Bankers bonuses bashed

 

              I read last week that City bonuses reached a peak of £11.6 billion in 2007-8. The forecast for this year is  £4.2 billion.

               Many will welcome this collapse. Some will say the bonuses are still too large. It is a fall of almost two thirds from the high.

                The Treasury will have very mixed feelings about it. They will be relieved it will reduce the number of embarrassing questions about City pay. They will  be worried that Income Tax revenue from this source will be £3.7 billion lower at current tax rates than if the 2007 level had persisted.

                   It was interesting to hear the PM say last week that he now intended to defend the City from Brussels regulatory attack. This is a change of emphasis, and probably reflects the growing realisation in Whitehall that the UK is still very reliant on tax revenue from the City.

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53 Comments

  1. Julian
    Posted November 1, 2011 at 6:24 am | Permalink

    “They will be worried that Income Tax revenue from this source will be £3.7 billion lower at current tax rates than if the 2007 level had persisted.”

    And what tax rate do bankers pay on their bonuses, I wonder?

    • lifelogic
      Posted November 1, 2011 at 8:11 am | Permalink

      Mainly at 40%/50% if working in the UK – almost certainly far less if they sensibly go abroad.

      • scottspeig
        Posted November 1, 2011 at 11:03 am | Permalink

        I always thought bonuses had less income tax due to it being a “bonus”…

      • Bazman
        Posted November 1, 2011 at 6:53 pm | Permalink

        A many are effectively public servants paid by the state and many 50% tax payers work for the state directly. They are not ‘sensibly’ going anywhere abroad.

    • norman
      Posted November 1, 2011 at 8:33 am | Permalink

      50% from the quoted figures. The difference in bonus payments is £7.4bn, the difference in tax revenue £3.7bn so 3.7/7.4 = 0.5

      Although that is at current tax rates, probably was 40% in 2007 so that may be a factor in lower bonuses with maybe more being taken via overseas / offshore vehicles for those who are based in more than one location, or taken in other ways that the highly paid accountants of these individuals dream up.

      • uanime5
        Posted November 2, 2011 at 12:10 am | Permalink

        If they have their bonus as shares they only have to Corporate Gains Tax, which I believe is 24%.

        • JT
          Posted November 2, 2011 at 11:40 am | Permalink

          Bonus payments are taxed as regular income … so 50% if over the relevent thresholds … well, higher of course because of NI payments AND removals of tax free income.

          How do you get income abroad .. and then back into the country without tax ? With paye — very difficult.

          If bonus’s get paid in shares .. they are taxed at 50% on the value of the shares .. then pay capital gains — if any — when they sell the shares.

          Bonus’s in the financial services sector are a good thing as they allow great flexibility of operating costs to match the great variations in operating income.

          The employees of RBS, Lloyds & Northern Rock are not public servants — they are employed by their respective companies. It’s just that their companies are majority owned by the State.

          Reply: Lloyds is a majority private sector company with a large state shareholding. The other two are majority owned by the state, and people expect them to behave differently as a result, as we all have to pay for their losses and any excesses

  2. lifelogic
    Posted November 1, 2011 at 6:37 am | Permalink

    Doubtless most of the bonuses are now being paid elsewhere and the taxes too. One person earning say £2M and paying 50% tax is paying perhaps 300 times an average worker in income tax. So where are the 300 jobs going to come from to replace the tax revenue. It is worse than this in fact as the 300 jobs will mainly use state schools and services the high earners will not in general.

    We shall see how it is affecting growth (if any) later today. Still it is work keeping the 50% in place until they nearly all go – just for “political appearance” reasons with support jobs and tax revenues all going too – isn’t it Clegg?

    • Bazman
      Posted November 1, 2011 at 6:25 pm | Permalink

      This making the rich richer to help the poor is for the birds.
      Until they nearly all go? I don’t see London house prices taking a dive due to the 50% tax rate and all the people who have to pay it. Leaving and taking their children out of private schools?
      You assume there is other places in the world daft enough to pay them the rate they do and also assume they do not live in London for other reasons such as family, schools, social life and business contacts instead of some foreign outpost. A simplistic analysis again to perpetrate myths by sycophantic sympathisers of people who think a million pounds is not much of a pay packet for failure.
      London’s very handy airports await these people and their wealth creating abilities that seem to be able only to create wealth for themselves and their chums whilst hoisting upon the rest of the nation high charges, bills and taxes. Taxes to bale them out or fund their subsidies often to subsidise low pay through the benefits system despite multi million pound profits and bonuses for low performance of shares, customer satisfaction and cost.

