Where the Road Might Lead Us – Prospects for Taxing Executive Compensation

Where the Road Might Lead Us – Prospects for Taxing Executive Compensation

Who has too much money out there? Go ahead, raise your hands. I’ll be over shortly with the collection plate.

You say you don’t trust me? I am wounded, yet fine – DIY, that’s the best way. The Robber Barons and Captains of Industry of past centuries agree – if you want to share generously, go it alone.

“He who dies rich, dies disgraced,” wrote Andrew Carnegie in his slim book, The Gospel of Wealth. Andrew, a historical figure with a big load on his conscience, had a sermon to preach. Those who create spectacular fortunes are morally obligated to help others, urged the uncannily charitable Scotsman.

In my line of work, to our wealthy clients, we recommend lifetime gifting, establishing trusts, and supporting charitable ventures, both now and beyond the terminus station. Giving is moral, and it cuts down on taxes.

Carnegie, Mellon, Rockefeller… rogues’ gallery or saintly communion? We needn’t ponder: they managed the range in their lifetimes. Their deeds live on, brimstone and jasmine, the fragrance infusing politics to our day.

Here’s an idea – outside my usual brief, but I’ll drop it down, so months from now you won’t be surprised by up-jumping political gambits. If you own a company or serve as a top executive at a major firm, ponder this: could you perhaps pay better salaries and benefits to your workers, and take less for yourself? Would that be so wrong or hard to accomplish?

Yes, I know how it sounds. And, yes, of course we’re still friends. It’s none of my business, but powerful political forces already have you in their unloving crosshairs. It’s an old notion: executive compensation is too high, common folk are foundering, something’s got to give, and it just might be you.

I haven’t heard anything concrete yet on exec compensation, but as you may have noted, President Joe Biden has submitted big spending plans to the public and Congress. Aggressively taxing executive pay has long been suggested, and it sounds like an easy way to boost IRS revenue: very few voters would actually get squeezed, and even the victims would remain super-prosperous. It’s not like anyone is talking guillotines.

These days, issues like this flow beyond revenue into realms of morality and equity. There’s two sides to morality, the talk and the action, and the latter is coming into fashion. Expect political combatants to pick up this issue and fight.

Lest our lives become nothing but anxiety and tedium, I’ll tell an illustrative story to take the edge off. There will be time to fret later.

My old man loved tennis. A rich man’s game, normally, dad played it at the public courts in Concord. He loved free stuff: all-you-can-eat, two-for-one, seniors get fifty percent off. No coaches or lessons for him: he watched the fellas play, picked up the serve and the spins, got pretty fly. He loved tennis so much, my mother got authentically jealous.

One time, some of the guys were invited to a tournament at Wentworth by the Sea, a grand old resort in New Castle, New Hampshire. The hotel opened in 1874, then expanded through the gilded years. To a ten-year-old boy, it was Elysian Fields, ancestor Homer’s ‘place of perfect happiness’, with croquet and free cashews, a terrifying pier out over the sea, smiling waiters in tails, a maze of calm halls spotted with ghostly chills, warmed by rich little girls with their rich little parents – such an impression it made on one overawed lad.

Driving off after the tourney – dad and partner advanced a few rounds, got knocked out by pros, had fun with no honor lost – the old fellow pointed to the castles of rich men who could make Gatsby look like Gilligan. Marble and granite, sandstone and slate, spanning the ornate 19th century to the glorious 1920s. Oh, those were the days to be rich.

Daddy-o told me the story firsthand – he was young in those days, worked in their mills. Those kingpins of industry, linchpins of civilization, for whom workers were sacks of coal, cars of ore; disposable, just-human resources. It was a tough time to work with your hands.

“Later on, they started worrying about facing St. Pete. Did those boys ever get generous, hoo! Why did they wait? When they were making their loot, couldn’t they share with the guys who sweated for them?” Dad hated commies; no time for dreamers; but fair was fair.

In the late 1940s, after the war, dad was a manager. In those days, African American men and women were moving north, searching for good jobs and a chance to breathe. I hate to write it, because it’s brutal, but there was a management meeting in which everyone agreed not to hire them. This was in Massachusetts, a liberal bastion even then.

My father said: Nothing doing. He was raised according to the narrow-minded mores of the time, I guess, but I don’t think he liked it. Some things aren’t right. So he hired whoever came looking, and did he catch hell. Greeks are stubborn, and know they’ll be sitting down with Saint Petros one day. The world changes quietly, step by small step for mankind.

In the absence of news, what can we expect? In recent years, three kinds of proposal for limiting executive compensation have been most popular. All aim to boost tax revenue and reduce inequality of income – hot-button issues for the Democrats in power, and not without interest to Republicans, either.

First, rules for taxation of deferred compensation could be adjusted. The proposals are complex, addressing the moment when equity or nonqualified deferred compensation is recognized in gross income, or proposing new definitions of terms to narrow the loopholes. Legislation based on complex formulations often fails, dragged down by its own weight.

Next, corporate tax deductions for executive compensation could be limited to a threshold, defined as ‘X’ dollars or as part of a ratio to median employee salaries. This sort of proposal aims to encourage more equitable sharing of corporate wealth. It’s a digestible morsel for voters, plus the details of hypothetical legislation are generally easy to grasp. If this one springs up, it looks to have legs to run.

Finally, one old idea sounds fit for our times. It calls for setting the corporate tax rate in increments, based on the ratio of executive compensation to the median salary of staff. If the CEO is paid 100x the median, the corporate tax rate would be 1 x X%; if she receives 200x the midpoint, the rate might be 2 x X%. Again, easy to peddle to voters, so keep an eye peeled.

Nothing has happened yet, but it’s time to consider and prepare a position. And maybe take a few minutes to read Mr. Carnegie’s book, charitably free online. As Scrooge would tell you, if a ghost comes a’ calling, it won’t hurt to listen.

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