A Super Tax on Income

[Ferret]

I was recently reading yet again about a CEO receiving an obscene bonus for his year’s work. And again, I couldn’t help but think it is wrong to have a few people earning up to a hundred times what the average person earns. (BTW, I also don’t like seeing my shareholder profits handed out so freely!)

The normal line is that salaries and bonuses are determined by market forces and if you pay peanuts, you get monkeys. I think this true to a degree, but I am still uneasy with such a huge inequality in income.

It got me thinking that perhaps this could be balanced a little by taking a large tax cut from very high incomes which would take just a little pressure off the need to raise taxes from the average person. A sort of super tax on income at, say, a rate of 70% for income over a million dollars.

I’m sure there are plenty of arguments against this and I realise it sounds a bit socialist.

There is the argument that high tax rates kill incentive. I think that’s only true up to a point. I think the level of annual income at which one could live a very comfortable life is well below a million dollars. People who chase more than this don’t actually need the money, but want it as a trophy. The trophy is still there even if they have to pay high tax on it.

Another argument is that those with very high incomes will find ways of sheltering it from high taxes. Perhaps, but the tax office is, rightly, continually looking for ways to stop people doing this.

Maybe the take from such a tax would be quite small, but I don’t think that stops it being worthwhile.

The government might just squander what was raised, but that is a totally separate discussion.

I think ASF members cover quite a cross section of the community and I’d be interested to hear the thoughts of others.

 

[prawn_86]

Less tax not more is what is needed.

Those earning big amounts invest it into better ventures than what i would trust the government to do with it.

 

[medicowallet]

Sorry Ferret,

I am quite happy paying for quality for a quality CEO.

They truly drive the business and are worth every cent. For example, look at what can happen to government budgets/productivity with the clowns we currently have running the system.


All that would happen if we taxed our best CEOs would be that they would leave the country, and yes, we would be left with only monkeys.

 

[Smurf1976]

Less tax not more is what is needed.

Those earning big amounts invest it into better ventures than what i would trust the government to do with it.

If there is one thing that is consistent about government, it is that they are not good at picking winners. But then neither is any form of centralised control (ie micro-managers etc aren't much good either).

Quality managers / CEO's are hard to find IMO and worth every cent.

 

[tothemax6]

And how else shall we decide the salary of a CEO? In a free market, the CEO gets paid what he is worth. If you want to earn this salary, start working to become a CEO. Theft from those with more is just shadenfraude.

 

[basilio]

I think most CEO's are way overpaid. IMO it is just a big con job from this supposedly elite group of leaders to line their own pocket.

The downside as I see it is three fold.

1) The shareholders of public companies ie us as investors or in superannuation funds are seeing an unreasonable amount of the earnings paid out in these super salaries.

2) Employees of these companies are being squeezed in terms of wages and work expectations to enable these profits.

3) The short term nature of payment guidelines often means that financial bottom lines are manipulated to produce impressive paper profits out of which real monies are paid. Think about Babcock and Brown for example where huge "profits" were booked by simply revaluing purchases and then the bonuses flowed. Ditto Macquarie Bank

Just my worth.

 

[Whiskers]

Sorry Ferret,

I am quite happy paying for quality for a quality CEO.

They truly drive the business and are worth every cent. For example, look at what can happen to government budgets/productivity with the clowns we currently have running the system.

But, throwing more money at Department heads and CEO's of Quangos won't achieve the same result necessarily as in private enterprise because their constitution, trust deed and Regulatory System is usually much more restrictive in the things they can do.

I think most CEO's are way overpaid. IMO it is just a big con job from this supposedly elite group of leaders to line their own pocket.

The downside as I see it is three fold.

1) The shareholders of public companies ie us as investors or in superannuation funds are seeing an unreasonable amount of the earnings paid out in these super salaries.

2) Employees of these companies are being squeezed in terms of wages and work expectations to enable these profits.

3) The short term nature of payment guidelines often means that financial bottom lines are manipulated to produce impressive paper profits out of which real monies are paid. Think about Babcock and Brown for example where huge "profits" were booked by simply revaluing purchases and then the bonuses flowed. Ditto Macquarie Bank

Just my worth.

