This, by me, is on the Guardian’s Comment is Free this afternoon:
Rumour has it that Alistair Darling is about to introduce a windfall tax on banks, and bankers. It's an idea that, as Larry Elliott has noted, is timely and appropriate. It is also fraught with problems if the action is to match the rhetoric. And let's be clear: this is important. Tax is not just about revenue raising: tax is also about pricing unacceptable behaviour out of the market and redistributing income and wealth — especially wealth considered by many to be unearned.
I have been arguing since 2007 that UK banks should pay 10% more in tax than other companies. I argued at that time that this was the fee they owed for the state taking the risk of guaranteeing the deposits on which all banks (without exception) depend. That guarantee is still in place. It is why we, the ordinary people of the UK, bear the risk of banking now, for which we need to be compensated by way of additional tax payment.
The tax due would be significant. Between them HSBC, RBS, Barclays, HBOS and Lloyds TSB declared current UK tax liabilities of £6.5bn in 2006, the last year before this crisis began. This was tax due at 30% at the time. At 40% they'd have paid almost £8.7bn. That's an extra £2.2bn of tax they'd have paid in the UK. Which as a fee for the deposits protected is insignificant, but if it had been introduced when I called for it in 2007 it might have had the required sobering effect that could have helped prevent the disaster of 2008. That is why such a tax is due now, and would, I think get EU approval, even after rigorous anti-avoidance rules to stop profit being shifted abroad were put in place.
And what of bankers' bonuses? Three practical responses are needed. First, as both Compass and the TUC have demanded, rigorous measures to stop tax avoidance by the very highest income earners in the UK are needed if any measure to tackle bonuses is to be effective or most of any additional tax charge will simply be sheltered using loopholes. As both organisations note, this is possible.
Second, it has to be said that tackling bonuses alone is going to be hard. True, if they are paid in shares that may make the task easier — but we are already hearing about massive basic pay rises to get round these constraints. And because we have yet to even see the 50% tax rate in operation it is hard to see how a rate above that could be introduced at present. This therefore requires creative thinking and I have two suggestions.
The first is very effective. It is to simply say that no bank (and they are easy to identify as they have to be licensed to operate in the UK) will get tax relief on paying a salary of more than £250,000 a year. This may not seem to hit the banker, but it will. Assuming a banker has basic pay of £250,000 and a bonus of £1m then that bonus would cost, assuming the banker was in a company pension scheme, almost £1.1m (if it was itself non-pensionable) and after 40% tax and 1% national insurance the banker would get about £590,000 (all numbers rounded for ease). At 28% corporation tax (the rate now due) tax relief would amount to a saving of just over £300,000 to the bank paying this, making its net cost of the bonus about £800,000.
If the bank wants to spend the same money on the bonus — £1.1m, then it can now only spend £860,000 because the difference (£240,000) would now have to be used to pay corporation tax. After employer's national insurance a pot of £860,000 pays an actual bonus of about £780,000 on which tax and national insurance will now (at 41% combined) be about £320,000 leaving a net benefit of £460,000.
That then leaves room for the last recommendation though, to increase national insurance rates on salaries over £250,000 (and ideally somewhat lower sums as well) so that this rate on such salaries is 11% — as it already is on salaries of £25,000. In that case the total tax paid on the new bonus would be about £398,000, leaving a bonus left after tax of £382,000.
That is still a staggering amount of money for anyone to receive after tax in a year. But more than £200,000 of additional tax would have been paid on this sum and tax relief of some £300,000 saved meaning, in effect, at least £500,000 extra to the Treasury on such a payment.
Two things inevitably follow: the Treasury will be better off, and bankers' bonuses will be reduced. Both are good news. And let no one cry for the banker: they're still getting a cash bonus well over 15 times bigger than UK average gross pay, which must, given that the example is entirely realistic, be a reason for creating the high pay commission so many now demand for the UK.
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[…] Get Free Insurance 7 December, 2009 — RickB Richard Murphy:- I have been arguing since 2007 that UK banks should pay 10% more in tax than other companies. I […]
So do the banks get back the fees they have already been paying for the state to guarantee their deposits?
Is your whole point that the FSCS levy is too low? And why should insurance premiums be a percentage of UK profits?
“I have been arguing since 2007 that UK banks should pay 10% more in tax than other companies”
I have no problem with this as by and large UK banks have been a shambles. But wouldn’t this just put UK banks at a disadvantage compared to those non-UK banks that managed their businesses prudently and weren’t over-exposed to toxic stuff?
And isn’t this sobering for those people who go on about Britain being a global leader in financial services:
http://finmanac.blogspot.com/2009/02/top-10-banks-in-world-by-market.html
Hi Richard
As I have said before on this blog as a comment, the root cause of the unstable and parasitic “toadstool” part of global finance is the credit money the commercial banks create without paying for it.
Senior bankers, Bank of England and Treasury know it exists without a credit creation charge. Indeed the Financial Strategy and Risk Team of the Treasury recommended as long ago as July 2007 in response to our letter to Gordon Brown in April 2007 before “the economic train” derailed that the idea of diverting a portion – at the base rate on all new money (a credit creation charge) – should be considered by the OFFICE of FAIR TRADING.
