Last Thursday, the day after President Obama announced a $500,000 cap on executive pay at bailed-out banking giants, the banking industry's trade journal celebrated. The President's cap, American Banker exulted, would be “unlikely to have much impact” on banking executive compensation.

American Banker, in one sense, has that right. The new White House cap doesn’t apply to most enterprises getting bailout dollars, and, even where the cap does apply, bankers can still eventually pocket millions in stock awards.

But the Obama $500,000 cap does have symbolic value — and a good bit of it. A President of the United States has sent the message that rewards at the top can sometimes be too titanic to tolerate. That’s a necessary first step down the road toward a more equal, less top-heavy America.

We have, to be sure,  an enormously long way down that road yet to travel. How long? Some new numbers on the nation’s highest incomes, fresh from the IRS, tell the tale. We have that story in this week’s Too Much.

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This past October, in the early days of the global financial meltdown, U.S. Senator Bernie Sanders from Vermont proposed a $400,000 cap on executive pay at bailed-out companies collecting taxpayer dollars. Sanders and two other senators then introduced legislation to that effect — and gained virtually no national media attention whatsoever. But times may be changing. In late January, a week before President Obama’s executive pay cap announcement, Senator Claire McCaskill from Missouri won national news kudos with a Senate floor speech that blasted the “idiots” of Wall Street and proposed a $400,000 bailout pay cap. Last week, on a voice vote the day after Obama’s executive pay speech, the Senate actually approved a $400,000 cap, as an amendment from McCaskill and Sanders to the economic stimulus bill. The cap, if still in place at the end of the stimulus legislative process, will apply to the pay that bailed-out execs pocket from here on out . . .

At least one prominent CEO is pushing back hard against all the bailout pay cap talk, but from a surprising direction. In a widely discussed op-ed last week, Reed Hastings, the top exec at video distributor Netflix, advanced an alternative to CEO pay limits: a 50 percent tax rate on income in America's top tax bracket. The current top rate: 35 percent. Hastings, who took home $2.4 million in 2007, wants the White House to stop “trying to shame” CEOs and start taking “advantage of our success by using our outsized earnings to pay for the needs of our nation.” The last CEO to make a stir calling for a 50 percent top tax rate? That would be General Motors CEO Alfred Sloan, in a 1948 appearance before Congress. But Sloan wasn't asking for a tax hike. He was asking for a tax cut — from the 86 percent top tax rate in effect right after World War II . . .

You won’t find a shopping mall any more lavish than the six-month-old Emporio in India’s New Delhi. Gold-plated ceilings. Atriums with crystal chandeliers. Boutiques offering every top luxury brand on the planet. You probably won’t find a mall any more exclusive either. The Emporio carries an entrance fee that equals, the Birmingham Post noted last week, “about one week’s salary for 80 percent of India’s billion-plus population.” Guards everywhere make sure that no one tries to sneak in without paying up for the $5 entrance ticket. With hundreds of millions of Indians living on less than a dollar a day, sociologist Satish Deshpande points out, India is “tending more and more towards a kind of apartheid, a kind of separation” now “sharply visible in our cities.”

Forbes has just published a ranking of the world’s 10 richest CEOs, as measured by “the size of their stakes in the businesses they run.” India tops the rankings, with four CEOs in the top 10. The United States follows right behind with three. That total would have been four, but casino king Sheldon Adelson has had a rough year. In 2007, Adelson held a $35 billion stake in his Las Vegas Sands Corp., the gaming industry’s biggest nonunion stronghold. Forbes researchers put his current stake in the Sands at “worth perhaps $1.5 billion.”

Paul Pinsky, a veteran progressive lawmaker in the Maryland State Senate, doesn't particularly relish watching CEOs amass billion-dollar fortunes. He relishes even less the taxpayer subsidies that speed the amassing. Pinsky last week introduced legislation, with seven co-sponsors, that will deny companies state tax deductions on any executive pay that runs over 25 times the pay of a company's lowest-paid worker. Pinsky says his legislation gives large corporations a choice — between bankrolling “outrageous” executive pay on their own dime or raising their lowest worker pay. In Congress, Rep. Barbara Lee from California will be introducing similar legislation later this month.

