Should high earners bear the burden of economic recovery?
We ask the experts for their answers… have your say online at: http://forum.employeebenefits.co.uk
Richard Higginson, head of reward at Towry Law:
“Why do you keep picking that chap if he is never properly fit and keeps getting injured?” I ask my 13-year-old son after he and his chums had struggled through yet another school rugby match with only 14 players for much of it. He replies: “Because he is a really good player and every now and then he does something brilliant. It’s not his fault we lose, it’s the whole team’s. Collective responsibility, Dad.”
I contemplated this while preparing a scathing damnation of over-paid bankers, who, many argue, have brought the economy to its knees. Many are no doubt squealing that it is not their fault and they should not have to bear punitive taxes on their bonuses.
Neil Roden, group director of HR at the Royal Bank of Scotland, seems to agree it is not the fault of the bankers as individuals. He is quoted in the media as saying that the bank’s problems were because of a financial issue rather than a people issue, and that borrowers should take some responsibility for their decisions.
However, I think the banks themselves are to blame. It is their reward managers who have created the reckless, bonus-fuelled culture through ill-thought-out incentive programmes and their remuneration committees who have approved them. And some of them, as the Chancellor puts it, “still believe their priority is to pay substantial bonuses to their already highly paid staff [when] their priority should be to rebuild their financial strength and increase their lending”.
It is the team that is at fault, not the hapless youngster squealing at the bottom of the ruck.
David Coats, associate director of policy at The Work Foundation:
The Chancellor’s pre- Budget report confirmed what we already knew – the public finances are in a mess and the fat years are over. Who should bear the burden of what economists call fiscal consolidation?
The first point to make is that returning the economy to growth and reducing unemployment must be the top priorities. If people are earning and spending, if companies are making profits and if the economy is growing, then tax receipts will rise. That is the painless part of the equation.
More painful, of course, is whether taxes on incomes should be increased and public spending cut. All the major political parties have accepted the necessity for tax rises and the government has already announced a package of measures to raise more revenue.
As the Chancellor made clear, those at the top are being asked to make a bigger contribution. His desire is to ensure that the burden is shared equitably. Progressive taxation is founded on the following principles: that each additional pound earned above a certain level is of diminishing marginal utility; that the rich have a moral obligation to the society in which they live, because they depend for their comforts on the efforts of others; and that a civilised society cannot be sustained without a strong welfare state.
Paying tax can be just as much of a moral act as making regular donations to charity. It is only fair that those who can afford to do so pay a little bit more.
Chis Noon, a partner at Hymans Robertson:
The pre-Budget report presented worse news on public finances than expected – a predicted £178 billion deficit in 2009/10, or about £6,000 per working person. It does not get any better when you look at national debt, which will be £1.5 trillion by 2014/15, or about £50,000 per working person.
When the average take-home pay is about £20,000 a year, it is unrealistic to assume that the majority of the UK workforce can make a significant contribution to getting the economy back on track. High earners have to take a disproportionate burden, but there have to be substantial reductions in overheads (the cost of the six million-strong public sector).
The challenge is to achieve balance. Excessively high rates of income tax (including national insurance) are inefficient for bankers or regular human beings – they drive away talent and keep consultants like me employed in designing clever tax-efficient solutions. The predicted 52% by 2011 is high enough. The attack on high earners in the public sector is purely political and potentially counter-productive. They represent a tiny fraction of public sector spending and we need capable people to transform what is a hugely inefficient system.
Limiting tax relief on all pension benefits for high earners is madness. No senior employee will remain in a pension plan and this reduction in management interest will result in a continued reduction in pension value for all employees.
High earners need to take it on the chin and help us out of this mess, but the government needs to start behaving rationally, rather than politically.