The United Kingdom is set to subject residents who earn more than £150,000 a year to a 50 percent tax starting in April of 2010. The new tax is particularly aimed at wealthy bankers and hedge fund professionals who have been the primary target of public criticism during the financial crisis. Despite the fact that many financial institutions had to be bailed out by the government, many finance professionals in firms that weathered the storm continue to earn substantial amounts of money. Their continued prosperity during tough economic times has raised public discontent, leading politicians to push through the new tax. In an article from the Times Online, London’s Mayor Boris Johnson expressed his fear that many financial firms and their professionals will flee London to escape the tax. According to Johnson’s January estimate, London could lose 9,000 top earners because of the bonus tax, reducing tax collections and insurance contributions by approximately £1.2 billion. While experts are predicting that the new tax could bring in over £2billion, the possible exodus of financial professionals could have a lasting impact on the United Kingdom’s future economy. Many of London’s largest hedge fund managers, including BlueCrest Capital Management and Brevan Howard Asset Management, have publicly announced that they are planning to send scores of top traders to Geneva to avoid the new taxes.
The United Kingdom’s tax situation can be interpreted as a two-by-two Economic game matrix with the government and financial firms as the players. The government’s two options are either to proceed with the 50% tax or repeal it before the deadline, while the financial firms options are to keep their professionals in London or relocate them abroad. The government would clearly prefer that they could move forward with the tax and that the firms would decide to keep their employees in London. On the other side, the financial firms would prefer that the government repeal the tax, so that they can keep their operations in London. Currently, many firms are “signaling” to the government that they are willing to relocate, although very few have officially committed to moving. Proceeding with the tax for the government is currently a dominant strategy in the short term because it appears that the increased revenue from the new tax will be much greater than the tax revenue lost by the financial firms leaving. Beyond increased taxes, it is also dominant because the politicians will gain voter approval. If the government moves forward with the tax, it is likely that the financial firms will move offshore so that they can retain and attract talent for their financial operations. |
