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Tilting at Windmills

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January 30, 2007
By: Kevin Drum

CEO PAY....The Wall Street Journal reports on Democratic plans to rein in skyrocketing executive pay packages:

The Senate's likely passage this week of legislation raising taxes on executive pay is just the beginning of a tough look by the new Democratic Congress at big corporate compensation packages.

....It would cap at $1 million a year the amount an employee could place in certain tax-deferred-compensation plans. Currently, there is no limit on how much compensation can be deferred into the plans, allowing executives to put off taxes for years on millions of dollars in pay.

The legislation also would limit the income-tax deductions companies can claim for high-paid executives who left the firm during the year.

I'm a consistent critic of outlandish CEO pay packages, but I doubt that this legislation is going to do much good. It will increase tax revenues a bit (about $100 million a year, according to estimates), but it's not really likely to have a serious impact on the size of executive compensation packages. It's like sticking your fingers in a dike: if you don't do something about the pressure on the other side, eventually you're going to run out of fingers and the dike is going to blow.

In this case, the pressure comes from stagnating wages for the working and middle classes, who have seen their bargaining position in the workplace deteriorate over the past several decades. The rest is just arithmetic: stagnating middle class wages in a growing economy translates to bulging corporate coffers, and that in turn translates to a gigantic pool of money available to bid for top executives. It's a lot like the sports world: Barry Bonds isn't a better athlete than Babe Ruth, but he lives in an era when TV and merchandising rights generate far more revenue than in the past -- and as long as this money is there, it's going to be used. In a free market, nothing can stop this. The same thing is true in the corporate world.

Unfortunately, this is a hard problem, and not one that Congress is anxious to tackle. But it's the core issue, of which growing income inequality and skyrocketing CEO pay is only a symptom. The question isn't how to put our fingers in this dike -- as long as the ocean of money is rising, we're always going to find that we don't have enough fingers to do any lasting good -- but how to increase the bargaining power of ordinary workers. This will increase middle income wages (the main thing we ought to be concerned about anyway) which in turn will lower the sea level of money sloshing around in corporate treasuries and automatically rein in CEO compensation. Unions can't really do this job anymore, and so far nothing has taken their place. Until we find something, though, all we have are fingers in the dike.

Kevin Drum 11:13 AM Permalink | Trackbacks | Comments (71)

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skyrocketing ceo pay packages and reduced linkage between compensation and performance are the result of tame boards of directors and their herd mentalities. if the boards exercised oversight and actually represented the stockholders who pay them, this problem wouldn't exist. executives need oversight. where have I heard that before?

Posted by: supersaurus on January 30, 2007 at 12:16 PM | PERMALINK

Do something about the trade deficit (see EPI's paper on this).

Or is that distasteful to "moderate" Democrats who want to stick with the Clinton/DLC legacy?

This is a two-fer: an almost 7%/GDP trade deficit (current account) is hardly financially responsible.

Posted by: alex on January 30, 2007 at 12:18 PM | PERMALINK

Here's a finger for the dike:

Pass a bill changing the rules for public companies as follows: No CEO or other executive can be compensated at more than, say, 100x the lowest paid worker in the company -- unless the owners of the company spcifically opt-in for a plan that allows the CEO to be paid more. The rule might be made that requires that opting in cannot be done by proxy, but only by individual ballot.

Posted by: fred on January 30, 2007 at 12:19 PM | PERMALINK

CEO pay is an example of a positional arms race, whose structure and discontents are detailed in Frank, R. & P. Cook, The Winner-take-all Society. Their prescription, generally, is a much more steeply graduated income tax.

Posted by: Michael O'Hare on January 30, 2007 at 12:24 PM | PERMALINK

fred: unless the owners of the company

What are you, a commie? You want the owners to have some say in how the company is run? That's not the American way.

Posted by: alex on January 30, 2007 at 12:24 PM | PERMALINK

This might sound snarky, but isn't intended to be: how hard a problem -is- this, really?

Aren't stagnating wages and deteriorating bargaining positions both addressed incredibly simply, via unions? And if so, aren't initiatives that support unions and widen union membership (like that card thing, where you check a box to vote to start a union) the simplest and most effective ways to address this problem?

Posted by: adam on January 30, 2007 at 12:26 PM | PERMALINK

if you take into account h-d t-v and the internets.....and our health system..

among others...

all americans are in effect millionaires!!

not just ceo's...

Posted by: right wing nut job on January 30, 2007 at 12:29 PM | PERMALINK

Fred!

We're on the same brainwave this morning, I was just going to write almost exactly that.

Except I wouldn't have the opt-in.

A plan like this would help the economy more than almost anything else, because it would dramatically increase the income of a lot of people at once. How much effect does the personal spending of the .1% of executives in the upper echelons have, compared with the wide-spread effects of the personal spending of everyone else?

And it certainly isn't as if corporations can't afford it, they're spending the money on the CEO already!

