The Guardian notes today that:
The unions will today turn up the pressure on the banks with a demand that bonuses should be treated as profit and therefore be liable for corporation tax. Even though the corporation tax rate is being cut over four years from 28% to 24% it is still twice the level of tax banks currently pay through employers' national insurance contributions.
TUC general secretary Brendan Barber said: "Making mega-bonuses liable for corporation tax could drive reform of our boardroom bonus culture and raise revenues." He added: "The government cave-in on bonuses last week will have only increased public anger."
The TUC wants all pay and bonuses that are more than 10 times the average level of pay to be disclosed, as well as the ratio of directors' pay to the average pay per employee. Staff should also have a seat on remuneration committees, he said.
I am pleased that the TUC has picked up this policy initiative, which is something I first wrote about some time ago.
The economic logic of this proposal is very simple. Maximum pay should either be 10 times median pay in the UK or 20 times the anticipated minimum wage. The number happens to come out at about £250,000 in either case. it is very obvious to anyone that no one need earn more than this figure to live a very good life of more than adequate material sufficiency in the UK. Therefore, any distribution to a person over about this sum must be of profit, and not pay as far as the company making payment is concerned. But profit distributions are not tax allowable in corporation tax. As a result no tax relief should be provided on them for the purposes of that tax. This has the obvious economic consequence of increasing the cost of payment of the bonus, and so reduces the amount of bonus payable, reducing pay differentials as a result, which is the intention of the proposal.
I would stress, however, that this does not mean that if paid by an employer who does not get tax relief on it the resulting receipt by the employee is not taxable as income from employment. It should, of course be treated in a way, and also be subject to National Insurance. The logic of tax deduction for corporation tax need not be matched by the treatment for income tax or National Insurance. There are ample cases where there is a mismatch between economic justification for a payment and tax treatment. This is one of them. There is no pretence in the proposal that the result is tax neutral. It is meant quite deliberately to tax something (bonuses) that is causing harm to our society, and in that context tax justice is achieved by inequality of treatment, and not by equality.
Disclosure: I advise the TUC
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Vince Cable has hinted that there are new measures in the pipeline which will increase competition in the banking sector. he asserts this will eliminate the super profits made by the banks from which their mega bonuses are paid. Would be good if it works but if it did where would the sons and daughters of Tory party members get work experience and employment?
As it is a profit distribution you would presumably tax it at dividend rates i.e. 42.5% less a 10% tax credit?
The idea that salary is a profit distribution would never stand up in court – and the reason why HMRC never challenges salary as anything other than wholly and exclusively incurred for the purposes of the trade.
The fact that enormous revenues are generated is evidence in itself that the bonus payments were indeed W&E incurred.
@Rod Cowan
Of course it would stand up in the courts. Don’t be silly. It will be the law. Are you saying that the courts should now overturn the law?
You also wrong. The revenue do challenge salary payments as being not only and exclusively for the purposes of the trade if there is no evidence that any economic activity was undertaken for the payment made as happens in some family company situations
The banks may well pay bonuses to their chosen few via their offshore operations, into accounts or discretionary trusts set up in offshore tax havens. I have investigated numerous cases of this nature.
Why not just tax all bonuses over £250k at 100% if you don’t like them?
@Paul Nugent
Because that’s not my intention
I’m using tax to reprice anti-social behaviour
It’s an age old practice
@Rod Cowan
Yes, would like to corroborate Richard’s point: Statute Law overides common law (under which most contract law is subsumed). Judges interpret statute law but only if it is ambiguous and even then subject to restrictions.
If it is anti-social behaviour then why not just ban it? If it’s allegedly so damaging to the economy then why not? It’s the same with duties on tobacco and alcohol.
Contrary to popular belief, the objective of booze and fag taxes is not to reduce consumption of these things, but to raise revenue. If it really wanted to eliminate these activities it would simply ban them. The government knows these substances are price inelastic so can keep on jacking up the prices but the demand for them will hardly fall.
The revenue raised in “sin taxes” far exceeds the cost to the NHS of treating illnesses relating to misuse, and the government know that. It does not ban them for precisely that reason.
I have to disagree with the assertion you make with regards to earnings of 250k, that it is very obvious to anyone that no one need earn more than this figure to live a very good life of more than adequate material sufficiency in the UK.
If I live in London and have ten children to support, 250k is probably a minimum necessary.
Richard,
Why are bonuses harmful to society assuming the receiptients are taxed normally on them?
Why is there a need to place an additional tax burden upon them?
@Mark
Go explore http://www.equalitytrust.org.uk/
@Paul Nugent
We ban drugs. It does not stop drugtaking. Your belief is naive.
Behaviour modifying activities much more successful.
And yes, it does have an impact
@alebro
It is hard to credit that anyone could make such a comment
I presume you are aware that at least 99% of the people living in London do not enjoy an income of this level
And that almost nobody has 10 children to support
So that unless your comment is intended to be humourous, in which case I didn’t get, reflect on what it says about you
@Richard Murphy
Richard, thanks for the ad hominem attack. I do have 10 siblings and am well aware of how hard my parents had to work to support the family.
@alebro
That was not an ad hominem attack
It was a statement that your comment was ludicrous
I’m not saying having ten children is ludicrous
I’m saying to suggest £250,000 is required is ludicrous
And I think that’s fact