The UK's 50% banker bonus tax is creating turmoil in the British banking industry—and could potentially have a huge impact on the country's Financials sector for years to come.
Some firms are considering relocating business operations to other, more business-friendly countries.
But the UK's loss is another country's gain—markets globally will likely be little affected.
There's a brawl on in the UK—and it could impact the country's Financials sector, possibly for years to come. The government took round one by raising the top income tax to 50%, levying a one-time (for now) 50% bonus tax on some 20,000 bankers (causing some confusion over who, exactly, is a "banker"), and giving free regulatory rein to the UK Financial Services Authority (FSA). In round two, the big banks are countering the government's new tax jab with a right hook—some major players are threatening to move out of London altogether.
The UK government's argued the bonus tax will encourage banks to reduce big bonuses—which in their view provided incentives for risk taking that greatly exacerbated the credit crisis and financial panic in 2008. (Though they're not likely balking at the expected £1 billion in expected tax receipts either.) Were big bonuses a major culprit? Maybe, maybe not. (Though we lean toward "maybe not.")
Whether or not you believe government compensation mandates are fair, unfair, or even effective at their stated aims, we can all agree unreasonably punitive taxes are great at driving businesses away. The UK is one of the most important global financial hubs; its economy is heavily dependent on banking. And already we're seeing some big banks checking for the exits. Goldman Sachs is reportedly investigating various strategies to lessen its tax burden, including uprooting business units altogether and moving them offshore. JP Morgan may scrap a £1.5bln plan to build new headquarters in London. We wouldn't be surprised to see other big (or even not-so-big) banks follow these giants. It's the Laffer Curve in motion—raise taxes, and you may find your tax base has dwindled, or relocated headquarters to Dubai.
Further, never forget the law of unintended consequences. Though the UK hopes bonus taxes will reduce bonuses, at some firms it's having the opposite effect. Instead of allowing their employees to bear the tax burden, Goldman Sachs and others may absorb the cost themselves—by increasing the amount of money allocated to bonuses, so employees receive the same net amount.
This tax scheme isn't the best news for Britain's Financials sector—yet it's likely to have little net impact globally. If Goldman up and leaves, that will be the UK's loss and another country's gain, and global markets will continue their march upward. We hope British legislators are paying attention: Generally, making doing business of any sort arbitrarily more expensive is never a wise idea—whether that business is one vital to general economic health (like banking) or making silicon chips or selling organic apples. Or, as one British politician cogently put it, "The solution to the banking crisis is not to drive banks out of London."