Posted by: cld on January 30, 2007 at 12:34 PM | PERMALINK

The fact is, in this global economy it will be difficult to "rein in" inflated CEO pay.
The solution is to apply a greater portion of that pay to the workers and middle class. That is easy to do: raise taxes on those making over a million a year. A lot.
Economist always talk about incentives, and how higher tax rates create disincentives to further effort. While there isn't actually much proof of this (since people want more money, even if they only get 1/2 of what their raise actually says they get), a tax raise would be effective on two fronts. The first is the alleged "disincentive," since executives may be less willing to seek astronomical pay packages if half or more is going to the government.
However, since I previously noted I doubt this will actually put a damper on the pay packages, higher taxes will just boost the governments coffers. And we can use this boost to pay for things like universial health care. Which will lower corporate costs, since they don't need to pay for health care anymore (excpet for the executives, who will no doubt insist on using super-pricey exclusive health care.
But the key is to stop these insanely low tax rates on the highest incomes. We are at our lowest level since before the great depression, since before the instituiton of the welfare state.
35% rate? It should be raised to 45% for those getting from 1/2 to 1 million, 50% for 1 million to 2 million, and climb another 5% for every million unitl it hits 75% or so. Just tax each strata of income differently (instead of the whole income at a single rate). And hire lots of IRS people to keep an eye on these super-rich. It would be a good return on an investment.

Posted by: agorabum on January 30, 2007 at 12:39 PM | PERMALINK

This isn't brain surgery.

1. A more progressive tax system (Eisenhower era)

2. Remove legal obstacles to union formation, and encourage them to form.

3. Return to a stricter model of media ownership and responsibility, so corporate control over the national discourse is not so pervasive and self-serving. One might have to tackle (3) before (1) and (2) become feasible.


Posted by: ppp on January 30, 2007 at 12:43 PM | PERMALINK

Directly setting caps on CEO pay seems like a lot of easily loopholed government regulation. If you want to cap how much money the high dollar folks make, we've already got a mechanism in place: the income tax. Eliminate the $95K payroll tax cutoff (there's 15% of income). Roll capital gains (including company granted stock options) into income. And bring the uppermost marginal tax rate up to 50% or better for total income in excess of $5M per year. Much the same net effect as regulating salaries without mucking about in companies' internal structures or creating exciting new regulatory bodies.

Posted by: Imaginary on January 30, 2007 at 12:45 PM | PERMALINK

Let employees run the executive compensation committee.

The farce is that employees have no representation at the executive level; give them leverage over the CEO's pay and median wages will rise in response as CEO's have to address rank and file employee's concerns in order to get a good review.

Of course this would never happen, but there could be variations on this theme (board+employees approve executive compensation)

Posted by: eightnine2718281828mu5 on January 30, 2007 at 12:48 PM | PERMALINK

Imaginary is right. Bring back a top marginal rate of 70%. If people want to complain that their after tax income is only $50 million instead of $100 million, I won't shed any tears.

Posted by: reino on January 30, 2007 at 12:51 PM | PERMALINK

I doubt that there is a workable legislative fix for this. Hell, we are going to have enough of an issue with minimum wage.

How about a slowcott? A boycott could hurt workers even more, so just encourage socially conscious consumers to cut back on purchases from the top ten evil doers. Wall Street is very sensitive to profit projections and growth.

A few ticks to the downside and big-time investors will be making noise. Update the list every year and reward companies that learn and penalize those who invest in companies that don’t.

Posted by: Keith G on January 30, 2007 at 12:52 PM | PERMALINK

Why can't unions do the job any more? Well, I know the reason is 25 years of Republican onslaught on the rights of unions to properly organize. However, why can't the new Democratic congress start to do something to reverse this trend?

Posted by: texarkguy on January 30, 2007 at 12:52 PM | PERMALINK

"Imaginary is right. Bring back a top marginal rate of 70%. If people want to complain that their after tax income is only $50 million instead of $100 million, I won't shed any tears."

No tears from me either.

Posted by: katiebird on January 30, 2007 at 12:54 PM | PERMALINK

"It's a lot like the sports world: Barry Bonds isn't a better athlete than Babe Ruth"

Jeez. There are tens of thousands of former and current major league baseball players, living or dead, out there. All but one inarguably make the statement "[NAME] isn't a better athlete than Babe Ruth" correct.

And yet you had to go and pick the sole player that arguably makes that incorrect.

N.B.: I'm assuming by "better athlete," you mean "better baseball player." I'm also taking Ruth into account only as a fielder and hitter. He's also arguably one of the top 100 pitchers of all time (in a brief career), which makes him head and shoulders above everyone in baseball history. But if you take his pitching into account, his numbers are much better than Bonds's in any event.

Posted by: Joe on January 30, 2007 at 12:55 PM | PERMALINK

In this analogy what does the dike blowing signify?

Posted by: crack on January 30, 2007 at 12:55 PM | PERMALINK

Actually, I think dealing with the tax incentives to pay huge salaries can really help. For example, my understanding is that the Clinton Administration considered, but did not attempt to enact, a $1,000,000 limit on writing off an individual's salary as a business "expense." If all salary over $1 million per year was not considered as an expense, then the business would have a tax incentive to devote more salary to less paid employees.

