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Taxation without Representation – Again?!?

By Brian | July 20, 2010 | Share on Facebook

Britain’s fiscal year has ended, and the results of its 50% tax on bank bonuses have been tallied:

LONDON—U.S. banks have paid the bulk of the £2.5 billion ($3.81 billion) the U.K. has collected from its bonus tax designed to curb excessive pay, hitting banks’ second-quarter earnings while creating a windfall for the U.K.’s new government.

The one-time tax to collect 50% of bank bonuses above £25,000 was introduced in December by former Chancellor of the Exchequer Alistair Darling, who initially estimated it would raise £550 million. . . The charge applies to all bank employees working in the U.K., regardless of where the parent company is located.

According to statements in the past few days from J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc., the four banks collectively paid at least $2 billion toward the tax in the second quarter. The U.K. five major banks by assets–Barclays, HSBC Holdings PLC, Lloyds Banking Group, Royal Bank of Scotland Group PLC and Standard Chartered–collectively paid about $1.1 billion to cover their bonus tax bills.

(NOTE: The Wall Street Journal may ask you to pay to read the whole article. Don’t – read it for free.)

So that’s $2 billion less for these banks’ (predominantly U.S.) shareholders, or $2 billion less in available capital to modify underwater (American) mortgages, or $2 billion less to loan to (American) small businesses – take your pick. Either way, it occurs to me that as an employee, shareholder and customer of one or more of these banks, the British government just levied a tax on me, even though I didn’t get a vote in their election. And the recently elected government is “warn[ing] the industry to be on alert for further taxes and regulations, particularly relating to compensation.”

Haven’t we been down this road before, England? Don’t you remember what happened the last time? I’m pretty sure it made all the papers. Now, if you’ll excuse me, I think I’ll go get myself a cup of tea…

Topics: Money Talk, Political Rantings | 5 Comments »

5 Responses to “Taxation without Representation – Again?!?”

  1. Jeff Porten says at July 20th, 2010 at 8:37 pm :
    I don’t think you’ve thought through the logical conclusions to the points you’re making here.

    1. You are saying that it would have been better for the UK to impose this tax directly on the bankers, rather than the banks? Because then the banks could have paid out the same bonuses, and just left their employees to handle the expense. According to the Guardian, this was the bill as originally written, but charging the banks directly was a last-minute change to appease opposition.

    2. You are saying that governments does not have the right to set taxes on foreign companies operating in their jurisdiction? Because that’s Glenn Beck territory. By your logic, unless there is completely free trade worldwide, then it’s a tax.

    I’ll also take a rebate on all federal sales taxes I paid on my cigarettes while living in DC, please.

    3. You are saying that the British took money out of US pockets. It seems to me to be more accurate that the US banks chose to do their accounting in order to circumvent the intent of the tax.

    A tax is a business expense. It was announced in December, 2009, effective immediately (based on what I’m reading now). The banks are apparently taking it as a charge against their 2Q 2010 earnings — which leads me to wonder why it wasn’t counted as a known future expense for the calculation of the 2009 bonuses. That’s the clear intent of the law.

    Just doing the math straight, if $2 billion was paid in tax, then $4 billion was paid in bonuses in the UK. Assuming that the $4 billion number was preset, and the $2 billion is a purely “extra” payment, then the banks could have made it revenue neutral by reducing the bonus pool to $2.66 billion and paid $1.33 billion in tax. Presumably, this could be amortized across the entire banking structure — as DeutscheBank did — or you could argue that the British bankers should take this charge on the chin, precisely because they are the people with representation in the UK.

    Phrasing this as “the US versus the UK” is just silly. I suspect that a British blogger could add up the cost to the UK economy from the actions of US banks, and come up with one hell of a lot higher number.

  2. Brian says at July 20th, 2010 at 10:06 pm :
    OK, first of all, the whole thing is kind of tongue-in-cheek. So deconstructing it is a little silly. That said, I’ll respond briefly to each of your points:

    1. The fact that it could have been worse doesn’t make it better.

    2. I understand that the economy is global and most large companies are international. I also understand that the different tax policies in the different countries drive the corporate structures of these companies, not the other way around. So raising taxes on corporations in your country is a sure fire way to get those corporations to re-organize to another country. All of that said, I do find it curious that this British tax affected American businesses twice a much as British businesses. It sounds to me like someone in London scored some cheap political points by finding a way to tax non-British citizens, and that’s not a precedent I’m completely comfortable with. Doesn’t make it illegal or anything, just an international extension of “using tax policy to drive social policy.”

    3. Here, you’re simply inaccurate. I can’t quote you the governing GAAP principle, but I can guarantee you that the companies were told (either explicitly by the British and/or American governments, or by their lawyers) how they were supposed to handle the tax expense. For supporting evidence, check out the billion dollar expenses companies like Catepillar and AT&T took in the quarter the healthcare reform bill was passed, even though the actual expenses won’t take effect for several years.

