One data point on tax incidence

by on January 10, 2010 at 5:14 am in Economics | Permalink

Warning: do not generalize.  Still, this is an interesting story:

City bankers will suffer little or no impact from the bonus supertax imposed by the government last month, according to a Financial Times poll of leading investment banks.

Most banks, polled in an anonymised survey, said they would absorb all or part of the cost of the one-off 50 per cent tax by inflating their bonus pools, even at the risk of irritating the government and their own shareholders.

The results chime with intelligence garnered by headhunters. “The tax is going to be 90 per cent absorbed by the banks,” said one senior recruitment consultant with clients in the City.

In many cases that will mean banks doubling bonus pools, with the cost of the tax borne by shareholders. Dividends, already under pressure as regulators force banks to retain earnings to boost capital, are likely to be hit, bankers concede.

1 valuethinker January 10, 2010 at 5:19 am

In other words the optimal tax. No deadweight loss due to a change in behaviour.

Just like petrol taxes, where we have some of the highest in the world (£20bn pa of revenue, in a country 700 miles long, 80% of whose people live in the lower 50%– our petrol tax amounts to c. $3USD per US gallon (total tax take, including VAT of 17.5%, is about 55p a litre, which is £2.09 per US gallon or c. $3.00), we can claim we are trying to discourage driving, but actually what we are doing is increasing government revenue.

The bonus tax was supposed to raise £500m, instead it will raise £2bn. But with no change in the behaviour of the taxees. Little or no deadweight loss. It’s been turned into a tax on excess bank profits.

Chancellor has scored a home run. |Law of unintended consequences.

2 yoyo January 10, 2010 at 7:16 am

The Chinese are laughing at us, once again.

3 Neal January 10, 2010 at 8:22 am

What does this say about the relative elasticities of labor supply/demand?

4 anon January 10, 2010 at 10:03 am

Warning: do not generalize.

Warning: do not try this at home. These are professionals on a closed course.

5 Brian January 10, 2010 at 11:28 am


If you believe banks add no value then you must believe that millions of customers and businesses who interact with them are extremely stupid. Also, it must be a huge mystery to you that banking services have spread globally to all countries despite it’s lack of worth.

Many people can’t comprehend the value of blogs, Twitter, and much of the Internet. It’s just information sloshing around after all. But I would argue both the banking sector and the Internet both add tremendous value to our world.

Revenues are normally a good measure of some sort of value provided.

6 Kenny Evitt January 10, 2010 at 12:23 pm

Warning: don’t think of a purple elephant!

7 Yancey Ward January 10, 2010 at 1:13 pm

Hey, it serves shareholders right. This is where the change, if needed, must arise- it is the shareholder’s money being pillaged, if it is (for the record, I think they are being robbed).

8 y81 January 10, 2010 at 2:51 pm

Doesn’t this suggest that most bankers have employment alternatives (with non-bank financial services companies, with banks in other countries, etc.) and that they must receive the same amount of take-home pay in order to remain at British banks? Since the tax is being borne by shareholders, won’t this mean that banks find it harder to raise equity capital, and become more leveraged? I guess what dopey lib/labs like the British want, so they deserve to get it good and hard, in my view.

9 Allan January 10, 2010 at 4:27 pm


I do NOT contest that ALL banks add no value. I do contest whether banks that pay their employees 8 figure salaries add value commensurate with the payments.

An example may be Goldman-Sachs, perhaps. Where it is investing money for venture capitalists or it is doing IPOs, there is value. But when it works in derivatives (taking hedges against its customers’ interests) it does not necessarily. The amounts paid to these investment workers (definitely not bankers in anything but name only (BINO’s?) are obscene and have no relationship to adding wealth to anything except their company’s profits (at the expense of the rest of the country when there the bubble bursts).

10 valentines day gifts January 10, 2010 at 11:08 pm

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11 mpowell January 12, 2010 at 4:14 pm

What Bernard Yomtov said. To put it mildly this casts some doubt on the general contention that workers are paid their marginal product and, more narrowly, that the obscene bonuses paid are simply a proportion of the individual executives’ value to the owners of the company (ie the shareholders).

Can those who propose maintaining the post-tax value of the bonuses not see how it confirms that those bonuses are pure rents? And that they are therefore fit objects for crushing taxation because there will be no efficiency cost?

The banker comments almost demand going forward with this tax just to see what happens. But no, I don’t think they have any idea how they might be undermining themselves. These spoiled brats have learned that threatening to take your ball and go home is the way to play the game.

12 Nancy Abrahamson August 20, 2010 at 3:30 am

There will be massive deadweight loss from the point of view of the UK. Businesses and employees in the London service industry will get hammered as high income earners are no longer around to spend locally.

13 wood blinds September 25, 2010 at 8:36 am

Twitter, and much of the Internet. It’s just information sloshing around after all. But I would argue both the banking sector and the Internet both add tremendous value to our world.

14 Alan Cassell November 10, 2010 at 6:26 am

This article deals with the question of how consumption taxes, especially the value-added tax,affect consumption prices. The analyses are based on data from EU countries for the period 1970-2004. The starting point is a conventional supply-demand analysis of the Tax incidence problem.

15 January 21, 2011 at 5:46 am

I think This is where the change, if needed, must arise it is the shareholder’s money being pillaged..Thanks

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