Similarly, a tax incentive not to increase the pay of middle class employees exists in the way social security taxes are withheld. As everyone know, there is a limit to the amount of salary that is subject to social security taxes, currently around $90,000.00. Thus, an individual who makes $900,000 pays the same tax as one who makes $90,000. How does this effect wages? Well, the employer matches what the employee pays. So, if an employee who makes over $90,000 gets a raise, the employer (I assume) does not have to pay additional social security taxes on that money. But when a person who makes under $90,000 gets a raise, both that individual, and the employer, has to pay more taxes. Thus, in terms of social security taxes, raising the wages of an employee making over 90k is tax free for an employer, while raising the wages of those under 90k is not. If the social security taxes were applied to all income, this disincentive to giving a raise to middle income workers would disappear.

Posted by: Andy Katz on January 30, 2007 at 12:57 PM | PERMALINK

How about a cause of action afforded to lowest paid employees of a company to recover an amount equal to the amount that the highest paid executive in the company receives to the extent that it exceeds 100x the wage paid to the lowest paid full-time worker? The Companies can pay CEO whatever they want, they just have to pay employees any amount that exceeds a baseline level of parity.

Posted by: the dude on January 30, 2007 at 1:07 PM | PERMALINK

Unions have become weak for various reasons, most notably because of government hostility towards labor, but labor also has itself to blame--too often they cave to corporate demands and seem to have little interest in organizing beyond their narrow scope. White collar workers are in depserate need of representation, but labor seems to have no interest in organizing them.

Thanks,

Mike

Posted by: lord_mike on January 30, 2007 at 1:11 PM | PERMALINK

But if we put too many restrictions on executive pay then we won't be competitive and all the executives will move to China and India.

Posted by: Yelling in the fog on January 30, 2007 at 1:19 PM | PERMALINK

Babe Ruth might in fact be a better baseball player than Barry Bonds. But a better athlete? Come on. For just one example, Ruth successfully stole 103 bases in his career -- out of 204 attempts, a miserable percentage. Bonds has stolen 509 so far.

Nothing like zeroing in on the most important element of a post, is there?

Posted by: DOW on January 30, 2007 at 1:22 PM | PERMALINK

First off, Babe Ruth was never a serial steroid abuser.

Second - on the CEO pay thing, there's only two measures that will ultimately be effective. Torches and Pitchforks.

Posted by: Extradite Rumsfeld on January 30, 2007 at 1:22 PM | PERMALINK

But if we put too many restrictions on executive pay then we won't be competitive and all the executives will move to China and India.
Posted by: Yelling in the fog on January 30, 2007 at 1:19 PM | PERMALINK

My answer to that?

Toodles!

Posted by: Extradite Rumsfeld on January 30, 2007 at 1:24 PM | PERMALINK

The market will take care of executive pay w/o Congress enacting some weird law with a bunch of loopholes. Liberals should focus on stagnating wages and insecurity in the middle and working class. Executive pay is just a distraction.

Posted by: Justin on January 30, 2007 at 1:24 PM | PERMALINK

Imaginary,

I agree that changing the tax structure is good idea for numerous reasons including that we've got to pay for education, roads, national defense, health care (hopefully single payer), etc.

But I also think that there are numerous virtues to changing the ways that corporate decisions are made. There is no need for new regulatory bodies, just setting the rules so that shareholders actually get to vote in their own interests.

It also isn't clear to me that raising the top marginal rate would necessarily have the effect you claim it will. Would Walmart pay its workers more if its CEO were taxed at a higher rate? Or would the board just vote to increase his salary by another 50% What would prevent them from doing so?

Let's take the case of HomeDepot. If the shareholders had had a real possiblity of voting on CEO compensation, I bet it would have been lower. What would have happened with the money that was saved? Maybe it would have been paid in dividends (in which case there is a virtue is higher taxes) may the workers would ahve been paid more, or maybe Home Depot would have reinvested the money, lowed its prices, made donations to charities, etc.

Posted by: fred on January 30, 2007 at 1:32 PM | PERMALINK

$100,000,000.00 is more than a finger in a dam. It will also force salary supervision. I do think the amount is a tad low (comparatively speaking).

Posted by: raoul on January 30, 2007 at 1:39 PM | PERMALINK

The market will take care of executive pay w/o Congress enacting some weird law with a bunch of loopholes.
Posted by: Justin on January 30, 2007 at 1:24 PM | PERMALINK

Ah, another starry-eyed worshipper of the Cult of the Invisible Hand.

The Market has nothing to do with executive pay. Golf games among cronie boards of directors determine it.

Posted by: Extradite Rumsfeld on January 30, 2007 at 1:40 PM | PERMALINK

The market for executive pay happens to be a bunch of powerful people who are deciding how much to give their friends. Only the regular employes, owners and customers suffer.

Comparing the results of companies with those of 40 years ago shows that investors are worse off with their current over-compensated executives.

Posted by: freelunch on January 30, 2007 at 1:48 PM | PERMALINK

Repeal Taft-Hartley and allow card check organizing for unions. CEO pay will plummet real quick.

