economic crisis

The UK Windfall-Tax Bombshell’s Second Day

December 10, 2009

The Wall Street Journal and New York Times go A1 with second-day(ish) stories on Britain’s bold bid to slap a 50 percent windfall tax on banker bonuses. And this morning, the Financial Times reports that France will also implement the tax and that Germany’s Angela Merkel called it “a charming idea.”

And The Wall Street Journal‘s Heard on the Street column, which surprised us by calling for a windfall tax a while back, stuns us again by applauding the UK’s effort, calling it a “justifiable response to the sector’s failure to exercise self-restraint throughout the crisis.” Simon Nixon’s logic here is unarguable (emphasis mine):

Some will argue it is unfair to target bankers in this way, particularly when the treasury only expects it to raise £500 million, compared with this year’s £178 billion deficit. But that misses the point: What is unfair is that institutions only in business because of unprecedented taxpayer support should be paying out vast bonuses in the first place.

The Journal‘s news report, though, makes a feeble attempt to compare American efforts to tamp down pay to those in the UK (ADDING: That’s probably because it has a scoop that the U.S. pay czar is targeting more bank employees than originally thought). The two aren’t even close. Our pay czar, Kenneth Feinberg, would cap base salaries only at banks who haven’t yet paid back their TARP bailouts. Salaries aren’t where the big bucks usually are and the Feinberg plan wouldn’t affect those still sitting on government funds, even though they’ve all benefited from them.

The UK would tax all banker bonuses—whether their firms are still technically on the dole or not—50 percent. That, as you can tell from all the gnashing of teeth and tearing of Saville Row-sewn cloth happening in the City of London right now. The WSJ doesn’t point out until well down in the story how much weaker the U.S. moves are.

If you want evidence that the U.K.’s efforts are still not all that, read this quote in the NYT:

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“This definitely forces you to take more aggressive evasive action,” said one investment banker, who was not authorized to speak publicly.

Note that this banker said “more aggressive,” implying he was already taking evasive action. Why is that not surprising. Surely there’s a mallet big enough to end this game of Whac-A-Mole. Sounds like a good story: Talk to experts about how to smother such attempts, which would presumably including jacking up base salaries, for one.

And here’s some evidence that the regulatory crackdown isn’t quite all that:

“There are so many ways for a bank to hide its risk exposure,” said Jon Danielsson, a professor of finance at the London School of Economics. “Taxing profits or bonuses will have no impact on risk-taking behavior.”

The Times quotes a Brookings guy saying we can’t do that here, and he’s probably right:

“I think it is very unlikely that you would see this kind of tax on bonuses here in the U.S.,” Douglas J. Elliott at the Brookings Institution in Washington said. But, he added, “There are going to be big bonuses this season. There will be high levels of public anger. Therefore there will be some bills introduced. I just don’t think they are going to make it through.”

As I said yesterday, it would be great to see a story exploring just why that is. Why is the UK so much tougher on its banks than we are?

But with the news this morning out of Paris and Berlin, this tax has more of a movement feel to it. As gridlocked and captured as the U.S. system is, it’s not unthinkable that it may get swept up in it, too.

Because even the politicians have to follow the public at some point. Check out a new Bloomberg poll on what Americans think about the impending record bonuses at banks:

Banks that got taxpayer help through the Troubled Asset Relief Program — the $700 billion financial rescue plan passed by Congress last year — shouldn’t pay any bonuses, according to 75 percent of those polled.

Of those, 51 percent say even the banks that have paid the government back shouldn’t be rewarding their employees so soon.

That means you, too, Goldman Sachs.

There are a couple of nice man-on-the-street quotes here:

The fact that they’re even in existence should be bonus enough,” says Cassie Swihart, a 58-year-old retired registered nurse from Warsaw, Indiana…

“Why would you want to give somebody a bonus who put us into this situation?” said respondent Elijah Brown, 42, an unemployed union contractor from California.

This will only become more interesting as hard news of the year-end bonuses emerges.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.