The real answer to bankers bonuses is….

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I note that my Guardian blog on how to tax banker’s bonuses has been well read.

However, the reality is that, as I note there, this will not be easy to do. Unlike many I can easily define a banker. They are people who work for a company or group of companies resident in the UKL where one or more member companies of that group are licenced to operate as a bank in the UK by the Financial Services Authority. That solves that one – and yes, it does include their insurance and pension companies and so on – and so what? It’s the whole financial services sector that has been bailed out.

I can also define a bonus. It is any sum paid in cash or in kind subject to taxation as the remuneration of an employment that is:

a) results in total remuneration exceeding £150,000 in a tax year and

b) is either i) not contractually due as part of recurring pay or ii) is contractually due to be paid in addition to recurring pay as defined by a  contract of employment whether the basis of calculation is discretionary or calculated in relation  to the performance of the individual, a team of which they are a member or the company or group of which they are a member or

c) any sum that results in total remuneration exceeding £500,000 per annum.

Note a and b act in combination, c is an absolute test.

I am sure my five minutes of drafting could be improved but I think that would work.

That said the real answer to baker’s bonuses is to tackle high pay per se. In a recent TUC submission on the Pre-Budget report it was argued (and I should declare that i wrote this, so I have edited it slightly to fit here):

One way of tackling the issue of tax avoidance is to introduce minimum tax rates for incomes over £100,000 so that the value of allowances and reliefs is restricted. However, because of the progressive nature of income tax between £100,000 and £200,000  there would have to be a number of minimum rates with potential transitional calculations between them .

There is another way of tackling this issue. That is to restrict the total value of tax allowances available to this group of high income earners. The obvious way to do this is to restrict the total value of reliefs they can enjoy to the average total actual value of the group with unrestricted reliefs.

The average value of reliefs given to those in the income band £70,000 - £100,000 is, according to  HMRC data, £4,540. It would seem appropriate to round this sum up and make the maximum reliefs and allowances any person could claim in a year the sum of £5,000. Of course, if £5,000 was not expended on activities qualifying for relief the lower amount actually expended would be subject to relief instead.

This would mean that those earning over £100,000 a year should not, on average, be able to enjoy tax deductions of any more than the average maximum of those earning less than that sum. This appears to be eminently fair: tax allowances are a way of claiming tax subsidy. There seems no logical reason why the best off in society should be able to claim considerably more tax subsidy than those on low income.

Do this for everyone and the tax raised might exceed £10 billion a year.

Then combine this with a tax on bonuses and we have a real indication being sent to those few thousand people who are utterly distorting values in our economy and who are seeking to hold us all to ransom so that the economy can continue to redistribute wealth in their direction – as is their intent, for very, vey few of them can earn sums of this magnitude – and if they do they are entrepreneurs and the sum is sheltered in limited companies anyway.

That’s my real answer to banker’s bonuses, and the unfairness and regressiveness inherent in our tax system right now. I’m pleased to note support this morning. Polly Toynbee has written:

Darling should reach for the excellent loophole stoppers devised by Compass and Richard Murphy of Tax Research UK.

I hope he does. I am not betting on it though.