LibDems Moot Good and Bad Ideas on Wealth and Fairness

As the U.S. debates the “Buffett tax” the LibDem party conference here in the UK is generating a series of proposals to address wealth inequality, from the inspired to the woolly-headed.

Inspired: (not least because it’s so blinking obvious). Danny Alexander suggests hiring more Treasury auditors who are devoted to ensuring that wealthy people who evade tax start paying up. Enforce the law for the wealthy as it is for everyone else. Hard to argue (though some will try).

Not so much: Business Secretary Vince Cable’s suggestion that companies be required by government to report what each individual executive and manager has done to merit their compensation. We have a mechanism that works better than government to punish companies that overpay incompetents. It’s called the free market (Presuming no bailouts, in which case all bets are off and executives can ethically be put on the GS payscale like every other federal worker). How could a government that apparently struggles to get people to pay tax they legally owe make judgements superior to the market on the inner workings of companies, employee by employee, as to whether each person’s contribution was appropriately rewarded? If some idiot executive is overpaid and evades the tax on his bonus, then the public sector should go after him (it’s usually a him) full throttle. But if some idiot executive is overpaid but ponies up the appropriate tax on his ill-deserved wages and bonus, that’s the company’s problem, not the public’s.

Author: Keith Humphreys

Keith Humphreys is the Esther Ting Memorial Professor of Psychiatry at Stanford University and an Honorary Professor of Psychiatry at Kings College London. His research, teaching and writing have focused on addictive disorders, self-help organizations (e.g., breast cancer support groups, Alcoholics Anonymous), evaluation research methods, and public policy related to health care, mental illness, veterans, drugs, crime and correctional systems. Professor Humphreys' over 300 scholarly articles, monographs and books have been cited over thirteen thousand times by scientific colleagues. He is a regular contributor to Washington Post and has also written for the New York Times, Wall Street Journal, Washington Monthly, San Francisco Chronicle, The Guardian (UK), The Telegraph (UK), Times Higher Education (UK), Crossbow (UK) and other media outlets.

16 thoughts on “LibDems Moot Good and Bad Ideas on Wealth and Fairness”

  1. Is this going to be vetted by the government, or merely made available for public scrutiny? Because if the latter, it would be a nice addition of information to the market. Right now (on this side of the pond, anyway), we get numbers for the salaries+bonus of a few leading executives plus aggregates for a larger group, but nothing transparent about how those amounts were determined, or even about the details of the plans under which bonuses are awarded.

    And yes, in a world where salaries are set by anything but arms-length negotiation, and looting of companies by top executives has become anything but rare, it is the public’s problem. Because when a major enterprise goes bellyup after years of being run into the ground for personal profits, the public still ends up footing the bill. Both for any plausible bailout and for the loss of the things that the company once on a time provided to its stakeholders.

  2. Paul says “Because when a major enterprise goes bellyup after years of being run into the ground for personal profits, the public still ends up footing the bill.”

    From that standard something non-plausible follows: that a government (which remember is struggling even to collect legally owed taxes) should be managing all private enterprise which might induce significant public cost if it fails — which I assume would be much if not most of private enterprise. Government simply can’t competently do that, if even it were a good idea to allow the state such enormous control of an economy, what government knows how to prevent bankruptcy and loss across all industries and all sectors in a developed economy?

  3. Keith:

    Had you considered the possibility — I know that it’s hard to believe it could be even conceivable — that even a government that struggles to collect legally owed taxes might be able to take some actions in the regulation of the way firms do business short of complete control that would nonetheless reduce (if only slightly) the odds of running companies into the ground for personal profit? Because over here, for example although the SEC is widely derided as a lapdog, relatively few people suggest that the corporate landscape would be better off without it.”)

    (Along those lines, difficulties in collecting legally owed taxes typically have to do with the funding and the policy remit of the taxing agency, rather than any general characteristic of government quality, albeit it can be difficult to run a government well if you deliberately underfund and/or hamstring the tax authorities.)

