Windfall taxes on bank bonuses: why they are right
Banks are blowing a lot of hot air about, screaming "don't tax windfall bonuses!" The UK government could be spoiling for this fight: as the Guardian notes, UK Chancellor Alistair Darling:
"is drawing up plans to face down the country's top bankers by taking the "nuclear option" of a windfall tax on their bumper bonuses as part of measures aimed at the super-rich. The dramatic move, which was off the agenda just weeks ago, is under active discussion as the Treasury and No 10 try desperately to control the explosion of public anger over bankers' pay."
The bankers are moaning, and their sense of self-entitlement is, apparently so strong, that there are
"rumours of senior Goldman Sachs executives buying handguns to protect themselves from the baying mob – the alternative of prudent self-restraint perhaps not occurring to them."
The bankers' wheedling is unjustified for many reasons, including:
- To a very large degree, the profits which lead to such large bonuses are "rents" stemming from banks' special privileges, not properly earned income. Otherwise, the forces of market competition would have driven super-profits down to more normal levels. A good response to unearned income, generally, is to tax it heavily.
- Related to the first point, these super-profits flow to a large degree from the backing of the state, as lender of last resort. The s
- Banks, as we have noted, are not normal market participants. They have unusual privileges, responsibilities and effects on societies, and they should be taxed in unusual ways.
- The point of government rescues is to protect the financial system, not to make bankers rich - especially those who through skewed bonus incentives, and otherwise) got us into the mess in the first place.
- As Martin Wolf put it, "Windfall” support should be matched by windfall taxes."
- As we have explained, the purpose of state bailouts is to recapitalise the banks. But we need to tax them too, to begin to pay for the process of cleaning up the mess they created. The best way to do this is to tax the bankers, not the banks. A windfall tax on bonuses does just that - it still allows the banks to build their capital.
- Banks should pay an insurance cost for their licence to engage in risky activities. The insurance comes from the state, so (leaving aside regulatory capital requirements) the cost should be paid in taxes.
- Public finances are going to be devastated for years, even decades. The public is rightly baying for bankers' blood. We live in democratic societies, and the politicians must respond to what the public wants.
- In response to the cry that "they will flee to other jurisdictions and everyone will lose out" - nonsense: first, the taxing windfall bonuses will drive the dangerous and "socially useless" parts of banking abroad - the more, the better; second, moving the frame of reference from the national to the global level, then the argument disappears entirely. Third, so much of this kind of talk is bluster. The only thing that is required is leadership, as we have explained. What The Guardian is suggesting may happen would be an example of that.