    • uanime5
      Posted November 2, 2011 at 12:17 am | Permalink

      The median salary is £26,000 per year. So they would pay 12% NI and 20% tax rate (32% in total) which is £8,320.

      Someone who earns £2 million will pay 2% NI and 50% tax rate (52% in total) which is £1,040,000 (assuming they don’t avoid paying taxes in some way).

      So the person earning £2 million is earning 77 times more than the average worker and should be paying 125 times more tax. So you’d need 125 jobs to replace 1 high earner who actually pays their taxes.

      • Bazman
        Posted November 2, 2011 at 7:30 pm | Permalink

        I await your reply to this logic lifelogic.

        • lifelogic
          Posted November 9, 2011 at 9:52 am | Permalink

          I was referring, as I made clear above to “income tax” . (NI mainly is needed for state pension contributions and sick pay and such) In fact the position is far worse than the 300 taxpayers as:

          1. People on average pay levels are more likely to use state services and state education, medicine, benefits.
          2. Families on average pay get other benefits through family allowance and family tax credits.

          So in many cases people, on average pay, get as much or more in benefits as they pay in certainly those with two or more at school.

          The government is very heavily dependent on the wealthy for tax income they would be mad to deter them as they are currently doing.

  3. Derek Vaughan
    Posted November 1, 2011 at 6:47 am | Permalink

    John,
    re your final words. If those in Whitehall did not have an appreciation of this crucial fact, what an earth are they doing there?

  4. lifelogic
    Posted November 1, 2011 at 6:47 am | Permalink

    Will Cameron be able to defend the city from attack by Brussels one wonders has he got the determination will he have his legs cut from under him by the LIBDEMS?

    We shall see how it is affecting growth (if any) later today. Still it is work keeping the 50% in place until they nearly all go – just for “political appearance” reasons with support jobs and tax revenues all going too – isn’t it Clegg?

    Doubtless most of the bonuses are now being paid elsewhere and the taxes too. One person earning say £2M and paying 50% tax is paying perhaps 300 times an average worker in income tax. So where are the 300 jobs going to come from to replace the tax revenue. It is worse than this in fact as the 300 jobs will mainly use state schools and services the high earners will not in general.

    • uanime5
      Posted November 2, 2011 at 12:19 am | Permalink

      How many of the super rich have gone and how quickly where they replaced by someone on the same salary?

  5. Electro-Kevin
    Posted November 1, 2011 at 8:03 am | Permalink

    There may be tax revenue from large bonuses – but many of those bonuses were afforded through taxes.

    That’s what people are upset about.

    • Electro-Kevin
      Posted November 1, 2011 at 9:34 am | Permalink

      … a bit like us being net contributors to the EU and seeming ungrateful when we get some of our own money back because we have to put a ‘Funded by the EU’ sticker on the building.

    • Bazman
      Posted November 1, 2011 at 6:32 pm | Permalink

      Quite right. Funny how none of the fantasist could not stop pointing out this if the tax came from metal bashing.
      In any other industry they would have got legal minimum after the company crashed. It’s the old joke of a banker taking most of the biscuits at a party and then saying “Watch these people, they will steal your biscuits”

      • Electro-Kevin
        Posted November 2, 2011 at 1:22 am | Permalink

        Don’t get me wrong, Bazman. I’ve nothing against bonuses. I’ve nothing against people earning good money. I applaud people of superstar quality making superstar lives for themselves – it gives us all something to dream about does it not ? I think most British people feel the same way as I do too.

        But where it goes wrong is when an industry (industry ?) states that it cannot get fair-to-middling staff motivated without paying them hundreds of thousands – perhaps millions – of pounds in bonuses.

        The quality of these staff is evident in the fact that they’ve helped to bring Western civilisation to the brink.

