, it is not too late to mitigate one other consequence of the suggestion that the tax might be extended. The government should make clear that any extension beyond the current tax year would cover total compensation, not just bonuses.
It’s not entirely clear why the government chose to focus on bonuses rather than total compensation. But it is plausible that it thought that taxing base salaries, too, would have been even more retrospective than taxing this year’s bonuses. This reasoning would also explain why guaranteed bonuses — the bugbear of politicians — have been exempted from the special tax.
So much for the past. But if the government does nothing, banks will merely jack up base salaries further as a way of escaping future taxes. This trend is bad for several reasons —notably because it would increase banks’ fixed costs, making them less able to withstand future downturns. By contrast, making clear that total compensation — say, above 150,000 pounds a year — was covered by any repetition would avoid this perverse incentive. There would still be the damage caused by having a two-off tax. But at least the government wouldn't be compounding its error.
