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

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

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