• 15 Jan 2013 at 2:48 PM
  • Banks

Goldman Exits A Tax Trade Early

Here is an important cultural difference between the US and the UK that you should, like, stick in the boot of your lorry or whatever: in the UK, it’s apparently not socially acceptable to put off paying bonuses by two months to save your employees five percentage points in taxes. In America, it’s considered perfectly reasonable to die to avoid a tax increase.1

I was not aware of this difference and it seems neither was Goldman Sachs:

Goldman Sachs has backed down from a plan to delay UK bonus payments until after the new UK tax year, which would have allowed bankers to benefit from a cut in the top rate of tax from 50 to 45 per cent. … The idea – first reported by the Financial Times on Sunday – would have seen the payment of the deferred portion of bonuses from prior years delayed from February until after April 6.

News of the plan prompted a flurry of criticism from lawmakers and even from within the banking industry.

Addressing the House of Commons Treasury select committee earlier on Tuesday, Sir Mervyn King, governor of the Bank of England, had criticised the idea.

“I find it a bit depressing that people who earn so much find it would be even more exciting to adjust their payouts to benefit from the tax rate, knowing that this must have an impact on the rest of society, which is suffering most from the consequences of the financial crisis,” Sir Mervyn told MPs. “I think it would be rather clumsy and lacking in care and attention to how other people might react. And in the long run, financial institutions do depend on goodwill from society,” he added.

You can sympathize with Goldman’s misunderstanding here, no? At their core, investment banks are in the business of helping clients deal with some circumscribed range of problems that relate to those clients’ money. “I need to get higher investment returns” is a problem you might go to an investment bank with. “I need help modeling and executing this merger transaction”: definitely. “I need to swap my investment assets for higher-rated assets that can be posted as collateral at clearinghouses”: why not.

You wouldn’t, of course, go to an investment bank with all of your all problems, not even all of your financial-ish problems. “I need to sell more widgets”: not a bank’s forte. “I need to know whether my potential acquirer is a giant fraud”: also apparently not. “I need to develop a deeper connection to my family and my God”: right out. “I need a reasonably priced and extremely discreet hooker who will come to my hotel”: exercise for the reader.

But at least in the American paradigm, “I want to pay lower taxes on my income” is exactly the sort of problem you might bring to an investment bank.2 A core competency of banks is finding structures to reduce or avoid taxation; it’s closely related to other core competencies like optimizing regulatory capital and maximizing accounting earnings. Sometimes this is so vanilla and obvious that you don’t even notice that it’s tax optimization: tax-free spinoffs and stock-for-stock mergers are just part of the furniture of corporate finance. Sometimes it involves convoluted structuring of the sort that some bankers probably even find “exciting,” as Sir Mervyn weirdly put it, though most probably just find it “their job.”3

So finding a really simple tax optimization strategy – “let’s defer delivery of some restricted stock until taxes are lower”4 – must have seemed unusual only because it’s so simple, not because, like, Paying Less Taxes Bad. And the fact that this straightforward optimization caused a political backlash is puzzling. “Where were the politicians when we were actually doing dubious tax trades?,” you might well ask.

What does this tell you about cultural differences? Well there’s the cultural difference between bankers, who spend their days tax-optimizing, and politicians, who emerge once in a while to bluster unreassuringly about somehow exemplary financial-industry practices. “A bank would do something to save on taxes? SHOCKING!”

But is there actually a UK vs. US difference here? Ask yourself, would US politicians actually get worked up about it if Goldman were doing this in the US? Remember they sort of did, moving up some stock awards to avoid higher US taxes, with no discernible negative consequences (and certainly without reversing themselves days later). As a one-time tax optimizer, I can’t help but see a connection to that lack of reaction and, for instance, the IRS ruling explicitly blessing Feline PRIDES. The UK apparently gets mad if you find a tax arbitrage. The IRS gives you an admiring tip of its green eyeshades.

It’s tempting to ascribe the difference to the occasionally mentioned distinction between US financial regulation based on rules and UK regulation based on principles. In the US, you pay the taxes that the rules require, and if you find a low-tax way through the rules, you win. In the UK, or so Mervyn King thinks, you pay the “right” amount of taxes, and you don’t look for nitpicky little paths through the rules to reduce that amount.5 That’s a theory, I guess. I doubt it’s a very popular theory among investment bankers. Even leaving aside its effect on their comp.