I would generally agree basilio, particularly with the highlighted bit.

And how else shall we decide the salary of a CEO? In a free market, the CEO gets paid what he is worth.

That's true to a point, but in corporate circles there's what's known as The Directors Club, (a sort of cronyism that also pervades other walks of like) where directors can and often do conspire to rig appointments and remuneration.

Too often the so called performance bonus criteria is too short term such that senior exec's manipulate the activities and performance for their own gain at the longer term expense of the company and shareholders.

This has often happened with predatory incursions into company's (Murdock comes to mind) where directors are planted in the target to facilitate a takeover or worse, asset stripping and running down of plant and equipment before on-selling the company to the detriment of shareholders.

But I don't think more tax is the answer, rather more control by shareholders of public company's as to who runs the company and the remuneration they receive.

This requires a change in the law, something I understand the Shareholders Association has been advocating for some time.

 

[Julia]

Sorry Ferret,

I am quite happy paying for quality for a quality CEO.

They truly drive the business and are worth every cent. For example, look at what can happen to government budgets/productivity with the clowns we currently have running the system.


All that would happen if we taxed our best CEOs would be that they would leave the country, and yes, we would be left with only monkeys.

Agree absolutely.

Ferret, I get what you're saying, but don't think it would be practicable for the various reasons already outlined.
Please, let's not trust the government with any more than we have to.

And I'd say there's nothing wrong with 'trophies'. They are, probably, more important to successful people than the money they can earn.

 

[Ferret]

It seems people are happy to pay up for a good CEO. That’s fair enough, although I don’t think Telstra holders feel they got very good value out of Sol Trujillo!

Those earning big amounts invest it into better ventures than what i would trust the government to do with it.

Prawn,
I wonder about this. Certainly businesses reinvest and make us all better off, but I’m not sure if personal incomes get invested in the same way. If I was earning over a million dollars I might look at spending some of that on a really nice house or a luxury car or a boat that would probably be imported. Maybe I'd choose to fly first class on vacations. Obviously some of this would flow through into the economy, but investing directly into a venture would be much more beneficial.

And how else shall we decide the salary of a CEO? In a free market, the CEO gets paid what he is worth.

Tothemax6,
I think the free market would still decide the pay for CEOs, just that they would be taxed higher on whatever the market decides. If you say that would mean they get paid even more to compensate for the tax, well, perhaps you’re right.

3) The short term nature of payment guidelines often means that financial bottom lines are manipulated to produce impressive paper profits out of which real monies are paid. Think about Babcock and Brown for example where huge "profits" were booked by simply revaluing purchases and then the bonuses flowed. Ditto Macquarie Bank.

Basilo,
Yes that is something that annoys me. Bonuses seem to be a one way street. A nice cheque when the company does well, but a nice base salary still when a company does badly. I think bonuses should always be long term. They are fine if there is out performance over a number of years, but results for a single year are too open to manipulation.

Whiskers,
Yes, I read every so often about moves to give shareholders more say on executive remuneration. It is a funny situation where there is a vote to accept the remuneration report at an AGM, but the vote is non-binding. Nevertheless, I don’t really like the idea of passing laws to try and set limits on remuneration. For mine, there is enough government intervention already.

And I'd say there's nothing wrong with 'trophies'. They are, probably, more important to successful people than the money they can earn.

Julia,
It’s my feeling, too, that the trophy is what is important to a very high income earner. I suspect that beyond a certain point the extra money is not really useful, but a high achiever still wants the highest salary because it is recognition that they are highly valued for what they do. If this is true, then the fact that they give a big percentage back in tax might not worry them. I could be totally wrong. I’ll never earn enough to know!

All that would happen if we taxed our best CEOs would be that they would leave the country, and yes, we would be left with only monkeys.

Medicowallet,
This point is very valid.

This aside, I’m still trying to understand why neither side of politics has ever proposed a super income tax. You would think it would be an easy sell since it would never apply to 99.9% of us. Is it that we all feel so overtaxed already that we baulk at the idea of a very high tax rate, even though it wouldn't apply to us?

