Friday, March 20, 2009

On bonuses

I've been hearing over the past few days that there are tax advantages to corporations to paying large parts of compensation as bonuses instead of salaries: so today I tried to find something out about this: it was not clear from the many pages I read why this would be: bonuses appear to be taxed (for the individual who earns them) at the same rate as income (or possibly higher): and I saw no suggestion of corporate tax breaks either.
So, this suggestion is probably bunk: but if there is a difference in the taxes paid by individuals or corporations when bonuses are paid, perhaps we should simplify things and have them treated the same: that is, bonuses should be viewed as income in the tax year they are paid, and should be liable to the same income/payroll/other taxes as other compensation.
The other obvious advantage of bonuses is that they can be used to make a base salary look lower. That is, to obfuscate. Just as stock options and other packages are used to make base salaries look lower, more reasonable, less outrageous. Case in point? Citi Bank's Vikram Pandit claiming that his salary a couple of years ago was under a million dollars, when in fact his compensation was more than ten times that amount.

When folks complain about the complexity of the tax code, call for a tax form that could be filled out on the back of a postcard, and then suggest that a flat tax is the necessary method to achieve that, I have some sympathy: simplifying the tax code is a great idea. But I am not convinced that the flat rate is the method to achieve this. After all, even if the tax is a flat rate, how many people will do the multiplication by hand and enter the figures. No, all once needs is a simple look-up table to return, given a taxable figure, the tax owed on the amount. The complications in the tax code are a result of deductions for this, allowances for that, and other special laws, rules, exemptions etc. Sure, the tax code could easily be simplified, but it can be maintained as a progressive code as well.

Yours, rambling through the tax fields,

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