Progressive taxation

December 9, 2009 in Finance

The UK's plan to tax banker bonuses at 50% is really quite clever. The tax is borne by the employer, not the employee, and so the following results:

  1. Bankers keep their bonuses, and the incentive structure (for better or worse) remains intact...
  2. Taxpayers extract value from the bank, and populist rage (somewhat) subsides...
  3. Shareholders suffer.

Let's just hope none of the taxpayers also happen to be shareholders, because at some point they're going to figure this one out.

I'm particularly curious to see what RBS does, as the bank's majority shareholder is none other than the British government. Thus far, the bank and the government have clashed over a series of controversial bonus plans: one side insisting it will make those payments, the other insisting exactly the opposite. Perhaps this tax scheme will incentivize the government not only to encourage bonuses but to ensure they are generous, as the tax essentially amounts to a bonus-linked dividend for the majority shareholder. Chances like this for the government to directly extract value from companies are few and far between...

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