New York’s New Darling

If you love New York, you have to love Alistair Darling.

The United Kingdom’s Chancellor of the Exchequer yesterday told Parliament he proposes to slap a 50% tax on bank employee bonuses in excess of 25,000 pounds (about $40,633). This new levy might be the greatest escape from peril the British have allowed Americans in New York since Howe let Washington retreat into Manhattan after the Battle of Brooklyn Heights in 1776.

The recent crisis has left the U.S. financial sector facing a rising tide of regulation, which, combined with the prospect of healthcare reform-driven tax hikes, have made the States a considerably less inviting abode for banks, hedge funds, private equity firms and the like. Onerous NY state and city taxes have only compounded a situation Britain might have taken advantage of by holding taxes steady or even (perish the thought!) easing off on banks. This would have allowed City of London-based firms to bid up for talent while restoring their capital. But Darling and the rest of Prime Minister Gordon Brown’s Labour Party are facing bleak prospects in an election that must be held by June of next year. By sticking it to the City, Brown, Darling & Co. hope to play on populist resentment enough to narrow the electoral gap, at least to the point of creating a hung Parliament and denying the Conservative Party a clear majority.

To this end, Darling’s latest proposal is part of a larger program of eye-popping tax increases. Indeed, the bonus tax, to be paid by the banks themselves as opposed to employees, comes on top of an increase in the marginal personal tax rate from 40% to 50%. Throw in National Insurance and Bloomberg reports the British Treasury will receive 103% of every quid paid to top City earners.

With his latest move, the Chancellor has, for the moment, decisively ceded the competitive advantage back to Wall Street, even with New York and America’s challenging tax and regulatory environment. Darling’s tax, not to mention uncertainty about future British taxes, should mean more jobs and revenue for NYC as international banks and financial firms move easily transferable personnel to offices and trading desks to the western shore of the pond.

When you think about it, it’s the least Darling could do, since the UK’s refusal to back Barclay’s bid for Lehman last year helped usher the later firm into bankruptcy (and its choice assets into Barclay’s hands at fire sale prices). A bit more than a year later it’s another story for the Yanks: Darling’s gift comes just as Bank of America repays its TARP loan and Citi appears poised to do the same, which would remove the largest US banks from Washington-imposed pay caps and enhance their ability to poach London-based talent.

There remain, however, several flies in the Big Apple’s sauce. Darling’s bonus tax is currently envisioned to be a one-time “raid” through April (i.e. just before the election) and once this pandering expires, so will much of NY’s newfound advantage. Higher UK taxes may encourage yet more levies on US firms, dulling the edge Labour has granted America. And the authorities in Beijing seem to lack Downing Street’s generosity, meaning Shanghai may do to NYC what London has demurred from. Further, NYC  need not look across oceans for potential rivals – Greenwich has already taken half the hedge fund business and Jersey City is siphoning away back office jobs from Lower Manhattan.

On the other hand, today French President Nicholas Sarkozy is said to be considering matching Darling’s bonus tax, and, being this is France, at a lower level (27,000 euros, or about $39,750) Of course the land of the 35-hour work week has been a self-hamstrung global competitor for a long time; this move simply safeguards Paris aginst acquiring any unexpected competitive advantage.

Financial service jobs, like money itself, can and do move across boarders with relative ease. High taxes and stiff regulation in one financial center will often only encourage rivals to take the opposite tack so as to garner a greater share of an industry which, lest we forget, remains a huge generator of both jobs and tax revenue. If Wall Street and the United States hope to remain the center of global finance, Washington would do well to remember what London has been kind enough to forget.

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