Tax something and you get less of it

The only certain things in life may be death and taxes. In Economics we are certain that people respond to incentives, just not always in ways predicted. This gives rise to The Theory of Unintended Consequences. It's just a theory but the evidence to support it is manifold. [Aside: A super little example can be seen in this report on attempts to preserve fish stocks in the Pacific.]

Anyway back to the taxes. Last week the Chancellor of the Exchequer in the UK, Alastair Darling, announced a super-tax on bankers' bonuses of 50% on all bonus payments above £25,000. This tax was targeted at those who had allegedly caused the finanical crisis and to offset the "bailouts" given to the financial sector.

In this instance a quick look at the incentives should clearly lead to the unintended consequence of this action. Rather than pay the tax, financial firms and their employees will just leave. It seems this may already be happening. Sky News' Business Report Mark Kleinman reports:

I have learned that Tullett Prebon, one of the largest independent financial trading firms in London, is offering its employees the chance to relocate to its offices in Switzerland, Bahrain and Singapore as a result of the uncertainty caused by last week's Pre-Budget Report (PBR).

Whether they will actually move is debateable. And also, it is actually too late for Tullett Prebon's employees to avoid the once-off super tax for this year, as the BBC report. However in an email to staff last week, the Chief Executive of Tullett Prebon (a company which received no "bailout" money), Terry Smith said:

"It is not clear how if at all the Chancellor's announcement yesterday will affect us, but his proposals regarding the way that bonuses are to be treated this financial year, coupled with the explicit refusal to guarantee that similar "one off" taxes will not be imposed next year and in subsequent years, has caused a number of you to once again raise the matter of relocation out of the United Kingdom."

The uncertainty alone may cause some employees to move to Tullet Prebon's offices in Switzerland, Bahrain or Singapore.

Alastair, my darling, surely you know that a bit of something is better than a lot of nothing.

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