Of course the reason that the media are frightened to refer to this anomaly is that Britain’s whole financial sector and last decades of “growth” while its manufacturing industry was declining were largely dependent on this advantage banks have – the ROOT of money supply (90% or more in 2006). It created huge advantages for Britain and the rest of the financially “developed” nations as their trade shifted into importing poor countries’ goods. The whole anti-globalisation movement depends on this trade injustice for its media exposure and popular political support. An anti-establishment industry grew up.
Now we have an even bigger industry, the climate industry, but without the simplest means of redistribution of all – diverting the base rate of interest on any new money as suggested, whether by banks or supermarkets – to the public purse, boom and bust will remain a problem and the suction of excessive money from the public —unfairly – into financiers’ pockets will continue.
The trade advantage was a puzzle to me, and must be a puzzle to many who do not yet understand the root cause of the advantages we had from globalisation. It is worth taking time to understand this. Once it is understood exactly how we “ripped off” other countries and start returning a fair amount, most “security” fears could start to fade away.
By ring-fencing the proposed return to poorer (producer) nations for climate change (an Environmental Tax as first suggested to the Stern Review) the whole world gets the benefit anyway. That is, I initially proposed a return from this trade advantage to the poorer countries ring-fenced for their climate needs (which are actually our climate needs as well).
The case has been made (see Financial Times articles and editorials 28-08-09) for banking to pay its fair share (but not by breaking up the banks as suggested in their editorial). In the same issue, the return to the poorer countries is mentioned in their subsidiary editorial. We have the simple means to do this. By offsetting the Env Tax to protect vulnerable businesses as well as households and individuals from part of this banking wealth we have the magic political and economic bullet..
It is a perfectly workable financial solution to move quickly to reduce future government borrowing by this means. See http://www.STEERglobal.org publications, click “all”. It is an appealing political solution and the time is ripe for it to be in next year’s budget. All we need is the right kind of noises in the PBR. IRG 0121 449 0278
Bonuses are paid out of profits – but these profits are arguably only a tax relief on the huge amount of debt in financial corporations, £5.53 trillion in 2008 according to the ONS. Why should interest payments on debt continue to be treated as an allowable expense when the debt is only being used for arbitrage or other forms of finanacial engineering? 10% more tax for all banks is neat but will hit the prudent retail banks with low levels of debt as well as the risk-hungry debt-laden investment banks. The removal, or trimming, of the tax allowance gets at the source of the problem – too much debt.
AVOIDING THE DANGER OF BANKS SHIFTING OFF-SHORE
This question has bee raised elsewhere and something similar is referred to at #2 above.
To continue from #3 above
The identification of the “free” credit money Which can be used to offset the ET mentioned above) can be done via the Bank of England or by a system of “100% Registered Money” as devised by Bill Davies (from our England/Scotland border regions).
OR in the meantime, as loans are issued by local banks, those loans could qualify for a subsidy for the material costs of insulation as installed. The surveyors currently unemployed after they trained as energy surveyors for HIPs or building control officers could have a checking role. Banks would do the admin in return for retaining some of the credit money.
In the figures the interest payments on all the free money being continually issued would be divided into “base” and “mark-up” and the “base” portion would be accounted for and accrue towards the funding flows needed for the insulation tasks. All this money diversion can be done at a local level. OFF-SHORE BANKS WOULD THEN HAVE NO ADVANTAGE.
This would kick-start things more rapidly as long as the surveyors were more thoroughly trained into the detail of energy loss and into where insulation would go to be most effective, for example around basements to make under-floor mass an effective energy store, slowly releasing energy upwards into what would now be well-insulated buildings. This would make solar more viable.
So the government is going to tax all the bankers who have earned bonuses from their banks for the lavish fees they have generated by advising the government (as disclosed last week).
On the one hand the government says the fees were good value for the tax payer, and then a few days later it says bankers are overpaid.
Solar power is not viable in this part of the world, Ian. Offshore wind turbines are the correct renewable resource. The technology is almost 100% there.
Hullo Carol
Some basics:
Yes wind is good, but cannot replace gas for heating unless super-insulation comes in to make houses and other buildings into giant heat stores (between 1/10 and 1/20 wall losses ie 0.1 W/sq m per degree C difference outside/inside)
Window losses can similarly come down in the “dark” months drastically with the use of super-insulating curtain inter-liners and a proper seal at sides and bottom “warmer walls and windows” COPYRIGHT (+ WWnW).
THEN wind and other renewables come in along with incidental energy.
ADDITIONALLY
Our tests show that sun strength in early December is strong enough for low temperature solar heat collection transfer and storage, albeit at low efficiency, but payback is there from the other months to warrant this form of solar collection. “All” that is needed is for government to properly subsidise External wall super-insulation.
I am happy to answer queries on 0121 449 0278 (Ian Greenwood) Wind has a long way to go to get us out of the “manure” as the Arctic thick floating ice finally completes melting and sea level rises accelerate further along with reduced fresh from melt-water.
Yes, I was talking about renewables. I understand from someone who is working in this area that 80% from offshore wind is feasible + 20% from gas. Subsidies should be applied to what works not wasting them on inefficient minutiae. Germany has been going down this road for too long.
[…] of negative stories of Icleandic evil but what they are doing is actually good for all of us, the free insurance we provide for banks, (keep your profits while we pay your losses) is nothing but theft. The full […]