Some missing numbers

 

             The business world is making a bad fist of presenting its case. We are back in the usual territory. The public mood says profits are bad. Senior business people are fat cats. Bonuses are wicked forbidden  fruit. Oil companies are making huge profits out of high prices. Banks are beyond the pale.

              There are, of course examples of corporate greed. The private sector has some bad companies that let down customers and staff.  I have no time for bail outs of banks by taxpayers, but then I was the one MP who recommended a different course of action to tackle the Credit Crunch at the time that would have avoided equity bail outs. I want the governemnt to get our money back by selling the banks and their assets as soon as possible.

              Let us look at a couple of figures we have been given recently. We have been told that Shell made $20 billion of profit last year. We have learned that banks will have to pay an annual £2.5 billion levy on the size of their balance sheets and been told by some this is not enough.

                Oil company reporting  is bizarre. They mainly report the net income. They never tell us how much tax they pay in total on all the oil and product they handle.  Shell’s $20 billion sounds large. Deep down in the figures you can discover that their turnover was a huge $368 billion last year. They admit to paying $20 billion of taxes, yet if you added up all the oil taxes concealed in their turnover figure it would come out as a much higher figure.

                  Producing net profits of under 6% of turnover is what they need to pay the bills for new wells, for new equipement and the other capital items they require to carry on in business. It is hardly excessive.  The role of profit is not merely to reward the risk takers, the shareholders. It is also to pay for the future jobs and investments needed by the business.

                    The true story of £1.30 a litre petrol is the 80p a litre the UK government takes in tax. The Oil companies should announce, when they announce their profits, the far larger sums they have collected for the world’s governments. It would give a sense of perspective.

                          The banks are to pay an extra £2.5billion of tax a year  based on the size of their balance sheets. Some suggest they should pay more than this. Let us suppose they had their way and the government doubled the tax it has announced. If we assume around one third of this is tax that will have to be paid by RBS and LLoyds/HBOS, where the taxpayer is a  large shareholder, we will see that we are partly taxing ourselves. As the aim should be to sell these banks back to the private sector as soon as possible, the tax will lower the price we get for these assets. As profitable banks sell at around 12 times earnings, taking another  £800 million off the earnings of the two we own would lower their total business value by around £10 billion. The current tax is already in the price of the shares, which remains low compared to their pre Credit Crunch levels. Taxing banks more  is popular, but from the taxpayers’ point of view it is not all win win.

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25 Comments

  1. Mike Stallard
    Posted February 10, 2011 at 6:58 am | Permalink

    The people who criticise the greedy banks are themselves greedy: greedy and envious. What they are in danger of doing is supporting the EU in stripping out our only remaining successful international industry and sending it the Frankfurt.

    • lifelogic
      Posted February 10, 2011 at 2:52 pm | Permalink

      Indeed people, especially on the left, are often greedy, envious, lacking in logic, reason, believe in all the global warming exaggerations and are hypocritical – such is life alas.

      Do not worry though I am sure that EU and Osborne combined will move much banking out of London anyway – now that labour has given the relevant powers away to the EU.

  2. norman
    Posted February 10, 2011 at 7:01 am | Permalink

    Well said. The public are under some sort of delusion that by taxing the banks they are in some magical fashion going to be punishing those who receive large bonuses. Wrong.

    When the government raises taxes on the banks those taxes will be paid by you if you have a bank account, if you have a loan with a bank, if you have an overdraft, if you have a mortgage, if you own shares in that bank, if you have a pension, if you have savings, if you have a credit card – in short, everyone.

    Raising taxes on banks really is one way of showing that we are all in this together as we’ll all be paying that tax together.

    Why people are cheering this tax on is completely beyond me.

  3. The ESSEX GIRLS
    Posted February 10, 2011 at 7:08 am | Permalink

    A truly excellent blog John as was yesterdays.

  4. lifelogic
    Posted February 10, 2011 at 7:32 am | Permalink

    Shooting themselves in the foot is what governments do best, after distributing the spoils of the election victory amongst their friends and tipping money down the drain on pointless prestige “investments” like athletics stadiums. These perhaps just used for a week or two. Doubtless they will give the stadium to West Ham just to save face over this pointless stadium they have constructed at vast expense.

