Thursday, November 05, 2009
A return on tax rates
From the RoundTable blog
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Norb Weckstein
Weckstein is a retired G.E. engineer and manager. He lives in Roanoke.
As Virginia Tech finance professor G. Rodney Thompson noted in his Sept. 11 commentary, "Return taxes to '60s levels," the "heady days of the 1950s and 60s, when the U.S. was ... the envy of the entire world" was also a time when taxes on the highest increment of earnings (affecting only the top 1 percent of taxpayers) were appreciably higher.
Financial analyst Bob Barnes' failed attempt to ridicule those facts not withstanding ("Confiscatory tax levels stifle the economy," Oct. 19 commentary), the issue of excessive executive pay that has resulted from lowering the top tax rate is a major problem.
Another financial analyst, Warren Buffet, has said, "In judging whether corporate America is serious about reforming itself, CEO pay remains the acid test."
For 45 years (1936-81) the top incremental income tax rate was between 70 and 96 percent. For earnings above that incremental level the government took back from $70 to $96 of every $100 the earner was paid. This was a giant disincentive for setting salaries above that threshold. Corporate income dollars were instead used for business improvement: tool enhancement, research, added workers, etc.
Dwight Eisenhower was the last fiscally conservative Republican president. He balanced the budget in three of his eight years in office and achieved good GDP growth. Without deficit budgets, he built the interstate highway system. Under Ike, family income increased by 20 percent. The top tax rate during his terms was 91 percent.
Reversal of this policy started under President Reagan. He reduced the top rate to 50 percent. He stimulated the economy, but by tripling the national debt -- from $700 billion to $2 trillion. Under Reagan's Cold War spending, we went from being the world's largest international creditor to the world's largest debtor nation. So today's budget unbalancing actions to stimulate the economy are not unprecedented.
George W. Bush dropped that rate to 35 percent and also set up a shelter called qualified dividends, with a 15 percent rate. Now, the CEOs and investors could keep between 65 percent and 85 percent of those dollars. So greed-based salaries and risky speculations soared.
According to a 1970s Federal Reserve study, the annual pay of the CEOs at 102 major companies was about $1.2 million in today's dollars -- about 40 times the average pay of a full-time worker. By the early years of this decade, the average CEO pay increased to $9 million, 367 times the pay of the average worker. What happened in that 30-year period that made them 10 times more valuable than they had been before? Nothing.
CEOs learned how to control their boards of directors and were able to set their compensation packages at unscrupulous levels. To protect their position, they compensated hundreds of supporting staff in similar manner. They ignored the fact that they are merely bureaucratic managers and not the owners of the businesses.
Even when failing to produce profits in today's recessionary climate, they still voted themselves raises, bonuses and bailout packages -- and laid off hundreds of workers to get the money to pay for these goodies. This is just legal theft from the stockholders who are the true owners of the businesses.
While the Feds have been able to impose limits on firms that have accepted stimulus dollars, tax policy implemented this massive redistribution of wealth from the workers to the CEOs, and only tax policy can reverse it.
It would be appropriate to return to a rate of about 75 percent for all annual compensation that exceeds a threshold of about $2 million.
While not strictly accurate, because the data includes speculator as well as executive income, this is interesting:According to IRS data, in 2007 there were 141,000 taxpayers in the top 0.1 percent of incomes, annually earning an average of $7.44 million each. If the top marginal rate were set as above, they would almost certainly reset their salaries to the $2 million level, rather than give the government $75 of every $100 of salary above that level.
A little arithmetic shows that $767 billion, formerly spent on bloated salaries, would now be available to reinvest in their businesses. This would be internally generated annual stimulus money freed up for improving their corporate operations -- without requiring any dollars from the government.
A win-win result achieved by only looking at a return to traditional tax rates for the top 0.1 percent of taxpayers.
