Bank Bonus Windfall Tax

In 2009, Alistair Darling introduced a 50% tax rate on bank bonuses of more than £25,000. The bonuses would be paid by the banks rather than employees.

I spent a lot of last year, saying how much tax revenues had fallen. The credit crunch and recession caused many traditional sources of revenue to dry up. Especially higher rate of income tax, stamp duty on housing purchases e.t.c.

Alistair Darling will be feeling somewhat relieved that his windfall tax on bank bonuses has netted the government an extra £2bn in tax revenue (higher than the estimated £550m)

This windfall tax revenue has occurred because banks have been paying record bonuses – despite only 12 months since the banking sector was bailed out by the government.

It is interesting that the tax of 50% has not deterred the bonus culture. The Guardian article even suggests banks have paid out more so workers don’t lose out from the higher tax.

It’s a strange situation – our national debt has increased significantly because of the bailouts and yet major investment banks are still able to pay out a global bonus of £40bn

Alistair Darling attempted to appease critics who feared the tax on bonuses would prompt defections from the City by insisting the 50% tax rate on bonuses of more than £25,000 would be paid by the banks rather than employees.

The one-off “bank payroll tax” will only raise £550m and is perceived as a fresh attack on the City following the bank bailouts last year, which the National Audit Office has calculated are costing £850bn.

Arguments for Bank Bonus Winfall Tax

  • There has been a sharp increase in income inequality in the UK, in the past two decades. (see: rise in UK income inequality) One of the main driving forces has been the rise in wages of the highest paid 1% and highest paid 10%. This tax helps to redistribute income and reduce government borrowing
  • Banks have benefitted from government intervention which rescued the banks during the credit crunch. Without the taxpayers intervention, all banks would have suffered, and may not even be in existence.
  • Diminishing marginal utility of money. Bonuses of over £250,000 show that bankers are gaining much more income than they need for essential spending.

Disadvantages of Bank Bonus Windfall Tax

  • May encourage banks to set up in other countries with lower tax rates
  • The disincentive to work and operate in UK may lead to a fall in tax revenues.
  • Promoted by envy, but doesn’t address issues of inequality

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By on January 9th, 2010

2 thoughts on “Bank Bonus Windfall Tax

  1. Didn’t you know that the basic principle underlying the great U.S. of A. is no longer “government of the people, by the people, for the people ….”?

    It’s been changed to “of the banksters, by the banksters, for the banksters”. And Gordon Brown who is similarly mesmerised by bankers is following suit.

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