Bonuses For Bankruptcy

FRIDAY, FEBRUARY 06, 2009

Bonuses For Bankruptcy

This year's real bonus pool

In recent years, the public sector has wasted a fortune on management bonuses (eg see this blog). And it's about to get a squillion times worse.

When Tyler was a Civil Servant 30-odd years ago, we didn't get bonuses. You did your job, you got your salary (yes, OK, and your index-linked gold plated pension), and that was that.

But at some point, the mandarins must have looked at the private sector and thought aha, the reason they're so much leaner and fitter than we are, is because they incentivise their people with performance bonuses. We'll do the same and our performance will improve. QED.

Unfortunately, they failed to spot the vital point that the private sector has a much simpler objective. All private sector firms have to do is turn a profit, and performance bonuses can support that objective quite straightforwardly.

Tyler discovered that when he moved to the pre-Big Bang City. Bonuses were paid (albeit on a much more modest scale than now), and they were linked pretty directly to how much profit his division had generated during the year.

He learned how the old City partnership structures had used bonuses primarily as a way of de-risking the volatility of earnings. By paying partners - and later employees - a share of the profit in the form of variable bonus, staff costs could be kept in line with the firm's year-to-year capacity to pay. That was still the basic model, and there was a very direct linkage between profit and the bonus pool.

But the public sector is very different. It is not targeting profit, or any such clearcut objective. There is no bonus pool driven directly by the money available. Indeed, there is no transparent and robust linkage back to any real world objective. Just another pile of box ticking commissariat wibble.

The result is that public sector bonuses get awarded irrespective of overall performance. From failing HMRC managers, to failing DWP managers, to failing Learning and Skills Council managers, to failing Met Police Commissioners, tofailing BBC execs, performance bonuses get paid irrespective. As a BBC spokesman put it, “bonuses are part of staff’s contractual entitlement”. In other words, they're part of salary.

When last sighted bonuses were running at £128m pa for the Civil Service alone. And the BBC bonus pool bill tops £20m pa.

But all of that pales into insignificance against the squillions we're reportedly now paying out to employees of our nationalised banks. Banks, remember, which are only being propped up with our money.

So WTF would we allow that?

One argument we've heard today is the BBC's contractural entitlement point. But what precisely does that mean? Sure, if a banker has a piece of paper spelling out the cash owed him by his employer, then the employer has to cough up. But I'd be prepared to bet most of these bonuses aren't anything like that clearcut - there's almost always a huge discretionary element.

And even if there is a formal quantified contractural entitlement, what if the employer has gone bust since signing the contract? In those circs, contractural entitlement or not, the employee is just another unsecured creditor. And right here and now, to all intents and purposes, our nationalised banks have gone bust. The only reason they're still doing the zombie walk is because we're propping them up.

Another argument is that unless we pay up on the nail, all those bright bankers will just leave. They'll go. They'll walk off down the road to work for... well... you know... uhhh... they'll be snapped up in no time... no, really, there's huge demand, and they are soooooo marketable...

Right.

Sure.

The truth is that right now, in the financial world - just like at Ford or JCB - keeping your job is your bonus. We don't need to pay anything else on top. And to the extent we do, no way should it be cash - it should be in deferred stock, or maybe some of that toxic debt whose value is so fluid.

But I'm very much afraid our wibbly-wobbly "government" is no St Obama. Despite all the huffing, it is simply going to cave. It makes you want to spit.

PS Wonder how the backroom prep for Gordo's much-hyped London G20 meeting is going? We know he's desperate to pose as the economic saviour of the world, but as each day passes it's becoming more and more difficult to disguise the fact that his fellow "leaders" think he's an economic prat. Sarko's outburst yesterdaywas great: "When the English decided to cut VAT by two per cent, a certain number of politicians rushed to tell me that I should do the same. Since then, not only has consumption in England not gone up, it continues to go down... When you put your country into debt to pay for operating costs, you have nothing in return for your debt and you ruin the country. The English did that it's because they don't have any industry left. Gordon Brown cannot do what I am doing..."And that's on top of the beastly Germans (see this blog). Should be interesting in April. [Oh, one small point for future reference, Nick - Gordo's not actually English. It turns out he's a one-eyed Scottish idiot sent down South specifically to bankrupt the English].

