The most recent issue of NY Mag features a long article about the compensation battles raging between Feinberg and the current CEO of AIG (and the AIG board and employees by extension). Pay regimes mandated by Feinberg are doomed to fail – the traders at AIG can, should, and will go elsewhere if AIG pays them a below market rate for their services. Trying to fix the pay problem at AIG will only work if we fix it systemically. The real question is, do we want to fix it?
As a society, we already make choices about what kinds of work we want to incent and create all forms of financial incentives for our citizens to act in particular ways. We’ve created strong incentives encouraging home ownership and taking on debt by making mortgage interest tax deductible. We incent investment through special tax rates on investment profits (long term capital gains tax). Relative to other wealthy countries, we incent the consumption of gasoline and energy by keeping taxes on them low.
Wealthier people pay more taxes on their ordinary income and the debate on what percentage is right at what income level will rage on – almost certainly forever. But that issue pales in comparison to the societal decision to tax all salary and ordinary income equally. While implementing this effectively would by no means be simple, if even possible, there is a strong argument to be made for taxing a teacher, entrepreneur, doctor, trader etc differently.
We already make a large number of decisions about where we want our resources to go – the problem is that we are making the wrong ones. The US will not be a great country if our incentives tell us to take on debt, make our profits on speculation instead of innovation, and consume energy without taking into account it’s true cost.
Several simple steps to start fixing our problems and reallocating our resources
- Board approved MDs pay no income tax for all income – investments, salary, etc – under $200,000 per year
- Accredited teachers working as a teacher for any educational institution – public or private – pay no income tax on any income earned
- Anyone in the US military pays no income tax on all income up to $100,000 per year
- The cost of the US Military presence around the world is not factored into the cost of a gallon of gas at the pump.Take a percentage of what we spend on defense each year and charge it as a gas tax – the poor will be impacted by this more than rich so grant them an exemption to the tax.
- Dollars spent commuting on any form of public transit are tax deductible; HOV commuters don’t pay tolls
- Companies without profits and fewer than 100 employees or $10M/year in revenue don’t pay payroll taxes. Currently, an entrepreneurial company – such as Oyster - pays the same percentage payroll taxes that Proctor and Gamble pays
- Increase the short term capital gains tax – Profits made from (long term) stock market speculation are taxed at the same rate as profits made from investments by VCs in innovating startups where capital can often be locked for years, if not decades.
- Eliminate the mortgage interest tax deduction. Home ownership is not an intrinsically good idea. Some people are far better off renting.
- Warren Buffet and Bill Gates Sr. have it right – we should aggressively tax accumulated fortunes via estate and inheritance taxes. Fortunes made in the US were made off of the collective infrastructure that US society provides. Wealth should not be passed on from generation to generation as it grows. If we allow it to, we will have our own wealthy aristocracy in this country emulating what exists in Europe with all of its attendant problems.