  4. In the US, a lot of publicly traded companies have internal oversight and compensation processes that are indistinguishable from criminal conspiracies to defraud shareholders. I suspect the same is true in the UK. I could see some possible benefit from creating a government investigation board, or at least improved regulations to make private investigations more fruitful.

  5. There is nothing “inspired” in the Alexander proposal–he’s merely suggesting that we should return to status quo under the Clinton administration after the Bushies dismantled the audit system and let high-end individual returns and corporate returns slip through unaudited. I’m not sure if the IRS ever had any specific triggers for audits or if, indeed, they were always conducted at random (but not evenly distributed–at one time, high-end returns were more likely to be audited, while the low-end ones received little attention because the potential recovery was minimal). If not, there should be triggers that go into effect if 1) the earned pre-deduction income falls into a particular bracket or 2) the discrepancy between the pre-deduction and post-deduction income falls outside the reasonable range or 3) there are particularly large (relative to income) deductions of one kind or 4) the filer has a history of faulty records. Corporate accounts should all be audited with some regularity–i.e., not necessarily every year, but should average, say, out two out of five (40%) and, if the income reported does not mesh with the size of the corporation (e.g., GE), all returns should be scrutinized. The point of ramped up audit at the high end is not that these files are more likely to be fraudulent, but that their fraud and errors are likely to result in higher recovery (and, potentially, higher penalties, although I’m not convinced that’s such a good idea, especially for good-faith errors). A single high-end audit recovery may well be worth 1000 low-end recoveries, so agents’ time is much more efficiently spent scrutinizing high-end returns. Like I said, I seen nothing particularly inspiring in that. On the other hand, automated scans for simple routine errors should apply equally across the board–no manpower involved in that, so no real efficiency issues (other than server maintenance).

  6. I disagree with the “not so much” part. If the information goes into a public database rather than trigger action by the IRS, that is an application of the free market. It would simply inject information into the market that is otherwise is not available. Had such procedures been in place, we would not have had Adelphia (Rigas), Tyco (Kozlowski), PharMor and WorldCom scandals, although it would not have prevented Enron or bribery scandals. Free market by obfuscation is not free market at all! You’re mistaking mere reporting for passing judgment. Reporting is not judgmental–it’s value-neutral.

  7. “But if some idiot executive is overpaid but ponies up the appropriate tax on his ill-deserved wages and bonus, that’s the company’s problem, not the public’s.”

    Sure, and since we’re talking private contracts, that idiot executive is welcome to work at a standard partnership.
    But once you’re given the exorbitant privilege of limited liability, you’re operating in a different world. And there’s no reason that we, society, they people who GAVE you that privilege, shouldn’t have as much say as we like about what quid pro quo.

  8. We have a pretty good mechanism in place to punish companies that overpay incompetents.

    You are lucky indeed…

    Over here I’ve not heard of one American CEO job that has been outsourced to China. Yet all of us know there are plenty of trilingual, super-astute Chinese executives who would bust their butts 17 hours day for 500 times less pay than a typical American CEO makes. Talk about being lean and hungry company(!). Instead everything that can get outsourced to China, does get outsourced, except for the overpaid deadweight at the top. That bloat never sees the paring knife. Funny how globalization seeks maximum cheapness in all manners. Of course we all know why: American aristocracy, like any aristocracy, can’t handle competition. That’s why they have to collectively spend $20 million a day buying up Senators and Congressman to do their oligarchical bidding…

    God only knows how much more competitive American companies would be if they could outsource the well-dressed, well-fed crap at the top of the company, for some hard-working, ethical, hungry, and frugal Chinese management teams…

  9. A common claim of the apologists for inequality and tax dodging is that stepping up tax enforcement would only encourage more evasion, and ultimately less revenue. It’s kind of absurd. Imagine how many of the same people would take such an approach with other forms of criminality.

