Goldman Sachs has paid massive bonuses. Bonuses so big that it is quite clear that the management of this investment bank have captured its profits for their own benefit at, at cost to the shareholders.
Assuming the UK pay is pro rata world pay total remuneration in the UK will be about £1.6 billion. But, as Robert Peston suggested yesterday, this is not split equally of course. It goes about 80 / 20 - i.e. 20% of staff get 80% of pay. So, that's average pay for 1,200 people of about £1.07 million - a total of £1.28 billion in all.
Now let's suppose that the UK took a simple and straightforward step - entirely in line with the ConDem's policy on pay, which is to say that maximum pay need not be more than 20 times minimum pay in the UK. The minimum wage works out to be around £12,000pa at present - so let's say for ease maximum pay should be £250,000pa. Anything above that is, I think, a profit distribution. Bob Diamond could not justify why pay of this amount was needed. Nor can I. In that case it is not incurred for the trade, I suggest. And in that case tax releif is not due on it.
Apply this rule to Goldman's in the UK and of the tootle pay of £1.28 billion to its senior staff and just £300 million of that pay would be subject to tax relief. That would mean that £980 million would not get tax releif, which at 28% tax would raise £274 million in corporation tax.
That's half the cost of the Education maintenance Allowance paid to well over 300,000 16 to 19 year olds whilst in education.
To put this another way - the tax relief on the excessive part of Goldman's bonuses to 1,200 people would be enough to pay for well over 150,000 young people to stay in education.
Isn't it obvious which is the better deal for the UK?
Extend the scheme to other banks and the whole EMA can be paid for.
So let's not pretend for a moment that the cash is not available. It is. The government is simply making the wrong choices. And it should be held accountable for them.
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Richard, please could you clarify you point regarding max pay of £250,000pa?
Nice try, but it exposes your naivety and lack of knowledge of the international financial sector in London.
For the this to work, you have to assume that Goldman Sachs’ UK operations have £980 miilion of taxable UK pre-tax earning, AND that these profits cannot be booked and recognized somewhere else.
Goldman has been a good citizen in London (so far) and has recognized sieable UK pre-tax income in the UK. But this is more a matter of choice than necessity, because the UK tax regime remains relatively favorable for financial companies. However, the vast majority of revenues generated by Goldman in London do NOT originate in the UK; think of London-based M&A bankers advising on a German takeover, or of London-based traders dealing in French credit derivatives. These revenues can therefore can be relatively easily be “diverted” to a non-UK entity.
There is very high probability that this would happen if any variation of your proposal were to be implemented.
@Greg
Cameron says a ratio of 20 is what he’ll allow in the state sector
In the private sector the minimum must be stat min wage
So max is 20 times that….an easy basis for upgrading over time too
@Million Dollar Babe
Oh what a load of rubbish
Goldman has been a good citizen in London, maybe. It does its frauds elsewhere, I note – and pays enormous fines for them without admitting liability, I also note
But Goldman is London not by choice, but by necessity
London is not an option for such a bank – London isa place you have to be
Like the FT – no London, no business
So stop talking complete and utter twaddle
If you’re in London you’ll pay the price – and that is IK tax
If you leave – that’s a massively welcome development – because we don’t need banks like Goldman Sachs – but if not (and I won’t get my wish on this one) – then tax is the price, to use Gladman’s language – and they’ll pay it because this is where money is made
And “diversion” is subject to tax rules too – if you aren’t aware of it
Take a breath Richard.
I am not suggesting that Goldman will be leaving London. Some employees will relocate (do you not wonder why London’s headcount is flat to slightly down, while the whole firm’s is significantly up), but the firm will stay.
However, I maintain that Goldman has options in the way it recognizes pre-tax profits. For instance, the firm has been very public in stating that it would reduce the balance sheet of its UK operations to minimize the impact of the bank levy.
The same would happen, on a magnified scale, if your proposal were implemented.
