A practical, popular, socialist policy on high pay

by Dan Cooke

It does not seem unfair to suggest that Sir Peter Tapsell, first elected on the coat-tails of Harold Macmillan in 1959, is not an obvious candidate for Ed Miliband’s “new generation”. By the same token, this enduring embodiment of the squirarchy would not commonly be associated with notions of “levelling down”, the “politics of envy” or – in language less likely to be heard within the walls of the Carlton Club  – action on excessive pay.

Yet in the House of Commons on Tuesday, Sir Peter – wittingly or otherwise – took the first major step in sketching out a meaningful prospectus for the high pay commission promised under a future Labour government. A prospectus that the Labour front bench has signally failed to provide so far.

In the Labour leadership contest, the proposed high pay commission was a signature issue for Ed Miliband: a sign that he would lead Labour away from the era when senior ministers were “seriously relaxed” about serious riches to a position where the party could take a stand against fat cat remuneration. When Ed said that the gap between rich and poor matters for all of society, and that excessive pay was a moral issue, it was not so much an applause line but a swoon line for many of his fans.

The instrument to achieve all this was the high pay commission, a moniker with a satisfyingly authoritarian ring. What a joy it will be if we bump into any premiership footballers or City bankers in the local pub over the next few years: “enjoy it while you can mate”, we can menace them, “you’ll be up before the high pay commission after the election”. Rather less pleasant, though, will be the day, after the glorious return of a Labour government, when exasperated ministers explain in response to the latest horror stories on executive compensation that “of course no one ever thought the high pay commission was intended to set limits on private sector pay”, and the cry goes out that Labour promised a new approach and yet did nothing of substance.

Why the prediction of disappointment? Well, of course it is true there are already suggestions of some worthy things the high pay commission might do, but they simply don’t live up to the implied promise of the rhetoric associated with it. In his interview on Uncut before the leadership election, Ed mentioned that he was thinking of “changes to corporate governance” – but if shareholders and boards really want to award bumper pay they still will. “Transparency” – but listed companies already publish what they pay their senior executives and this isn’t stopping sensational pay awards. And changes to “tax and the incentives that there are to pay bonuses” – which could be promising but, call me a cynic, the total silence on detail ever since doesn’t suggest a clear idea of where we are going with this (it aint going to be higher marginal tax rates, one suspects).

However, there is one long-overdue reform which could transform the debate about high pay, meaningfully address public concerns and yet respect the right of private businesses to set pay rates as they wish in a free market (we all know in our heart of hearts this bit is important too).

Which brings us back to Sir Peter. At treasury questions on Tuesday, our Knight of Socialism spake thus: (in the account of Simon Hoggart) “Do tweasury ministers agwee that the real pwoblem about bankers’ bonuses is that they are not paid out of pwofits, but out of wevenues”?

This devastating question should be asked not only about bankers’ bonuses, but all remuneration exceeding a reasonably proportionate level. Today it is a basic principle of both accounting and tax law that any payment in respect of employment – regardless of size – is a business expense which reduces profit (or increases loss) of the employing enterprise and thus also reduces tax on its profits. The payment is taxed only once, in the hands of the grateful recipient. By contrast, a distribution of profit to shareholders is both included in profits for tax purposes and then taxed again in the hands of shareholders.

Fair enough in principle. There is, of course, a difference between expenses incurred in order to generate profit and the profit itself.  But under tax law there are strict tests to determine whether many types of business expense are incurred necessarily for the business; if not, they are considered an effective distribution of profit and taxed accordingly. However, this test does not apply to remuneration. So while expenses of office parties and entertaining have to be reasonable to be tax deductible, there is no limit on the pay that can be offset against corporation tax and no need to explain anything to the taxman to do it.

This is the real scandal of excessive pay today. It may well be just the business of shareholders whether they wish to share their profits with senior managers through lottery-level pay, bonuses and options. However, it is most certainly the business of all taxpayers if we are sharing the cost of these awards by granting a matching tax credit to every payout. Of course, if this is to change, someone would need to decide on the rules for what pay can remain tax deductible and what cannot. Should it be linked to average pay, ratios within that employer or just capped, what about deferred pay, share awards and so on?

Great. This is a real job for the high pay commission. The bottom line is clear – private businesses should be able to pay what they want but, beyond an appropriate limit, this must come out of taxable profits, not pre-tax revenue.

So although, actually, he was more concerned about shareholder returns than social justice, Sir Peter asked a vital question. And, as Hoggart concluded, “as for the minister, one Mark Hoban, he had no reply, but blithered and wittered and chuntered until he embarrassed himself”.

Unless our leadership has a better answer to the question, I hope we can look forward to an exciting new policy of tax reform to address this anomaly and give life to the promise of the High Pay Commission. If so, we can offer a vote of thanks to Sir Peter Tapsell.

Dan Cooke is a Labour activist and lawyer.

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2 Responses to “A practical, popular, socialist policy on high pay”

  1. william says:

    The issue that counts is the starting rate for income tax and its alter ego,NI.The headline grabbing remuneration of a relatively small number of employees in public companies is due to the failure of the non executive directors on remuneration committees,who are invariably retired members of the club.Ask yourself how state rescued banks can pay bonuses to some employees , but no dividends to shareholders, whose capital is at risk.

  2. Stephen W says:

    That genuinely is a good idea. It would produce a real disincentive among companies for handing out truly ridiculous pay without engaging in shallow “price and incomes” controls.

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