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Windfall Taxes on Bankers Pay and Bonuses

Readers will already know that Smart Taxes is not a supporter of windfall taxes on development land rezoning. This is because they will lead to landowners refusing to trigger the tax liability by simply not selling. Paradoxically, windfall taxes could lead to increased land cost as development land gets scarcer: – not going to happen today nor tomorrow, admittedly – but eventually.  Such windfall taxes are a distraction and could bring all taxes on upswings in land values into disrepute and, as we know, annual taxes (or rents) based on land values do not inhibit sales;-  they would even stimulate market transactions.  However, that does not mean that all taxes on windfall earnings are bad. Taxes on unearned windfall earnings by bankers are  well advised where the financial sector, fresh from government bailout, still insists on a level of remuneration that most people find incomprehensible. Tax Justice Network in the UK makes a good case below. The same case could justifiably be made for Ireland.

The bankers’ moaning is unjustified for many reasons, including:

  • To a very large degree, the profits which generate are “rents” not properly earned income. Otherwise, the forces of market competition would have driven super-profits down to more normal levels. The proper response to unearned income is to tax it heavily.
  • Related to the first point, these super-profits flow to a large degree from the backing of the state, as lender of last resort.
  • Banks, as we have noted, are not normal market participants. They have unusual privileges, responsibilities and effects on societies, and they should be taxed in unusual ways.
  • The point of government rescues is to protect the financial system, not to make bankers rich – especially those who through skewed bonus incentives, and otherwise) got us into the mess in the first place.
  • As Martin Wolf put it, “Windfall” support should be matched by windfall taxes.”
  • As we have explained, the purpose of state bailouts is to recapitalise the banks. But we need to tax them too, to begin to pay for the process of cleaning up the mess they created. The best way to do this is to tax the bankers, not the banks. A windfall tax on bonuses does just that – it still allows the banks to build their capital.
  • Banks should pay an insurance cost for their licence to engage in risky activities. The insurance comes from the state, so (leaving aside regulatory capital requirements) the cost should be paid in taxes.
  • Public finances are going to be devastated for years, even decades. The public is rightly baying for bankers’ blood. We live in democratic societies, and the politicians must respond to what the public wants.
  • In response to the cry that “they will flee to other jurisdictions and everyone will lose out” – nonsense: first, the taxing windfall bonuses will drive the dangerous and “socially useless” parts of banking abroad – the more, the better; second, moving the frame of reference from the national to the global level, then the argument disappears entirely. Third, so much of this kind of talk is bluster. The only thing that is required is leadership, as we have explained. What The Guardian is suggesting may happen would be an example of that.

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