Short-term Political Gain Increases Potential for Labour Pain in UK

With today's announcement that a one-time tax of 50% would be levied on both citizen and ex-pat bankers in the UK, Gordon Brown's Labour Party made a strong statement to Britons that it intends to punish financiers for their greed and past failures. However, despite a populist short-term boost to flagging poll numbers, Labour may come to regret this move heading into next year's general election. This is because the revenue impact of this purposely punitive tax will be far less beneficial to society than the economic benefit that would otherwise be gained by increased spending both in the short and medium-runs.

The City of London is one of the great financial centers of the world, neck and neck with New York in terms of transactions and IPOs over the past few years. It is not likely that it will lose its competitiveness when it comes to attracting top talent overnight, even with the potential of a big tax bill attached to employment contracts. Smart people will continue to seek jobs there, and it is unlikely that a mass exodus of talent will occur now that the announcement has been made as some fear. However, in an economic environment where unemployment numbers are obsessed over, contracting growth numbers are the norm, and there are legitimate fears that even the holiday season will not provide enough stimulus to carry retailers into the black this year, surprise taxes on top-earners should not be viewed as one of the keys to recovery.

This should not be viewed as an endorsement of the mess banks have gotten themselves into recently. In fact, it is my opinion that this bonus situation could have been avoided entirely if government had kept its hand out of the mess and allowed the weak to fall prey to the whims of creative destruction. However, whatever one may think about the trickle-down effect of the spending of the wealthy in general terms, surprise cuts to relied-upon income for top-earners will certainly have a negative impact on the broader economy. This is especially true with the timing of the announcement. Spending is likely to be curtailed even further than it might have been as bankers change spending plans on a dime.

Historically, end of year bonuses go to everything from down payments on homes to holiday presents and playthings. They impact spending on both necessities and discretionary items. Because of multiplier effects, the resulting impact of this spending is far greater than the boost to Her Majesty's Revenue and Customs coffers via tax could ever be.

Any taxing and subsequent spending by Labour is bound to have a shadow of the impact that top-earners could have by simply spending during the holiday season. Ultimately, if the same retail workers, travel agents, hoteliers and real estate agents who Labour is courting by making these moves are still feeling economic pain next year, it could very well be David Cameron who is responsible for the next round of budget announcements.