Asymmetrical Information

Over at the other place with the higher commenting hurdle, you conclude

I myself am prepared to argue that investment bankers and traders make more money than they deserve to, and let's not even start on the lawyers. But I cannot think of any way to reverse this trend without doing enormous violence to America's admirably efficient financial markets, and thence its economy.

How about much steeper progressive income taxation? Steeper at income levels well above median or even 75th percentile income?

How about much steeper progressive income taxation? Steeper at income levels well above median or even 75th percentile income?

The seventies called. They want their malaise back.

> How about much steeper progressive income taxation? Steeper at income levels well above median or even 75th percentile income?

Should this hit the google boys? If so, why? If not, why not?

One argument for this tax rate is that the CEO is making way more money than the average worker. Suppose that the CEO at a given company makes scads of money, but his salary is only 20x times that of the lowest paid worker at said company. Suppose that another CEO makes significantly less, but his salary is 200x that of the lowest paid worker at his company. Why should CEO#1 pay a higher rate than CEO#2?

And, as with all progressive schemes, the question of "how much should each income cohort pay?" comes up. What fraction of the taxes should folks who are in the top 1, 5, and 10% of income pay? Is it healthy for the average person to basically be a free-rider?

The typical response to "what about google" is "we'll treat founders special".

Let's talk about Eisner. He didn't start Disney and he took home scads of money, around $1B total. (If you look at some of the profit numbers in the mid-90s, there's even some cases where he got "lucky" - instead of two good years, Disney had one bad and one great. Coincidentally, Eisner's contract gave him more money for great/bad than good/good.)

However, during that same time, Disney went from ho-hum company with a glorious past and no future to something of a behemoth.

So, is it unreasonable for Disney shareholders to have said "he's an expensive bastard, but maybe it will be worth it"?

Or, is the argument that Eisner didn't bring anything special to the table, that someone cheaper would have done as well?

Folks who want to have inexpensive CEOs can choose to invest their money with that in mind. (Hmm - maybe there should be a mutual fund with that as its theme.) Why shouldn't other people be allowed to make a different decision?

Lawyers and people in the financial industry work in the most successful rent-seeking businesses, and they do so with not only the permission of government, but with its active encouragement.

How do you address income inequality arising from these businesses? You do it by limiting and eliminating government power, not by increasing it. Democrats and Republicans will never agree to this.

Jane used the phrase "tournament model" to explain CEO salaries (in the longer Free Exchange post). One interpretation of that is that there's a pile of rents sitting in the CEO's chair, and that there's some internal competition to see who gets it. And that competition may be based on who has the best Powerpoint slides rather than who could do most to raise the productivity of firm. If that's accurate, which of course is open to debate, then why not use progressive taxation to capture some of it. It's hard not to wonder about these things when Bob Gates was trying to get Army troops pumped for their involuntary extra 3 months deployment by announcing that they get $1,000 a month extra as a compensation.

"The seventies called. They want their malaise back."

The malaise was not due to taxation. It was due to a spike in real energy costs. Our malaise ended when Iran and Iraq began dumping oil on the market as fast as they could to fund their war efforts.

Here is a nice site I like to visit once in a while.
http://www.wtrg.com/oil_graphs/oilprice1947.gif

I used it in the past to convince people that oil prices were not really that high, adjusted for inflation. I can't do that anymore.

How about we just don't worry about how rich the rich are? We could focus on ways to make the poor less poor. They already are a lot less poor than they used to be. Taxes already punish the rich. How much is enough?

EI

Thanks Njorl. I would also put inflation, wars and financial instability well above any indictment of progressive taxation as a source of problems in the 1970s. On the other side of Jane's equation, she correctly notes the role of total compensation and not just wages in driving the income share trends. But that means that America's dysfunctional healthcare system is being counted as part of labour's share, which is perhaps a strange way to do it.

"Corporate profits haven't skyrocketed as average worker pay has stagnated. The share of national income going to capital has fluctuated by less than 3% on either side since 1948"

That may be deceptive. Not all wealth that goes to capital is income. All unrealized capital gains are excluded from that calculation; they aren't income yet. In recent years, corporations have dramatically shifted away from issuing dividends and instead increase the value of their stock, for tax purposes.

> And that competition may be based on who has the best Powerpoint slides rather than who could do most to raise the productivity of firm. If that's accurate, which of course is open to debate, then why not use progressive taxation to capture some of it.

Even if it's accurate, why is "capturing it" a valid goal?

It's fairly clear that both tall and pretty people make more money. Is that a justification for heavier taxes?

During the UK's infatuation with nationalization, one of the advocates came across Churchill in the men's room. Churchill wasn't at the adjacent urinal, so said advocate commented "feeling a little standoffish". Churchill replied "whenever you see something big, you want to nationalize it."

I think the problem (and there is one) of CEO pay, and to a lesser extent, the pay of other top execs, is that there really isn't a market mechanism or a system of checks and balances in place. Pay is set by the board, which is in many cases assigned by, or partly by, the CEO, and in many cases the participants are familiar with each other, sit on each other's boards, or have in the past, etc. At any rate, the whole thing often devolves into financial logrolling, which is how we get the rare (but not rare enough) $40 or $100 million+ package - because these small groups of people are so insulated and detached from reality that it seems reasonable to this sort of thing (or maybe they just dont care). The common responses are that you need this much pay to get and keep the best people - but many of the highest paid CEOs are demonstrably terrible. Or that well, people can always vote against compensation packages at the annual shareholders' meeting, which is fundamentally dishonest, given anyone's understanding of (a) how likely it is that people, or even institutional shareholders, will bother, and (b) what the response would be from the board/CEO if such a vote actually succeeded. Power corrupts. No checks and balances, whether through the market or something else, and pay will be 'incorrect' according to the market at best, and felonious at worst. Too much is too much. It wouldn't impact a company's stock if the money were given to a random janitor, or tossed in the garbage, but it still wouldn't be right.

"Is that a justification for heavier taxes?"

Courts are for justice. Taxes involve only pragmatism.

Even if it's accurate, why is "capturing it" a valid goal?

Good fiscal policy involves deciding on the level of expenditure and then choosing the most efficient means of raising revenue to finance that expenditure. If there's an element of the potential tax base that represents pure rents and has no productivity implications when it is taxed, then by all means tax it first before more distortionary taxation or borrowing.

On a broader topic, doesn't it seem increasingly absurd that The Economist forces "Jane" to labor anonymously at Free Exchange when we all can usually figure out that it's her (is there anybody else blogging there, anyway?)?

It's a dumb editorial policy on the part of the powers that be The Economist, who clearly don't "get" blogging.

What Steve Bainbridge said.

> I think the problem (and there is one) of CEO pay, and to a lesser extent, the pay of other top execs, is that there really isn't a market mechanism or a system of checks and balances in place.

The problem with that argument is that shareholders have chosen that arrangement. They're perfectly free to choose another arrangement.

Why is it a good thing to impose additional costs on a choice that they pay for? (We've already established that neither prices nor other salaries would change significantly if CEOs worked for free.)