Bank bonus tax - why it won't work

So the government wants to clobber the greedy bankers, the former 'masters of the universe' who did so much to lead us to the financial Armageddon we're currently facing. It sounds like plain old-fashioned fairness: why should the rest of us struggle to balance our family budgets and keep our jobs while these guys reward themselves for making such a mess?

I appreciate the 'justice' argument. Reward people for success, not failure. We shouldn't be cowed by bankers threats to emigrate to Zurich if they're stopped from gorging themselves on bonuses. After all we own the banks now. It's our money. If they want to emigrate, let them. At least it won't be our money that funds the bonuses. I believe that the City is big enough to steamroller on. I think the message, distorted though it is by political populism, is sound: that bankers have a social function. They're the keepers of our money and they'd better be responsible. If they're not, they're out on their ear, bonus or no bonus.

I think it sounds fair. Especially as Alistair Darling has announced that the 50% levy on bonuses over £25k will fund the extension of a scheme offering 18- to 24 year-olds out of work for six months a job, training or an internship. But the problem is the bonus tax won't work.

It's absurdly easy for banks to duck the tax. They can simply pay the rewards as a salary; or they can give out shares instead of cash bonuses; defer the bonuses until the windfall tax period ends; or make their big earners self-employed. It may even be illegal to tax just one group of workers, though this is yet to be tested.

The City contributes 12% to Britain's entire tax income. Kill the City and you kill the billions they pour into the coffers of UK plc. If the government was serious about imposing discipline on the City there have to be stronger ways of doing it than - let's face it - an envy tax. Yes, the banking sector has sinned and should be given a damn good caning. Regulation should consist of red lines that the banking sector must not cross. Encouraging long-term stability in place of short-term profit would be a start. Separate out the domestic, 'vanilla' banking from the more exotic overseas investments, as Northern Rock failed to do. Insist that banks hold a big chunk of their holdings in cash. In other words take measures that make it illogical, and unprofitable, for banks to reward short-termism with bonuses. That would be more effective than a windfall tax.

It's not even crystal clear what exactly even constitutes a bonus. It's easy for banks to wriggle out of it. Darling's idea relies heavily on the banks themselves co-operating.

Britain is buried beneath a debt mountain and it's so huge that the government is bereft of ideas as to how to solve it. We may never be able to clear it. There are only two ways for a government to raise money: tax and borrowing. As Hamish McRae said in today's Independent: "The place it [the Government] has to go to raise these billions is the City; there is nowhere else. Yet it bad-mouths anything and anyone connected with finance. How bright is that?"