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November 25, 2007
The Bounteous Wisdom Of High Marginal Tax Rates
I've heard from a lot of people that back in the 1950s, executives used to think more about the long-term health of their businesses, rather than what would happen to their company's stock price in the next couple months. While it's hard to quantitatively measure things of that kind, it's certainly the case that average CEO tenure has declined dramatically. In the 1950s, the average CEO stayed at his job for 10 years. Now it's under 3 years, and I wouldn't be surprised if shorter CEO tenures are tied to shorter-term thinking.
Another big difference between the 1950s and today is that top marginal tax rates have fallen dramatically. From 1951 until 1963, the top marginal tax rate was above 90%. Now it's 35%. So if you were trying to accumulate wealth in the 1950s, it would've been sensible to look after the long-term health of your business and rely on a steady income, year after year, in the lower brackets. Nowadays, you don't have to do that. You just have to juke up the stock price without tending to the fundamental health of the corporation you're running, earn an insane paycheck for a short period of time, and the low marginal tax rates will allow you to keep two thirds of the money you make. So CEO pay runs to 800+ times the minimum wage rather than the mere 50 multiple that prevailed in 1965, and the people at the top are ready to take the money and run.
I'm actually with the Laffer Curve people part of the way here -- you collect less in taxes when you run the top bracket above 90%, because people stop pushing for big salaries when they can't keep their money. But that's just fine with me. If restricting CEO pay just leaves more money in the till for workers to take home, I'm happy enough to run the downward redistribution of wealth through the private sector rather than through government-run social welfare programs. It's actually fine to be on the far slope of the Laffer curve, because that's where money flows down to people in the lower brackets.
November 25, 2007 | Permalink
Comments
This seems like as good a forum as any for a comment I've wanted to make for a while:
Actually improving the lives of workers is harder than you think, and redistribution doesn't work quite as well as we wish it would.
The reason: money is not the same thing as wealth. The Spanish discovered this right after the Age of Exploration, when they promptly became a third-rate power after discovering that they couldn't eat, wear or live in gold (which they had been industriously collecting while their "stupid" British counterparts were wasting their time with furs and timbers and edible plants). Similarly, eventually we're going to have to face the fact that some huge amount of our GDP is fairy gold, generated by financial sleight-of-hand rather than the creation of stuff people would actually be personally willing to trade money for.
To some extent, this effect is ameliorated by the fact that all this fake money is in the hands of the super-rich, who have to face the diminishing-returns problem. They have nothing better to do with their money than spend it on conspicuous display, where it's okay that they're not really getting their money's worth because the point is the expense. (Or else they can dump it en masse in the coffers of Republican causes.) But when that money goes to the hands of the workers, who'll want real value for every dollar they spend, things will start to crumble...
Posted by: TheKingInYellow | Nov 25, 2007 4:50:52 PM
I can see the money/wealth difference arising when there aren't enough goods to buy with the money, or when goods are hard to come by, as in the Spain case. But in modern times there are plenty of goods -- from food to clothing to houses to iPhones to health insurance -- to be had for anyone who has enough money. If you just gave poor people more money, they'd be able to have more of these, and that would be nice.
Posted by: Neil the Ethical Werewolf | Nov 25, 2007 4:57:39 PM
The a partial counter-argument to this that I seem to remember from my Economics classes would be that the CEO's of the 50s focused more on non-financial incentives - offices, cars, fawning staffers etc. More seriously, it is thought that those CEOs would run their companies in ways that were self-aggrandising but would not generate shareholder value, primarily by 'empire-building' (maximising revenues and employee numbers). Running companies in this way would then theoretically limit the efficiency of the economy. Mind you, modern CEO's seem to do plenty of the former, and quite a bit of the latter, so I'm not sure how far these arguments get you
Posted by: Anony | Nov 25, 2007 5:38:19 PM
My impression from the news articles is that the right thing to do is make most of your CEO's compensation stock in the company. That way, the incentive is to increase the long-term stock price of the company. Since we're talking about CEO, you have to telegraph the sale of the stock, which makes it difficult to "pump and dump".
Posted by: Nicholas Beaudrot | Nov 25, 2007 5:43:39 PM
Neil--
They're available for anyone with enough money because not very many people have enough money. As we spread out the wealth, the supply side becomes more and more of a limiting factor.
(This matters primarily for big, infrastructure-heavy commodities like houses and education. Apple can probably crank out all the iPhones it wants. But very few people think that the major burden of America's poor is a dearth of gimcrack gadgetry. In fact, often those who can't afford good food/housing/schooling *can* afford those things, as sermonizing Republicans love to point out.)
And, of course, the way we develop sources of genuine wealth is by creating incentives for entrepreneurs. Replublicans think that this is best done by dangling the prospect of being way, way too rich. I disagree...but something ought to be done.
