The bonus bandwagon

Every time I read a newspaper, there seems to be an article castigating the banks that still want to pay bonuses ­ even the likes of Osborne, Buffet and Soros are calling for a ban on “significant cash bonuses”. The banks argue they need to pay bonuses to remain competitive and avoid a mass exodus from the City.

I believe that paying bonuses is a good thing, setting aside whether bankers deserve such payouts. Now, I am not a banker and have no vested interest in banking other than not wanting to see a return of last year’s meltdown. So, why do I think bonuses are good for the economy?

The answer lays in taxation. If one of the government’s priorities is to reduce public sector borrowings, then an increase in tax revenues can achieve this. And so the exchequer greatly benefits from bonuses being paid out by the banks.

From 6 April 2010, the top rate of income tax hits 50% and the taxman would collect this top rate on bonuses as opposed to only 28% in corporation tax if the banks decided to scrap bonuses. So if the banks pay out bonuses of, say £1bn, additional tax will be collected of £184.16m. Adding National Insurance payable by both employer and employee, there would be an additional £138m collected by the exchequer, even after taking into account the tax relief a bank would obtain in paying the additional National Insurance.

Big bonuses have risen to £15bn in the past three years, which means additional tax revenues of £4.84bn. Now, I can hear some of you arguing if banks don’t pay bonuses, then the additional profits are more likely to be paid as dividends to its shareholders and the taxman collects on those dividends. Even if that happens, a substantial proportion of dividends are paid out to foreign institutions who will not be paying any tax, while dividends paid to UK companies also fail to attract any tax either.

So, my view is that bonuses are good for the economy and a way of maintaining the City of London. And shouldn’t the man at Goldman Sachs who advised Goldman’s not to invest in the sub-prime mortgage market be properly rewarded?

Lynton R Stock is a partner at Shelley Stock Hutter LLP