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.
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Richard,
Surely targeting employees of an organisation that holds a banking licence won’t work as many of these people are pseudo employees anyway. As you’ve reported, the City of London is a dab hand at tax avoidance so many of these people are not PAYE like most of us, but pay themselves the minimum wage through their own limited companies taking the rest as dividends.
I agree we should have a high pay commission, close tax loopholes and tax more progressively. However, where banks are concerned we need to restrict their highly questionable behaviour in the first place. Fundamental issues be debated and addressed, namely:-
1. If rich rewards are on offer in banking, why it is so difficult for new entrants to get a licence and enter the market, thereby reducing the excessiveness of these rewards?
2. The big players, especially in investment banking, are running a cartel, a fact admitted by the Government. I thought cartels were illegal. Why aren’t they being broken up?
3. How are banks able to operate by rewarding themselves first above the interests of shareholders and their customers?
4. Bankers do not possess magical ‘talents’, they just wish us to believe they do. To equate their abilities with those of footballers, artists and musicians is laughable. Few top bankers have banking qualifications as most have been recruited through nepotism and the ‘old boy network’ (see City Boy for a good example).
5. Regulation is to be embraced not rejected. It prevents behaviour which is considered unfair, dishonest or illegal. The growth of London as a financial centre is due to the increasing willingness of the Government to turn a blind eye to such practices.
6. Why is it so expensive for the government to give the banks extra funds? The £5bn advance to Lloyds earned the banks £300m in fees. How hard can it be to hand over this sort of cash? How many schools and hospitals could be improved with the £300m?
I share your pessimism regarding the likelihood of reform from Brown and Darling. I fear there will be a grand announcement which will grab headlines and make them look strong, but in reality allow the guilty to slither through a gaping loophole.
Neil
I agree with all this
The real answer of course is not just to tax banker’s bonuses
Banking must be reformed
And we must have progressive taxation
Compass, the TUC (and I hope this blog and others) are leading the way in showing this is possible
Richard
I think that rather than go for a one off grab aiming at a specific group Darling would be better to take aim at the whole fat cat culture, the best way to do this is to enable shareholders to directly sue managers or directors of companies for criminal overcompensation. By making excessive compensation an offense similar to theft with the prospect of doing time inside for blatant excess the directors of public companies would be forced to consisted shareholder interest to a far greater extent. As a major shareholder in RBS the government would thus have the upper hand for sure in any negotiations. With overpaying a criminal offense I would imagine the minds of management would be much more concentrated than the current slap on the wrist proposed which I am sure that rather than comply with strenuous attempts will be made to wriggle out of ..
I would love to agree with you, Catsick, but I suspect that it would be very difficult to make such charges stick in a court of law. Look how the banks managed were found “not guilty” on the charge of overcharging customers recently.
@Neil – one of the best comment posts I’ve ever seen on this blog. Full of insights. I think there’s a case for using RBS or Lloyds Group (or maybe both) to create a new type of bank – one which charges much lower fees to its customers (both corporate and personal sector) and breaks the cartel. RBS or Lloyds could clean up the market if they did this – at the very least they would force the remaining private sector banks to lower their exorbitant fees. This is the kind of innovative thinking that we need to see from the UK government but sadly, UK Financial Investments (the holding company that manages the government’s stake in RBS and Lloyds) is being run as if the credit crunch never happened.
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