Goldman backs down on UK bonus delay [FT]
Goldman Sachs considers shifting bonuses to benefit from tax rate cut [Guardian]
Goldman Retreats From Plan to Award Bonuses Later in Britain [DealBook]

1. Considered perfectly reasonable by John Carney, anyway. My tax professor gave two core pieces of tax advice:

  • It’s always better to die later rather than sooner, and
  • It’s always better to make more money rather than less money.

The second helps if you get confused about marginal tax rates. The first is … possibly not a principle of tax law. Still.

2. At least on your trading and investment and corporate-finance related income.

3. Obvs you know where I come out.

4. You can see why GS was “not … considering changing the way the bonuses for 2012 are handed out.” That’s, like, real money, that people need to pay their mortgages or whatever. Nobody’s gonna mind waiting two months on their RSU delivery. No sensible banker values those RSUs at anything other than zero.

5. Though why the old discredited rate is the “right” rate and the new rate that the government has decided upon is the “wrong” rate is sort of beyond me.

29 comments (hidden to protect delicate sensibilities)
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Comments (29)

  1. Posted by InfiniteGuest | January 15, 2013 at 2:59 PM

    This is why we can't have nice things.

  2. Posted by Hobbes | January 15, 2013 at 3:00 PM

    “We know no spectacle so ridiculous as the British public in one of its periodic fits of morality.”

    – Thomas Babington Macaulay

  3. Posted by VonSloneker | January 15, 2013 at 3:02 PM

    Oh you English are sooo superior, aren't you…

    – Otto

  4. Posted by Guest | January 15, 2013 at 3:20 PM

    Anything to declare?

    Don't go to England.

  5. Posted by Guest | January 15, 2013 at 3:23 PM

    You know: fish, chips, cup 'o tea, bad food, worse weather, whiny public, Mary fucking Poppins

  6. Posted by Alpha Dog | January 15, 2013 at 3:24 PM

    The American view is that income, like a Taco Bell Griller, is too good to share.

    Goldman Google AdSense Quant

  7. Posted by No one, ever. | January 15, 2013 at 3:41 PM

    Great post.

  8. Posted by Reaper, G. | January 15, 2013 at 3:46 PM

    Shut up, you American. You Americans, all you do is talk, and talk, and say "let me tell you something" and "I just wanna say." Well, you're dead now, so shut up.

  9. Posted by UBS Food Industry VP | January 15, 2013 at 3:57 PM

    I wish my bonus was more like a Taco Bell Griller.

  10. Posted by Guest | January 15, 2013 at 4:00 PM

    Did shazaam anally rape the DB hamster?

  11. Posted by DB IT Hamster | January 15, 2013 at 4:08 PM

    I would "thumbs down" this comment an infinite number of times. If I had thumbs, that is.

  12. Posted by Guest | January 15, 2013 at 4:10 PM


  13. Posted by Toff | January 15, 2013 at 4:12 PM

    Are you finished?

  14. Posted by Might Have Happened | January 15, 2013 at 4:12 PM

    GS Client: “I need a reasonably priced and extremely discreet hooker who will come to my hotel”

    Matt: Well, what's reasonable? What's extreme? I'm going to go ponder that whilst making some charts and get back to you with some graphical representation of available data, also, in order to control for currency risk you should probably consider entering into a swap with us once you figure out what currency she accepts.

  15. Posted by VonSloneker | January 15, 2013 at 4:14 PM

    Oh n-n-n-no, R-r-r-reaper is c-c-coming to r-r-reap me!

  16. Posted by Guest | January 15, 2013 at 4:17 PM

    "It’s always better to die later rather than sooner,"

    Not always

    -Terri S

  17. Posted by Guest | January 15, 2013 at 4:21 PM


  18. Posted by Reaper, G. | January 15, 2013 at 4:25 PM

    Try the salmon mousse!

  19. Posted by Quant me maybe | January 15, 2013 at 4:30 PM

    "In America, it’s considered perfectly reasonable to die to avoid a tax increase."

    — Hemingway couldn't have said it better.

  20. Posted by Brick Top | January 15, 2013 at 4:57 PM

    In the quiet words of the Virgin Mary… come again?

  21. Posted by No one, ever | January 15, 2013 at 7:25 PM

    Great reply.

  22. Posted by NOTPAYINGURTAXES | January 15, 2013 at 10:52 PM

    Who would want to work in the cesspit that is the UK is beyond me. Bunch of commies.

  23. Posted by Brudda | January 16, 2013 at 7:23 AM

    English is not synonymous to British.


    Scotland, Wales and Northern Ireland.

  24. Posted by Her Majesty | January 16, 2013 at 11:13 AM

    Haha noone cares about our barbarian neighbours. The term "British" is applied because we are legally one united country, but people only care about England.

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