Posted by: CDWard on January 30, 2007 at 1:57 PM | PERMALINK

"...Thus, in terms of social security taxes, raising the wages of an employee making over 90k is tax free for an employer, while raising the wages of those under 90k is not. If the social security taxes were applied to all income, this disincentive to giving a raise to middle income workers would disappear."
Posted by: Andy Katz on January 30, 2007 at 12:57 PM

This would be a simple way to start and would also help the financial stability of Social Security. It gets my vote.

Posted by: Doc at the Radar Station on January 30, 2007 at 2:00 PM | PERMALINK

How about this: let the board set the CEO's salary and if the stockholders don't like it they can replace the board members.

Posted by: Brian on January 30, 2007 at 2:06 PM | PERMALINK

Yelling in the fog: if we put too many restrictions on executive pay ... all the executives will move to China and India

Yes, that would be a side benefit.

Posted by: alex on January 30, 2007 at 2:16 PM | PERMALINK

Instead of the board, let the share holders vote on CEO salary/compensation (assuming the ballot is written in clear English). Maybe tie it to the CEO (and other executives) earn $X / share. It would be nice to let the share holder know how much in dividends they might be getting screwed out of. Also make it a requirement for the annual report to state how much top compensation is times the lowest.

Problem with tieing CEO compensation to the lowest paid worker is that companies will just sub-contract out the low paid work (e.g. cleaners) A company of "only" 6 figure engineers, helps to boost a CEO's pay while maintaining the appearance of a low CEO-lowest paid worker ratio.

I also like eliminating the social security income cap.

Not sure I like the idea of rolling capital gains into income. Some of us contribute to mutual funds, 401K's, etc. No point in penalizing middle class workers who are being smart about retirement. Or perhaps a progressive capital gains tax? Or first $X-thousand dollars of capital gains is free, after that, the rate goes up with your income rate. You'd have to exclude 1st houses from capital gains, which I think they are somewhat, but I don't understand that stuff enough.

Posted by: taka on January 30, 2007 at 3:06 PM | PERMALINK

Interesting discussion. While many of the suggestions on this page are excellent and ought to implemented, I would like to add another prespective, namely that the market might actually correct itself of its own accord as corporate board begin to realize that the marginal increase in talent gained by hiring a superstar CEO is not worth the cost. Essentially, they will start to realize that the $100 million a year guy isn't twenty times more talented than the $5 million a year guy.

If there is one thing that has been quite noticeable over the past year or so it's the number of high-priced CEO failures, such as Bob Nardelli at Home Depot. I think boards are going to start thinking twice about shelling out the big bucks for a superstar CEO unless he/she is the perfect fit for the company.

Posted by: mfw13 on January 30, 2007 at 3:14 PM | PERMALINK

No other developed country in world has this CEO / worker compensation imbalance?

The first question should be - Why the anomaly?

Also, sports stars are paid from industries that are virtual monopolies with structural barriers to entry that don't compete in the world market. The industry can't be moved to China or India.

The sports workforce also happens to be very unionized and has shut down the industry when the percentage of the revenues granted to the owners is considered too high.

Posted by: racersave on January 30, 2007 at 3:20 PM | PERMALINK

I'm with all those here who want genuine progressive taxation (like the Eisenhower era), stronger unions (like the Eisenhower era) & I like the idea of a pay cap -- my recollection is that the law in Germany is that the boss can't receive more than 20 times what the lowest paid employee gets -- if you want to increase the bosses pay, no problem -- as long as you also increase the pay of the receptionist or janitor (or whoever is at the bottom of the heap). Single payer health insurance would also help (really!).

Posted by: Prior Aelred on January 30, 2007 at 3:26 PM | PERMALINK

racersave: No other developed country in world has this CEO / worker compensation imbalance? ... Why the anomaly?

In other countries they have a system called "capitalism" that gives the owners (i.e. stockholders) some say in how much their employees (e.g. CEO's) get paid.

That's not the American way.

Posted by: alex on January 30, 2007 at 3:32 PM | PERMALINK

"Not sure I like the idea of rolling capital gains into income. Some of us contribute to mutual funds, 401K's, etc. No point in penalizing middle class workers..."

As a middle class worker the vast majority of your lifetime income will come from wages so a tax system which does not prefer investment income over wage income will benefit you. The preferential treatment of investment income isn't free, you are paying for it in higher taxes on wages. Wealthy people get most of thier money from investment income, so they benefit from the lower taxation on that and higher taxation on wages.

Posted by: jefff on January 30, 2007 at 3:32 PM | PERMALINK

In other countries they have a system called "capitalism" that gives the owners (i.e. stockholders) some say in how much their employees (e.g. CEO's) get paid.

That's not the American way.
Posted by: alex

So, stockholders have no say? Since when?


And, Extradite Rumsfeld, the Invisible Hand works fine when we let it. Your not liking an outcome is hardly evidence otherwise.

