In which one of the country\’s leading tax experts reduces tax revenue while claiming to increase it

Rightie ho Richard:

Assuming the UK pay is pro rata world pay total remuneration in the UK will be about £1.6 billion. But, as Robert Peston suggested yesterday, this is not split equally of course. It goes about 80 / 20 – i.e. 20% of staff get 80% of pay. So, that’s average pay for 1,200 people of about £1.07 million – a total of £1.28 billion in all.

Now let’s suppose that the UK took a simple and straightforward step – entirely in line with the ConDem’s policy on pay, which is to say that maximum pay need not be more than 20 times minimum pay in the UK. The minimum wage works out to be around £12,000pa at present – so let’s say for ease maximum pay should be £250,000pa. Anything above that is, I think, a profit distribution. Bob Diamond could not justify why pay of this amount was needed. Nor can I.  In that case it is not incurred for the trade, I suggest. And in that case tax releif is not due on it.

Apply this rule to Goldman’s in the UK and of the tootle pay of £1.28 billion to its senior staff and just £300 million of that pay would be subject to tax relief. That would mean that £980 million would not get tax releif, which at 28% tax would raise £274 million in corporation tax.

Hmm, could there be something of a problem with this idea?

Well, yes, there could actually. For a start, the Coalition hasn\’t said anything at all about relating maximum pay to minimum pay across the economy: it\’s only within one organisation that maximum pay and minimum pay might, if we think about it a bit, need relating to each other. In the public sector to boot.

But there\’s another problem here, one that you might expect one of the country\’s leading tax experts to note.

We have another name for \”a profit distribution\”.

\”Dividend\”.

And we have a taxation system for such dividends.

Let us take that £980 million figure he uses there.

Currently, paid out as pay, this pays (as we\’re already well above the higher band tax limit) 50% in income tax. Plus from this coming year, 13.8% in National Insurance (oh yes, employers do indeed continue to pay national insurance, it\’s only employees\’ NI that is capped. And yes, employers\’ NI does come out of wages in the end, as Ritchie himself has said).

So we get, of that £980 million, 63.8% going to the Revenue*. £625.24 million then.

Now what happens if we do this as a dividend, a profit distribution?

Yes, we get that £274 million in corporation tax. However, we don\’t get 50% in income tax on what is received, because we already count that corporation tax as having been paid upon the dividend. You actually only pay 36.1% on the dividend that is actually paid.

That dividend actually paid is £980 minus the corporation tax, £980 – £274 is £706 million, which is taxed at that 36.1% which is £254.866 million.

And there is no National Insurance payable upon a dividend or profit distribution.

Add our two tax sums together and we\’ve £274 million in corporation tax and £254.866 million in income tax for a grand total of £528.866 million to the Revenue.

Which is, with a bit of rounding, £100 million less than we\’d get by taxing those bonuses as wages.

So there we have it, one of the country\’s leading tax experts has decided to reduce tax revenue while claiming to increase it.

And he\’s done it by reducing the amount of tax bankers pay on their bonuses.

And as Ritchie continually tells us, reducing taxation on the rich simply increases the amount that must be paid by the poor.

Why does Richard Murphy wish to oppress the poor so?

* This isn\’t quite right as the NI is in addition to the £980 million but I cannot be bothered to work this out.

5 thoughts on “In which one of the country\’s leading tax experts reduces tax revenue while claiming to increase it”

  1. But Tim, surely it’s obvious that with a maxium/minimum earnings multiple of 20 we would easily save in excess of 100 million pounds of social spending as a result of the disappearance of the ills of our current unequal society.

  2. Actually, to be fair to Ritchie, I suspect he’d advocate applying corporation tax, and still continuing to apply NI and income tax on the amount paid, thus increasing revenue (although by less than he claimed).

    That this would be completely fraudulent (if it’s a dividend, then treat it as a dividend the whole time, if it’s a wage then treat it as a wage the whole time – you can’t mix and match) seems to have passed him by.

  3. Isn’t it 65.8%?

    NI is not reduced to zero over the UEL; it was 1% but will be 2% this year. So:

    50% income tax + 2% employee’s NI + 13.8% employer’s NI = 65.8%

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