David Blackburn

City bonuses need to be curbed, but more tax is not the answer 

City bonuses need to be curbed, but more tax is not the answer 
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One upshot of George Osborne’s and Alistair Darling’s attacks on city bonuses was that the FSA had not gone far enough in trying to curb excessive reward. This morning, the left leaning think-tank Compass and Vince Cable have joined the debate. They suggest that there be a ‘High Pay Commission’, to examine wage ratios within financial institutions, and that the tax system is restructured to close the gap between income tax and capital gains. Cable makes the case in the Guardian, but this paragraph struck me:

‘There is no need for a return to a 1970s-style income policy for top pay – though, of course, the government is indirectly responsible for funding often outrageous quango pay. It should look at the principles and myths about top pay. For example, the FSA is accused of diluting a commitment to curb bonuses that lead to dangerous risk-taking – on the basis that this might affect the "competitiveness" of the City. This is a dangerous myth. The banking sector guaranteed by the government is almost certainly too big for the taxpayer to underwrite. We should not be afraid to say adieu to investment bankers who think multimillion-pound bonuses are insufficient.’

 

It is extraordinary that, in the same paragraph, Cable talks of the ‘dangerous myth’ of competitiveness and then suggests we can afford to ‘say adieu’ to investment bankers who dislike the altered tax regime, and still propose tax rises.

As Fraser frequently points out, a higher tax rate may yield less than a lower one and could damage British competitiveness in the international market. Equally, taxing booze hasn’t encouraged temperance: what’s to suggest that manipulating the tax system will end the city’s bonus culture? Or is there any guarantee that such a move will not impede our most important industry? A further problem with capital gains tax is that it is levied after the sale of asset, so I doubt those crafty city boys will sell their Ferraris and holiday homes in the South of France. Certainly, the Masters of the Universe need their wings clipping, but the way to achieve that is through effective regulation, not by, as Derek Simpson said so memorably, “taxing them out of existence”.