Monday, November 15, 2010

Bankers Bonuses

At the weekend I read a fantastic article from Fraser Nelson which pointed out that the 50% tax bracket was the Coalition government’s most expensive policy. Perhaps Alan Johnson should direct Ed Milliband at it to help bring him around to his way of thinking.

Now I’m no fan of that policy, I agree with Fraser, and the wealth of evidence that shows that excessively high tax rates result in lower tax collection, however I understand the justification of keeping it for now.

Plus if we’ve got it let’s use it to our advantage. How? Well let’s look at Bankers bonuses. It’s reported in today’s media that the banks are in secret talks to restrict this year’s bonus pool from £7bn to just £4bn showing massive restraint and playing into the narrative that we must reduce the size of city bonuses to show that “we’re all in this together”. St Vince at BIS will be happy as he’s been warning banks that excessively large bonuses could result in a bonus tax again.

However let’s stop and think about it for a second. At the moment the UK government needs money, and bankers are heavily tax at 50%. There is no way on earth that they are going to try to put their bonuses (probably the most heavily scrutinised of their pay) through a tax avoidance scheme so that £7bn will net the exchequer £3.5bn of income tax. However if we reduce it to £4bn then George will only be getting a paltry £2bn through the Treasury accounts, a difference of £1.5bn.

So let’s put that into perspective if the government continues to push for banks to restrict their bonus pool they’ve giving up enough money to pay for 11.9 days of debt interest. The easy argument is that’s not a lot so why bother, but let’s put that in perspective again. It will only cover 11.9 days of interest, that’s how much we’re paying every day, let’s face it every little bit regardless of how small or large matters.

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