Posted by: Brian on January 30, 2007 at 3:58 PM | PERMALINK

So, why not let the market take care of this? If you don't like a CEO's pay, don't buy, or sell, the stock of his/her company, or don't vote for board members who approved the salary. With independent boards and bad publicity over CEO pay, the excesses will be taken care of. Board cronyism can only go so far.

Taxing high salaries etc. may be a good idea, but it is a separate issue as to whether the government should be setting pay scales.

Posted by: Justin on January 30, 2007 at 4:27 PM | PERMALINK
Why can't unions do the job any more?

Technology.

Well, I know the reason is 25 years of Republican onslaught on the rights of unions to properly organize.

That, too.

However, why can't the new Democratic congress start to do something to reverse this trend?

Technology naturally value of skilled labor vs. unskilled labor and the power of capital vs. labor. This does two thing: it reduces the power of laborers when considered as as a class, and it reduces the degree of both actual and apparent common interest among different kinds of laborers. Both effects work against the power of unions to effect broad changes in conditions.

The solution, as I see it, is to seek to reform the structures of society based on the view of both kind of labor and location on the labor/capital axis as not semi-inherent "classes", but rather mutable roles, and to seek to enable and empower people to move up on the skill axis insofar as they remain laborers, and to enable people who are currently dependent on labor to become substantial capitalist (not substantial in the sense of "filthy rich" necessarily, instead "substantial" in the sense of deriving a substantial portion of their wealth from capital.)

This, in essence, means building an ownership society in the opposite way that conservatives envision it; rather than demanding that people become owners and punishing those that are not while rewarding those that are, we need to build systems that enable people to become capitalists without losing the security which, in the present system, comes only with having a job and which prevents those who aren't already wealthy, generally, from being able to afford to gradually become substantial capitalist.

Posted by: cmdicely on January 30, 2007 at 4:36 PM | PERMALINK

Justin --

It seems to be obvious that the problem is precisely that the market is NOT tkaing care of this (of course it is only because of the rules & regulations & controls of socities & governments that markets are able to function at all).

Posted by: Prior Aelred on January 30, 2007 at 4:38 PM | PERMALINK

I think that $1 million cap on the corporate deduction for salary IS in effect, but it is circumvented by using stock options instead of salary. Solution is to count stock "options" as salary when granted rather than when exercised (or prohibit granting of stock options altogether). Make it illegal (again) to hire "permanent replacement" workers to replace strikers. Card-check union elections. Social Security/Medicare tax on ALL compensation. No interlocking corporate boards. Executive salaries to be confirmed by shareholder vote.

Of all the aspects of this run away compensation, the one that has me scratching my head the most is how shareholders allow this to happen. "Extra" cash should be coming out of corporations to shareholders, not to execs. The only reason I can think of that this does NOT happen is that "shareholders" generally these days means institutions, and the heads of those institutions are getting salaries that are just as outrageous.

Public pension plans (such as CalPERS) should be ON this issue like white on rice. I think CalPERS is, actually, but other public institutional shareholders should be, too.

Posted by: Cal Gal on January 30, 2007 at 4:43 PM | PERMALINK

How do they manage to put so much into tax deferred accounts? The limit on 401Ks is about 15 grand.

Posted by: hack on January 30, 2007 at 4:45 PM | PERMALINK

What's needed is to eliminate a SHITLOAD of corporate income tax loopholes, far beyond this baby.

Dems won't really do that, though; Hollywood/entertainment/Silicon Valley has it's own effing fingers in Jack Horner's pie.

Posted by: SocraticGadfly on January 30, 2007 at 4:45 PM | PERMALINK

It seems to be obvious that the problem is precisely that the market is NOT tkaing care of this (of course it is only because of the rules & regulations & controls of socities & governments that markets are able to function at all).

Posted by: Prior Aelred

Utterly wrong. Or maybe you could you provide evidence for your specious claims. Maybe the reference to societies could hold up to scrutiny.

Posted by: Brian on January 30, 2007 at 4:54 PM | PERMALINK

For what it is worth, a lot can be done at the margins without trying to create more government or changing the very nature of our economic system. Even small changes to the tax code, particularly social security, some aid to unions and greater spending on the common good would help to reverse the trend toward greater and greater income inequality and with it political inequality.

Posted by: terry on January 30, 2007 at 4:57 PM | PERMALINK

With independent boards and bad publicity over CEO pay, the excesses will be taken care of.

Speaking as a corporate lawyer allow me to retort: AHAHAHAHAHAHAHA! HAHAHAHAHAHAHA!

Board cronyism can only go so far.

Again HAHAHAHAHAHAHA etc.

Posted by: Stefan on January 30, 2007 at 5:00 PM | PERMALINK

So, why not let the market take care of this? If you don't like a CEO's pay, don't buy, or sell, the stock of his/her company, or don't vote for board members who approved the salary.

The point is that the market doesn't take care of this. In my profession we have an untold number of ways to rig and manipulate pay structures so that the true costs of executive pay are hidden from the average shareholder.

Posted by: Stefan on January 30, 2007 at 5:04 PM | PERMALINK

Cal Gal,

My understanding about the mutual fund shares I have bought is that they have happily taken my money but I get zero voting rights that should have come with my shares.

