Democrats in Congress recently engaged in some political grandstanding that reveals the typical twisted economic logic of liberalism. They want to tax “excessive” employee pay.
The bill, from Rep. Lloyd Doggett, D-Texas, and Sen. Jack Reed, D-R.I., is meant to stop senior employees from getting huge bonuses that their companies can deduct from their corporate tax bill each year.
Under current law, companies can deduct employee salaries from their taxable income as long as those salaries don’t exceed $1 million per year. Democrats say companies are getting around that limit by paying out millions in bonuses that they also get to deduct from their tax bill.
Doggett said the bill would require companies to pay taxes on those millions in bonus awards.
Yeah, well, maybe first Lloyd Doggett and Jack Reed can explain why it’s any of their business how much a company voluntarily pays its employees. Top talent does not come cheap, and if the shareholders and their representatives on the Board of Directors are OK with paying top dollar, it’s their business and nobody else’s.
“Our tax code has a perverse incentive for companies: the more you pay your executives, the less you’ll pay in taxes,” Doggett said. “It is wrong to compel working families and small businesses to foot part of the bill for lavish executive bonuses.”
This deceptive rhetoric is intended to convey the false impression that the executive incomes are being unfairly subsidized. But in fact, by using bonuses to reduce their tax liability, firms are properly restoring the tax treatment of executive pay as a legitimate business expense. The way the corporate tax is supposed to work is that business expenses are fully deductible–and that should include paying for corporate talent just like any other resource.
Doggett’s objection to the fact that “the more you pay your executives, the less you’ll pay in taxes” is absurd because the same can be said of every other business expense. The more the firm pays its manual laborers, the less it pays in taxes. Does that mean the firm has a perverse incentive to pay its manual laborers too much? No, because any overpayents would have to come at the expense of corporate profits.
Doggett talks about wanting to get rid of a perverse incentive, but his bill would have the opposite effect–it would give firms a perverse incentive to employ less scarce executive talent than they should optimally use. Doggett’s bill singles out executive pay for a special tax that does not apply to other business expenses. That gives firms a perverse incentive to skimp on executive talent in favor of other resources that are taxed at a relatively lower rate. Doggett and Reed propose to get rid of a perverse incentive while actually creating one.
Moreover, if Democrats were really serious about removing perverse economic incentives, they would render this debate about taxing executive bonuses altogether moot by abolishing the corporate income tax altogether. The corporate income tax creates a hugely destructive perverse incentive by double-taxing future consumption.
It works like this. People earn income in order to pay for consumption. People have the option, however, of taking their consumption now, or saving their income to consume in the future. Current consumption is taxed only once, by the personal income tax. But future consumption gets taxed a second time by the corporate income tax.
You save your money by purchasing stock that you hope will pay you a dividend so you can consume more in the future. But before the company can pay you that dividend out of its profits, the profits get taxed by the corporate income tax. So now you’ve effectively paid taxes a second time on the same income you earned originally. This double taxation of future consumption creates a perverse incentive for people to favor current consumption since it is only taxed once. That is, people will save less, which reduces capital accumulation, and lowers the growth and efficiency of the whole economy.
Of course, the Democrats are not serious about eliminating perverse incentives. Doggett and Reed know they can never get this bill passed in a GOP Congress. They’re just engaging in political grandstanding. Sad.