So the boss of the FSA says he can’t cap City bonuses, no doubt because he’s a banker.
University professors say he should.
Now I happen to think capping may be hard. Making sure that bonuses don’t pay is not hard to do. There are numerous ways to price them out of the market:
First, uncap National Insurance Contributions over £100,000 i.e. make all on salaries above that sum pay NIC at 11%, not the 1% they pay on that level of earnings now.
Second, increase the employer's NIC rate on salaries over £100,000. Currently up to 12.8% and reduced for contracted out pensions first make it a mandatory 12.8% without exception to £150,000, then 15% to £200,000, and 20% over £250,000 and so on up to 50% at £550,000 and above. Use the averaging method for such salary levels to make sure these rates are collected, of course.
Third, deny tax relief on all salaries over £200,00. That will cost a marginal 28%.
Broadly speaking (and ignoring the rates on the first £100,000) this will increase the net tax cost of many current £500,000 bonuses from current rates of about 10% combined NIC of £50,000 less tax relief of about £153,000 (meaning net cost to the employer of about £393,000) to a total cost to the employer (the National Insurance Contributions rates applying to total pay, not banded pay) of about £750,000, with the employee receiving approximately £50,000 less at the same time.
In other words, by playing with just National Insurance Contributions and corporation tax the cost of bonuses could be more than doubled overall.
Now how much would that raise in tax?
And what a powerful market corrective tax could be in this case.
And please don’t tell me people will leave: as the professors say, they won’t.
And any employer seeking to diverts payments abroad should be charged a 100% mandatory penalty of tax evaded, just to add to the incentive to comply.
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Makes a lot of sense !
Doesn’t make any sense at all. Taxing bonuses simply moves the trading activity offshore where it can’t be taxed at all. They won’t leave the bank but they will leave the UK. Don’t tell me it won’t happen, because that sort of departmental move has happened in all sorts of companies and will happen again. That is precisely what the Dublin Docks scheme in Ireland, Belgian Co-ordination Centres etc.
Worse than that, since it will be hard to distinguish “City” bonuses, by which I assume you include earnings of hedge fund managers and other non-bank institutions from the earnings of senior directors of other companies, you will drive even more multinationals offshore.
The issue isn’t one that can be resolved by taxation but addressing the fact that there is disproportionate emphasis on variable remuneration in banks. The FSA have funked the issue, but they are the only people who can and should exercise some control. Paying several billion in bonuses has the same impact on bank’s capital as writing off several billion in assets every year, and should be treated with the same level of inquiry and scrutiny if banks want to continue have the same level of tax payer support for deposits placed with them.
Alex
a) What’s wrong with hitting other high pay?
b) No, they can’t all run – the UK economy is here
c) Belgian coordination etc is a corporation tax scam – requiring no real people
d) So what if they go? Might we not be better off?
I make the last point seriously: can we afford bank speculation?
Richard
a) What’s wrong with hitting other high pay?
High pay won’t stay here to be hit. I don’t particularly see any reason to hit people just because they earn a lot of money. The difference between taxing someone at 40% and 80% is that the tax payer is 3 times better off if he avoids the high tax. That is much more of an incentive than the difference between 0% and 40%.
b) No, they can’t all run – the UK economy is here
The fact that they can’t all run is hardly a reason to do so. If the heads of big companies move offshore there will likely be a loss of investment here in the future.
c) Belgian coordination etc is a corporation tax scam – requiring no real people
Maybe, but it showed that firms will incur the cost of moving their operations to save tax. It didn’t just enjoy corporation tax savings but also special rates on real estate taxes, lower income tax rates for employees and exemptions from withholding taxes and duty on shares.
d) So what if they go? Might we not be better off?
That is a different issue. The point is that they will not sit around in the UK not trading as speculatively as before simply because there is a high tax on bonuses if they are successful.
I make the last point seriously: can we afford bank speculation?
That is a point for the FSA, not HMRC.
I heard (or read) the other day someone asking what else should happen to all that dosh if not pay it out in bonuses. This is the problem: the system allows the finance sector to make excessive profits by processing the wealth created by others.
Alex
Both report to the Treasury
Richard
Carol
Tax the banks 10 – 20% more
Richard
@Richard Murphy
But they have different functions. There are lots of people in the Army, but fortunately they are not al generals.
Richard, I have a better idea of how to increase the tax take on banks. In the US property taxes are levied on property owners (unlike our stupid system) and where a mortgage exists the bill is sent to the lender, the holder of the deeds. Since banks have been the main beneficiaries of house price inflation and have in effect been appropriating land rent, when we get a decent ad valorem property tax here (preferably the one advocated by Compass) we could send the banks the LVT bill and see how they fare trying to reclaim it from their mortgagors. This would be one way of ameliorating the effect of LVT on debt-laden homeowners.
Oops, make that mortgagees.
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