Ministers’ desire to clobber senior bankers with some kind of tax on their bonuses is understandable, but it will be fraught with practical difficulties.
It may win votes in the short term, but the obstacles to a tax which is fair, doesn’t contravene European legislation and has no nasty unseen consequences are considerable.
Accountants can think of no personal tax which targets an occupation. Priests and barristers may be able to claim specific trifling expenses, but an entire tax against one occupation is unheard of and sets a potentially dangerous precedent. If it’s bankers this year, could it be estate agents next year? Or professional footballers, or MPs?
While the appeal of targeting hated professions, or merely well-paid ones, is superficially attractive, the scope for abuse is considerable. Accountants last night were already suggesting such a tax could be discriminatory and illegal. They also suggested the tax authorities would quickly be tied in knots over what constitutes a banker, or indeed a bonus.
City folk have always been ingenious in helping clients legally dodge tax. How much smarter will they be in devising loopholes to sidestep one on themselves?
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And if banks alone are targeted, the risk is that the questionable activities they indulge in will simply transfer to non-banks. Reckless so-called casino-banking will merely migrate to other sectors.
Another problem could be the time-honoured principle that the tax authorities do not impose changes on money already earned. The next big round of bonuses are due to be paid in the first three months of next year, but in a sense they have already been earned for efforts over the past 11 months.
A tax on the imminent round of bonuses may not technically be a retrospective tax, according to one accountant, but the City will certainly seize on it as unprecedented. One theory is that the Chancellor will raise employers’ National Insurance contributions on bonuses above a certain level. This, of course, would penalise the bank, not the banker, though it might encourage the bank to pay smaller bonuses. It would have to be carefully structured: any NI increase is perceived as a tax on jobs.
A tax on banks would be easier to implement, but it could merely reduce the amount of profits retained to boost capital strength. With regulators desperate for banks to strengthen their balance sheets, this could backfire badly. The other consequence would be an exodus of talent. Not for the first time, the bankers seem to hold more aces than the authorities.