    The banking sector need proper competition. It is absurd that they are able to charge up to 30% lending to customers who are often a better credit risk than the banks themselves and even higher on default rates. It also needs proper regulation to ensure that charges are not absurdly complex and hidden as they are now. It is often hard to find out what rates are actually being charged almost never is it on the actual statements. Anyone wanting to understand a credit card agreement need a month to study it and a degree in law and maths.

    The big state has been able to disguise the total tax costs of this big state by taking tax at source under PAYE and off bank interest, splitting tax into employers NI, empoyees NI, Income tax, VAT fuel duty and the rest to hide the total take.

    Business should make the true cost of tax (and even pointless regulations) apparent on all purchases. People should regard it as their moral duty to pay as little tax as possible
    and move things overseas where they can. Further to point out the absurd levels of tax as often as possible. Only in this way, when the state finally run out of money, might the government finally stop its policy of tax and tip down the drain.

    Voting clearly has zero effect.

    • Stuart Fairney
      Posted February 10, 2011 at 10:30 am | Permalink

      “Voting clearly has zero effect”

      Indeed, if you vote for an establishment party, you get establishment government, so….

      …the next step seems clear

      • Andrew Johnson
        Posted February 10, 2011 at 6:14 pm | Permalink

        That is the logical action to take, but perhaps with one caveat. Where there is a real conservative like John standing, we can vote for them. As things stand in the Conservative party at present, that’s no more than around 50 MP’s, judged by the voting record.
        Given that around a third of the electorate don’t bother to vote at a General election, it is extremely worrying that so many whodo seem to feel that voting clearly has zero effect.
        Does this mean we will all have to occupy Parliament Square? Hang on didn’t a couple of million people take to the streets to protest about the possibility of going to war with Iraq?

      • Simon
        Posted February 11, 2011 at 10:52 am | Permalink

        But will the rest of the electorate realise that LibLabCon are all the same ?

        Even if other parties/independents got the neccessary seats do you still have faith they would be counted and collated properly and the result reported honestly by Pravda ?

        The establishment have so much invested in the status quo and control all the machinery needed to report a ficticious result .

        Many people swear blind that in Irelands second Lisbon Treaty referendum the count did not correlate with the exit poles they were carrying out .

  5. Johnny Norfolk
    Posted February 10, 2011 at 7:44 am | Permalink

    and nothing is said about the” earnings” of pop ” stars” footballers and the media.

    Why is this.?

    • Winston Smith
      Posted February 10, 2011 at 3:10 pm | Permalink

      Because they are celebrities and that’s different. Football clubs are private businesses and mostly profitable. Loss making clubs like Chelsea benefit from rich owners who add £00ms to our economy. They also contribute a lot to local communities, by providing facilities, community training programmes and supporting local hospices and hospitals. The media/arts/film industry, however, is directly subsidised by the State, often because its the only way the ruling elite can get their pretentious tastes catered for. They cannot be criticised due to their superficial support for socialist causes. You can earn £10m a year but if you slag off capitalism, then you are one of the people.

    • lifelogic
      Posted February 16, 2011 at 9:38 pm | Permalink

      Footballers cannot be replaced by two players who are 90% as good (s0 180% as good) it is against the rules of the game. Bankers and business leaders can be however, So footballers are paid more as a result as are celebs. It is either them or it is not them.

      Not true in most of business where 2 X 90% for 1/3 wages each is a far better bet.

  6. DavidB
    Posted February 10, 2011 at 7:46 am | Permalink

    The banks should have been allowed to go bust. The taxpayers wrongly bailed them out at great risk and expense. The reward for that unreasonable help? Bonus payments running to millions. Do Icelandic bankers get massive bonuses these days?

    It is politics now. The public object to the bonuses. I object to the bonuses. It is up to private companies what they pay their staff. If the banks were privately owned they could pay their staff whatever they like. But 3 of them are not private. The taxes are a political response to a situation which should not have arisen.