 

[Whiskers]

Whiskers,
Yes, I read every so often about moves to give shareholders more say on executive remuneration. It is a funny situation where there is a vote to accept the remuneration report at an AGM, but the vote is non-binding. Nevertheless, I don’t really like the idea of passing laws to try and set limits on remuneration. For mine, there is enough government intervention already.

Ferret, I don't mean more gov intervention, but more shareholder intervention/say.

What I meant to say by "more control by shareholders of public company's as to who runs the company and the remuneration they receive", I meant shareholders should have more say in how the remuneration package is designed, especially the performance bonus criteria for short term contracts.

It will take either a Corporations law change or just a change in ASX listing rules to give shareholders a greater say in the remuneration package design and amount.

The study below finds that Australian CEOs have significantly greater base salaries than their U.S. counterparts, while U.S. CEOs are more likely to be compensated with restricted stock and stock options. That's a little concerning, but the performance bonuses that are often so secretive and detrimental to our companies are of more concern to me, especially when CEO's are employed on shorter term contracts and paid more in cash and less in restricted stock where they would be more inclined to maintain the longer term interests of the company to preserve their restricted shares value.

The following abstract gives a bit of a comparison between Aus and US remuneration.

Abstract:
[FONT=Myriad Roman, Arial, Helvetica, Sans-serif;]This study compares CEO employment contracts across two common law countries: the United States and Australia. Although the regulatory regimes of these jurisdictions enjoy many comparable features, there are also some important institutional differences in terms of capital market, tax, and regulatory structures, which are discussed here. Debate has raged in the United States on the issue of whether executive compensation is efficient and determined at arm's length, or skewed due to a power imbalance between managers and shareholders. A comparative analysis of the kind undertaken in our study provides an additional perspective on the optimal contracting and managerial power models of executive pay in U.S. academic literature. Even if one model has greater explanatory power in the U.S. context, this will not necessarily be the case in other jurisdictions, such as Australia. [/FONT]

[FONT=Myriad Roman, Arial, Helvetica, Sans-serif;]In order to do our comparison, we create pairs of U.S. and Australian firms that are matched on a number of dimensions including firm size and industry. We find that Australian CEOs have significantly greater base salaries than their U.S. counterparts, while U.S. CEOs are more likely to be compensated with restricted stock and stock options than the Australians. More striking is the fact that U.S. CEO employment contracts tend to last longer than Australian contracts, and are more likely to have arbitration provisions, change-in-control provisions, tax gross ups, do not compete clauses, and SERPs. We also find that Australian contracts are much more apt to include performance hurdle requirements before CEOs can receive restricted stock and options, and restrictions on CEO hedging of restricted stock and options. A number of the contractual differences we document appear to be consistent with key institutional differences between the two countries. [/FONT]

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1664615

Right at the top of the page is a "One-Click Download" button for the full report.

 

[Macquack]

And how else shall we decide the salary of a CEO? In a free market, the CEO gets paid what he is worth.

That is a laugh, how quickly people forget the Global Financial Crisis of 2008.

A "free market" as in the massive government intervention to stabilise the world financial system at the brink of collapse because of greedy 'capitalist pig' CEO's who had the audacity to demand "bonuses" even after their companies were bailed out of extinction with taxpayer monies.

I am with ferret on this one.

 

[Bill M]

That is a laugh, how quickly people forget the Global Financial Crisis of 2008.

A "free market" as in the massive government intervention to stabilise the world financial system at the brink of collapse because of greedy 'capitalist pig' CEO's who had the audacity to demand "bonuses" even after their companies were bailed out of extinction with taxpayer monies.

I am with ferret on this one.

So am I, Tell me honestly guys does Ralf Norris the CEO of the CBA really deserve a $16 Million salary for a year? You could replace him for a fraction of the cost and the job would still be done the same. What about all those Super Fund managers that lost half your money through the GFC, are they really worth their salaries?.... as old Kerry would have said Pigs Ar*e!

 

[Wysiwyg]

So am I, Tell me honestly guys does Ralf Norris the CEO of the CBA really deserve a $16 Million salary for a year? You could replace him for a fraction of the cost and the job would still be done the same. What about all those Super Fund managers that lost half your money through the GFC, are they really worth their salaries?.... as old Kerry would have said Pigs Ar*e!

