Sunday, May 01, 2011

Tax policy should reward merit: raise taxes on money nobody could earn or merit

On April 24, the "liberal" Washington Post published a high profile article by economist Arthur C. Brooks, arguing that "Obama is wrong when he says it's 'fair' to tax the wealthy." Most of the so-called "liberal media" bend over backwards to showcase conservative opinion, and to highlight any political current of hostility to perceived "liberalism." The Post is no exception. Whether this is fairness or political masochism remains open to debate.

Brooks offers an erudite, eloquent, emotionally appealing argument. No doubt he has sincerely convinced himself. The only flaw in his presentation is the facts on the ground that he conveniently omits.

Brooks offers several game-playing experiments - popular in many academic fields that try to understand human behavior. In one, a person is issued $10 - unearned, as Brooks emphasizes. They are asked to make an offer to split the $10 with a second person. If they can't agree, neither gets any money. Generally, the second person will accept an offer for $4, but anything less will be rejected as "unfair."

Then Brooks turns to a survey about buying beer. It seems people tend to tell research assistants they would be willing to pay more money to buy the same beer from a fine hotel than from a run-down grocery store. Seventy-percent of people, say the latest surveys. Then Brooks jumps to his eagerly-anticipated conclusion: "The $10 game involves redistributive fairness; the beach-beer experiment reveals meritocratic fairness."

Meritocratic? There is NO difference in the "merit" of the beer. No research assistant seems to have offered the option of paying more for a luxurious room at a fine hotel, because that is worth it, but paying what the beer is worth when buying beer, rather than paying more because it is sitting on a shelf in a fine hotel.

But that is a better way of talking about fairness in our tax system. Nobody likes paying taxes, but if there are no taxes, there will be no government: no police protection (unless you can afford to hire your own private security), no traffic lights, no street cleaning, no military defense, no coast guard, nobody inspecting our food to make sure it is free of mouse droppings and salmonella...

There is no greater merit in beer bought at a fine hotel. The consumer is not paying more for a better quality product. The vendor is charging the customer more simply because they can. Brooks runs on at some length about whether a secretary who is "quicker, more efficient and more reliable" should be paid more than one who is slower, less efficient, and less reliable. Almost nobody would deny the better secretary better pay.

Unfortunately, among those who wouldn't bother to pay the more skilled and reliable secretary more, are a large proportion of those who do the hiring, firing, and setting pay levels in American businesses, particularly at the corporate level. They are too busy paying themselves huge packages. Then they cry "merit" when the president attempts to at least give the hard-working secretary a tax break.

There are stratospheric compensation packages which have nothing to do with "merit." The difference between an entry-level job paying $20,000 a year and a responsible position paying $60,000 a year may well be demonstrated ability, invaluable experience, and skill. The difference between $100,000 a year and $1,000,000 a year may indeed by the drive, acumen, and long work days over many years that build a successful business from scratch.

But what about the difference between $1,000,000 and $30,000,000 a year? Are there enough hours in the day for a corporate CEO to work thirty times harder than the self-made entrepreneur? One might argue the opposite. On pure merit, it is the woman or man who builds a business from scratch who should be making the bigger money. The corporate CEO is stepping into a business built by others before his father was born.

How much more is a top-earner worth, on merit, than the secretary in the local branch office, the janitor who cleans the building, the window-washer, the local salesman, the newest graphic artists in the advertising department? Thirty times as much? One hundred times as much?

Try this out for "fairness" and "merit." Add to the existing minimum wage laws a provision that the lowest paid employee of any enterprise shall be paid no less than one percent of the total compensation package of the highest paid executive. One percent. A penny for every dollar. Oh dear, $700,000 a year entry-level janitors!

In the long run, perhaps CEO compensation would come down to $7,000,000 a year (what a harsh penalty for being entrepreneurial). That would bring the janitor down to $70,000 a year, which, frankly, a good, hard-working, skilled janitor is worth. We all want our bathrooms clean, but none of us want to clean them ourselves.

The laborer is worthy of his hire. Where would all the revenue go that is no longer funding outsize executive packages? It might go into new investment, which might actually create some of the new jobs corporate executives pretend to create. Or, it might go into lower prices, so the rest of us could manage to live on what we earn.

In the meantime, nobody, in any income bracket, is going to be robbed of the rewards for their labor by paying a few more percentage points on their highest tax bracket. Like all of us, the wealthiest in the land can take the Standard Deducation, tax free. Usually, they file a Schedule A to take much larger deductions. They pay only 10% on the first bracket of taxable income, after all the income that is tax free. By any tax proposal on the table, they get to keep 65 percent of the income in the highest tax bracket.

Frankly, business derives a large part of the benefits of government operations, as much or more so than do those who depend on government programs such as Medicaid for their survival. There is no reason that large business incomes should not bear a higher share of the costs.