Quote of the Week

“President Barack Obama's pay limit for the CEOs of bailed-out banks was a bold, popular stroke, but it's also a line that can easily be erased or ignored. Only a handful of executives will be affected directly; wider curbs on pay will require Congress to put a lot more muscle behind the president's words.”
David Nicklaus, business columnist, St. Louis Post-Dispatch, February 6, 2009

New Wisdom
on Wealth

Thomas Frank, Wall Street Bonuses Are an Outrage, Wall Street Journal, February 4, 2009. Over-the-top executive rewards create incentives to hide losses, take crazy risks, and even to loot.

Bob Sutton, CEO Compensation Research: Why You Want Rich People to Set Your Pay, Work Matters, February 4, 2009.

Mark Fiore, Wall Street Executive Air. A Web video short that tells the financial industry story with a grin.

Alan Brinkley, Railing Against the Rich: A Great American Tradition, Wall Street Journal, February 7, 2009.

Raymond Lawrence, A Country Awash in Money But Going Broke, CounterPunch, February 8, 2009. A 15 percent infrastructure levy on America's billionaires, this Episcopal cleric muses, could wipe away the state budget shortfalls that threaten schools and health care.

Hope's Audacity Meets Inequality's Enormity

Back in 2006, Mark McGoldrick, a trader with Wall Street investment banking kingpin Goldman Sachs, took home $70 million, a sum that amounted to about $200,000 for every day he labored. McGoldrick, interestingly, actually considered his labors somewhat undervalued. The next year he exited Goldman Sachs to start his own hedge fund. 

How could someone making $200,000 a day feel undervalued? Researchers at the IRS late last month released a set of fascinating data that can help us understand. High-flyers like McGoldrick have indeed been making $200,000 a day. But a sizeable cohort of Americans have been making fantastically more.

In fact, says the IRS, the top 400 U.S. tax returns in 2006 — the year McGoldrick pulled in $70 million — reported an average $263.3 million in income, nearly quadruple McGoldrick’s personal bottom line.

How can someone pocket over $263 million in a single year? Simple. Find a line of work that pays $60,000 an hour. Then work 12 hours a day, seven days a week, for an entire 12 months.

America’s most fortunate 400 don’t, of course, spend 12 hours a day behind some desk working. In fact, precious little of top 400 income comes from actual wages and salaries, just 7.4 percent in 2006.

The income of the super rich comes overwhelmingly from wealth, not work. Capital gains — income from the sale of assets America’s deepest pockets already owned — supplied nearly two-thirds, 63 percent, of the top 400's 2006 income. Many millions more came from dividends and interest payments.

In all, the top 400 reported $105 billion in income over the course of the year. They paid a mere 17.2 percent of that in federal income tax, a smaller share of their income than the rich right below them ended up paying in tax. In 2006, America’s top 1 percent — taxpayers with at least $388,806 in income — paid federal income tax at an average 23 percent rate.

Millions of average Americans actually pay more in federal payroll tax — for Social Security and Medicare — than they do in federal income tax. If you take these payroll taxes into consideration, the top 400 pay federal taxes at a lower rate, as billionaire Warren Buffett likes to quip, than their receptionists.

Buffett isn’t kidding. In 2006, he paid 17.7 percent of his income in taxes. His secretary, who made $60,000, paid 30 percent.

Should we be aghast at all this, at the mammoth concentration of income and wealth that currently sits at America’s economic summit? One conservative think tank, the Tax Foundation, thinks the new IRS top 400 data offer nothing in particular that should alarm us.

The latest IRS top 400 snapshot, a Tax Foundation analysis trumpets, “clearly shows that wealthy Americans are not a static elite club that no one can penetrate.”

From 1992 through 2006, the Tax Foundation goes on to note, only just over a quarter of the high-income Americans who have appeared on an IRS annual top 400 list have appeared more than once. Only eight individuals on the 2006 list also showed up on the 1992 list and every list in between.

The Tax Foundation seems to believe that this “churning among the top 400” should leave us feeling comforted. But let’s go back, before we get too comfortable, a little bit further in time, back a half-century to a quite different American economic scene.

