The Politics of Executive Pay: Ideology, Not "Social Justice," Fuels Calls for Restraints on Executive Compensation

By Markham, Jerry W. | Regulation, Spring 2011 | Go to article overview

The Politics of Executive Pay: Ideology, Not "Social Justice," Fuels Calls for Restraints on Executive Compensation


Markham, Jerry W., Regulation


Current liberal ideology seeks "social justice" through the appropriation and redistribution of wealth--usually from members of the business class. Though we associate such redistribution schemes with places like the former Soviet Union, China, Cuba, North Korea, and Zimbabwe, it has a lengthy history in the United States. For example, in 1777, a Pennsylvania constitutional convention considered, but rejected, a provision that stated: "That, an enormous Proportion of Property vested in a few individuals is dangerous to the Rights, and destructive of the Common Happiness, of mankind; and therefore every free State hath a Right by its Laws to discourage the possession of such Property."

Today, the demand for wealth redistribution comes clothed in populist appeals to the unfairness of the gross disparity between executive pay and that of the average worker. This claim resonates well in the press, but efforts to redistribute wealth through taxes, mandatory public disclosure, and corporate governance "reforms" have all failed. Nevertheless, compensation politics continues unabated, as demonstrated by the latest fight over the Bush tax cuts.

Redistribution by Taxation

Liberals (in the American political sense) have long viewed disproportionate taxation as a "fair" way to redistribute the wealth of U.S. businessmen. The "progressive" income tax is based on an ability-to-pay principle--that is, the wealthy's higher income is reason enough for their being assessed higher tax rates.

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Unsurprisingly, the wealthy have proved unwilling to part with their wealth and can avoid the worst effects of disproportionate taxes through various tax shelters. Anticipating the Laffer curve theory that lowering taxes can actually generate more revenue for government, then-secretary of the treasury Andrew Mellon convinced Congress in the 1920s to lower the top income tax rate on investment income from 65 percent to 24 percent. Despite the cut, Mellon was able to reduce the national deficit.

Mellon's tax cutting efforts were cut short by the Great Depression, a period in which both political parties abandoned his common sense approach to taxation. President Herbert Hoover imposed a "temporary" increase in the top income tax rate to 63 percent in 1932. Revenues from the income tax promptly fell by about 50 percent. Calling businessmen a "stupid class," Franklin Roosevelt proclaimed that the American public wanted "their fair share in the distribution of the national wealth." He sought to give it to them through such legislation as the Revenue Wealth Tax Act of 1935, which raised the top marginal income tax rate on individuals to 75 percent. However, that and other punitive legislation directed against businessmen only served to worsen the economic situation during the Great Depression, as capital went into hiding. There was simply no incentive for businessmen to take risks when they would have to bear all of the losses and give the government most of the profits.

The highest marginal tax rate for individuals was raised to 94 percent during World War II, and the adoption of an "estate tax" applied another 50 percent tax on earnings that had already been taxed as income. Nevertheless, the wealthy continued to fight this wealth confiscation effort through various tax avoidance and evasion schemes. Indeed, higher taxes actually encouraged the preservation of wealth, rather than its redistribution. Before the estate tax, the successful formula for wealth redistribution in the United States was tried and true: "From rags to riches and back to rags again in three generations." Tax-motivated trusts, however, not only avoided the estate tax, but also derailed the rags-to-riches-to-rags natural order of wealth redistribution. Those trusts placed family wealth in the hands of professional money managers who could prevent it from being squandered by the third generation. Hence, the Kennedy and Rockefeller dynasties put trust fund babies into high offices and concentrated wealth for generations.

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