There’s no logic in a punitive tax on bank bonuses
LET us imagine two bankers. Let’s call them Jocelyn and Alastair. Last year they were both paid £2m. Jocelyn had a basic salary of £500,000 and a bonus of £1.5m. Alastair had a basic salary of £2m and no bonus. Who thinks that Jocelyn should pay more in tax than Alastair? Ed Miliband seems to be the only one.
Now, before everyone screams that this is not so, let me clarify what I mean. Obviously, many people think both Jocelyn and Alastair should pay more tax than they do. I don’t happen to be one of them, but this is a large group. A smaller, but still significant number would probably advocate a tax rate of 100 per cent which kicked in at a rather lower figure than £2m, reasoning that no-one needs to earn that much money. Some of those people may have thought through the consequences and be quite prepared to say goodbye to the Premier League and a large part of the UK film and music business. This is not a view I share, but probably one that many people hold. But I don’t think I know anyone who thinks Jocelyn should pay more in tax than Alastair.
There are obvious advantages to a system in which people are remunerated partly by means of a bonus. When, as is common in banking, bonuses are paid partly in shares, it is a form of the John Lewis economy that Nick Clegg was advocating a few weeks ago. It can be motivating for employees and rewards talented people more than their less talented colleagues. Furthermore, imagine that the bank that employs Jocelyn and Alastair is in financial difficulty. That shouldn’t stretch your imagination too much. It has to shed staff. Shedding Alastair would seem best. Both earn the same amount of money, but Jocelyn has evidence he is doing a good job. But it is more expensive to fire Alastair, as his severance pay will be linked to his higher basic salary. Paying a large proportion of a person’s salary in the form of a bonus makes them cheaper to fire.
But the bank payroll tax enacted in the Brown administration – and which Labour wants to reintroduce – charged higher taxes when part of the remuneration was in the form of a bonus. It encouraged banks to move away from the fairer and more efficient system. Bonuses were converted into higher basic salaries, making the demonised bankers harder to fire. Their remuneration then did not decline with the recession, as it would have, automatically, under a bonus scheme.
Sometimes banks will define the objectives for their senior executives badly. Sometimes a bonus will incentivise a banker to pursue risky lending strategies. But they are quite capable of learning from their mistakes. This is not a reason to get rid of incentives altogether.
There is no basis in fairness or in good banking policy to penalise bonuses. If anything, the tax system should encourage employers, especially of those on fairly generous total remuneration packages, to use a bonus system. It rewards people more fairly. It automatically adjusts costs in line with market fluctuations. It makes it easier to shed surplus staff. No one but Miliband can be against that.
Quentin Langley is a senior lecturer at the University of Bedfordshire Business School and the editor of BrandjackNews.com