Heaven only knows if the voting rights are completely forfeited or if the mutual fund companies can vote the shares.

In my mind the mutual fund market is a very strange pseudo-market with odd ownerships and a warped invisible hand that carreses some while squeezing others.

Posted by: Tripp on January 30, 2007 at 5:06 PM | PERMALINK

The mutual funds definitely DO vote the shares. That would be a very good place to put pressure. I'd like to see some aspiring mutual fund become a "good governance" fund, kind of like the green funds. But the good governance funds would focus on companies where the board does good oversight, including executive pay issues.

Posted by: Cal Gal on January 30, 2007 at 5:19 PM | PERMALINK

There is plenty of data that indicates US CEO compensation is unique.

It is easy to deduce that the tremendous amount of compensation going to CEOs would be a competitive disadvantage for the any for-profit entitiy(unless maximization of profits is not the goal). The pay is just an additional labor cost that non US corporations don't have to pay.

If a global labor market exists (it doesn’t) there would be a downward pressure on CEO compensation the same as any other laborer.

FYI – Germany has a 20 percent “worker” representation requirement on their board of directors. That little requirement explains Germany’s lower CEO compensation.

Posted by: racersave on January 30, 2007 at 5:21 PM | PERMALINK

"How do they manage to put so much into tax deferred accounts? The limit on 401Ks is about 15 grand."

I beleive it isn't "tax deferred" accounts, it is deferred compensation.

Cheney was getting checks for hundereds of thousands of dollars every year from halliburton for at least his first few years as VP because he was getting deferred compensation. He wasn't (technically anyway) working for the company anymore, but his pay as ceo was set up to come in for years after he stopped (technically) working for them.

So instead of getting a million dollars a year a ceo might get half a million a year and 100k in each of the next five years, or whatever. This helps reduce thier taxes, or helps disguise thier high pay from shareholders, or whatever (probably a combination of factors).

Posted by: jefff on January 30, 2007 at 5:27 PM | PERMALINK

The Bill and Melinda Gates Foundation invests $43 million in a company ostensibly to invent an anti-malaria drug. The company instead comes up with a synthetic fuel.


"In a way we're creating the next oil."

Posted by: cld on January 30, 2007 at 5:29 PM | PERMALINK

"The mutual funds definitely DO vote the shares. "

Well... they definately can. And yea, some secretary probably checks all the boxes to approve the board reccomendations at minimum. In general, however, for fund managers shareholder oversite is a cost without much benefit. They have to pay someone to pay attention to oversight on thier holdings, but if the company does any better all mutual funds owning the stock benefit equally. The only way a fund would have a financial interest in good oversight is if they focused on a few companies they owned large shares of, or if they used it for marketing as you (Cal Gal) suggested. Beyond that it's all up to thier professional obligation to represent the interest of fund shareholders vs their desire to knock off early and go fishing or whatever.

Posted by: jefff on January 30, 2007 at 5:34 PM | PERMALINK

How about levying each company's income tax according to an increasing function of their income inequality?

Posted by: Matt on January 30, 2007 at 6:15 PM | PERMALINK
EFor what it is worth, a lot can be done at the margins without trying to create more government or changing the very nature of our economic system. Even small changes to the tax code, particularly social security, some aid to unions and greater spending on the common good would help to reverse the trend toward greater and greater income inequality and with it political inequality.

I suppose it depends what you mean by "small". I tend to think you need to, at a minimum, do something like this on the tax front:
(1) Tax all personal income (including long-term capital gains and inheritances, with perhaps some exclusion for small gifts and inheritances) as normal income (but allow recognition of income for tax purposes in advance of realization for all income), and
(2) Expose all income, not just income from wage labor, to the taxes that are currently "payroll" taxes (and allow it to equally serve to qualify for the benefits paid for by those taxes).

Posted by: cmdicely on January 30, 2007 at 6:19 PM | PERMALINK
How about levying each company's income tax according to an increasing function of their income inequality?

Setting a "maximum wage" above which payroll and benefits to an individual employee cannot be deducted from the employer's income for tax purposes, particularly if that maximum is a function of the payroll and benefits of the least-well-compensated employee, is one way of doing that.

There are others, as well, of course.

Posted by: cmdicely on January 30, 2007 at 6:22 PM | PERMALINK

cmdicely. You are thinking along the lines I was thinking. I would keep the reduced rates for dividends and capital gains for say the first $25-$50K of such income--do not want to punish the middle class who are trying to save a bit. I would extend it to simple interest income to the same extent. After that it should match any other income tax paid on wages. I would not add social security and medicare, but what I would do is exempt employers but not employees from paying social security on the first $20K in wages (but calculate the employees benefits as though those contributions were made) and pay for it by continuing the employers share of social security above the $95K cap, but not the employees share. I agree that the estate tax should not be repealed and that marginal rates should be increased at the upper income levels and I would do it by creating more rates/brackets. Like if the current top rate is 35%--I would not know-add 5% for the next $500K, 5% more for the next $500K etc. I would probably top it out at 50 to 60% only because you want to avoid the more extreme avoidance behaviors among otherwise reasonable people--some people will go to the extreme with a 15% rate. Those sorts of changes would do a lot over time especially with other benefits that get phased out as income increases like tuition deductions/credits. To the extent you raise enough revenue, you can build in more tax benefits for lower compensated people particularly for things like education, retraining and health care.

