Yesterday, the TUC called for all remuneration over £250k to be paid directly out of company profits and not offset against a company’s corporation tax liabilities. At present, all remuneration is viewed as an operating cost and so it reduces a company’s tax liabilities. Under the rules suggested by the TUC, only the first £250 paid to any individual could be offset against corporation tax. The rest would have to be paid out of the company profits.
This idea has been floating around for a while. I’m surprised it has taken the TUC so long to pick it up. I first wrote about it nearly three years ago when it was put forward by the German Social Democratic Party, albeit with a significantly higher cap. The SPD proposed a cap of 1 million euros; about £840k at today’s prices.
The proposal has a certain logic to it. If a government wants to send out a strong message on what it considers to be excessive pay, telling firms that it is not a legitimate operating cost is a good way of ramming that message home. We are not going to stop you paying huge amounts but neither will we collude with you in pretending it is an operating cost for tax purposes. If you want to pay big money, you can do so out of your own profits.
A move such as this might have some beneficial effects. Firstly, it would concentrate the minds of shareholders. Paying big rewards out of the pot that was originally intended for distribution to shareholders might encourage them to take more of an interest in the remuneration policies at their banks. Secondly, it might encourage banks to make high-earning employees shareholders in their own right. If you are going to pay them out of profits, giving them shares seems logical. Remuneration in the City is already shifting in this direction anyway.
That said, it is possible that neither of these developments on their own would do much to mitigate the risk of another financial crisis. So far, bank shareholders have proved surprisingly acquiescent to senior employees taking an ever bigger slice of the cake. People have been predicting bank shareholder revolts for years yet little more than the odd grumble has ever disturbed the peace. Employee share ownership isn’t a panacea either. Bear Stearns employees, for example, had a relatively high level of share ownership but that didn’t stop them driving their bank off a cliff.
The TUC’s proposal was aimed at the banks but it would also affect other companies. The effect of such a change in the tax laws on football clubs would be interesting, to say the least. If mega salaries could no longer be classed as operating costs, the whole economics of football would change overnight. Given that Premiership footballers are even more internationally mobile than bankers, this could see many of them seeking higher rewards elsewhere.
The TUC’s suggestion is an interesting one and it certainly deserves further discussion. It could be another useful way of bringing in more tax while expressing social displeasure at the excessive earnings of the few.
The threshold of £250k is almost certainly too low though. As I said a couple of weeks ago, we need to strike a balance between making the banks pay more and making them pay so much that they set up elsewhere. There are considerable obstacles to banks relocating and so far the threatened exodus has been little more than hot air. But too much pressure from governments could make a move overseas seem more cost-effective. Corporation tax on remuneration above £250k might be enough to tip the balance. So, while this proposal has its merits, the cap should be higher and, ideally, the UK should implement it at the same time as other jurisdictions. That the Germans are considering something similar is encouraging. And their proposal of a 1 million euro cap sounds a lot more realistic.