        Quite brilliant people are working in the NHS and in the Armed Forces for a relative pittance. There motivation a sense of duty and calling. Radio 4 today harked back to Martin’s Bank in the 1950s and its very British and very principled way of operating.

        It can be done.

    • JT
      Posted November 2, 2011 at 11:45 am | Permalink

      Where have bonus’s been paid by taxes ?
      except civil servants >?

      and how much has the financial sector paid in taxes in the last 10 years ?

  6. Kevin
    Posted November 1, 2011 at 8:23 am | Permalink

    When you talk about the UK “tax receipts” from city bonuses, is that gross or net of the amounts needed to bail out these bankers for their excessive risk-taking?

  7. A different Simon
    Posted November 1, 2011 at 8:28 am | Permalink

    Yes these banks pay a huge amount of tax but surely to an extent they have become glorified expensive tax collectors .

    They give the Govt it’s cut through taxes and buying Govt bonds so the Govt can remain profligate and the Govt turns a blind eye to it’s sharp practices .

    It’s hard to see how the humungous increases in banks reported profits over the last 20 years can be explained by genuine innovation , reductions in costs or anything else which would benefit society as a whole .

    Quite the contrary , irresponsible lending , leveraging and gambling depositors money to hell whilst the taxpayer implicitly guarantees those deposits for free , extortionate charges for people at the very bottom of the food chain under the threat of removal of “free banking” for the majority a bit higher up , lack of competition , too big to fail .

    I expect that all that would be achieved if these banks relocated or came under the jurisdiction of Brussels or Frankfurt is that the proportion of the ill gotten gains that gets recycled by tax would be lost by the UK .

    Would be nice to be able to look back in 10 or 20 years time to see that the UK had achieved a more balanced economy but the signs are not good .

    Without a strong Govt which is prepared to introduce universal pension schemes which operate for the benefit of it’s members , pop the property bubble forever by removing measures which guarantee shortages , the financial sector will suck what little life is left out of the U.K.

    • forthurst
      Posted November 1, 2011 at 11:20 am | Permalink

      “It’s hard to see how the humungous increases in banks reported profits over the last 20 years can be explained by genuine innovation”

      Come off it. What about Collateralised Debt Obligations? What about Synthetic CDOs? What about Credit Default Swaps? What about ‘naked’ CDSs? What about becoming too big to fail so that every time they run out of money they get subventions from the taxpayer? What about being too big to prosecute for selling misrepresented derivatives and placing bets on those clients’ inevitable losses. The banking industry has truly come of age when it can do whatever the hell it likes without provoking more than grumplings from the 99% as they hand over more of their modest savings to refloat the casino.

      Did you mean innovations that were socially useful, perhaps?

  8. Simon 123
    Posted November 1, 2011 at 8:30 am | Permalink

    My goodness! The Greek crisis is now moving with the speed of an express train and Brussels faces the full horror of a referendum producing the wrong result. Where do you go next if the Greek electorate tells the Brussels political elite to sling its hook?

    My own view is that (a) Brussels does not know what to do to resolve the Euro crisis and (b) whatever it is that needs to be done cannot be delivered by democratic mechanisms. If so, markets will then call the shots as they did in Germany in the 1920s.

    The Brussels elite should now be on full alert for the implosion of the Euro or, in the worst case, the entire EU project.

    What should the British political establishment do? First, stop burbling on about ‘seats at the table’ and ‘exercising influence in Europe’. Second, lead an alliance of non-Euro states in providing an alternative critique of what the Brussels elite is doing.

    We are in true uncharted territory: what will happen on the stock and currency markets the day after the Greeks reject the Brussels package?

    It just shows what a mess you get into when political elites ignore and despise those that put them in power.

    • alan jutson
      Posted November 1, 2011 at 9:17 am | Permalink

      Simon 123

      Yes interesting times ahead.

      Me thinks there will be much rushing around by politicians in Brussels for a few weeks yet.
      What will be really interesting is if Greece gets offered more before any referendum, as this will prove Camerons strategy and thinking was wrong for the UK for two reasons he used as an excuse for refusal to allow a referendum here.