Posted by: terry on January 30, 2007 at 6:44 PM | PERMALINK

"I would keep the reduced rates for dividends and capital gains for say the first $25-$50K of such income--do not want to punish the middle class who are trying to save a bit."

The exemptions you propose would most likely punish the middle class. Rich people can get more than 25-50k of investment income or more every year of thier lives, middle class savers don't. Rich people will max out that tax advantage year after year, and regular people who get most of thier income from wages will not. As they approach retirement they might become net beneficiaries of such an exemption in the short term for the last decade or two, but for the whole rest of thier lives it means higher taxes on thier wages and less money in thier investment accounts.

Posted by: jefff on January 30, 2007 at 7:06 PM | PERMALINK
I would keep the reduced rates for dividends and capital gains for say the first $25-$50K of such income--do not want to punish the middle class who are trying to save a bit.

Taxing income from capital at the same rate as income from labor isn't “punishment”, and, anyhow, I think you do better to reward the less-than-wealthy (including, but not limited to, the “middle class”) who want to save by providing tax breaks for investing that phase out with raising overall current income, rather than favorable taxes on gains realized.

I would not add social security and medicare, but what I would do is exempt employers but not employees from paying social security on the first $20K in wages (but calculate the employees benefits as though those contributions were made) and pay for it by continuing the employers share of social security above the $95K cap, but not the employees share.

The point of adding social security and medicare on capital income is to even out the treatment of capital and labor income; at the same time, though, it also means that the worker who sacrifices some ability to do labor to also become a microcapitalist is still protected in retirement; with age, one may lose the ability to do wage labor, but no less so one may lose the ability to actively manage one's capital investments. There is no good reason to make a laborer sacrifice the social safety net to become a small-time capitalist.

I agree that the estate tax should not be repealed and that marginal rates should be increased at the upper income levels and I would do it by creating more rates/brackets.

I agree with increased progressivity, both higher rates at the high end and lower rates near the low end; at the same time, I could be easily convinced to support repeal of the estate tax provided that bequests were taxed as income for the recipient.

Like if the current top rate is 35%--I would not know-add 5% for the next $500K, 5% more for the next $500K etc.

Current marginal federal tax rates are:


More than Up to Rate
---------------------------
$0 $7,850 10%
$7,850 $31,850 15%
$31,850 $77,100 25%
$77,100 $160,850 28%
$160,850 $349,700 33%
$349,700 no limit 35%

What I would do is something like:

 More than       Up to      Rate
---------------------------------
         $0       $7,850     5%
     $7,850      $31,850    10%
    $31,850      $69,250    25%
    $69,250     $129,000    28%
   $129,000     $317,850    33%
   $317,850     $635,700    35%
   $635,700   $1,000,000    40%
 $1,000,000   $1,500,000    45%
 $1,500,000   $2,250,000    50%
 $2,250,000   $3,500,000    54%
 $3,500,000   $5,000,000    59.5%
 $5,000,000   $7,000,000    63.6%
 $7,000,000  $10,000,000    67.2%
$10,000,000  $15,000,000    70.6%

And so on, each six brackets being 10× the income, and each subsequent bracket adding 10% of the difference between the preceding brackets marginal rate and 100%.

Posted by: cmdicely on January 30, 2007 at 7:20 PM | PERMALINK

I agree the salary cap idea is futile and doesn't really get at the real issue which is the financial vulnerability of the great majority of American families.


CEO salaries are indisputedly obscene in this context but I really don't think capping them-- even if we could do so effectively--would really redirect the flow of cash to families who truly need it.

You're right to focus on worker bargaining power.

Posted by: BroD on January 30, 2007 at 7:33 PM | PERMALINK

Er, in the above chart, the rate between 50% and 59.5% is supposed to be 55%, not 54%, but the whole thing is to illustrate a general idea, anyhow...

Posted by: cmdicely on January 30, 2007 at 8:06 PM | PERMALINK

White collar workers are in depserate need of representation, but labor seems to have no interest in organizing them.

Under the current law, most white collar workers are classified as "supervisory" i.e., "management" and not entitled to union representation.

Posted by: Brautigan on January 30, 2007 at 9:11 PM | PERMALINK

How about tackling it by dealing with the minimum wage? For example, pass a law saying that "the percentage increase in the federal minimum wage shall equal the mean percentage increase in the total compensastion awarded to the CEOs of all stockmarket listed corporations in the previous year".

That's a bit crude and you'd have to make sure you didn't leave loopholes in the definition of total compensation but I'll bet that the increase in CEO pay would drop pretty damn quickly.

