The problem with taxing bankers\’ bonuses

An energy trader is suing BP for unpaid bonuses of $1.1m (£700,000), claiming that he made the oil giant more than $20m of profit in a single year.

It isn\’t just bankers who get the bonuses you see.

In fact, it\’s not even only bankers that play in the markets where bankers earn bonuses.

So restricting how much can be paid to bankers as a bonus, taxing them differently, even insisting upon deferred payment, could just mean that activity currently done within a bank will just be done outside it.

If your contention is that those with the ultimate taxpayer backstop should not be speculating, this is just fine of course. Although, in the UK context, it\’s rather difficult to insist that such speculation was or is the cause of our problems: Northern Rock went down over the funding system it used for its mortgages, not because of any speculative markets. RBS imploded because it had overpaid for ABN Amro and Lloyds is in the doo doo because of the merger with another failing mortgage provider.

But even if you do think this is a good enough reason, don\’t forget that there are no solutions, there are only trade offs. And one of these trade offs will be that such speculation moves out of the orbit of the banking regulators and: well, just look what happened to the unregulated shadow banking system, that one that existed outside the orbit of the regulators, indeed, that shadow banking system that grew up over the years precisely to be outside said orbit.

And there\’s nothing new or unusual about this problem: the secondary banking crisis of the early 1970s had exactly the same cause.

It\’s often better to have these things where you can see them, even if you don\’t do much about them, than try to do something and drive it all to where you cannot see, therefore cannot understand, them.

2 comments on “The problem with taxing bankers\’ bonuses

  1. Tim, I don’t know that big bonus payments from the company that gave us Deepwater Horizon is going to play any better than bonuses to RBS bosses.

  2. The guy was on about £75K basic, and wants his bonus of all of £15K or so from 2007. And now he wants £700K after being sacked for gross misconduct.
    Do I have just the teensiest suspicion that his misconduct was to grossly exceed his trading limits, and that the profits were a fluke?
    Perish the thought.

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