Tax Analysts Blog

Tax Follies in Pursuit of Equality

Posted on May 7, 2014

Over the past several years, the issue of income and wealth inequality has been all the rage. Apparently the old adage "The rich get richer" was spot on. The purported inequality never bothered me much. Rich people usually get their money from being smart and working hard and taking advantage of opportunities. Some inherit from rich relatives or marry for money. I can't control how people get their money.

The fact that rich people are rich bugs the heck out of folks on the left. Television pundits decry the unfairness, young people occupy things, and the 1 percent is vilified. As with many real and perceived problems, people turn to the tax laws for redress of income inequality. Traditionally, liberals have favored progressive taxation because it takes money from the rich and gives it to the poor. But it's more about screwing the rich than helping the poor. Progressive taxation often reflects policy based on petty jealously. We envy the guy driving the Lamborghini -- let's tax him.

The most recent attempt to attain equality using the tax system is in California, which taxes corporations at 8.84 percent and financial institutions at 10.84 percent. The State Legislature is considering a bill that would tie corporate tax rates to executive compensation. SB 1372 would create a new corporate tax table that would determine a company's tax rate based on the ratio of CEO-to-worker pay. Beginning January 1, 2015, the applicable tax rate for publicly held corporations would be between 7 and 13 percent, depending on how much more a company's CEO earns than its workers. Financial institutions would be taxed at a rate between 9 and 15 percent, depending on their compensation ratio.

A company that pays its CEO more than 100 times the median compensation of its U.S. workers and contracted employees would face corporate tax rates between 9 and 13 percent. Companies whose CEOs earn more than 400 times the median income would be taxed at 13 percent, and those with CEOs earning between zero and 100 times would be taxed at a rate between 7 and 8 percent. The legislation also would raise the applicable tax rate by 50 percent for a company that has a year-over-year drop of more than 10 percent in the number of its full-time U.S. workers and an increase in contracted or foreign full-time employees.

Sen. Mark DeSaulnier (D), one of the bill's sponsors, says the law would address the problem of income inequality in California. The idea has been endorsed by the public employee unions in California (which have never met a bad tax law they didn't like). It's been endorsed by liberal luminaries such as Robert Reich. And Harold Meyerson of The Washington Post fawned over it as an example the federal government should follow.

Good grief. It's hard to conceive of a more pernicious tax policy. Tax reform advocates and public finance experts have long called for broad bases and low rates. They call for simplicity and neutrality. SB 1372 violates all those policies. The government is going to decide the appropriate level of executive compensation and then penalize those not in compliance through the tax law? And punish companies that hire part-time or contract workers?

The goal is to force California corporations to pay their executives less. Again, that is about screwing the rich and has very little to do with helping the poor. Apparently, supporters of the legislation would be perfectly happy if all that happens is a reduction in executive compensation. The problem of inequality would be addressed! The supporters believe -- incredibly -- that the companies will take the excess executive compensation and give it to the workers. In reality, California companies will find it harder to recruit and retain executives. And because wages are still controlled by the market, worker pay won't change. Indeed, if this folly becomes law, the money saved on executive compensation would go directly into shareholder pockets.

But the law would never work. It applies only to publicly traded corporations. You don't have to be as smart as a fifth grader to see the opportunity to convert to a limited liability company or partnership, or S corporation, or just to go private. That would only further gut the corporate income tax. Moreover, the bill uses the SEC definitions of executive compensation, which are often subject to debate. There will be a cottage industry within the tax community to redefine the word "compensation" to get around the law. A tax law that results in such shenanigans is no good.

Read Comments (5)

emsig beobachterMay 6, 2014

David:

The only tax that would truly strike the upper crust is the Jonathan Swift tax
(read Gulliver's Travels Part 3 Chapter 6).
"...to tax those qualities of body and mind, for which men chiefly value
themselves; the rate to be more or less, according to the degrees of excelling;
the decision whereof should be left entirely to their own breast. The highest
tax was upon men who are the greatest favourites of the other sex, and the
assessments, according to the number and nature of the favours they have
received; for which, they are allowed to be their own vouchers. Wit, valour,
and politeness, were likewise proposed to be largely taxed, and collected in
the same manner, by every person's giving his own word for the quantum of what
he possessed. But as to honour, justice, wisdom, and learning, they should not
be taxed at all; because they are qualifications of so singular a kind, that no
man will either allow them in his neighbour or value them in himself. The women
were proposed to be taxed according to their beauty and skill in dressing,
wherein they had the same privilege with the men, to be determined by their own
judgment. But constancy, chastity, good sense, and good nature, were not rated,
because they would not bear the charge of collecting.

If the tax returns were made public via the Internet and other social media,
all governments would run surpluses.

The best part of this tax is that it would spur the idle rich to acquire more
wealth in order to meet their inflated tax liabilities.

amt buffMay 7, 2014

Some tax laws are designed to capture revenue; some tax laws are designed to
capture votes.

emsig beobachterMay 8, 2014

Travis:

EXCELLENT POST!!!

What the apologists for the 0.01% forget is that when wealth became extremely
concentrated during the Gilded Age, the 99% clamored for and got anti trust
acts, laws against child labor (much to the chagrin of the Gilded Age Newt
Gingrichs) and many other social welfare programs.

Today's plutocrats should be grateful that the Pikettys and the Occupiers only
want some of the plutocratic wealth spread around. The modern day Huey Longs
and "Pitchfork" Ben Tillmans are quiet, for now.

P.S. We should replace the estate tax or the propsosed Zuckerberg tax with an
Inheritance tax (The Paris Hilton tax).

travis rechMay 9, 2014

"Rich people usually get their money from being smart and working hard and
taking advantage of opportunities."

I think the argument Picketty makes is that executive compensation is far
outside the bounds of what could be considered their marginal productivity.
And even supposing you aren't concerned about that, the other point is that if
growth remains low the heirs of today's CEOs (and their heirs) will not have
acquired their fortunes through intelligence and hardwork.

It can be taken as a fact that concentrated wealth warps the political process,
and it remains to be seen how undemocratic the political process will get if
the concentration becomes even more significant. These are real concerns and
increasingly obvious outcomes.

David, I think you err when you ascribe the desire to reduce inequality to
"jealousy" and "envy." While some people are certainly jealous, I think a
great amount of uproar from true progressives (rather than plutocratic
Democratic party insiders) isn't based on jealousy, it's based on the desire to
have a government not owned and operated by and for billionaires and
multi-nats. People want a meritocratic society, not an inherited aristocracy.
I don't think these desires are born of jealousy at all.

Pattie PattieMay 13, 2014

The rich are robbng America of its treasure while the leftists are robbing it
of its soul.

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