    But here’s a question, assuming that logic is chopped. Dollar for dollar, how much would we save per dollar spent on enforcement? Seems like easy money to me. If only petty criminals could be squeezed for as much cash.

  10. My (small) mistake–reading too quickly and missed the part about it being UK. No matter. They followed the same path. And the idea of posting the company tax reports right next to their executives’ pay still sounds pretty good to me.

  11. @ShadowFox: That’s simply not accurate., PM Blair set up the original taxation unit in HMG focused on the wealthiest citizens in the UK and it still exists straight through the current government (It was never undone). The new proposal thus builds on what precedes it rather than being a reversal of recent policy.

    @paul: Good question about who the disclosures are for. I was going by the trial balloons in the morning papers which were released before Cable’s speech and didn’t make this point clear (I posted immediately knowing that all world leaders check in to RBC before finalizing policy proposals). I am against the idea whether it is the government or someone else who acts on the information. If the government requires the disclosures, it has to monitor compliance. That means civil servants have to know all the companies well enough to judge what is an accurate disclosure of who did what at a company. Other civil servants would have to monitor from a personal protection viewpoint (e.g., a bank manager gets a bonus for his great work promoting a gay-friendly environment…he then suffers as neighbors and family members who didn’t know he was gay shun him..does he sue? Should the regs be changed in such circumstances? and we will need more civil servants to monitor that). Assuming against available evidence that if you hired enough civil servants, they could do all that, I still say feh — the opportunity cost is too high, put every one of those folks onto getting the companies and the executives to pay their damn taxes!

  12. Keith: I offer a mild counterexample, just to show you where public/investor attention might usefully be focused. In the US (and in the UK as well, I presume) many executives are awarded bonuses for reaching certain targets in terms of gross sales, division profits, stock price usw. However, as an investigation by one of the major papers found a few years back, well under 10% of companies have provisions in their bonus plans that require a bonus to be relinquished if later accounting restatements show that the necessary targets were not in fact reached. Requiring the details of those plans to be made public would be a huge improvement for accountability.

  13. ShadowFox:

    “I’m not sure if the IRS ever had any specific triggers for audits or if, indeed, they were always conducted at random ”

    I know somebody who was involved with the IRS, figuring out how to spot stated figures which were unlikely. So I’d vote for ‘triggered’.

  14. Keith: “We have a pretty good mechanism in place to punish companies that overpay incompetents. It’s called the free market (Presuming no bailouts, in which case all bets are off and executives can ethically be put on the GS payscale like every other federal worker).”

    The problem here is not so much that companies overpay incompetents but that they still overpay their managers even if competent (executive pay has been rising much faster than pay for regular employees over the past decade). At least part of the reason is that the size of executive pay is not controlled well by the free market and that it’s probably more accurate to say that executive pay is set largely under cartel-like conditions, shielded from market forces.

    There is also the minor issue that a market failure that takes the shape of a global recession may be something that should be avoided regardless because of the harm it causes innocent bystanders.

    That said, I doubt that Vince Cable’s suggestions would have a significant effect. Germany has a system that essentially implements the same things he proposes (executive pay there is determined by a supervisory board, which generally includes some employee representatives), yet average executive pay in Germany and the UK isn’t very dissimilar at the top levels (FTSE 100/DAX companies). And at least how much they’re paid should already be disclosed, based on the Directors’ Remuneration Report Regulations 2002?

  15. Then too disclosure just as often becomes a mechanism to drive the inflationary spiral in executive pay ever higher, because it gives compensation committees cover to raise pay to match or exceed the average paid to other executives. This has in fact created a business for “compensation consultants” to advise corporations on executive pay.

  16. All: Despite the trial ballon mentioned above (in the Independent the morning of the Cable’s speech), it seems to have vanished subsequently — I presume Vince read this post, realized his error and crossed out that part of the speech. Wise man.

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