Bankers and their Bonuses*

A very interesting article.

We analyse the role of financial sector workers in the huge rise of the share of earnings going
to those at the very top of the pay distribution in the UK. Rising bankers’ bonuses accounted
for two-thirds of the increase in the share of the top 1% after 1999. Surprisingly, bankers’
share of earnings showed no decline between the peak of the financial boom in 2007 and
2011, three years after the global crisis began. Nor did bankers’ relative employment position
deteriorate over this period. We discuss proposed policy responses such as transparency,
bonus “clawbacks”, numerical bonus targets and tax.

Bankers seem to be doing very well out of the crisis. And this was a well argued paper. For example: I quote:

In terms of policy, we begin by considering whether there is really any “problem” to be
addressed. If bankers are paid in a competitive labour market and simply rewarded for their
talent, there seems little reason for government intervention, at least on efficiency grounds.
However there seems to be substantial evidence of rents within the sector – a result of
imperfect competition or arising from the implicit and explicit guarantees and subsidies that
the sector receives from the government due to the “too big to fail” problem. We discuss
various policy options that seek to either remove the basis for these rents or to tax them ex
post. Finally, we note that on equity grounds, policy may seek to reduce the post-tax income
taken by those in the upper echelons of the income distribution – which implicitly targets
bankers given their prominence among high-earning workers. This has primarily taken the
form of higher marginal tax rates.

The authors argue that regulators are unable to remove the rental issue. Which is a curious argument to make but then in the absence of a truly global government with one currency, this issue will keep on happening as national regulators will keep on making suboptimal decisions based upon large banks presence in multi country jurisdictions. We have been here before, remember the Dutch and East India companies? They were also too big to fail. So I suspect and concur with the authors that the result will be to increase the marginal tax rates on the top earners. This can have unforeseen implications.

See for example what happened in France. Here’s one example:

Over 8,000 French households paid taxes topping 100% of their incomes, according to French Finance Ministry data. See Taxes on Some Wealthy French Top 100% of Income. You may scratch your head in disbelief. How is that possible?

Stateside, you might guess it was the alternative minimum tax. In France, it was a one-time 2011 levy on incomes for households with assets over 1.3 million euros ($1.67 million). 8,000 families paying 100% may seem a small number, but nearly 12,000 households paid more than 75%. The percentages sure do grate.

Or this:

Hollande's 75% supertax on the mega-rich is at the centre of another row after French football clubs said they would cancel all matches scheduled for the final weekend in November to protest at the levy.

The symbolic tax – a 75% tax on income exceeding €1m (£850,000)a year – has caused a headache for the Socialist government since it wasthrown out as unconstitutional by France's top court. To avoid the embarrassment of a major policy U-turn, ministers redrafted the tax earlier this year to shift the burden from individuals to employers – a legislative shimmy that has spooked football clubs, which famously pay vast salaries even to bit-part players.

Clubs say they are already under financial pressures and that the tax would spark an exodus of top players to rival leagues abroad, killing the domestic game. In spite of a poll showing that 85% of French people are in favour of the tax being applied to football clubs, the clubs decided to step up their protests.

this promises to be fun. Much more ink and excited electrons will flow below the bridge before this is settled.