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Miliband’s missing millions

    Tim Montgomerie tweeted last week about the inconsistency of Labour’s support for bank bonus taxes and their support for caps on those same bonuses. Many of Labour’s spending commitments such as extra childcare and their “Youth Jobs Guarantee” are supposedly to be funded from the reintroduction of the tax on bonuses that they enforced at the end of their time in power. It’s no longer controversial to suggest that their overall spending commitments have reached absurd levels compared to the revenue raising capacity of the bonus tax. By some estimates they are proposing to spend more than £10 for every £1 raised. Even so, you would expect Labour to be doing everything they could to increase the yield from their bonus tax.

    The European cap on bank bonuses is a particularly poorly conceived piece of meddling and there has been much uncertainty about who exactly would face the new rules. However, by supporting the cap Miliband is not only in favour of a policy which is likely to have many unintended harmful consequences but is also reducing the pool of bonuses available for him to tax. Data from the European Banking Authority late last year suggested there were 2,714 UK bankers earning more than €1 million last year with bonuses averaging 3.7 times their base salary. Average pay of those 2,714 bankers was approximately €1.95 million which gives us an average base salary of €410,000 and an average bonus of €1.54 million. Assuming that shareholders agree to a maximum bonus of twice the base salary, then this means an average fall in the bonus of just over €700,000. Labour’s bonus tax in government was a levy of 50% above any bonuses above £25,000. If their proposed bonus tax remains at 50%, then they would be able to raise €350,000 less per banker. If all 2,714 of those bankers face the cap, then approximately €950 million or £780 million less would be raised through the bonus tax with the presence of the cap.

    It is possible that not all of the highest earning bankers face the cap due to various technicalities. Also, the ‘average bonus’ may not be quite what has been reported and bonuses below the cap may rise. Nevertheless, a loss in bonus tax revenue of hundreds of millions seems reasonable especially given that the bonus pool appears to be shrinking with increasing use of allowances and rising base salaries as well as the fact that some bankers earning between €500,000 and €1 million also face the cap. The figure also doesn’t seem unreasonable given that in 2009/10 the bonus tax raised approximately £3.5 billion in gross terms.

    The simple fact is that if Miliband wants to raise more revenue from the bonus tax, then bonuses need to be higher. He needs to choose either bonus caps or bonus taxes, not both. The UK’s banking sector is in dire need of more competition and dynamism. However, neither Miliband’s amateurish populism nor Europe’s regulation obsession are the way to reform the industry.

    Andrea Leadsom MP’s CPS paper gave some excellent ideas for reforming the sector by reducing barriers to entry, permitting orderly market exit and boosting competition in the markets for banking products and services. 

    Adam joined the Centre for Policy Studies as Head of Economic Research in January 2014. 

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