Yeah it's not like he is making innovating inroads with monetary policy. People are reluctant to take positions of responsibility unless the pay packet is too hard to resist.

 

[tothemax6]

It seems people are happy to pay up for a good CEO. That’s fair enough, although I don’t think Telstra holders feel they got very good value out of Sol Trujillo!

Tothemax6,
I think the free market would still decide the pay for CEOs, just that they would be taxed higher on whatever the market decides. If you say that would mean they get paid even more to compensate for the tax, well, perhaps you’re right.

Yes, Trujillo was junk. Men like him should be flipping burgers, not 'directing' (in his case flying around lots and enjoying how important he is) a company. But a free market does not mean everything is gotten right all of the time, it means there is pressure for the best to rise to the top, and the worst to fade out. Had Trujillo been a good business man with good insight, he would have been worth the money as Telstra's earnings would have increased (and thus so would the share price or dividends).
And I think you are right - in the end the taxation would just be more tax, and CEOs would still be paid huge amounts. Of course, as Kerry Packer proved - the super rich find ways around the tax anyway.

That is a laugh, how quickly people forget the Global Financial Crisis of 2008.
A "free market" as in the massive government intervention to stabilise the world financial system at the brink of collapse because of greedy 'capitalist pig' CEO's who had the audacity to demand "bonuses" even after their companies were bailed out of extinction with taxpayer monies.
I am with ferret on this one.

I don't think you got one thing right in that whole post. Allow me to educate you, since you seem to be all over the place:
1) To claim the GFC was caused by capitalism, assuming you have done your research, is insanity. It is one of the most clear cut and well documented cases of a government intervention induced crash there is. If you look at the specific areas of the US economy that failed first, these were the most regulated industries in the country. These sections of the economy were highly socialist. In the real estate market, the government-sponsored entities known as Fannie Mae and Freddie Mac, were required to provide loans to people who could not otherwise get them (because they could not afford them). This is a massive market distortion - these organizations ended up leveraged 1000 to 1. Try that in a free market. So you had people who could not afford a house, entering the market anyway due to loans facilitated by these organizations, causing house prices to rise. As the house prices began to steady rise, this then fueled the idea that 'house prices only go up'. This then led to looser and looser loans - the buyers and loan writers could rely on the appreciating house prices as collateral, leading to 'negative amortization' loans, and 'interest payment only' loans.
The sub-prime crash was caused DIRECTLY and UNARGUABLY (assuming basic logic and observation of reality is used) by government actions.
Now to the banking industry. Firstly, the banking industry in the US is as socialist as an industry can reasonably expect to be in a so called 'capitalist' society. The 'money' used by this industry, is created out of thin air by a government organization. This organization ('the Federal Reserve') decides the rate on this money and its quantity, command-economy style. Furthermore, the banks are enormously regulated. There is no more regulated an industry than banking. Following the tech crash in 2000, the interest rate on money was lowered to 1%. At an inflation rate of 3%, this means people are effectively paid to borrow money. Is that capitalist? Is that free market? This provided the fuel for the housing bubble to commence, and all the crazy over-leveraging to occur. When Lehman brothers collapsed, they were leveraged higher than 40 to 1, heavily invested in the housing bubble.
The GFC was CLEAR CUT, caused by socialism. I challenge you to explain how it was not.

2) The bailout was neither necessary, nor right. It's passage should have led to the imprisonment of many many politicians and officials, as well as people in the banking industry. Naturally, the bailout was framed as the government having to save 'the free market' from its reckless self. In reality, they were trying to patch over the massive economic crash they had directly caused themselves, and using a non-existent free market as a scapegoat. They should all be locked in jail for a long time.

