Britain's Hefty Bonus Tax Enrages Bankers

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Alistair Darling, British Chancellor of the Exchequer, 9-18-07
AP

In Britain, the government has taken action against big bank bonuses by announcing a plan to tax them to the hilt. The tax has London financiers in an uproar. CBS News correspondent Sheila MacVicar has more.

When Britain's Chancellor of the Exchequer - the equivalent of the U.S. secretary of the Treasury - stood in parliament this week, bankers knew they and their bonuses were in his sights.

"There are some banks who still believe their priority is to pay substantial bonuses," said the chancellor, Alistair Darling.

He announced a brand new 50 percent tax payable on bonuses over $40,000, a one-time hit supposed to raise an estimated $890 million. It's a drop in the fiscal bucket next to Britain's estimated national borrowing of $290 billion. And it's rankling many.

"It is a visceral, vicious, spiteful act," said David Buick, an analyst at BCG Partners in London. "But in terms of balancing the books and getting the UK economy, getting the show back on the road, it's a joke."

Critics are saying that the move is more about politics than economics and calling it "payback time" from the government.

Just as in the U.S., Britain had to bail out British banks to the tune of $1.3 trillion in total support.

"No politician, no government could conceivably allow bankers to haul off great big stinking sacks full of cash when they've been floated by the taxpayer," said London Mayor Boris Johnson.

The bonus claw-back hits all bankers at all banks, whether they were kept alive by the government or not.

Investment bankers are feeling so besieged that one major bank has cancelled its holiday party and banned highly paid employees from holding their own. The message: no conspicuous consumption here.

But the banks may delay bonus payments until after the tax is lifted, or, more acceptably, offer future benefits rather than ready cash. And they have issued a warning: keep this up, and we'll go where the welcome is warmer.

"Can individuals go anywhere else? Yes, we have the power of travel and flight and we can do business wherever we wish to," said Justin Urquhart Stewart, director of Seven Investment Management.

The threat - made many times before - is that bankers will flee London. Only this time cities like Singapore are closer to the fast growing economies of Asia and income there is taxed at a low, low 15 percent.