Friday, April 15, 2011

It's not about excessive executive compensation, it's about tax rates

This past Sunday's New York Times  business section had a story about how executive compensation at large corporations has returned to pre-recession levels.  Here's the total compensation (salary, bonuses, perquisites, and stock options) of the top 5 CEOs in 2010 (change from 2009 compensation in parentheses):
  1. Philippe Dauman, Viacom: $84.5M (+149%)
  2. Ray Irani, Occidental Petroleum: $76.1M (+142%)
  3. Lawrence Ellison, Oracle: $70.1M (-17%)
  4. Michael White, DirecTV: $32.9M (n/a - new in 2010)
  5. John Lundgren, Stanley Black & Decker: $32.6M (+253%)
Poor Larry Ellison, who had to take a pay cut this year.  Don't feel too badly for him, however - the article notes that his holdings of Oracle Stock are worth over $26 billion.

The Times  article discusses shareholder concerns over rising compensation, and whether companies are truly getting value for what CEOs and other executives are paid.  But as much as the federal government has tried to control compensation through regulation, i.e., Sarbanes-Oxley, passed in 2002, it has had little impact.

The real issue is not how to control executive compensation, but the fact that tax rates on these mega-millionaires are as low as they are.  Each one of these CEOs paid the same marginal tax rate last year - 35% - as anyone who made over $373,650.  And they paid only 10 percentage points above the rate paid by someone with an income as low as $68,000.

The chart below shows the marginal tax rates for married couples with the mean income in each quintile, the top 5% of all earners, and the top marginal tax rate, from 1969 through today (click the chart to see a larger version of it).  The largest reductions have come for the top rate, dropping from 77% to 35%.  In contrast, the bottom rate has decreased only five percentage points.  For families in the middle, there has been a nine point drop.

The fix to this problem is far simpler than crafting legislation to try to control how much corporations pay their executives.  All Congress (and the president) needs to do is to have the fortitude and political courage to increase the top tax rate.  I am not arguing to return the top marginal tax rate to the 1960s level of 90% or even the 1970s level of 72%.  But can anyone convince me that any of these CEOs would work any less hard if the top marginal tax rate was increased to the pre-Bush tax cuts level of 39.6%?  Or even a ten percentage point increase to 45%?  I'm ready to listen to your arguments.

What does this have to do with educational policy?  The debate about controlling federal government spending - much of which of focuses on discretionary spending, including spending for education at all levels -  could be made easier if upper-income Americans paid a fairer share of taxes.

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