    We need the banks broken up. Limits imposed on their size and ownership. The ones owned by the state need to be floated as soon as practically possible. It needs to be enshrined in law that the state never bails out a bank again. And they just have to accept the tax hit sackcloth until such times as they are private enterprises again.

    The distortion which the bailouts have caused is typical of politicians and the unintended consequences of actions passed by people of the calibre of our MP’s. It is a political problem. The clever banksters should be taking all bonus payments as shares and keeping their heads below the parapet. They can collect once they are private again without enraging the public and embarrassing the government. In my opinion, cash payments should be taxed at 100% – until they are private companies again.

    • Robert
      Posted February 10, 2011 at 12:01 pm | Permalink

      They are all stock exchange listed companies per se with varying government holdings and the latter only applies to RBS and Lloyds/HBOS only!

  7. alan jutson
    Posted February 10, 2011 at 8:12 am | Permalink

    If only more people could, or would be bothered to understand the mathematics of business.

    • Tim
      Posted February 10, 2011 at 10:56 am | Permalink

      Dear Alan

      Perhaps you can teach us. I am sure millions of us would love to know how to access (through our jobs) the sums of money apparently earned by the banks and others. Where do we find out? I’m sure it’s not just a question of being bothered.

      Regards

      Tim

  8. Antisthenes
    Posted February 10, 2011 at 8:58 am | Permalink

    When the lefties get their way and ban profits, free markets and capitalism which will ensure that we eventually return to the stone age, will they then say that they were wrong? I doubt it somehow.

  9. JimF
    Posted February 10, 2011 at 10:07 am | Permalink

    I think the point here is that there seems to be no way of a majority shareholder viz. the Government influencing the remuneration of bank employees. That is one of the frustrations of the public. Whilst banks were turning in large profits, and seemingly being competitive i.e. relaxing their credit controls, then this was fine. Now they are seen as

    1 ripping-off savers, having created an enormous margin between their price of lending and cost of borrowing;
    2 being a poor credit risk, in other words savers are asking themselves why they should lend money to a bank which is a poorer credit risk than themselves;
    3 unaccountable to their shareholders. In the days of Brian Pitman, I seem to remember him justifying the large salaries by reference to the share price- The Lloyds share price was King, and everybody was a winner. Quite suddenly that link was forgotten. Shareholders were the only big losers. For Bank bosses the reset button was pressed and they could start the gravy train rolling again.

    Until all 3 of these issues are addressed, the public won’t move on.

  10. waramess
    Posted February 10, 2011 at 10:13 am | Permalink

    The public are not so stupid that they object to companies making large profits nor are they so stupid that they object to individuals earning large incomes. You don’t even need me to give you examples.

    What the public object to are a sector of society being protected from the folly of their own actions with our money, courtesy of our Government, without our consent and for no good reason. They object when they see the outcome of current monetary policy is to further enrich the banks at our expense and without our consent by a government who gained power on the pretext of doing otherwise.

    The Public are not such fools that they are unable to see where the difference between savings and lending rates are going nor are they so stupid that they cannot see where the benefits of QE end up.

    Only politicians can be so stupid to pretend otherwise.

  11. Gary
    Posted February 10, 2011 at 10:16 am | Permalink

    even if the banks repaid 100 percent of the bailout loan today, we would lose 25 percent due to the inflation caused to the pound against the dollar largely by the act of bailing out the banks. So the taxpayer will lose and the banks, once again will fleece us. Regarding oil, the prices will probably rise beyond those in 2008 because the speculators have incentive to drive them up, as they did in 2008. a) The banks have to deploy the free QE proceeds to them and the oil market is one of the few large enough to absorb all that money, the govt increases its tax take, and the QE printed dollars get somewhat sterilized by the increase in dollar demand for more expensive oil. We the taxpayers, as always, will foot the bill for this stealth tax.

  12. StrongholdBarricades
    Posted February 10, 2011 at 10:20 am | Permalink

    How many of those top ftse companies actually pay UK Corporation Tax?

    I believe that it is less than 25%

    Therefore, doesn’t the CT rate affect mostly SME’s?

    If you withdraw profits by taxation, doesn’t that reduce the amount available for re-investment?

