Windfall levies on banks are politically seductive and economically slippery. They look like a way to fill a fiscal hole without raising income tax on swing voters, yet they ignore a variable Treasury modellers know well: when you tax returns in the City of London, booking locations and bonus pools move faster than press releases admit.
Chancellor John Healey has summoned bank chief executives to Downing Street this week while cabinet colleagues tell newspapers they oppose a fresh sector charge. That split is not mere positioning. It reflects genuine uncertainty about how much revenue a levy would raise once traders, structurers and compliance teams price in the marginal cost of staying in the UK.
Elasticity is not treason
JP Morgan's Jamie Dimon warned earlier this year that adverse consequences would follow another bank tax. Critics dismiss that as lobbying. They should instead ask for the elasticity assumptions in the Office for Budget Responsibility's spreadsheets. If a five-point surcharge on banking profits shifts even a single digit of payroll abroad, the static revenue score collapses.
Bonus pools are the transmission mechanism. Investment banks accrue compensation as a share of revenue; when revenue is taxed more heavily in one jurisdiction, desks renegotiate profit-and-loss attribution. The change does not always mean a headline exodus—it can mean quieter shifts of risk books to Dublin, Paris or New York while the UK entity keeps a thinner capital buffer.
What good governance looks like
If Healey wants credibility, he should publish scenario tables alongside Tuesday's summit: low, central and high relocation responses with explicit job and tax footprints. Private assurances in mahogany rooms do not substitute for parliamentary arithmetic. Markets are already pricing gilt volatility; they do not need another surprise wrapped in the word "windfall."
Labour came to office promising growth in every postcode. Taxing the sector that finances infrastructure and pensions without a transparent model undermines that promise. Cabinet ministers who warn against bank taxes are not shilling for shareholders; they are reminding the Treasury that elastic activities migrate.
Healey can still raise revenue—broad bases, fewer loopholes, honest carbon pricing—but bonus pools shrink when levies ignore relocation math. Publish the elasticity, then decide.
Until those tables exist, markets will assume the worst—and price UK bank equity accordingly every Monday morning.
History offers cautionary tales: one-off bank taxes often arrive with sunset clauses that quietly extend, teaching markets to discount political promises. Treating elasticity as measurable science rather than moral argument is the only way to break that cycle.