As usually happens when hard line Socialist utopias are created, Jeremy Corbyn’s maximum pay plan would help the rich not the poor.
That is because when employees reach the maximum, other ways would be found to reward them which would increase inequality and reduce the tax take from the rich.
In Soviet Russia access to the splendour of the Bolshoi Ballet was a perk for the wealthy. The poor weren’t helped, and no tax was collected on the perk.
So it would be if Corbyn got his way. Employers would pay bonuses, perhaps in shares or profit share, when they can’t pay extra cash. The thing is, shares or profit shares, when sold, are liable to Capital Gains Tax, not Income Tax as wages are, and the capital gains tax rate is lower than the income tax rate above £140,000.
The other option is to give a higher amount of renumeration as pension contribution. It’s not in your salary for Corbyn to tax, but you will have a happier retirement than a poor person, and the government get less tax than if you take it as salary.
So if I were rich, I know what I would choose. I would vote Corbyn, not Tory, because I would be better off.
Other benefits in kind would be even harder to collect the tax on, whereas just having the income through PAYE would mean the government have a greater chance of collecting the tax.
Closing some of the loopholes I described above (and there are hundreds of others), would do much more to achieve the aims of reining in excessive pay, but they are more iterative and less headline-grabbing, so no use to politicians of the Corbyn kind.
* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election
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23 Comments
Better to concentrate on setting out the alternatives, rather than dissing Corbyn if the Lib Dems want to get above 1.6% in East Ham ever again.
As I wrote yesterday – “Jeremy Corbyn later in the day seemed to drop this idea and replaced it with trying to reduce the ratio of salaries within companies, hopefully liberals can support this idea …”
However I think David Thorpe is wrong about taxing benefits. Bonuses are taxed as income. If you have a company car you have to pay more income tax. If you are paid in shares, it is still income and liable for income tax. Even if the extra payment was in the form of a contribution to a private pension it should be declared and is liable for income tax.
In my experience, the author is quite right. It is doubtful whether direct government interference in setting pay levels, including through taxation, would be effective. Some here may remember the days of punitive taxation, in the ‘seventies. British companies came up with many imaginative ways legally to circumvent the rules. That was when ten-year top-hat pension schemes proliferated for directors along with imaginative, highly lucrative incentive packages. It took at least ten years for tax regulation to catch up.
How were such schemes approved? Well, by the same mechanism that still exists today. Readers are probably aware that in large companies, top executive pay and benefits are set by remuneration committees. They normally consist of non-executive directors and the company’s chairman (if non-executive), advised by compensation consultants. The non-executive directors are executive directors of other companies. The compensation consultants (who are few in number) exercise the same role for other companies from whom they draw their data.
Remuneration committees therefore can be considered the ultimate ‘old-boys’ network. As a whole they compose a closed circle of people who all have an interest in maximising their benefits- even the remuneration consultants whose fees are eye-watering. After all, which executive would want to employ a ‘cheap’ one?
My practical suggestion, as a step to changing this self-reinforcing behaviour, would be to require employee involvement on these committees. John Lewis is often cited as an example of a successful company whose chief executive does not receive stratospheric compensation. It is also an example of employees being trusted to understand the real world and what is good for their company, including the need to attract and retain good executives.
I believe that even employees who are not actually owners can also be trusted to do the same for their other employers.
@ David Thorpe,
The wealthy choose whatever arrangement they can to minimise their tax bill. If it means directing their income more towards capital gains, dividend payments, increased pension contributions, share options or whatever then that’s what they’ll do. That is what they already do. Mostly these are all quite legal. If they wish to stray into the realms of semi-legality/outright illegality then there are accountants who can provide their services to advise on these, mainly offshore, schemes too.
That won’t change simply because Jeremy Corbyn, or anyone else, might choose to put a cap on incomes!
just increase income tax, and other taxes on things that are really income. Oh, and put fuel duty up, particularly on diesel. Poor people don’t have cars, mostly.
@ Jenny – “Poor people don’t have cars, mostly.”
Do you live in an urban area, Jenny? Where I live in a rural area people are much more reliant on having a car to access places of work. Without, their employment prospects are only further diminished.
All the “alternatives” to ordinary pay you mention are easily quantifiable and hence easily taxable (in some cases already taxed), as others have pointed out.
Can you think of any more?
I actually don’t accept for one second your assumption (worrying common amongst Lib Dems it seems) that the rich simply cannot be taxed fairly or pay inequalities tackled. In the UK, CEOs of top companies earn 228 times the average per capita GDP. Comparative figures are:-
Norway 101
Denmark 82
Sweden 75
Singapore 65
Japan 62
Finland 61
(Source: Bloomberg)
There’s nothing inevitable about what happens here, and once again it’s disappointing to see the Lib Dems taking the wrong side on this.