The bankers seem to be under the illusion they are God’s gift to humanity, yet when individuals have migrated to other sectors their performance has not been anything to write home about.
The sooner its realised they don’t possess extraordinary superhuman powers, the better!
@Million Dollar Babe
Ah, so you’re advising tax abuse
Now there’s a surprise…
Roll on the EU’s Common Consolidated Corporate Tax Base
@Richard Murphy
I am most definitely NOT advising tax abuse. I would be very keen to find out more about the EU’s Common Consolidated Corporate Tax Base. I do not know anything about it, but like you I feel that the levels of tax competition with in the EU is leading to serious distortions in many markets.
I had a separate comment though. Your calculations have a “double-counting” problem. (I am rounding up/down the numbers to simplify things)
As things stand, Goldman is paying about £1.3 billion in bonuses to UK employees. The treasury will capture roughly 50% of that through income tax, or £650 million.
If Goldman were unable to obtain relief for compensation above £250,000 per employee, its taxable profit would increase by about £1 billion and it would be liable for an additional £300 million in corporation tax. Its total payment would be £1.6 billion, of which the treasury’s share is £950 million.
The obvious problem with this assumption is that the incremental £300 million would come straight out of Goldman’s shareholders. Those are not selfless and generous investors, but American shareholders with little inclination to subsidize the treasury of a foreign land (and little love or patience left following Labor’s bonus tax which hit them in full).
If shareholders refuse to foot the bill, the alternative is for the proceeds to could come out of the bankers’ pockets. For shareholders to remain “whole”, the bank’s bonus pool would have to be reduced to circa £1 billion. But this brings some problems for your conclusions.
First, any reduction in bankers’ pay means lower income tax revenues for the treasury, which is not offset by the higher corporation tax receipts (obvious, since one is charged at 50% and the other at 28%). Instead of raising an extra £300 million, the treasury will only raise around £150 million. Not bad, but not as much.
The other, more serious problem, is that in this scenario the London bankers’ net pay will have dropped by c. 25%, but this will not have happened in any of the competing jurisdictions. You are entitled to your view that bankers will not leave London and I agree with you at the macro level. However, I also believe that a sudden 25% drop in standards of living will cause some sort of reaction, especially in the case of Goldman Sachs where, unlike at Barclays or RBS, the employees are in their majority foreign nationals with limited attachment to the UK. If only a small fraction of Goldman’s London employees (less than 10%) were to relocate, together with their business lines, the UK treasury would be worse off.
m$bb
@Million Dollar Babe
a) the bankers have captured this bank – don’t be daft – the evidence is clear that they don’t give a damn about the shareholders
b) if I’m wrong we beat high pay! Great!
c) Please take the next plane – as I told Stern magazine this afternoon – these people are the biggest threat to democracy in the world now because the risks they take could destroy our society.
@Richard Murphy
a) Who did they capture the bank from? It is a publicly traded company. If a shareholder is unhappy about the direction of travel, he/she can just sell.
b) but if you are wrong (and you beat high pay), you also have fewer revenues to finance the social and education programs to wish to see maintained. Sorry, but you cannot have your cake and eat it.
c) Fine by me. Although Goldman (with JP Morgan) is the one bank that has stood out during the crisis for the quality of its risk management.
If you are correct, Richard, that the excess bonus over £250,000 is not incurred for the purposes of the trade, then all it takes is an HMRC inspector to agree with you and litigate it and HMRC will win based on the current law.
As you are no doubt aware, HMRC would never win such a case. Wages and salaries are always allowable in computing trading profits. When was the last time won a case seeking to deny relief for wages and salaries for genuine employees.
If you compare the wages to the revenue generated then these bonuses are no big deal. It is no good using absolute figures if the company’s revenue is so much higher. In fact, surely the fact that higher salaries are paid by companies with greater revneues is proof that the expense was incurred wholly and exclusively for the trade.