John McCrory

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AIG bonuses aren’t the problem. Excessive executive pay is.

On WBUR’s Here and Now, today, New York Times business columnist David Leonhardt pointed out that the excessive bonus pay at AIG (and now, Fannie Mae and Freddie Mac) are only a symptom of the larger problem of excessive executive pay. He suggests that one way to deal with this that actually works, is to look at the tax code. It’s time for a new tax bracket for extremely high earners — people making $400k and up, he says.

He also explains this in his column today:

…any attempt to build a new financial system, one that’s less susceptible to bubble, bust and bailout, will have to include a new approach to pay.

The clear implication or Leonhardt’s argument is that taxes are the most effective tool for removing the incentive for ridiculously high pay. Other methods haven’t worked. Sounds about right. There’s also the issue of fairness.

The current top tax bracket is $373,000 and up, so people who make insane sums of money — and I ask you: who really needs to make more than $400,000 a year? That’s an astronomical sum, isn’t it? —  are paying 35% as their marginal tax rate.

Check out the history of top tax bracket rates on Wikipedia and at the Tax Policy Center. Notice that the top bracket’s marginal rate was 50% or higher until very recently: 1987.

When the Beatles emigrated to the United States in the 1970s to escape the Tax Man in Britain, they were fleeing a marginal tax rate of 95% to one of around 70%.

The exception before that is the 1920s, when the top rates were in the 25 percent range during the bubble that built the Great Depression. Leonhardt says that experts are suggesting a 45% rate for insanely high earners would make sense now.

So what should be the appropriate limit on what an exec or CEO can earn? In the corporate social responsibility literature, there’s a guide for pay that is useful: the top earner should earn no more than 7 times the company’s lowest earner.

So imagine a company in which the entry-level staff make $30k a year. The highest paid person in the organization would be eligible to earn $210k — which I happen to think is a lot. Note that in such a system, there’s an incentive to raise entry-level salaries so top earners (usually the folks in charge) can make more. I’m for it.

But that 7:1 ratio won’t happen on its own. It’s time to change the tax code to create a new tax bracket (or brackets) for the insanely high earners. Given the history, 70% doesn’t seem outrageous for folks earning over a million, and 50% for folks earning over $400k to a million. What do you think?

Filed under: Economics, ,

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