Jenny poor people may or may not have cars, but if not they will use public transport and purchase goods delivered via vehicles using diesel, so either way an increase in fuel duty will impact on them as much if not more than the rich. As would an increase in income tax, unless you mean the higher brackets rather than the basic rate.
In politics it rarely works to tackle the thing you object to head on – Corbyn’s pay cap in this instance. What you have to do is identify the prime mover(s) behind it, in this case eye-watering levels of pay for a few while growing numbers depend on foodbanks.
Just quickly I can think of two drivers which each merit a different approach.
1. Public companies (PLCs): The problem is that directors are too often beyond any effective control so they are effectively able to loot the company for private gain. Obviously this is bad for the company’s long term health, especially since looting very often takes the form of cutting back on investment to boost short-run profit and hence bonuses. So it’s not just about pay, offensive as that may be; it directly impacts national economic performance.
The solution is, as Alan Depauw says, is to take a leaf from the John Lewis playbook but I would go further than he does. It’s the board and not just the remuneration committee where influence is needed and employees are the ones to do it. They have a strong interest in the company’s future. At John Lewis they can fire the MD. And because he knows they can he has to behave and invest in the future. Obviously it’s also good for industrial relations. The idea that industry should be in a state of semi-permanent warfare is just bonkers.
2. Investment banking: City banks comprise many departments where small, close teams run fast moving specialist trades. Their fast moving nature means that huge autonomy has to be delegated, the specialist dimension means that line management often has little grasp of what’s going on and what the risks are. But profits can be astronomical so teams are incentivised to take extreme risks and management to turna blind eye to the problems knowing that if it goes badly wrong the taxpayer will bail them out.
The solution is Glass-Steagall or equivalent. For instance removing limited liability from directors in any institution taking deposits from the public would mean they were gambling with their own money. And that would mean that management would pay better attention to risks. And that would mean lower salaries and less blow ups.
Don’t like this “but there’s nothing we can do” attitude. If we think that the current distribution of income is fundamentally wrong, then, as Jenny Barnes suggested, just tax it, and the share schemes and the rest of it. While your at it, make companies pay higher rates of employers NI on all the remuneration of these highly paid staff. And don’t buy this guff about the highly paid having unique skills which make them irreplaceable. If, God forbid, the Board of Directors of the top 350 companies happened to fall under the same London bus, you may rest assured that keen, bright, talented replacement would be found without too much trouble. Libel laws prevent me naming the FTSE100 COEs who have screwed up one company, moved to another at huge cost to the shareholders, and buggered that one up as well !
Far too many in our party accept the mantra from wealthy people that you can’t reduce what top people earn because otherwise company bosses will move elsewhere. Of course this is complete nonsense. There are plenty of capable middle managers who would love the chance to move up and who would work for a lot less than the so-called super bosses.
Let’s be clear, no-one needs to earn the obscene levels of pay that are paid the top managers, chief executives, company directors and the like. Especially whilst people at the bottom of the income scale have their pay cut in the names of austerity or cutting costs.
So the issue is what to do about it.
The simple answer is to tax people who earn these high salaries more and ensure that however they are paid – shares, pension contributions, company cars, subsidised holidays, you name it – they have to pay tax on it. Of course it would be easier to do this if action was EU wide. I don’t want to hear about the laffer curve or any other pro rich nonsense, because it’s a convenient theory that the wealthy proffer to stop them paying their fair share.
The second answer is to introduce rules that allow intervention when the ratios between top and bottom salaries get so far out of line. We could start in state businesses and government institutions and then move to public utilities, local government. We could then move to banks, especially those that rely on the site to keep them afloat, then public companies. The prophet of capitalism, Adam Smith, argued that the government should ‘hold the ring’ the ensure that businesses did not rip off the public and were run ethically.
Of course those affected are going to howl with indignation, but if the money thus collected by the government is used to boost low pay and make incomes much more equitable then the people will support such moves.
Corbyn is wrong to call for a maximum wage, but making the UK a more equal society is surely a Liberal Democrat aim and it’s time the party stopped accepting the ludicrous view of the well paid and started to campaign for income equity.
Setting any sanctions on the ratio of bosses salaries to those of the least well paid will just mean companies outsourcing the work of the lowest paid so they do not appear on their company payroll.
Liberals do not believe in such government interference in market forces other than the rate set for the government’s own employees.
@ Mick Taylor. Spot on.
Time the party had a policy working party on the unequal society with Thomas Piketty as compulsory pre-reading.
