Anyway, this week I got two e-mails about this blog from old friends. One was from a Kellogg MBA who took a couple of classes from me a few years back. She's now working for a large global consulting firm. I was thrilled to get her mail --- and also thrilled to know that somebody is actually reading some of what I write here. If there are other Kellogg MBAs out there in cyberspace, come on out of the woodwork. Let me know what you're up to.
She was wondering if I had any thoughts about this article from the NYT.
After the small fortune she paid to Kellogg, I figured I should probably answer one more question from her. (Utah students: You get zero extra questions... jk.)
So here are a few thoughts:
(1) I'm not a fan of caps on pay. Super smart people have lots of opportunities. They're going to make scads of money one way or another. Do we want them to make their money working as "consultants" to the banking industry, where they can charge whatever fee they like? Or do we want them to be employees, where their fortunes can depend a bit more on how the firm does? I think the latter is better, but the pay caps will push people to the former. (I do think we should be limiting payments to owners --- that is, limiting dividend payments --- for bailout banks.)
(2) Is the Obama administration thinking about this? I am 100% certain they are. How am I so sure? Austan Goolsbee, an economist from the U of Chicago GSB who's on the President's Council of Economic Advisors, is one of the leading experts on taxing CEO pay. Here's a link to a paper of his on this.
(3) What Goolsbee found in his research was that CEO labor supply seems to be pretty inelastic. If you think back to how taxes affect economic activity, a lot depends on how elastic --- that is, how price sensitive --- demand and supply are. If demand and supply are elastic, then taxes can cause buyers and sellers to choose not to transact. The tax increases the price buyers pay and reduces the price sellers get... So if buyers and sellers are sensitive to price, this government interference will lead to reduced buying and selling. If demand and supply are inelastic, then the price doesn't matter much to the buyers and sellers. They're so eager to trade that even the tax doesn't deter them.
When the Republicans talk about how taxes will hurt economic activity, they're essentially arguing that demand and supply are elastic. This is for sure true in many markets, but not all.
Putting this in the CEO labor market context, if sellers (that is, CEOs) are price sensitive and their wages are taxed more heavily, then you might imagine them working less. A CEO might think "Well, I used to keep 70 cents of every dollar I earned, and now I keep 60. So I'll work less." If this were true, you might think that the pre-tax level of pay would go down after a tax increase.
But this isn't what seems to have happened in Goolsbee's data. CEO pay went up in the year before the tax increase and down in the year after. CEOs seem to have found ways to shift a little pay from the future to the present. But then pay went up on pretty much exactly the same trend as before.
So --- I think the advice the President is getting on taxing the rich is this: "Probably it won't cause the rich to work much less."
Let's see in the upcoming State of the Union address if Obama has anything to say about this.
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2 comments:
About Hastings' comment in the NYT: I've been saying this for years. Top performers should be allowed to earn an income as high as possible, so no caps should be put in place.
It makes sense to me that these people give back a little more (in the form of higher taxes) to the country that made it all possible. The incentives to work more and perform better remain intact. Maybe the incentives aren’t as strong anymore, but I think it doesn’t matter too much: more is still better!!!
It seems that one could easily opt-in to paying more to the government if one was so inclined. They don't force a refund upon you. Perhaps we should encourage donations from wealthy individuals. Maybe they can endow a cabinet position or get a bureaucracy named after them. It seems to work in other places.
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