EDITOR'S TAKE: The solution to avoiding random tax increases is clear

When we wrote last May that banks would pay large bonuses at their peril this year, the immediate reaction (from a reader) was, "Don't be ridiculous. Why would a bank care less what the loser "general population" think?"

Needless to say, time has shown us to be right and that particular reader to be wrong. Banks do need to take the opinions of the general population into consideration because, in the West at least, they're operating in democracies. The populace do not like bankers; rumours of big bonuses sharpen that enmity.

Hence, following weeks of bonus speculation, the US government looks like following the UK down the route of punitive taxes for banks. As of last night, a levy on US bank profits is being mooted.

"Given the mood of the country, it is essential that we do it," House Financial Services Committee Chairman Barney Frank told the Wall Street Journal.

Coming so close to banks' year end results and surfacing only after most banks will have considered their 2009 bonus pots finalized, the US bank levy is messy. It makes the London bonus tax look curiously comforting for its certitude.

The Financial Times says the proposed US levy will probably fall only on the top 20 to 30 US banks. It will probably aim to recoup the $120bn spent in TARP funds, but will probably do so over several years.

If this is the case, the US levy could prove mostly mouth and no trousers. $120bn divided equally between 25 banks over three years amounts to $1.7bn a year. JP Morgan's total compensation costs could reach $29bn this year alone; Goldman's could total $22bn.

Nevertheless, what the past few months have shown is that if the electorate wants bankers' blood, elected politicians feel obliged to do something about it. If one form of taxation is not seen as being penal enough, another may be imposed later.

Choosing where best to locate investment banking operations has therefore become a game of gauging the political risk that governments will squeeze banks to appease voters.

Both Goldman and JP Morgan are among those said to be reviewing where to locate businesses in future. If they wish to pay as they please and to avoid unexpected tax increases, the factors they need to take into consideration are now clear: the political system (democracies are to be avoided); bailouts (historic banking bailouts foster popular dislike of the banking system); and budget deficits (large budget deficits incline governments to tax financial institutions in an effort to balance the books).

Weighing up these three measures, the financial centres of the future appear clear: Shanghai, Singapore, and Abu Dhabi (or maybe even Dubai). Alternatively, if they wish to continue operating in Western democracies unhindered by unexpected taxes, the banking industry will seriously need to clean up its image. When it comes to 2009 bonuses, it has left this a little late.