Sunday, January 9, 2011

Bank restraint on bonuses would mean LESS tax paid

I'm no fan of big bank bonuses but the argument is more complex than some think. We actually generate far MORE tax by allowing banks to pay bonuses than if we discourage or prevent them from doing so. To this extent I was disappointed by the PM's comments on the Andrew Marr show this morning. David Cameron said "I want to see the bonus pool smaller than last year."

This may be what the public thinks it wants but at a time when the Government wants to increase tax receipts it makes no sense.

Imagine a bank has a profit of £10m. How much tax gets paid if it pays no bonus?
Just Corporation tax on the profits. That's 28% of £10m which is £2.8m

If the bank ignores requests for restraint and pays out £8m as bonuses, how much tax is paid?

Well, in addition to the bonuses the bank will pay employers' NICs on the bonuses. So that's 12.8% of the £8m, being £1,024,000.
The bank will still pay corporation tax on the remaining profits: That's £10m-£8m-£1,024,000 = £976,000. And 28% of that is just £273,280.
The total tax paid by the bank then is:
Employers' NICs : £1,024,000
Corporation tax: £273,280
Total.................. £1,297,280 - compared to the £2.8m tax if it paid none of the bonus.

But that's not the end of the story as the bankers will be subject to tax on the bonuses they receive: Income tax @50%, so that's £4m, plus 1% national insurance = £80,000

So the total tax paid if the bank pays £8m of bonuses is:
  • Tax paid by the bank: £1,297,280
  • Tax paid by bankers: £4,080,000
  • Total:..................£5,377,280
That's almost double the £2.8m tax paid if the bank 'exercises restraint' and pays out no bonus.

Of course if Labour's one-off banker bonus tax were reintroduced it would generate even more tax. But that's a different argument. The PM should be explaining why he doesn't want to do this, rather than arguing for smaller bonus payouts. That makes no sense as the bigger the bonuses the more tax is paid.

1 comment:

  1. Hi Mark

    Interesting analysis although I believe that the issue could be much more complex than you suggest.

    If the bonuses can be reigned in it would enhance the profitability of the banks, this should increase the valuation of the banks (some of whom are owned in part by us). This could be by a multiple that is several times the profit enhancement.

    Clearly your example could apply for each year that bonuses are paid. So i think there are two sides to this coin and the right decision could/should be influenced partly by the time line to realise the government's investments (and the degree of desperation to generate cash immediately as opposed to in the future).

    Another point that should be considered is the benefits of the bonus money being used to fund businesses (which should itself generate tax revenues through corporation tax,employment taxes and VAT).

    Finally there is also the emotive issue, particularly in the case of the nationalised banks. The taxpayer is suffering because of the unwise decisions the industry made in the past, any other business would have been allowed to go to the wall -instead the taxpayer has baled them out. Whilst I think the priority should be to do the right thing for the economy, there should also as far as possible be equity/justice in the government's policy.