In 1955, America’s top 400 collected on average, in dollars inflation adjusted to 2006 levels, $12.3 million in income each, an amazingly tiny fraction of the over $263 million in average income the top 400 reported in 2006.

Should we dismiss this spectacular increase in top 400 income because no one on the 2006 top 400 list also appeared in the 1955 top 400? Or should we worry about an economy that's generating colossal windfalls at the top while Americans at the middle and bottom are getting nowhere fast?

We do need to note one other fundamental difference between the 1955 and 2006 top 400s, a tax difference. In 1955, the top 400, after exploiting every tax loophole they could find, paid 51.2 percent of their incomes in federal tax, almost triple the 17.2 percent tax rate on the 2006 top 400.

If the 2006 top 400 had paid taxes at the same rate as the top 400 in 1955, the IRS would have collected another $90 billion in revenue. But the IRS didn’t collect that revenue, a reality that left the pockets of America’s richest stuffed with tens of billions of dollars they could use to make their influence felt on the American body politic.

These tens of billions have been piling up in the pockets of America’s richest, year in and year out, ever since tax rates on the rich started plunging a generation ago, with the Reagan revolution.

Our body politic, in every way that counts, still hasn’t recovered.

Unequal Nations, Unhealthy Kids

Eric Emerson, Relative Child Poverty, Income Inequality, Wealth, and Health, JAMA, the Journal of the American Medical Association, Vol. 301, No. 4, January 28, 2009.

Conservative ideologues in the United States love to hoot at bleeding hearts who worry about poverty. These ideologues point to statistics that show the widespread ownership of color TVs and microwaves and argue that real poverty barely exists in America. How can you possibly, the refrain goes, call a family with air conditioning poor?

If you’re not totally destitute, in other words, you’re not living in poverty.

Most serious scholars ignore this babble. They recognize that poverty operates as a relative phenomenon. If you can’t afford to lead a decent life, as your society defines decency, you’re going to feel poor — even if you do own a VCR.

And if your household has less than half a society’s most typical household income, researchers today believe, you likely won’t be able to afford the decency basics. Your children will feel left out, socially excluded.

But does this “relative” poverty actually make a difference? Or is “social exclusion” just some academic artifice? All of us can easily comprehend how utter destitution — hunger or homelessness — can translate into all-too-real negative outcomes. But “relative” poverty? What difference can that make?

A great deal of difference, notes Eric Emerson in this analysis just published in the prestigious journal of the American Medical Association. Children who live in relative poverty, research studies turn out to document, remain far more likely to die young, to drop out of school, to be obese and physically inactive, to be bullied, and to suffer from mental health problems.

Adults who have lived, as children, in relative poverty also die earlier. An “exposure to relative poverty,” relates Emerson, “has been associated” with a long list of deadly ailments, from stomach, liver, and lung cancer to diabetes, coronary heart disease, and alcoholic cirrhosis.

Relative poverty, Emerson emphasizes, doesn’t rise or fall with national wealth. Relative poverty rises and falls depending on how equally a nation distributes that wealth — and power. No nation in the world today has more wealth than the United States. Yet no rich nation does less than the United States, the world's most unequal developed nation, to help poor children.

The workings of the global market currently leave over a quarter of both French and American children below the relative poverty line. But social safety net programs in France, a much more equal nation than the United States, significantly offset this poverty. The French safety net reduces the actual share of French children living in relative poverty from 28 to 7 percent.

In the United States, 27 percent of children live in relative poverty before we take safety net programs into account, a disheartening 22 percent after.

“Child relative poverty,” Emerson pronounces plainly, “is strongly related to overall income inequality.”

And that means that “health professionals and health policy” alone, Emerson sums up, can’t cure the ills that ail poor kids. Any meaningful effort to address these ills will ultimately have to challenge “the willingness of the electorate in democracies to tolerate the existence of inequality and its effects.”

Stat of the Week

People who sit on corporate boards of directors — the people currently responsible for setting executive pay levels in the United States — strongly believe they're doing a fine job on the CEO pay front. In a recently completed survey, conducted by the Center for Effective Organizations at the University of Southern California, 85 percent of board members labeled their CEO compensation program “effective.”

Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org.