      Its the wrong time because the EU is in trouble.
      Its the wrong tactic, we need to negotiate first.

      Greece is now putting that argument to the test.

    • A different Simon
      Posted November 1, 2011 at 9:39 am | Permalink

      No killer instinct on the part of Westminster is there .

      Reminds me of Joe Bugner ; a boxer who didn’t really like hitting people .

      When Europe is saved by the bell they won’t be interested in showing the same mercy to us .

  9. Gary
    Posted November 1, 2011 at 9:10 am | Permalink

    The banks are now among the largest recipients of welfare in the world. They are taxpayer subsidised. All of them, directly or indirectly. The growth of the financial sector comes at the expense of the productive sector. It has to, banks are merely middle men. When the broker grows the money is skimmed from the productive.

    That the govt wants to nurture this sector, says it all about the priorities and allegiance of the govt. They don’t know what they are doing.

    • A different Simon
      Posted November 1, 2011 at 10:17 pm | Permalink

      “The growth of the financial sector comes at the expense of the productive sector.”

      That is the real problem isn’t it . Beyond a certain size the financial services industry becomes harmful .

      What proportion of the fruits of the average persons lifetimes labour must the financial services industry take directly due to :-

      – interest margins on oversized mortgages due to the way they have puffed up house prices ?
      – fees on private pensions and annuities ?

    • JT
      Posted November 2, 2011 at 11:48 am | Permalink

      Banks are the largest recipients of welfare ?
      Gary, what are you on about ?
      Very confused with your knowledge.

  10. john gladwyn
    Posted November 1, 2011 at 9:21 am | Permalink

    John,

    its worth remembering that the number is lower partly because base salaries have increased so much. As a result of the new bank rules on bonuses, they increased the fixed component of compensation and reduced the variable. So to look only at narrow bonus not total comp is a mistake.

    Still, the debate around financial sector pay is a mistake. It looks at the last crisis not the next one. The fact is that bank layoffs everywhere tell you where bank pay is going, fixed or variable. If none of the banks can meet their cost of equity (and it seems they cannot yet), then compensation will inevitably fall in time.

    Much more worrying is the impact the new Basel 3 rules will have on growth. Will politicians (yourself David Willetts, William Hague and a few others aside) ever be brave enough to deal with the next crisis rather than the last one??

  11. alan jutson
    Posted November 1, 2011 at 9:25 am | Permalink

    Simple lesson.

    With modern technology Business can relocate to anywhere in the world now.

    They look for
    A stable country, Sensible employment laws, lowish tax rates for both staff and company, a high standard of living, and a good education system.

    The more you have of these requirements, the more likely you are to keep those businesses you already have, and the more likely you are to attract new ones.

    Its a fact of corporate life.

    Governemt should simply ask itslf a question, are we attracting many more businesses than we are losing, could we attract more, and then act accordingly.

    • Richard
      Posted November 1, 2011 at 1:30 pm | Permalink

      Alan, again you are absolutely right.
      Every few years in this country, we seem to pick on a section of people to be the “pantomime villains” that everyone boos and hisses at the mention of their name.
      At present it is “the rich” in general and of course the bankers, but not so long ago it was the turn of estate agents, multi national corporations, lawyers, property developers, landlords, and those who took on unprofitable companies turned them around and made them profitable again (sorry, I mean wicked asset strippers).

      I realise defending Bankers is an unwise thing to do at the moment, but unless we stop being quite so hostile to high earning people and the many highly profitable businesses who have settled here, we will find our tax revenues in the future going down and our unemployment totals going up as they pack up and do their business elsewhere.

    • uanime5
      Posted November 2, 2011 at 12:24 am | Permalink

      Care to explain why Germany with its complex tax laws and strict employment laws has a far more successful economy than the UK with its lose tax laws and lack of employee rights.

      • JT
        Posted November 2, 2011 at 11:51 am | Permalink

        The German economy is just at a different part of the cycle.
        It’s integration of the East has had significant impact over the last 10 years.
        The British economy still has hangover from colonial past
        Both UK & Germany have complex tax laws and employee rights

  12. Alan Wheatley
    Posted November 1, 2011 at 9:29 am | Permalink

    What would have been a reasonable bonus to have paid the banking regulators if through their efforts the UK had avoided a banking crisis?

