This is what will happen if income taxes are hiked to 70% and a windfall bonus tax is imposed
More colour is emerging on the government's intentions regarding personal taxation.
According to The Telegraph, Alistair Darling is thinking of imposing a 60-70% tax rate on everyone earning more than 500k, as well as a one-off windfall tax on bonuses in banks.
As we reported in May, the 50% tax rate already due to be imposed on income over 150k from April will, in itself, leave anyone earning over 250k in the UK with less disposable income than their counterparts in any other major financial centre globally. A 60-70% top rate of income tax - which wouldn't be transitory - would therefore blow the UK out of the international water.
Combined with the additional tax on bonuses, the following outcomes are likely:
1) City bonuses will be heavily deferred this year: If 2009 bonuses are subject to a one year punitive tax rate, banks simply won't pay them. Expect the bulk of payouts to be deferred until 2010 (perversely, therefore, damaging the Exchequer in the short term).
2) Salaries will be raised even higher than they have been already: If bonuses are subject to punitive levels of taxation, banks may well increase salaries for top performers beyond their current 300k ceiling.
3) A higher proportion of bonuses will be paid in stock/options: If only cash bonuses and income are subject to punitive tax rates, expect an increase in the proportion of bonuses paid in the form of options subject to (what is currently) an 18% rate of capital gains tax.
4) Departures for alternative employers: If only banks are subject to a punitive bonus tax, expect some traders to leave for hedge funds, prop houses and commodities brokers.
5) Lower tax receipts: Ernst & Young has calculated that a 60% marginal rate of taxation on income over 500k would raise 2bn for the British Treasury. However, as its head of tax policy Chris Sanger points out, this is subject to high earners remaining in the country: "The danger is that these highly mobile people will simply choose not to come here, meaning that we'll not only lose the 60% but all the other tax income they would have paid at the lower rate," he points out.
