Thank you for the detailed explanation of ways in which this works. However, I would really like your thoughts on what would happen if the IRS only allowed $1million to be deducted from the corporate taxes, meaning that the stockholders would be more conscious of the ridiculously high pay many in upper management are receiving. I own some GE stock, and when it was crashing from $50 to $5, and stayed low afterwards, I was outraged to see that the top 7 executives were still being paid between $11 and $22 million well after their pixx poor performance.
I chose the $1million figure because there is a lot of nostalgia for the late 50s and early 60s when top executives only earned about 40 times what the lowest level workers earned. In recent years it has ranged from 200 to 1,000 times the lowest pay levels. So I thought take the target political wage of $15/hr. Multiply it to a years pay and then times 40, and that was around $1million. If everybody things those were such great years, then let them live and pay on that scale.
You really want my opinion? First then I will state that I want a repeal of the 16th and 17th Amendments.
As for executive compensation, I think it is up to the shareholders. I understand your point. I think at least part of the breakdown is that the rise of money management - that is to say 401k funds, retirement funds, index funds etc. You owned GE stock and you get POd to lose 90% of your value while the executives take home $20 million. And I don’t blame you. They have no shame. But, it is a good old boys network. The executives of the funds, the executives at the big companies - I won’t say they active collude but they are all connected by 1 or 2 degrees of separation. Now take some state retirement fund (I live in CA so say CalPers which is the public employee retirement fund) they are invested all over the place in everything. If GE drops 90% they are not happy. But are they going to lead a revolt against management? Not on that basis alone because management is going to be talking them away from the ledge with all kinds of plans and ideas and promises. They don’t want to get internally involved in their investments because it would be fighting many quagmires. Their job is to just decide where to put their money and believe that the right people are in place to manage the companies they are invested in.
I’d say if you took 90% of my value I’d toss your ass out on the door. Someone else might say that person has every reason to work extra hard to get the value back, and is in the best position to know how because he or she knows how/why it happened. And still others might say, if you don’t pay him or her $20 million, s/he’s going to take a job at some other engineering firm (or whatever the hell GE does these days) that will want his experiences and connections. So it’s not all that simple.
In theory you could impose a cap on wages. If we can have a minimum wage we could have a maximum. Or as you said, a high rate on 7 figure incomes. Both, imo, would be very disruptive. If you have time, or over time, check out some of Milton Friedman videos on Youtube. He was a brilliant, insightful and very well spoken economist. The key takeaway though from all of it is that government intervention into the markets inevitable causes the markets great damage and possibly destruction. When it is not your money and you are not personally benefiting from how you spend it, you will spend it recklessly and carelessly because it doesn’t matter to you. This same principle would seem to apply, imo, to the rise of money management firms. They control the shareholder votes and for the most part have little to gain by being disruptive. They probably almost always vote for whatever management asks for, regardless of how poorly management has performed. It’s not their money and they won’t be held personally responsible for losing it.
To the specific question of putting a cap on deductions - it’s the wrong idea. First, the problem with the big multinationals is not the deductions but that they operate in a way to put their profits in the place that offers them the most tax avoidance... like the Ireland example. Write some code and put that code in an Irish corporation. License the code to a dutch company at 90% royalty rate. Thus, 90% of the income goes to the Irish company where there is zero tax on royalty income. They will constantly seek out the best way to structure operations to minimize their taxes.
Mainstream GOP politicians, while I still think they are wrong on many ideas, are at least on the right track. If you put a cap on deductions you are going to limit capital investment. I want to build a new factory. It will cost me $20 million. You tell me I can’t deduct the cost of that factory? Then my incentive to build a new one is much lower. That’s simply bad for economic growth. The GOP has moved to lower corporate taxes and to expand the amount of deductions on capital expenditures. They should get away with the ridiculous amortization schedules. The tax code is absurd. And frankly I think it is immoral to tax wages at all. We humans have to work - it is our nature to work. When we lived in caves we had to work hunting animals and picking berries to provide for our families. Now in the age of paper money we do other kinds of work to pay for our families. To tax that work is imo exactly contrary to human nature. And it leads to all kinds of corruption.
Which isn’t to say I oppose all taxes. Just taxes on wages earned from labor. Some guy who gets paid tens of millions as a bonus or investment capital, I may not consider that to be wages. But money earned working should simply not be taxed at all. Just my personal opinion but I consider it immoral. We should be charitable, that is our responsibility. We shouldn’t be cajoled or threatened into “transferring” our responsibility to be charitable to the government. That just gives us an excuse to not be charitable, less of an ability to be charitable, and almost no decision on what constitutes charity.