THURSDAY, FEBRUARY 05, 2009

Tax Fax Gap

We name the man responsible for our tax gap

As you may know, the Grauniad is currently running a two week campaign on theTax Gap, "exposing" big corporate tax avoiders. They say:

"Big businesses, the super-rich and an entire industry of consultants - many based in the City of London - devote huge amounts of time and money to paying the taxman as little as possible...

Like the credit boom, the tax-avoidance game represents the triumph of technical proficiency over social responsibility... the behaviour of these companies has a pernicious knock-on effect on others. Socially responsible companies find their "good" behaviour punished by being at a competitive disadvantage to more ruthless companies who price in their avoidance to the consumer."

Now, we have some sympathy with the G's campaign. Indeed, we have blogged the so-called Tax Gap several times (eg here and here), noting how much it costs us poor schmucks who dutifully pay up every last penny of tax HMG decides to stick on us.

Our solution is simple: first, cut the incentive for tax avoidance by cutting expensive Big Government back down to size; second, drastically simplify the tax codes so there is much less scope for avoidance.

Oh yes, and the Major would add a third measure - the reintroduction of drawing, quartering, and burning at the stake for anyone caught evading taxes.

Unfortunately, it's most unlikely the Gran will adopt our solution. For one thing, under its government, public spending has mushroomed to pay for all those public sector non-jobs advertised at huge cost in the G every week. And also, under itsgovernment, Stalinist micro-management has made our tax code the longest and most complex in the developed world.

So our hopes for its campaign are not high, and we were not intending to blog it.

But then on Tuesday, somebody called Derek Draper (Mrs T reckons he might be one of those fat blokes they have on breakfast TV) used the Garn series to assault the TaxPayers' Alliance. You can read exactly what happened here - real handbags at dawn stuff.

So far as I can follow what he's saying - and it's a bit tricky - Droper reckons that because big companies use Brown's monstrous tax code to avoid UK taxation, and because Brown's monstrous public spending cannot be cut, that means the TPA wants hard-working British families to starve to death in a snow-filled ditch. You know, because they have to pay even higher taxes to balance the books. Kind of idea.

So what are facts? How big is this Tax Gap (ie the shortfall between what HMRC would collect in tax if everyone "played the game", and what they actuallycollect)?

For years, nobody really had a clue. But last year, as we blogged here, HMRC finally published some estimates - at least for direct taxes. Here's their summary table (click on it to enlarge):

So for 2003-04, HMRC estimated the total Tax Gap on Income Tax, CGT, National Insurance, Corporation Tax, IHT, and Stamp Duty was in the range of £11bn to £41bn, with a point estimate of £22bn. Since receipts in that year were £246bn, that implies losses in the range 5-15% (point estimate 8%).

But take a closer look at how that breaks down between the various direct taxes. And look in particular at Corporation Tax avoidance - which is the focus of the Grun's campaign and the basis of Darren Drooper's handbagging. The estimatedTax Gap was £2.1bn to £6.6bn, with a point estimate of £4.4bn. Which, given that Corporation Tax revenue that year was £28.6bn, implies a CT gap in the range 7-23%, with a point estimate of 15%.

Now, a CT Tax Gap amounting to 15% of CT revenue is serious money. No doubt about it. But £5-6bn (which is what it would be this year) is nothing compared to the disastrous state of our public finances. In particular, even if we stopped all of that avoidance tomorrow, it is nowhere near enough to save hard-working British families having to pay much higher taxes post the next election.

And remember this - tax avoidance is completely legal. These big companies are doing nothing that our tax codes don't permit.

Indeed, you could say it's yet another example of the unintended consequences we blog so often on BOM: the commissars devise some highly complex set of rules to achieve a "targeted outcome", and then fly into an apoplexy when real people out in the real world respond by changing their behaviour in some perfectly rational but "socially irresponsible" manner (cf the poor but rational young women who respond to welfare payments aimed at"abolishing" child poverty by producing even more poor children).

One other thing - just take another look at that HMRC table. The biggest gap by far is not in Corporation Tax. It's in Income Tax/National Insurance/CGT. And that is nothing to do with evil capitalist mega-corporations laundering their ill-gotten gains through the Dutch Antilles. It's the good old black economy here at home.

It may even be Mr Dripper's window cleaner.