Wednesday, January 7, 2009

How A 90% Tax Bracket Would Improve Corporate Governance

Yglesias cites Surowiecki on the incentive structure that our economy gives to Citigroup CEO Chuck Prince:
much of the problem on Wall Street wasn’t that people stopped looking for dragons. It was that even when people recognized the possibility of dragons, they decided it was in their short-term interests (even if it wasn’t in the company’s interests), to run the risk of getting incinerated anyway.
Says Matt, "And, indeed, as best I can tell Prince is still a multimillionaire. Looking back, I think it’s clear that Prince didn’t exactly maximize his wealth with his decision-making. But he didn’t really blunder, either. Nobody’s perfect, and he made out extremely well in the scheme of things."

This reminds me of one of the most underrated reasons for having high marginal tax rates. And I don't mean high as in 45%. I mean 1950s-style high marginal tax rates -- 90% on the top bracket. It forces businesspeople to think about the long-term health of their companies.

Suppose you're a CEO and the top bracket starts at $5 million. If that bracket is taxed at a really high level, discouraging you from even asking for a salary that pushes over $5 million, the only way to accumulate truly awesome wealth is to keep collecting a steady salary of $5 million over time. (I'm assuming in this scenario that we don't give big tax discounts to capital gains as we currently do.) You have to make the sort of decisions that will keep your company in good shape for a long time so you can stay CEO of a thriving firm and keep collecting your $5 million paycheck every year for decades.

But suppose the top bracket is taxed at a much lower level. In this case, you don't need to look after the long-term health of your company to make a huge fortune. You can ride the mortgage bubble hard for a few years and ask for a gargantuan salary, up in the tens of millions, when your bubble-riding has made the profits high. With a low tax bracket, you'll pocket most of it. So what if the bubble pops after a few years and your firm collapses because of your decisions? They can't take all that money away from you.
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