Let's try a different analogy. I'm researching a biography. It is not likely to be a best seller - few biographies are. I need to consult at least three archives at universities and historical societies. None of them charge admission.

It is good, and right, that they don't charge admission. It would be an unconscionable infringement on the free market of ideas, on diligent inquiry, to require payment for access to our common history. But, it does take money to run these archives. Someone does the work of sorting, filing, categorizing, typing up finding aids and indexes. Someone unlocks the doors and supervises and pulls the boxes.

On the rare occasions that someone who has used these archives has a best seller, they darn well ought to share a chunk of the revenue with the archives. Yes, the author put a lot of hard work into writing a best seller, and they deserve to profit by it. But, many no less deserving or hard working are not so fortunate. Without the archives, and all the work and costs to sustain them, the best-seller could never have been written.

Why shouldn't those who make a lot of money be the ones expected to give a lot back? Not everything, not even fifty percent, but a substantial sum. Those who didn't make money don't have money to give.

When it comes to taxes, we all get to keep most of what we need for basic survival, ALL of us, even the wealthiest. We pay a bit more on the income over and above our most basic survival needs. And we pay a bigger chunk, but much less than half, of the money that is way beyond what anyone "needs." That is as it should be.

This is going to stifle entrepreneurial initiative? Nonsense. Nobody ever walked away from $1 million, because they would only get to spend $720,000 of it. The highest compensation packages aren't for entrepreneurial intiative anyway. They are paid out by well established corporations to people who simply move money around in well established channels, making darn sure they really ARE "too big too fail" so that when they blow it, taxpayers HAVE to bail them out to avoid a full-blown Depression.

Anyone who is serious about eliminating the deficit, and paying down the national debt, MUST face the fact that tax revenues are what we pay these down with. It is unfortunate that George W. Bush and his minions doubled our national debt during good times, when we should have been saving for a rainy day. But they did, and they did it in our name, after promising that we could have our cake and eat it too. Now it's time to pay for the mistake of believing them.

Let those who make far more than they "need," far more than anyone's "merit" could explain, pay more. It is the least they can do for their country and their generous fellow citizens. Give the real entrepreneurs, and those whose work has real merit, a well-earned and long-overdue break.


justliberty1776 said...

"Raise taxes on money nobody could earn or merit" -- if we must tax, then this should be obvious. But who decides "merit," and by what metric?

You cannot prove that a CEO did not truly earn his millions in salary and stock options. Proving that he did or did not, becomes an inquisitorial exercise involving all sorts of arbitrary judgments.

Executives who pay themselves richly do so because they can. They can because a) shareholders and especially b) workers usually are too fragmented and powerless to demand a larger share. In the case of the workers, a multitude of government policies drastically narrow opportunities, which forces them to settle for crappy jobs with crappy companies.

Open up opportunities and we would increase competition on the labor side. Part of this involves untaxing and removing unnecessary regulations from production and trade.

Another part involves shifting taxation to where it belongs. A good econ textbook will tell you that the only kind of tax that does not in any way burden production, and therefore, carries no deadweight loss, is a tax on land value. The value of land on the market is not earned by its owner, but reflects an entire community's investment (private and public) and the surplus created therefrom. THerefore, as Adam Smith wrote, it is the most appropriate fund for public revenue. Once upon a time, land tax was the main revenue source in the States.

This is the kind of thing that a good econ textbook will mention once, perhaps with a brief mention of Henry George (who espoused a bottom-up tax on land value alone to replace all other taxes). However, they then completley pass over the tremendous significance of the point with nary a mention again in the curriculum. By the time the student emerges from indoctrination as an economist, he has totally forgotten one of the most significant facts he learned.

Look up "Single Tax" -- I think you'll find it interesting.

Siarlys Jenkins said...

Henry George had his heart in the right place, but as working class families became homeowners, and aged in their own homes living on limited pensions, we have all learned how inequitable taxes on real estate can be. People lose their homes because their income is no longer sufficient to pay the taxes. Further, landlords always make sure the rent includes enough to pay the taxes, so the land OWNER doesn't really pay the tax.

Could it be proven that a given CEO did not truly earn his millions? I suspect that a well-funded study which examined each CEO's working hours, experience, education (experience would count for far more), the productivity of the enterprise under a given CEO's watch, compared to others, the legality of the way the enterprise operated, could establish a good set of guidelines.

But justliberty has undermined his own argument by observing that executives who pay themselves richly do so because they can. That has nothing to do with merit.

As a working hypothesis, I believe it is reasonable to start with the principle that the CEO's actual merit is not more than 100 times the deserts of the janitor. I would be happy to see careful scientific research to refine the appropriate dividing line. I suspect such research would reduce the ratio, perhaps to 10/1 or 25/1.