Don’t lower taxes, raise salaries

Let us, for a moment, assume that the anti-tax rhetoric from some parts of the populace reflects real concern rather than mere Libertarian wankery. Now of course, everyone wants to hang on to as much of their earnings as possible, but why is this message so strong right now? Well, for one thing, median wages (measured in dollars/hour worked) have actually dropped over the past four decades.

(Note: If you look at graphs showing total income, they will show a slight rise, but this is because people are working longer hours. In terms of dollars/hour worked, wages have declined.)

Not only has the average worker lost income, but worker productivity has improved, which benefits the business owners. By rights this productivity should at least benefit both parties.

If employee salaries matched their increase in productivity, then people would be making almost 3x their current average salaries. Instead, only around 10% of workers have seen increases in sync with productivity.

It’s understandable then that people would be looking to lower taxes. They need a way to compensate for the lowered income. But turn that around and it’s just a way of saying they want more income. You can achieve the same end by raising salaries instead. Assume someone is paying 30% in taxes and making $1000; they keep $700. If you lower the tax rate to 20%, then they get to keep $800, but you can also give them a $800 take home by keeping the tax rate steady and ensuring they earn $1145.

The question now becomes one of how to raise salaries. It turns out that the money already exists, it’s just going elsewhere.  The past few decades have seen a massive transfer of wealth to the top few percent. In the wage graph above, you can see that the top 10% have benefited from an almost 4x increase in salaries, but that’s not the whole story. For one thing, once you’re at the top of the food chain, salaries are not the only compensation; stock options are a major factor.  A classic example of this are execs like Larry Ellison, Steve Jobs, Larry Page, and Sergey Brin whose official salaries are only $1/year. However, their total compensation is typically far more. In 2010, for example, Ellison earned over $77 million in stock and bonuses.

As you can see be the graph below, CEO pay has done anything but stagnate.

Where the CEO used to be making 20x the average worker, they now typically make 273x. Their salaries have gone up by more than a factor of ten relative to the workers.

It would be easy for Congress to create a tax policy that penalized companies for overpaying executives rather than ordinary workers.  More direct approaches could be considered as well. For example, the Social Democrats of Switzerland presented a ballot measure last year that proposed capping executive pay at 12x that of the average worker. That proposal was defeated, but as less draconian one (50:1 has been suggested) might be more palatable.

Part of the problem is that executive compensation tends to be set by a company’s board of directors, which are made up of — guess what — other executives. How about including the workers in those decisions? Workers might want to think about the benefits of unions.  Here’s one more chart that shows the correlation between the drop in union membership and middle class income.

Given the caveat that correlation is not causation, it certainly indicates the possibility that workers do better when they have representation.


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