Income inequality: I’ll have some finite pie. Or not.

High CEO pay isn’t harmful.

http://www.slate.com/articles/business/the_edgy_optimist/2014/04/top_ceo_pay_income_inequality_isn_t_as_harmful_as_we_think.html

The article discusses generally how impossible it’s been to actually prove that executive pay exacerbates income inequality.  And Biden economist Jared Bernstein and other insiders are in the position of having to subtley acknowledge that, there being no good studies with relationships that correlate.

How could there be?  I mean, as a matter of statistics maybe yes, high CEO pay increases the gini.  But the implicit assertion of the income inequality monger is that CEO’s are taking money that could as a matter of corporate discretion be directed to worker salaries or to lower product prices.

Well that’s not true because that’s not how it works in almost all cases.  You look at Ellison, his pay isn’t taken from a corporate pot that could be used somewhere else if it wasn’t going to him.  In reality he gets a million or two or five or whatever in W2 cash pay.  The rest is a stock grant, and that stock is deemed into existence by the board of directors at bonus time.

There’s 3 big winners in a transaction like this.  Ellison, who gets paid.  The company, who gets to invent money (stock) into existence to make that payment.  And the government, who simultaneously gets to take 20 – 40% of the transaction as an income tax.

The public at large is not an obvious winner here, but nor are they a loser.  Change the tax rules to disincentive that sort of pay, and maybe it ceases to happen.  But that money doesn’t then get redirected to the worker or get reflected as lower on the shelf prices.

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9 thoughts on “Income inequality: I’ll have some finite pie. Or not.

  1. pm1956

    Minor quibble: it would be taxed as a capital gain, wouldn’t it? Either long or short term, depending on when it was exercised.

    And, of course, that is another problem with most of the critiques of CEO pay: this “pay” amount isn’t, in many cases, actual pay at all–it is a grant of stock, and only becomes income to the CEO when it is exercised (which is almost never when the CEO “pay” is announced).

    What i do have a huge problem with are the games that are sometimes played with this–grants of stock that are retroactive to a time when the stock was lower, etc. I think that they have been clamping down on some of these problems (Bill McGuire got caught in some of this) but I really have not followed it at all.

    Personally, i think it would be better if the boards would restrict the stock grants even more–require that the CEO hold on to the stock during their tenure as CEO, and use this at retirement in lieu of a pension. If the idea of stcok grants are to tie the CEO performance to the stock price performance, then they should also take steps to tie it to long term performance, and not allow them to cash out based on insider knowledge.

    Reply
    1. Erik Petersen Post author

      I agree, I just figure if it’s going on his 1040 then it’s an ‘income’ tax. But I don’t know the answer to that, I don’t know that a stock grant isn’t taxed at personal income tax rates.

      When you’re right, you’re right, and you are right. This stuff is very far removed from a dude ever getting a pay check for $35 or $75 million. Other thing is, I’m not convinced these magazine articles aren’t incorrectly using a top line number rather than the delta between the grant price and the exercise price.

      I agree, but I thought everyone pretty much accepted that those McGuire type examples were fraudulent.

      Reply
      1. pm1956

        A huge part of the problem is that many people think that the system is rigged–and it clearly is rigged, in cases like McGuire. But it is also rigged in that Boards tend to award lots of stock options to each other–board membership is a big circle jerk, with interlocking boards all over the place, and there is little evidence that bonuses and compensation is really tied to performance.

        Personally, i think that the biggest problem of wealth inequality is the corrosive effect it has by creating a system of “them” and “us”, of undermining the legitimacy of capitalism and our economic system. It is largely a corrupt system, a you scratch my back and I’ll scratch yours, and merit seems to have less and less relationship to outcomes, and fairness is a vanishing concern.

        And now I’m going to turn off my curmudgeon role and enjoy my unearned spoils.

    1. Erik Petersen Post author

      Well I feel good having said what I said.

      I am not comfortable using the tax code as he posits, as a cudgel this way to discourage high pay enough so that it does not occur, with the understanding then there’s then no real expectation of capturing revenue either.

      I understand the Laffer curve as noting tax revenue capture efficiency moves up or down in tandem with rates. Other thing unstated or not stated well is there’s a point with rates where people / companies do not put their capital / labor income in a transaction where it is exposed to confiscatory rates. They opt out. I guess MattY says this, and this is where he touches on what I said, and it is the most important point.

      Thing about tax rates and stock options now is CEO pay throws off what I would call a great big gob of tax revenue. Which is also to say rates and taxation with that are conducive to tapping into these peoples earning ability in a way that taxation of W2 pay is not. If you set confiscatory rates to thwart that stock option system for the sake of ameliorating social corrosion on pay inequality, you will see that pay go away. But you also lose that big gob of tax revenue. You then have to reach back then to more modest means people to get that money.

      I don’t see the trade off as worth it, the trade off being ease social corrosion and give up tax revenue. The social corrosion is substantially a byproduct of ignorant demagoguing anyway.

      Reply
      1. Erik Petersen Post author

        Add to that….

        Conservatives like to caricature liberals as wanting to redistribute the pie rather than grow it, and even set an upward boundary on income and limit some people’s ability to earn more.

        Inevitably the liberal rejoinder to that is “no, we don’t want to stifle anyone we just want to see that some people pay their fare share”.

        Well what MattY acknowledges is the liberal desire to set a de facto hard upper boundary.

        This is for lack of a better word extraordinarily un-American in a way that liberals have been careful to steer right of for some generations to this point. Was that just posturing?

      2. pm1956

        It might not be posturing so much as they never expected it to get this bad….until this moment they never dreamed that CEO pay would be 1000 times average wage (I’m just pulling that number out of my ass to make the point–way back in 1970, CEO pay was X times larger than average pay, by 1980 it was 5x times average pay now it is 100x times average pay…no one expected this type os exponential growth–people sort of assumed that CEO pay would stay at x times average pay, or revert back to x times average pay).

        And I’m not certain to say that they want a hard limit–but it is fair to say that they think that this is too much, and that something needs to be done, and that the trend is corrosive of our social values that hold our society together–that we are looking more like France 1788 or Russia 1916 or China 1930….

    1. Erik Petersen Post author

      I read it, those were my exact thoughts. It’s silly and unserious, the writer strikes me as a B team talent. But it confirms that yes, the left wants income limits.

      Reply

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