    • Bazman
      Posted November 1, 2011 at 6:56 pm | Permalink

      It was the like the Soviet Union. The regulators facing the sack or a pay rise for giving their boss a massive pay rise. As I consistently point out. The Soviet Union is alive and well in Britain. With socialism for the rich thriving as the population faces ever harder living.

      • uanime5
        Posted November 2, 2011 at 12:25 am | Permalink

        What you described is capitalism / fascism, not socialism.

        • Bazman
          Posted November 2, 2011 at 6:26 pm | Permalink

          Maybe what I am describing is a form of economic fascism?

  13. stred
    Posted November 1, 2011 at 1:03 pm | Permalink

    These enormous salaries always occur through monopoly of control. With banks, the money has to flow through their system, so inevitably the fingers are in the till and they grab as much as they can. The same principle applies to professions and businesses which are granted a monopoly and their service is legally required.

    These professions and companies are then wealthy enough to afford the lobbyliars and maintain their position in law. In the case of large companies and investment trusts they form a backscratching cartel to ensure that they can cream off ever larger salaries and bonuses.

    As stated above, it is the general public that pays for this, as an unofficial tax. Capitalism now is showing the signs of corruption that ruined the ideals of Communism.

  14. Ben Kelly
    Posted November 1, 2011 at 1:51 pm | Permalink

    Kevin John Gladwyn and Simon offer a far more constructive perceptive than your comments John.

    If such huge unearned “bonuses” had not been taken out by these overpaid prima donnas on instruments that had no value then lower amounts of tax payer funds would have been needed to recapitalise the banks and offer guarantees in 2008-now. This is still going on with euro zone banks and I anticipate RBS, Lloyds and Barclays will be back for more when Spain, Italy Ireland and Portugal follow Greece’s lead to default.

    Tax take on a bonus 50% – tax payout to recapitalise after the bonus has been paid out for a loss making instrument 100%.

    I’ll take the lower bonus payout and tax take this time please.

  15. Posted November 1, 2011 at 2:03 pm | Permalink

    There is a popular perception that pay is the driving force for all those working in city institutions.

    Once we can cover our basic bills, most of the rest of us make career decisions in which the nature of the work we are doing, its value to society, the kind of person it will enable us to be and the impact those choices will make on those we love are also of great importance.

  16. Mark
    Posted November 1, 2011 at 2:31 pm | Permalink

    We know that some bonuses have been reduced because of lowered profits (e.g. as announced by Goldman Sachs), but the apportionment of the decline between operations transferred overseas, increased base rates of pay, and declining bonus payments would be interesting to research. Of course, lowered pay should also feed in to reduced need for subsidy. I wonder if the BoE will update their estimate of that as being worth £100bn p.a.

    • sm
      Posted November 2, 2011 at 9:44 am | Permalink

      Take apparent profit on deals on the upswing of a boom and then take awards made possible by very large amounts of worlwide government taxpayer support to keep the fractional reserve banking system from collapsing in on itself.

      People pay for this on the way up
      1)’inflated asset prices houses and interest thereon and similar’
      2) purchasing of financial assets at higher prices bid up by (debt created money) via enforced pension saving with a commission based system not driving costs down.
      3) Loss of productive but marginal jobs made uneconomic by incorrect economic price signals. (Sterling/Interest)

      on the way down.
      1) loss of income/jobs,unemployment and possible bankruptcy
      2) higher inflation (caused by money printing to support zombie banks as distinct from the productive economy) leading to falls in spending on essentials for those that have little and discretionary items for those that have more. Others in safe sinecures may find luxuries more affordable.
      3) devaluation of Sterling based assets.(possibly to incorrect levels)
      4) loss of frontline public services as non-essential managerial pay,pensions and perks take are protected.
      5) protection of vested interests and suppression of loss taking on those responsible.
      6) loss of democratic accountability, institutional distrust and gradual awareness of the rigged game.
      7) The unfavoured real private sector take the hits.
      8) Loss of confidence , strikes,further economic malaise until real change.