    I think the government should at least consider having a level playing field for CT across the EU, and I still think that 18% is too high

  13. Pete
    Posted February 10, 2011 at 10:47 am | Permalink

    I think people also forget that ‘shareholders’ are ordinary people. If you have retirement savings, you are almost certainly a shareholder. It’s ironic: middle class left wingers are looking around for rich people to squeeze, but because they have retirement savings, they end up squeezing themselves instead.

    Unfortunately it seems that the government has bought into the ‘profit is bad’ mentality. For-profit companies are not going to be allowed to bid for free schools; why not? A for-profit company would have an incentive to provide the education that parents and pupils want. That seems much better than a school which is set up to put across the religious views of the founder.

  14. Alte Fritz
    Posted February 10, 2011 at 11:28 am | Permalink

    Johnny Norfolk’s contribution points to the infantilisation of politics. Why are footballers’ earnings still called wages and expressed in a weekly sum? Why is little attention paid to their tax avoidance schemes including being paid for image rights?

    It may be a function of getting older, but I am sure that the content of public debate is gradually sinking.

    I wonder who would buy our state banks and how they would fund a purchase? By bank loans or a floatation?

    Finally, why is not more made of the fact that Lloyds would not be in a deep dark hole if Gordon Brown had not bullied them into buying HBOS at the point when they were getting cold feet about the deal, or is my memory at fault?

    • grahams
      Posted February 10, 2011 at 7:13 pm | Permalink

      You are right on Lloyds. Mr Brown’s favourite Lord “Red Adair” Turner , as head of the FSA, ruled that the basically sound Lloyds would have to raise more new capital if it stayed on its own than if it bought HBOS. Not entirely objective I think. Lord Turner still heads the FSA which, as Mr Redwood has pointed out, has made it harder for banks to lend for business investment.

  15. Cliff
    Posted February 10, 2011 at 11:41 am | Permalink

    John,

    I am not so sure that the general public are so hostile to the bankers; I suspect it is just the left dominated media that are hostile.
    I am never envious of what others earn, I used to aspire to do the same myself but sadly, could not.
    I wonder if the constant attacks on the banking industry are merely smokescreens to distract us from the real state of our nation and our incompetent leaders. It appears to me that the bankers and the disabled have been set up as scapegoats for all our nation’s failings in much the same way the Jews were (in past times-ed).

    What people don’t seem to appreciate, is just how reliant our nation’s economy is on the banking sector as we have little manufacturing left in our country.

    I hear that the Scotish Parliament are discussing a so called “Tesco Tax” to take some of the profits off the big supermarkets. If we start taxing success, surely we are becoming even closer to the old USSR model of economics and in the end, businesses and people will just not bother to be successful as there would be no point.

    I feel we can make a case for limiting bonuses for those in the state owned banks but, surely if our so called Conservative led government starts interfering in private companies and their pay structures, we are no better than the control freaks known as Labour.

    It seems that Mr Cameron has really got himself confused over the meaning of being a Conservative; no wonder he is sliding down the poll ratings at such a rapid rate.

    • Simon
      Posted February 11, 2011 at 5:54 pm | Permalink

      “What people don’t seem to appreciate, is just how reliant our nation’s economy is on the banking sector as we have little manufacturing left in our country.”

      1) Is our economy reliant on the banking sector though or is it one of the great unchallenged myths ?

      Sure they pay a lot of corporation tax but how much of that is on exports and legitimate (not due to their monopoly) profits ?

      Seems that most of it comes from high charges on poorly performing investment products and extortionate loan margins .

      Over the course of a lifetime I bet the financial services industry relieve the average man in the street by over 15% of the fruits of his labour .

      2) Little manufacturing in our country

      Well certainly of the usual things that individuals spend their money on other than beer .

      I reckon it’s one of the other great unchallenged myths that you can’t produce things like clothes economically in this country any more .

      Tried to buy a British made shirt in Wokingham today but there was not one for sale new , though I suppose there might have been one in a charity shop .

      Does anyone else get upset by the lack of a British made option ?

      Is anyone else on this board prepared to pay a small premium to support their fellow British workers and improve the balance of payments ?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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