In his annual pre-budget report, Chancellor of the Exchequer Alistair Darling said that a levy of 50 percent would be applied to any bonus over $41,000. Darling said the toll could raise $900 million, which would be used to finance measures aimed at cutting the country's 9 percent unemployment rate.
"There are some banks who still believe their priority is to pay substantial bonuses to their already high-paid staff, Darling said. "If they insist on paying substantial rewards, I am determined to claw money back for the taxpayer."
Peter Macdiarmid, Getty Images
British Chancellor of the Exchequer Alistair Darling is no Santa Claus for Britain's bankers this holiday season.
The new tax is directed at all British banks, whether they profited from bailouts or not. Darling's U.S. counterpart, Treasury Secretary Timothy Geithner, has subjected only recipients of government money to pay controls. Geithner told Bloomberg TV this week that he wanted an end to "an era of irresponsibly high bonuses," and that he wants "to see fundamental constraints on how senior executives are paid" even among banks that have paid back their government aid to get out from under compensation limits. Nothing as dramatic as a whopping, across-the-board 50 percent tax seems likely, however.
The revenue pocketed through the new tax will barely make a dent in Britain's national debt, which is expected to hit $2.3 trillion by 2014. So what's the real reason behind the crackdown on big bonuses? Well, there's a parliamentary election due in May -- the ruling Labour Party currently lags behind the opposition Conservative Party by eight points -- and any banker-punishing move is a guaranteed crowd-pleaser.
Peter Mandelson, the government's business secretary, denied that the tax was an attempt to win favor with the public. "I know some people think that the banks have brought this on themselves and that we just ought to teach them a lesson," he said. "That's not the frame of mind that we are in."
However, there's no doubt that the levy will play well with the British public, many of whom think bankers both caused and profited from the recession. Since 2007, British banks have received $1.4 trillion in government bailouts. But while they've happily quaffed taxpayers' money, banks have so far been unwilling to curb their extravagant bonus payments, despite the fact that many would have gone out of business had it not been for government intervention. This winter, up to 5,000 executives in the City of London are tipped to claim bonuses of $1.6 million or more. In a country where most people will soon be hit with higher taxes and fewer public services as the government struggles to pay off its soaring debt, that money grab doesn't go down well.
Although some bankers have warned that the new super-tax could lead to businesses fleeing overseas, few could have been shocked by the announcement. Both Labour and the Conservatives have long cautioned executives against being seen to line their own pockets while the nation suffers.
The mass anger that bankers provoked in Britain was clearly seen in the spring, when ex-Royal Bank of Scotland chief Fred (nickname: "The Shred") Goodwin was rewarded with a pension pot worth $1.1 million a year -- despite the fact that his bank had recently been saved from collapse by the government. Newspapers ran headlines screaming "Off with his Fred" and "Shred Fred," and windows at Goodwin's Edinburgh home were smashed by vandals. And at an anti-capitalist rally in London in March, protesters broke into and looted an RBS office, while onlookers cheered.
So maybe instead of decrying Darling, bankers should thank him for this earnings cut. After all, if it successfully reduces the public's rage, it could mean they have to clean up fewer shattered windows.