Posted by: TheKingInYellow | Nov 25, 2007 6:23:48 PM
TheKingInYellow,
http://www.ici.org/new/faqs_401k.html, 2.7 Trillion in 401Ks growing at 13%.
http://www.pionline.com/apps/pbcs.dll/article?AID=/20070319/PRINTSUB/70316036/1010, 8 trillion in pensions growing at 9.3%
Unless you’re of the opinion only the super rich have 401Ks and Pensions that pretty much kills your entire post. I’m pretty sure the vast majority of these workers appreciate their paper growth of fool’s gold.
Dumping in masse in Republican causes, would that in any way resemble Soros? I’m pretty well read and I can’t think of a single conservative that spends as much on partisan political causes as Soros. Hey it was a great display of clichés though, unfortunately just not accurate.
Posted by: NateO | Nov 25, 2007 8:17:45 PM
Nate, Richard Mellon Scaife has given way way more to right-wing causes than Soros ever will to the left. By 1998 Scaife had put about $340 million into conservative groups.
Posted by: Neil the Ethical Werewolf | Nov 25, 2007 9:03:52 PM
"The a partial counter-argument to this that I seem to remember from my Economics classes would be that the CEO's of the 50s focused more on non-financial incentives - offices, cars, fawning staffers etc."
Example No. 54789 of Chicago School economists pretending that they're empirical; and then just slinging total bullshit with a complete lack of any actual data. First, current CEO's don't spend any less on their offices (if anything, they probably spend far more rather than less); often now get corporate jets instead of piddly large American cars and have no shortage of present-day fawning employees. This theory not only has no data whatsoever (so, Uncle Miltie, where's that, you know, science you kept telling everyone economics was?) it just flies in the face of every bit of the anecdotes we do actually have.
Posted by: burritoboy | Nov 25, 2007 10:14:51 PM
I'd much rather see us raise marginal rates -- ideally making the tax code a lot more progressive -- than explicitly mess with the pre tax earnings of business executives via a new set of regulations. Maybe CEOs today aren't as effective as the allegedly wonderful, far-sighted, long term planning executives of Eisenhower's day. But I doubt it.
The primary job of a CEO is to make money for the owners of the firm. Corporate America today is profitiable like never before. All this attention to stock prices, and all these monstrous pay packets, seem to be doing something right.
We don't need to manufacture false narratives about the supposedly superior talents of business people from a golden age of social responsibility. All we need to do is say: it's dangerous and excessive to tolerate a never ending growth in the divide between rich and poor, and we're therefore going to use the tax code accordingly.
Posted by: Jasper | Nov 25, 2007 10:25:23 PM
"I'm actually with the Laffer Curve people part of the way here -- you collect less in taxes when you run the top bracket above 90%, because people stop pushing for big salaries when they can't keep their money. But that's just fine with me."
And all those self employed people work less, producing less, because of the high marginal tax rates. And all those entrepreneurs strive less to create new businesses because of the high marginal tax rates. So total production goes down, making society as a whole poorer.
Way to go, eh?
Posted by: Tim Worstall | Nov 26, 2007 6:07:09 AM
And all those self employed people work less, producing less, because of the high marginal tax rates. And all those entrepreneurs strive less to create new businesses because of the high marginal tax rates. So total production goes down, making society as a whole poorer.
And all this terrible stuff was happening during the period when the USA became the dominant economic power in the world and when the middle class came into its own. How very interesting.
Pastors' tenure has trended exactly the same way; senior/lead pastors tend to last around 3 years. It's possible that this is another way the clergy have been aping corporate CEOs. However, I do know that the role of the senior pastor has changed from "leader" to "visionary." Leaders stick around, visionaries sweep in, open the taps and let the ideas flow. When the tank of ideas is dry, they move on to the next place where they can do exactly the same thing. Some in the clergy have taken to describing it as having only one pastorate over the course of a career spent in dozens of congregations.
So there's something that's changed in American society that contributes to what Neil's describing aside from the economics of CEO pay.
Posted by: Stephen | Nov 26, 2007 9:19:14 AM
"And all those self employed people work less, producing less, because of the high marginal tax rates. And all those entrepreneurs strive less to create new businesses because of the high marginal tax rates. So total production goes down, making society as a whole poorer."
Americans, statistically, tend to work at much, much larger firms both than they have historically and than EU workers tend to do. Also, considerably more of American's economic activity goes through large firms instead of small firms than do most other developed economies. Those self-employed people simply aren't producing much economic activity in the US compared to self-employed people in the higher-tax EU produce.
Posted by: burritoboy | Nov 26, 2007 12:48:44 PM
"Americans, statistically, tend to work at much, much larger firms both than they have historically and than EU workers tend to do."
They do? Love to see some statistics on that.
Posted by: Tim Worstall | Nov 27, 2007 7:45:35 AM
