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||May 17, 2010|
Conservatives in the United States and Britain have been marching, in lockstep, for over three decades, pushing a variety of almost identical comfort-the-comfortable policies that have made their nations two of the most unequal in the world. But the marchers may now be headed in somewhat different directions.
In the UK, the Conservative Party has just gained a parliamentary majority, but only after agreeing, as one analyst notes, “to ditch a few of their ugliest policies — like giant inheritance tax cuts for double-millionaires.” British conservatives are even swallowing “considerably higher taxes” on capital gains, the income the wealthy reap from selling stocks and other assets.
Meanwhile, in the United States, conservatives are busily blasting any move to end the Bush-era tax cuts for America’s richest. The nation, they’re warning, remains weighed down by a horrific tax burden that threatens to beggar us all.
This week, in Too Much, we examine this claim — and sneak a look at another bizarre delusion of our time, that top CEOs somehow merit their vast fortunes. The British may be stepping into a new era. We still have a way to go.
Too Much online
|GREED AT A GLANCE|
The gap between the rich and everyone else is growing in the United States. The gap between the rich and everyone else is growing in China. The difference? In China, growing inequality seems to have people really worried. China will face “unimaginable consequences,” the Chinese Economics Research Institute’s Yang Yiyong warned last week, “if nothing is done to stop the trend.” China’s most affluent 10 percent took home 7.3 times the income of China’s poorest 10 percent in 1988, adds Beijing economist Li Shi. The margin in 2007: 23 times. Executive paychecks, meanwhile, are now running 128 times the average Chinese worker wage. Says Zhang Jianguo of the All-China Federation of Trade Unions: “It is urgent to reform the current income distribution system in China.”
If U.S. top execs were making 128 times more than average workers, they would have taken home $5 million in 2009. In fact, says a new Associated Press pay survey, the typical big-time U.S. CEO actually pulled in $7.2 million last year. But that total, the AP cautions, vastly undervalues the option windfalls top execs pocketed in 2009. One example: Ford Motor granted CEO Alan Mulally options to buy five million shares of Ford stock a year ago March, a point in time near the stock market’s meltdown nadir. Ford, in its official pay disclosure, valued these options at $5 million. But the value of Mulally’s 2009 options now stands at about $48 million, and the options he collected in 2008, initially valued at $9 million, currently figure to clear Mulally a $21 million payday. Observes David Wise, a Hay Group management consultant: “The dirty secret of 2009 is that CEOs were sitting on more wealth by the end of the year than they had accumulated in a long time.”
“Hedgies can have big hearts,” a reporter gushed last week after the hedge fund industry helped raise a record $88 million for the homeless at the annual Robin Hood Foundation dinner, Wall Street’s single biggest charity gala of the year. Over 3,600 hedge fund managers, private equity execs, and bankers attended the affair and cheered lustily when the dinner’s take broke the event’s $72.7 million record set last year. Marveled Robin Hood Foundation co-founder David Saltzman: “I’m bowled over by people’s extraordinary generosity.” Saltzman must be fairly easy to bowl over. In 2009, as the top hedge fund trade journal revealed last month, the 25 biggest hedge fund earners collected a combined $25.33 billion. The $88 million haul for the homeless at last week’s gala amounts to less than the over $100 million the hedge fund industry’s top 25 took in, on average, each and every business day in 2009 . . .
Wall Streeters may take home, in 2010, even bigger windfalls. In the year’s first quarter, reports last week indicated, Citigroup, Bank of America, JPMorgan Chase, and Goldman Sachs each went the entire quarter without a single day of trading losses, the equivalent of a baseball “perfect game.” Who deserves the credit? Maybe the Federal Reserve. Thanks to the Fed, notes a Bloomberg analysis, big banks can borrow at close to zero percent and profit sweetly simply by investing what they borrow in super-safe government notes that yield between 3 and 4 percent. How much do bankers stand to profit if they continue their “perfect game”? In 2009, a year that saw the big banks actually post losses on one of every five trading days, Wall Street bonuses alone totaled $20.3 billion, over double New York's expected state budget deficit this year . . .
Submarines, reports Forbes, aren’t just diving anymore. The latest subs use wings to “fly” through the water, down a thousand feet and more. Billionaires, says submarine designer Graham Hawkes, find all this irresistible. The latest model from his sub design firm, the two-passenger Deep Flight Super Falcon, has become a hot new deep-pocket craze. Noted Hawkes last week: “These machines give their owners capabilities that no one else has on the planet.” The cost? The new Super Falcon carries an eminently reasonable $1.3 million price tag. Guests on billionaire Richard Branson’s private Caribbean island can rent his branded version of the new sub for just $25,000 a week.
Quote of the Week
“Reducing the concentration of wealth would combat the political instability that results from too few owning too much.”