Posted by: Tim on January 31, 2007 at 6:31 AM | PERMALINK

The Barry Bonds/Babe Ruth analogy to executive compensation is ridiculous. Barry Bonds and Babe Ruth were part of the entertainment industry, and presumably their employers were willing to pay them more, not necessarily because they were good at their craft, but because their names would bring in more money to their employers. Just how many people decided to buy products produced by General Electric or Chrysler because Jack Welch or Lee Iacocca were the companies' CEOs?

Let's understand something: high priced CEOs get to be high priced in large part because of public relations. I, company owner, hire a CEO, and make him a high-priced CEO, to try to persuade the investment market that my high-priced CEO will make the company's stock price better (regardless of whether he is even capable of doing so, of course). The investment community talks up the stock, until it's clear that my choice of CEO has failed, after which that CEO is jettisoned with a huge pre-negotiated buy-out (example Phizer). It's a perverse incentive, but it's true.

Posted by: raj on January 31, 2007 at 7:59 AM | PERMALINK

jefff, I doubt if you will check back, but if you do dividends and capital gains are currently taxed at 15% which is a huge boondoggle for the wealthy. At the same time as you note it can provide a break for the retired and as someone who considers himself middle class the couple of thousand I recieve in dividends and capital gains from mutual funds--all of which gets reinvested-I do get something of a tax break with the current law and I think it does encourage my saving at least something for my dotage. Your point is accurate, but as my first comment indicated, I am suggesting that just marginal changes in the existing structure can serve to decrease income inequality. Getting those dividends and capital gains taxed at 35% under current law after the first $25-50K would do a world of good.

Posted by: terry on January 31, 2007 at 10:51 AM | PERMALINK

"and I think it does encourage my saving"

Why? If the investment taxes weren't lower your wage taxes would be lower and you would have more money to save. Having money to save is the limiting factor for the middle class. Tax breaks for investing have been piled on this country for almost 30 years now and the savings rate just keeps dropping: those tax breaks clearly don't encourage saving despite what people think. Middle class people need to build principle from wages before they get investment income. Rich people primarily build principle from investment income. In fact that would be a good working definition of middle class as opposed to rich: rich people get most of their money from investment, non-rich people get it from wages.

"Getting those dividends and capital gains taxed at 35% under current law after the first $25-50K would do a world of good."

Sure, it would be better for the middle class to not give tax preference to investment income after the first $X for any value of X less than the maximum investment income of the richest person in the country, but the best X for the middle class is going to be approximately 0. 50k investment income means over 500k in principle, for most middle class savers that's near their maximum wealth point.

25-50k investment tax preference isn't free, you are paying for it with slightly higher taxes on wages and higher investment income, but as a middle class person you are very unlikely to come out ahead on the deal, while a slightly rich person will always come out ahead because they will always be benefiting from the tax preference to its fullest extent at the maximum tax rate, while you will get part of the exemption at a lower tax rate. A very rich person would probably come out behind as well because thier total income would always be so large that the tax advantage would be a net loss for them. A poor person would never see any benefit.

Once a person has 50k in (conservative) investment income they are pretty much home free. These investment tax breaks, including the reduced ones you support, are aiming at the wrong place. It's the getting wealth that is hard, not the having wealth. Investment tax breaks target having wealth, not getting it.

The right wing loves to talk about secondary tax effects and ignore primary ones, but absent compelling evidence primary effects are almost always more important. Taxing wages more than investment doesn't help people who get most of thier income from wages invest, it helps people who get most of thier income from investment invest, duh!

Posted by: jefff on January 31, 2007 at 1:30 PM | PERMALINK

Wow wow wow. There are some real lunatics on this thread. agorabum, Imaginary, and cmdicely stick out the most. I can't believe you are actually calling for top tax rates of 50-75%! How does it matter HOW MUCH you make...that kind of percentage is just UNFAIR!

To say, "Well you still have $50 million left after taxes" is just crazy. Who cares how much is left...fairness is about the percentage.

The truth is that the richer someone is, the LESS taxes they pay. And it has nothing to do with the tax rates. It is because they can afford armies of accountants and lawyers to move their money offshore, put it in tax-deferred investments, etc. They also rarely "own" anything...their homes, cars, etc are all owned by corporations and trusts, so they pay very little taxes on all of it.

So the very people you are trying to hurt, out of nothing more than shameless jealousy, are really not going to be hurt by this at all.

It is all of the "fairly successful" people in the US that end up really carrying the tax burden and an unfair share of the load. I am talking about those making between $75k and $500k per year. We do not have enough time or money to hire the army of lawyers and accountants, and we sure as hell can not put it all offshore somewhere.

I make around $200k per year total, and with Fed and Local (State) taxes, plus Property and Sales Taxes, and all the "hidden taxes" like gasoline, I am EASILY giving away 50 cents on EVERY DOLLAR I make to government.

The top 5% of earners in this country pay over 90% of the total tax revenues. There are people that get more taxes back in their refund checks than they paid in all year.

How is this fair? Someone PLEASE tell me.

Posted by: Troy Allen on January 31, 2007 at 4:42 PM | PERMALINK




 

 

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