Wrong Mr Evershead. Liberals led the way in regulating business and giving protection to workers. If companies did as you suggested the government could make it an offence to do so and insist that all people who work for companies appear on their payroll or tax companies as if they were. It’s odious to continue to act as though we are helpless in the face of deliberate action by companies to reduce wages, avoid employment rights and evade taxes like national insurance. They don’t get away with it in other European countries so why should they here. In the US everyone is liable to US taxes wherever they earn the money and they have to complete tax returns in order to be able to offset taxes paid in other countries against their US liabilities.
Time for concerted action against tax cheats and employment swindlers, not mealy mouthed excuses for not taking action.
@ David Evershed ” Liberals do not believe in such government interference in market forces other than the rate set for the government’s own employees”……….
Where do you get that from ?
Not from Lloyd George : “There are so many in the country blessed by Providence with great wealth, and if there are amongst them men who grudge out of their riches a fair contribution towards the less fortunate of their fellow-countrymen they are very shabby rich men. We propose to do more by means of the Budget. We are raising money to provide against the evils and the sufferings that follow from unemployment”…. Limehouse speech.
… and not from Jo Grimond….. in 1983 in the Thatcher years ….. “individualism has gone too far and, perhaps, more equality was required”.
@ David Evershed Inequality and non-intervention.
The following report from my local paper today illustrates what is wrong in unequal Britain.
“DESPERATE housing tenants are being forced to choose to ‘eat or heat’ as a crisis caused by the introduction of the new Universal Credit benefits system in xxxxxxxxx leaves them strapped for cash.
xxxxxxxxx Foodbank has seen a surge in referrals since the introduction of the new digital benefits system, with the number of people needing help in November last year almost doubling from the previous year. The xxxxxx Foodbank revealed it handed out more than three tonnes of food to feed 383 people in November – including 145 children”.
This report ought to be a cause for shame that Liberal Democrats, when in government, acquiesced with the introduction of Universal Credit. It’s time to rediscover radical Liberalism.
In response to Mick Taylor’s comments:
“deliberate action by companies to reduce wages, avoid employment rights and evade taxes like national insurance”
This is a natural response of companies competing with imported goods and services from low wage countries. The status enjoyed by public and private limited companies under company law is such that it is right that government should intervene to level the playing field. Where in practice companies subcontract work, the NI losses on the wages of those who might otherwise be employed directly by companies at minimum hourly rates is minimal. However, this doesn’t apply to higher paid workers so superficially there may be a case for levying a tax on outsourced contracts to recover notionally lost NI but I suspect this would create an expensive bookkeeping exercise with very little revenue benefit. The use of evade above in this context which implies tax fraud is a separate issue to be dealt with by better enforcement.
Yes we need radical solutions as well as attention to detail.
David Thorpe’s article is just an anti-Corbyn rant with ‘clever’ ideas as to why companies/individuals could dodge it…BTW, If you can see avoidance, so can the taxman and the ‘loopholes’ in the article are already closed…
Where are our such proposals to the inequality in society? .The article implies that such salaries are acceptable because they pay tax???????? It is not just about taxing the pay; it is the pay itself that is seen to be obscene..
Stuart’s (11th Jan ’17 – 5:31pm) shows how top heavy our system is compared to others. In 2015, High Pay Centre Director Deborah Hargreaves said of the recent awards,”Pay packages of this size go far beyond what is sensible or necessary to reward and inspire top executives,”….Yet, when Corbyn suggests doing something about it, he’s accused of trying to create a “hard line Socialist utopia”…
Sadly, all I see in the article is how negativity far outweighs radicalism…
Good to see ideas discussed here for radical steps to reduce inequalities of wealth and income, not accepting the differentials between what top executives acquire and the pay of their workers. Equality being one of our fundamental values, we must not leave this discussion to the Labour Party, and nor should we when poverty in Britain is likely to rise again this year. Perhaps Mick Taylor points us in the right direction, backed by David Raw suggesting a policy working party on the unequal society.
Mr Corbyn may, or may not, have come up with a bad answer but he has come up with a crucial question which has been waiting over long for answers.
Centre stage conversations about managing economies so that there is a generality of freedom from want are long over due. Perhaps the Brexit and POTUS election votes indicate this.
No need to be so defeatist, all your objections about calculating the real “pay ratio” can be overcome. See https://mobile.twitter.com/EquitaxBlog/status/139150862126809088 and https://mobile.nytimes.com/2016/12/07/business/economy/portland-oregon-tax-executive-pay.html
Note that taxing the corporation, not the executive/individual, is likely to be more effective at moderating pay ratios: arguably, CEO pay would simply rise to compensate for punitive personal income tax rates.
Equitax. Very interesting ideas in the links you post. Will anyone join me in proposing linking corporation tax to the ratio between executive pay and employee pay?
the loopholes in this article are certianly ot already closed-I help people use them every single day..Im working on the next lot of loopholes right now.,.