Other proposals aim mainly to achieve revenue and fairness objectives, as well as a means to support indirectly bank recapitalizations or a retroactive measure for banks that received state aid. These motivations were given for the tax on bonuses introduced in a coordinated move by the UK and France in 2009. The UK bank payroll tax applied to banking groups (including building societies) and was levied at a rate of 50 per cent on all discretionary and contractual bonus awards, to the extent that the bonus exceeded £25,000. It took effect from the time of the announcement, on 9 December 2009, until 5 April 2010. The French tax applied to bonuses, including deferred payments and awards of stock as well as cash.
Some interesting lessons can be learned from the UK and French bonus tax experiment. Thefirst one is that the two governments were well aware of the potential consequences of the tax on the location of financial services as shown by the effort to coordinate their policies and by the one-off nature of the levy.14 The second is that the tax, while formally applying to labour income, appears in many instances to have been paid out of profits (via a grossing-up of pre-tax compensation). The tax appears to have raised revenue for £2.5 billion, an amount aboutfive times larger than the government initial
13Office of Management and Budget (2011: 39).
14In the British case, the tax on bonus is only partly one off, as from 6 Apr. 2010 the top marginal rate of the personal income tax was raised from 40% to 50% for income above £150,000.
Table 1.1. Financial levies and taxes in the European Union, 2011
Country Rate Base
Germany Progressive fee for liabilities: • Liabilities excluding capital and deposits
• 0.02% for liabilities under €10bn; • Derivatives (notional value)
• 0.03% over €10bn; and
• 0.04% above €100bn Flat fee for derivatives
• 0.00015%
Capped at 15% of credit institution’s annual profit (after tax)
France 0.25% of the capital requirements (based on Risk weighted assets)
Risk-weighted assets
Austria Progressive levy: Unconsolidated balance-sheet total excluding subscribed capital and reserves, secured deposits, and certain liabilities to banks, provided they are necessary to fulfil liquidity provisions plus add on forfinancial derivatives on trading book
• no levy for base under €bn;
• 0.055% for base over €1bn; and
• 0.085% for base over €20bn plus 0.015% on the volume of all
financial derivatives
Portugal 0.05% on banks’ liabilities (i) liabilities excluding Tier 1 and Tier 2 capital and insured deposits (only the amount effectively covered) 0.00015% on off-balance-sheet
derivatives
(ii) notional value of off-balance-sheet derivatives will also be‘levied’
(excluding those used for hedging) For both cases, the amount on which
the levy will be calculated corresponds to the annual average of each end-of-month balance.
Denmark Ex post levy depending on the need but annual contributions capped at 0.2% of covered deposits and securities
Covered deposits and securities
Hungary Progressive levy: Balance-sheet total corrected for interbank loans
• 0.15% below and
• 0.5% above HUF50bn Sweden 0.018% for 2009 and 2010
0.036% after 2010
Liabilities excluding equity capital, debt securities included in the capital base, group internal debt transactions between those companies paying the fee, and debt issued under the guarantee programme
United Kingdom 1 Jan. 2011–28 Feb. 2011: 0.05% for short-term chargeable liabilities and 0.025% for long-term chargeable equity and liabilities.
Liabilities excluding Tier 1 capital, insured deposits, policy holder liabilities, and assets qualifying for FSA liquidity buffer
1 Mar. 2011–30 Apr. 2011: 0.1% for short-term chargeable liabilities and 0.05% for long-term chargeable equity and liabilities.
1 May 2011–31 Dec. 2011: 0.075%
for short-term chargeable liabilities and 0.0375% for long-term chargeable equity and liabilities.
continued
estimate.15The high tax yield provides evidence of the choice of many banks to absorb the cost by‘grossing up’ their bonus pools.16The motivations for the
‘tax shifting’ in the UK appear to originate in the ‘mobility’ of skilled labour (Radulescu 2010). Shareholders appear to have borne the tax partly to reduce the impact of a higher top marginal tax on their globally mobile employees.
This desire to maintain a UK presence may be suggestive of the existence of locational rents associated with a London presence. The nature of these and the extent to which they are durable over time are not clear.
Tax shifting raises two issues. Thefirst one is related to the effect of the tax on bank capitalization. To the extent that the tax is borne by banks’ profits through grossed-up bonuses, the levy may have a negative effect on bank capitalization, thereby running against the regulatory objective of strengthening the capital base of banks. The second is whether a direct levy on banks’ profit may not be a more efficient way for allowing the financial sector to repay the cost of the bailout.
Table 1.1. Continued
Country Rate Base
1 Jan. 2012 onwards: 0.078% for short-term chargeable liabilities and 0.039% for long-term chargeable equity and liabilities.
Latvia 0.036% Liabilities excluding equity capital,
deposits subject to a deposit guarantee scheme, mortgage bonds, and subordinated liabilities that are included in equity capital as subordinated capital
Cyprus 0.095% on the overall level of deposits in Cyprus (see base) for the years 2011 and 2012. Capped at 20% of credit institution’s taxable income for the two years 2011 and 2012.
Overall level of deposits (of residents and non-residents) in Cyprus, excluding the interbank deposits of credit institutions operating in Cyprus. The tax imposed for 2011 will be calculated on the basis of deposits at 31 Dec. 2010.
Respectively for 2012, the tax imposed will be calculated on the basis of the deposits at 31 Dec.
2011.
Source: Economic and Financial Committee (2011).
15Brooke et al. (2010).
16George and Megan (2010). There is also anecdotal evidence that some bank had planned to raise its base salaries for managing directors and others in order to make up for lower bonuses (Schaefer et al. 2009). The discussion about the extent of the tax revenue windfall does not appear to have taken account of the reduction in the corporate tax base associated with higher gross compensation.