Stat of the Week
California’s race for the Republican gubernatorial nomination will likely become the most expensive primary race ever. Front-runner Meg Whitman, the former eBay CEO, has already shelled out $59 million from her personal fortune. The “underdog,” black belt-karate computer exec Steve Poizner, has so far expended $17.7 million out of pocket. Current governor Arnold Schwarzenegger, meanwhile, has just unveiled a new state budget that axes most state day care funding for low-income families.
|inequality by the numbers|
'Overtaxation': Our Phoniest Problem?
Friends of the financially fortunate are trying to turn reality upside-down — and save our undertaxed rich mega billions in the process.
Taxes on the wealthy in the United States run low. Many wealthy Americans want these taxes to run even lower. But the American people, for some strange reason, have never rallied around candidates who champion tax cuts for the richest among us. So rich people-friendly politicos do the next best thing. They champion tax cuts for everybody.
But this approach can prove problematic, too. Across-the-board tax cuts for everybody, the rich included, can quickly end up gutting the revenues that fund the public services average Americans depend upon and appreciate.
How do friends of the fortunate sidestep this inconvenient reality? They wildly exaggerate the tax burden that falls on average Americans. They endeavor to convince America’s non-rich majority that we’re deeply and terribly “overtaxed.”
Last week brought two new data dumps that challenge this “overtaxed” claim. One compares what U.S. taxpayers pay now to what they used to pay in years gone by. The other compares tax bills in the United States to tax bills elsewhere in the developed world.
The two analyses, in the end, tell the same tale: Any candidate or lawmaker who calls the United States “overtaxed” is running interference for America’s rich.
The first new analysis — from the U.S. Commerce Department — shows that total income, property, sales, and various other taxes together equaled 9.2 percent of all U.S. personal income in 2009, the lowest such rate since 1950.
The second, an analysis from the industrial world’s official economic research agency, found that the average married couple with two kids in the United States has a tax burden one-half the size of the comparable average family in the developed world as a whole.
This second analysis zeroes in on what the Paris-based Organization for Economic Cooperation and Development, or OECD, calls the “tax wedge,” the difference between what an employer has to spend to employ someone — both in wages and the employer’s share of social security taxes — and what that employed person actually nets, after taxes, in take-home.
In 2009, for the developed world as a whole, the “tax wedge” — or, more simply put, the tax burden — stood at 26 percent of the employment costs for average-wage couples with two children. In the United States last year, that average family tax burden ran 13.7 percent.
Only five of the nations the OECD tracks had a lower tax burden than this U.S. rate. Twenty-four had higher.
The bottom line? By any rational historical or global standard, we don’t have an “overtaxation” problem in the United States.
Our problem lies elsewhere. We have an undertaxed rich. Under current U.S. tax law, the wealthy in the United States don’t have to pay much in taxes. Even worse, they don’t even pay what they owe.
Another reminder of this systematic shortchanging of Uncle Sam emerged last week — from the independent panel that Congress created in 1998 to monitor the IRS. According to the latest available figures, this IRS Oversight Board notes in its new annual report, $290 billion a year in taxes due is going uncollected.
Not all of that, to be sure, reflects tax evasion by the rich. But tax evasion by the wealthy represents an oversized share of that gap. In 2008, one study broke the IRS “tax gap” data down by income level and found that Americans making between $500,000 and $1 million a year were underreporting their incomes at triple the “misreport” rate of taxpayers making between $30,000 and $50,000.
What’s the IRS doing about all this? The Oversight Board sees some promise in recent IRS action. The agency, notes the Board, “initiated a major effort in 2009 to identify taxpayers who were hiding money in offshore tax jurisdictions.”
As part of that effort, the UBS Swiss banking giant has agreed to turn over the names of 4,450 U.S. taxpayers who had been stashing dollars in secret Alpine accounts. And 14,700 U.S. taxpayers have agreed to reveal details on their own offshore accounts after the IRS set up a voluntary disclosure program.
Data from these 14,700 affluent taxpayers, says the Oversight Board, will hand the IRS “a wealth of information to mine for future enforcement efforts.”
Unfortunately, on the audit front, the IRS doesn't seem to be moving with the same sense of urgency. Close examinations of high-income returns remain relatively rare. The exam rate for taxpayers making over $200,000 a year has essentially remained flat for the past three years, hovering around 2.9 percent.
And the IRS still lacks an up-to-date sense of how much in taxes America’s rich are evading. The $290 billion “tax gap” estimate the IRS Oversight Board cited last week comes from data collected way back in 2001.
This failure to update the tax evasion stats, notes the Oversight Board, makes it “difficult, if not impossible, for the Oversight Board, the IRS, or any other member of the tax administration community to determine with any degree of certainly that the IRS is making progress in reducing the tax gap.”
We need that progress. In troubled economic times, we need that money.
