Jon Chait seems to have the goods on my pet theory that lower top income tax rates may actually explain changes in the pre-tax income distribution. Basically, the timing and magnitude of the shift in executive compensation look pretty wrong for my theory to have much explanatory power.
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About Those Taxes
01 Nov 2006 12:16 pm
Comments (6)
DCPI - I'm sorry, but I'm not entirely sure what you are asking. Are you saying that it is not collusion that causes high baseball salaries and also not avoiding the taxman? Are you then asking what caused the rise in baseball salaries?
My point would be that the growing disparity in baseball salaries, sports salaries and even corporate salaries may all be related and that they are not the result of collusion in general (though specific cases may be). I would expect that you would also see the same trend with authors, entertainers and lawyers as well.
One theory of baseball's salary inequality was increased by the demise of collusion (or conversely, the free agency era starting in '75). Since then the disparity has only increased.
However, other sports have seen similar trends (even sports w/o owners, such as tennis and golf), which undermines that theory.
In Hollywood, the typical explanation for the rise in star's salaries is the demise of the studio system in the 60s.
On the corporate front the increase has also grown over the same time frame.
In some of these cases (ie baseball) taxes are irrelevant since the owner pays the same whether it goes to the taxman or the player.
The best explanation I have seen for the growing income inequality across the economy comes from Cornell's Robert Frank, who offers the theory of the Winner Take All economy. Though I have not read his book, he was my econ prof at Cornell nearly 20 years ago and I learned his thinking first hand.
What Frank did not address in his lectures that I can recall was why the change?
My explanation, for what it is worth, is that the depression and WWII created a special era in U.S. history unlike any other. A generation shared a trial and common sacrifice that kept a lid on the most ostentatious displays of greed. In addition, North America was spared the economic devastation visited on the rest of the planet, which allowed the U.S. a breather from competition in the fifties.
If you go back to the time prior to 1930 you will again find wider disparities in wealth.
I know that Democrats point to Roosevelt's policies for creating more equality, but I do not find that argument compelling. In my experience leaders must reflect the consensus and channel it, they cannot create it.
Thank you for the clarification and exposition.
I think Roosevelt deserves more credit than that! He didn't have to go about structuring the New Deal the way he did.
What about European countries that were neutral in WWII? (Switzerland, Scandinavia)
I think that the link between tax policies and CEO compensation is the political climate behind both of them. If there exist a somewhat egalitarian popular sentiment, the taxes on very high incomes will be higher and exorbitant salaries of executives will look bad in the eyes of the public -- including the shareholders. Conversely, if the dominant thinking equates exorbitant compensation with enormous talent (if we pay CEO 50 million dollars, he must be a genius!), then there is no resistance to such compensations (or shame, for that matter), and it is easy to convince people that high tax brackets are just hindrance for talent and creativity, or something similarly unjust.
Comments closed November 15, 2006.
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Heads in the Sand
I thought that it was pretty uncontroversial that the Congress' decision a decade and half ago to make cash compensation of more than $1 million non-deductible pushed corporations off the fence to use more option-related compensation. The theoretical groundwork that options better aligned managers interests with those of owners (solving the agency dilemna) provided the excuse.
Then the market went bonkers and all the option grantees got more than people had expected.
Greed and envy, being what they are, overcame shame.
BTW: How do you explain sports salaries? You see the same dynamic there. Remember when Koufax and Drysdale held out together for $100k each? Obviously, you are too young to remember. Read Jim Bouton's Ball Four and their is a fun discussion of his contemporaneous negotiations with the Yankees that includes documentation of the then Major League Minimum ($8k or so if I recall). That would mean Koufax/Drysdale were making 12 times or so the minimum.
Today ARod makes $27 million while the minimum is $400k give or take. So he is making about 67 times the minimum now.
Since sports salaries are negotiated between clearly adversarial parties the argument of corrupt boards does not fly nor does your argument of not wanting to give to the taxman. There must be another explanation.
Posted by DCPI | November 1, 2006 1:16 PM