Dec. 9 (Bloomberg) — U.S. lawmakers already wary of expanding the government’s role in running financial companies probably will avoid matching the U.K.’s tax on banker bonuses.
“We don’t think it is at all likely that Treasury-IRS would impose a 50 percent tax on banker bonuses,” said David Schmidt, a senior consultant for New York-based compensation firm James F. Reda & Associates. “This pay cut would likely cause an exodus of talent.”
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U.K. Chancellor of the Exchequer Alistair Darling imposed the one-time tax today and said he will raise income taxes after elections next year. The levy applies to discretionary payments of more than 25,000 pounds ($40,522) and will be paid by the institution, not the employee.
The U.S. Congress this year unsuccessfully considered a 90 percent tax on bonuses at companies that received more than $5 billion in aid after retention pay for employees of American International Group Inc. sparked a public furor. The House passed the measure, while the Senate retreated when President Barack Obama said the U.S. shouldn’t “govern out of anger” and AIG employees promised to repay their bonuses.
Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank combined will hand out $29.7 billion in 2009 bonuses, up 60 percent from last year, according to analysts’ estimates. The three banks repaid aid received last year and aren’t subject to review by paymaster Kenneth Feinberg.
House Financial Services Committee Chairman Barney Frank today said he favors “increasing the tax level in general for upper-income people,” and said his committee lacks jurisdiction on tax matters.
‘Won’t Fly Here’
The U.K. measures “probably just won’t fly here,” said Charles Geisst, finance professor at Manhattan College in Riverdale, New York. In the U.K., “it’s as much a political excise tax as it is an income tax.”
U.K. bankers already pay a tax on their bonuses at their marginal rate that is due to rise to 50 percent from 40 percent on wages over 150,000 pounds starting in April.
“This policy makes U.K. banks less competitive internationally,” said Scott Talbott, chief lobbyist at the Financial Services Roundtable that represents large banks. “The new 50 percent bonus tax and the 50 percent income tax amount to a 100 percent confiscatory clawback of bonuses.”
Richard Waugh, chief executive officer of Bank of Nova Scotia, Canada’s third-largest bank by assets, said the U.K. measure won’t be adopted by other nations.
Studied Carefully
“When you look at the advantages and disadvantages of it, I think that the officials will realize the complications of quickly changing your tax has to be studied very, very carefully,” Waugh said today in an interview.
A U.S. bonus tax is a “great idea” that is justified by the taxpayer-funded bailouts, said Clyde Prestowitz, president of the Washington-based Economic Strategy Institute and a former Commerce Department international trade official.
“Goldman Sachs and the others may be making tons of money but they wouldn’t be making anything without the bailout, which saved them,” Prestowitz said. “There’s a lot of pain and agony out there because of their malfeasance.”
Compensation consultants and tax experts probably are “poring over the fine print in an effort to figure out legitimate ways to avoid this new tax,” said Robert Profusek, a partner at Jones Day in New York specializing in mergers and acquisitions and executive pay.
Donald Susswein, a former PricewaterhouseCoopers LLP tax lawyer, compared the U.K. tax to a 1993 U.S. rule barring companies from writing off most pay exceeding $1 million, except for performance-based compensation such as stock options. The rule triggered a surge in pay linked to stock options pay, Susswein said.
“That was one of the most disastrous policies the U.S. Congress ever undertook,” said Susswein, who runs a Washington- based consulting firm bearing his name.