      Manipulation of the money system by bank-politicos(doing our bidding?) (accentuated by fractional reserve banking) has a lot to answer for. Even Sir MK has doubts on the current setup.

  17. Mark
    Posted November 1, 2011 at 2:32 pm | Permalink

    We know that some bonuses have been reduced because of lowered profits (e.g. as announced by Goldman Sachs), but the apportionment of the decline between operations transferred overseas, increased base rates of pay, and declining bonus payments would be interesting to research. Of course, lowered pay should also feed in to reduced need for subsidy. I wonder if the BoE will update their estimate of that as being worth £100bn p.a.?

  18. Winston Smith
    Posted November 1, 2011 at 3:35 pm | Permalink

    As ever, the politicians and the media only look at the very top and the extreme cases. The issue which they are not addressing is the fiscal drag on the 40% tax-rate payers. They are continually squeezed by inflation, fuel prices, train fares, stealth taxes, bureaucracy and worsening public services and quality of life. Like everything in this Country, I am being punished to insure against the stupid, the feckless and the downright reckless.

    Forget the small number of very high earners and start thinking about those on middle and upper middle incomes. So many of my peers are looking for opportunities abroad. The Govt needs to analyse who and why they are leaving.

  19. Mike Stallard
    Posted November 1, 2011 at 3:38 pm | Permalink

    Do you know what? I couldn’t care how much greedy bankers get paid.
    It is absolutely none of my business that’s why. I am afraid for them too. When people get obviously poorer, they look round for some else to blame. In Germany it was, of course, the Jews. In Russia it was the kulaks. In China is was, for heaven’s sake, your own parents!
    I am afraid that in this country it is going to be the bankers who get it. And they are providing us with our only working industry.

    No.

    The people who I dislike seeing get rich are the ones who do it out of my own pocket. Like the greedy bureaucrats in the County Council who are sacking a cleaner of 14 years’ loyal service and then giving themselves a pay – sorry expenses – rise. And I am expected to pay for that out of my rocketing taxation.

    • Gary
      Posted November 1, 2011 at 10:22 pm | Permalink

      You may not have noticed, but the bankers bonuses are coming out of your pocket. Without the bailouts, the market would have swept these banks away, and efficient ones would have replaced them. The inflation that is stealing your savings is to keep the banks alive. The donations to the imf fire bank bailouts are coming out of your pocket. You have been duped.

  20. Posted November 1, 2011 at 11:50 pm | Permalink

    Never mind the bankers John – it’s boom time for directors!

    Directors of top companies have increased their own pay by an average of 50% to an average of £2.7 million.

    Why????

    • Posted November 1, 2011 at 11:51 pm | Permalink

      Ooops -sorry here’s the link to the reference:
      http://www.bbc.co.uk/news/business-15487866

    • Winston Smith
      Posted November 2, 2011 at 3:50 pm | Permalink

      Their salaries went up 3.2%. Its their total package that have increased by 49%. The analysis was for Year Ends Feb to April 2011. If you look at the FT-100 shares, their values increased by around 25% year on year to March 2011. As much of their package would include share options, this accounts for a significant part of the increase. The period of ananlysis was also during the recovery period, so I suspect profitability rose and so did their bonus.

      This is not to excuse the inflated renumeration packages for top directors, but the headline numbers are not what they appear. I’m afraid we have a system of socialist corporatism, where powerful centralised bureaucracies favour and work in cohorts with large corporations.

    • Bazman
      Posted November 2, 2011 at 6:30 pm | Permalink

      Insider companies run for the benefit of the few by the few. Often even excluding shareholders.

  21. Lindsay McDougall
    Posted November 3, 2011 at 3:53 am | Permalink

    If we are prepared to apply capitalism properly, and let any failed business fail, then we don’t need very little regulation. Difficulties have arisen because we made banks a special case. Special pleading has been a feature of our railway industry for decades. Do we want our banks to end up the same way?

    It cannot be stressed often enough. If we want the nation to evolve, the freedom to fail is every bit as important as the freedom to succeed.

  22. Bazman
    Posted November 6, 2011 at 12:33 am | Permalink

    Due to lack of reply defending bankers bonuses in this blog they have been bashed. In a straight fight you are just idiots putting your petty views on the many.

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