    The article I linked to mentions that the revenue was much higher than expected because the big banks didn’t cut bonuses because of the law (which was the hope, I think). In actuality, the whole truth is that the European banks (Barclays, UBS, Deuthsche) lowered everyone’s bonuses and raised everyone’s salaries to compensate, which reduced their tax liability, but also reduced their ability to reduce compensation in the next financial downturn – the exact opposite of what the law intended.

    The American banks did some of this, but mostly kept bonuses high in order to stem the tide of execs leaving for foreign banks. The whole “revenue neutral” argument assumes that cutting people’s bonuses in half has no effect on revenue, which is another (very long) blog post, so I’ll just sum up my response in three words: No, it doesn’t.

  3. Jeff Porten says at July 22nd, 2010 at 7:14 pm :
    The tax raised five times what the British government expected. According to what I’ve heard on the BBC, the UK is supposed to be among the best in the world at this kind of estimate. Which means that the law was probably intensely flawed in its ability to affect banking behavior–but it’s still the behavior of the banks that caused the taxation.

    I’m sorry, I don’t buy your argument that the lawyers and accountants said, “Here’s the only way you can do it, I’m sorry, but that’s just the way it is.” Small businesses generally have options for their accounting, and vary them in order to avoid taxation. Larger businesses generally have more. Unless there’s a law that says, “You must use such-and-such accounting in the event that the UK ever decides to whack you,” then I have trouble believing that there’s only one way to do it.

    Again: the tax wasn’t on American citizens, it was on any corporation organized as a bank on UK soil. You still haven’t explained how the UK forced the banks to pay that much in tax, when it was avoided by EU banks.

    You still seem to be making an excellent argument in favor of taxing the employees directly.

  4. Brian says at July 22nd, 2010 at 10:58 pm :
    OK, one more time – it was a bit of a joke: Britain taxing Americans, like 1776. Get it? Hah, hah.

    In actuality, it’s not really that different than a VAT tax or an import/export tarrif. One country making money off of another country. Not really that big a deal.

    That said, the UK is among the best at this kind of estimate? You mean every other time a country tried to figure out what a tax on a particular type of compensation would do to the affected industry, they did worse than the UK? Pretty neat trick, since this is the first tax of this kind. I think perhaps the BBC’s showing a bit of patriotism there.

    No matter – the reasons the tax failed (from a policy influence perspective) are well-discussed and well-documented. American banks couldn’t afford to drastically reduce bonuses for fear of raining down holy hell from the US Congress and the media. Banks based outside of the US had no such PR problem and took exactly those steps. In recent months, with the pressure off (thanks to the SEC & Goldman + BP), some of the US banks (not Goldman, to my knowledge) have made similar moves, but very quietly and with little public reaction.

    As for Generally Accepted Accounting Principles, you’re just making stuff up now. Yes, there are choices firms can make, but the Financial Accounting Standards Board (FASB) is a constant source of controversy, most recently about the pooling of interest and the expensing of stock options.

    These decisions can vastly impact the financial statements of a company, which can vastly influence their stock price. So, if anything, you have it exactly backwards: the bigger a company you are (read: public company), the less wiggle room you have.

    Which is not to say there aren’t legal (and illegal) ways to lower your tax expense (as the UK was hoping would happen here).

    As for taxing employees directly, you seem to be reading that into what I’m saying. Had the UK wanted to limit the tax to within its own borders (it didn’t), there are lots of ways to do that, including making the tax applicable only to those employees who receive bonuses and reside in the UK, for instance. Who they tax is not relevant here.

  5. Jeff Porten says at July 25th, 2010 at 2:36 pm :
    the UK is among the best at this kind of estimate? I think perhaps the BBC’s showing a bit of patriotism there.

    Doubt it. The Beeb is pretty brutal against the UK government when the situation warrants. As I gather, the UK was the first country to devote a department to this kind of economic analysis, so their techniques are considered to be the gold standard. I cited the BBC only because I’m taking their word for it rather than digging deeper.

    American banks couldn’t afford to drastically reduce bonuses for fear of raining down holy hell from the US Congress and the media.

    Huh? The holy hell came from maintaining the large bonuses. A reduction would have been good PR, even if—as you point out—the compensation had been shifted elsewhere.

    [The FASB's] decisions can vastly impact the financial statements of a company, which can vastly influence their stock price

    Granted, I know diddly about how banks are regulated over and above the standard public company. What I do know is that accounting news is reported as “the company decided to do X”, ergo, they have same decision space. I.e., “Apple used to charge $1 for some downloads, but they now can give them away for free.”

    Had the UK wanted to limit the tax to within its own borders (it didn’t), there are lots of ways to do that

    Unless the UK has enlisted Harry Potter at Inland Revenue, they can only tax within their borders. Said taxes affect any corporation operating in London. Much in the same way that I just paid PA sales tax on my coffee, but next time I’m hanging out in England, it’ll be VAT instead.

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