 

[Julia]

I don't think you got one thing right in that whole post. Allow me to educate you, since you seem to be all over the place:
1) To claim the GFC was caused by capitalism, assuming you have done your research, is insanity. It is one of the most clear cut and well documented cases of a government intervention induced crash there is. If you look at the specific areas of the US economy that failed first, these were the most regulated industries in the country. These sections of the economy were highly socialist. In the real estate market, the government-sponsored entities known as Fannie Mae and Freddie Mac, were required to provide loans to people who could not otherwise get them (because they could not afford them). This is a massive market distortion - these organizations ended up leveraged 1000 to 1. Try that in a free market. So you had people who could not afford a house, entering the market anyway due to loans facilitated by these organizations, causing house prices to rise. As the house prices began to steady rise, this then fueled the idea that 'house prices only go up'. This then led to looser and looser loans - the buyers and loan writers could rely on the appreciating house prices as collateral, leading to 'negative amortization' loans, and 'interest payment only' loans.
The sub-prime crash was caused DIRECTLY and UNARGUABLY (assuming basic logic and observation of reality is used) by government actions.
Now to the banking industry. Firstly, the banking industry in the US is as socialist as an industry can reasonably expect to be in a so called 'capitalist' society. The 'money' used by this industry, is created out of thin air by a government organization. This organization ('the Federal Reserve') decides the rate on this money and its quantity, command-economy style. Furthermore, the banks are enormously regulated. There is no more regulated an industry than banking. Following the tech crash in 2000, the interest rate on money was lowered to 1%. At an inflation rate of 3%, this means people are effectively paid to borrow money. Is that capitalist? Is that free market? This provided the fuel for the housing bubble to commence, and all the crazy over-leveraging to occur. When Lehman brothers collapsed, they were leveraged higher than 40 to 1, heavily invested in the housing bubble.
The GFC was CLEAR CUT, caused by socialism. I challenge you to explain how it was not.

2) The bailout was neither necessary, nor right. It's passage should have led to the imprisonment of many many politicians and officials, as well as people in the banking industry. Naturally, the bailout was framed as the government having to save 'the free market' from its reckless self. In reality, they were trying to patch over the massive economic crash they had directly caused themselves, and using a non-existent free market as a scapegoat. They should all be locked in jail for a long time.

Top summary. If the free market had been allowed to function in the first place, and governments had kept their ignorant hands off, the global situation would be a helluva lot more healthy now.

 

[Gringotts Bank]

If CEO pay was based upon the share price performance (incl. dividend) it would be quite satisfying for us shareholders! As part owners, that's all we get!

Top jobs generally go to people who can make things happen. Sometimes that's not the case however. I don't like Qantas CEO, and Traheo was a disaster. Half the CEO's of spec mining companies are spivs.

 

[johenmo]

If CEO pay was based upon the share price performance (incl. dividend) it would be quite satisfying for us shareholders! As part owners, that's all we get!

Top jobs generally go to people who can make things happen. Sometimes that's not the case however. I don't like Qantas CEO, and Traheo was a disaster. Half the CEO's of spec mining companies are spivs.

I don't think a super tax would work - the package would be adjusted to compensate.

But neither do I believe that the (disgusting) packages given out are healthy. There are enough examples of those who pop up, get their money and then move elsewhere after doing a poor job. But even worse, to me, are the "entertainers" - primarily sports. A footballer getting millions per year? And the same public that accepts this as acceptable will then mouth off at people like surgeons earning half the amount. And the pitiful amounts earned by paramedics. Society is, I accept, inequitable.

No-one is worth $16 million a year, don't care what anyone says to justify it to themself, when others who contribute just as much or more are earning so much less.

I shall now climb off the soapbox now I have finished my rant.

 

[Garpal Gumnut]

Considering how badly Labor have spent the taxes collected thus far while they have been in Government, I would prefer not to speculate on any further taxes until they have been sent packing.

gg

 

[tothemax6]

No-one is worth $16 million a year, don't care what anyone says to justify it to themself, when others who contribute just as much or more are earning so much less.

Meh, the worlds been there many times before, its not the right way to see things and it never works out well in the end.
The reality is that those people are worth that price to those who pay it. Paying Michael Jordan a few mill to bounce a ball round a court is a bargain for the profit the sports industry gets in return from selling tickets and ads.

 

[drsmith]

Punitive taxation of high salaries goes against the capitalist model of reward for effort.

The problem occurs when emphasis drifts from the advancement of a team or group (no matter how large) towards the advancement of a smaller sub-group or individual. The effectiveness of political leadership is no different in this respect.