Philip Rumore, Call for pay freeze ignores the reality of Buffalo schools, Buffalo News, May 12, 2010. Society's choice: Squeeze teachers or tax the rich.
Citizens for Tax Justice, Extending Bush Tax Cuts for High-Income 'Small Business' Owners Would Further Enrich the Wealthiest Taxpayers, May 13, 2010. Why we need to avoid creating a backdoor to tax savings for the mega rich.
Red McCombs blasts CEO pay, Austin News (KXAN), May 14, 2010. A Texas billionaire business legend says government now needs to step up and rein in executive pay.
Dalya Alberge, Gordon Gekko at Cannes, Wall Street Journal, May 14, 2010. Filmmakers stunned by our "exponentially growing accumulation of wealth" are about to release a torrent of new films about Wall Street.
A Home Run of a Smash Against CEO Excess
David Bolchover, Pay Check: Are Top Earners Really Worth It? Coptic Publishing, 2010. 150 pp.
David Bolchover, a widely published business writer, likes sports. He follows sports all over the world. He can wax knowledgeably about American football, European soccer, and Indian cricket.
Bolchover puts all this expertise to good and witty use in this spirited new book, an engaging attack on the enormous treasure that has, for three decades now, been cascading into corporate executive pockets.
What has sports to do with these lavish rewards? Maybe everything. The case for our CEO pay status quo, as Bolchover rather convincingly details, rests on the assumption that top executives, just like sports stars, possess an irreplaceably rare talent that enterprises must reward prodigiously — or face sure doom.
The best way to shatter the sheer nonsense of this “talent” defense? We need only compare our corporate world with the world of sports.
In sports, we can readily rate individual performance and how well that performance contributes to team success. In large companies, by contrast, we face “the near-impossibility of measuring individual contribution.” A firm, Bolchover notes, may perform well “despite its leadership, not because of it.”
This contrast between sports and business, Pay Check suggests, can help explain why we never hear sports figures make the case that they “deserve what they earn because they need to be properly motivated, or because they work exceptionally hard, or because they work under pressure, or because their reputation is at constant risk.”
CEOs, on the other hand, regurgitate arguments like these on a quite regular basis. Why don’t sports stars? They don’t suffer, says Bolchover, “from the same deep-seated insecurity borne out of a lack of clear measurability of personal value.” Sports stars simply have no need for "tortured justifications.” Unlike CEOs, they have talents “both clearly valuable and extremely difficult to replace.”
Bolchover gets at the same point with a fascinating discussion of Faking It, a popular British TV show now broadcast worldwide. In Faking It, the show’s producers take a volunteer from one walk of life, give that volunteer a four-week crash course in another field, and then have the volunteer compete against three veterans from that new field before a panel of expert judges.
These judges are supposed to identify which of the four competitors is “faking it.” But, sure enough, they routinely fail. Bolchover, building on this history, asks us to imagine a Faking It-style exercise with sports stars and CEOs.
“If a fit, very tall, young man who played some basketball in his spare time was asked to play for the Los Angeles Lakers,” the author asks, “do you think he would be more or less able to ‘fake it’ once he stepped onto the basketball court than would an intelligent, well-educated, 52-year-old white male asked to perform the role of a chief executive?”
Similar insightful — and delightful — analogies appear throughout the pages of Pay Check. Bolchover takes on, at one point, the financial industry claim that “rain-making” bankers who have brought in $20 million in new business surely deserve at least a few million of those dollars in bonus.
“What does ‘brought in’ mean?” Bolchover wonders. “Can we attribute that revenue specifically to one person? Would that banker have ‘brought in’ $20 million of revenue if he had been working on his own, or for a company relatively unknown in the marketplace?”
And since when, Pay Check adds, do we pay people more money because they deal with great sums of money?
“Nobody seems to be suggesting,” Bolchover quips, “that cashiers in high street banks get paid large amounts of money because they handle it all day, or that successful shoe salesmen get given a mountain of shoes.”
Bolchover’s antennae, unfortunately, fail him on questions broader than the reasonableness of executive pay. He remains convinced that some people — sports stars and especially entrepreneurs who start their own companies — truly do deserve to become “extremely rich.” Their riches, he believes, can even be “very healthy” for a society. All evidence, of course, points to the exact opposite.
Bolchover quite rightfully dubs corporate executive pay “an elaborately constructed theft, the results of which are hugely damaging to society as a whole.” But we can say, and should say, the same for all grand concentrations of private wealth, in sports or anywhere else.
So take this book with a grain of salt. You don’t have to swallow it whole. Just learn from — and enjoy — the delicious demolition of corporate executive pay you’ll find in these pages.
|About Too Much|
Too Much is published by the Institute for Policy Studies: Ideas into action for peace, justice, and the environment. 1112 16th St. NW, Suite 600, Washington, DC 20036. (202) 234-9382. E-mail: email@example.com. Unsubscribe.