Soaking the rich. What's the problem?

Great Debates
121

Here’s what I said about this issue in another thread:

First off, can we all (on both sides) drop the insults, name-calling, and motive-assignments? Liberals didn’t categorically fail economics 101. There are very very smart honest well-intentioned economics professors who hold generally liberal views. There are very very smart honest well-intentioned economics professors who hold generally conservative views. Furthermore, the vast majority of people on both sides of this issue aren’t primary trying to maliciously injure the rich or the poor or anyone.
OK, so the question is, or at least has drifted to: is it a good idea to raise taxes on the rich to pay for government spending? (I’m talking about this in a “in 2009 America” context, rather than a purely philosophical context.)

This seems to have 2 general subquestions:
(1) is it ethical/fair to raise taxes on the rich? Is doing so “stealing” or asking them to pay an unfair burden or anything of that sort?
(2) is it economically wise to raise taxes on the rich? Will doing so generate increased revenue with drawbacks that are livable, or will it stifle economic growth and crush the US and the Chinese will use our skulls for soupbowls?
I’ll address them one at a time.
(1) I think it’s a bit tricky to talk about “fair” here, for a couple of reasons. First of all, on a purely practical matter, it’s pretty much fait accompli that we have a graduated income tax, as does basically every other country in the world. So unless you’re one of the few people who are arguing for a totally flat tax (such as Crafter Man), then it seems a bit contradictory to say that the current system is fair, but one where the top tax rate went up would not be fair. More importantly, though, even a “flat tax” is in some ways “unfair”. I mean, what about a REALLY flat tax where everyone paid $10? That would certainly be “fair”. Or a system where you paid as you go, and every single thing was done with road-use-taxes or police-use-taxes or what have you, so you actually paid for the services the government provided? That would be “fair”. My point being, “fair” is really pretty meaningless in this context.

I can come up with some things that would be UNfair: a tax system where the top marginal rate was >100%, for instance. But I don’t think “fair” is a particularly meaningful concept when comparing flat tax to graduated tax to hypothetical-super-flat-tax etc.

So let’s ignore “fair” for a second and talk about ethical. What kind of society is most “good”? Well, a useful way to think about it (I think this has a name as a rhetorical device, I saw it on an episode of The West Wing) is to try to imagine how you want society to be without knowing what rung on the ladder you’ll occupy. Sure, if I know I’m rich, I can selfishly want to lower taxes as much as possible. And if I know I’m poor I can go hogwild screwing the rich (or, to be much more fair to liberals, putting as many programs in place as possible to allow me to learn how to get richer through hard work and so forth) (particularly education) (but I digress). But if I don’t know, then what is going to give me the better average life if I’m inserted into US society somewhere at random: ultra rich rich people who can bathe in pools of champagne and poor people with no net and no health insurance and crappy educations for their kids and no housing; or slightly less rich but still super rich rich people who are stuck bathing in pools of California sparkling wine and poor people whose gets kid good educations, who have access to job training and public transport to help them get ahead, etc. Seems like an easy choice to me. (I’m quite sure that many of you reasonable conservatives are now thinking “aha, a false choice, because in the second case the economy as a whole will suck way more”. Not a prima facie ridiculous comment, and I will get to that in part…)

(2) So does taxing the rich result in economic suckage? Bluntly, no. Top income tax rates have been MUCH higher than they are now and the economy has done just fine. This is not a case where we’ve for 100’s of years had a 10% top income tax rate and some crazed nut is proposing raising it to 60% and people are genuinely concerned that that will destroy the economy. The top tax rate has been up and down and up and down and lately has been WAY down compared to where it’s mainly been, and there have been massive economic booms, and super insanely rich people, during all of those times. People can poke around in those stats and find trends, and I’ve seen them honestly argued in both directions, but it’s absolutely 100% clear that the top income tax rate can be MUCH higher than it is right now at the same time the US economy is doing absolutely utterly fine.

122

You seem to have a reasonable command of the English language, decent typing skills, and better than average spelling.

However, you are spending time on an Internet bulletin board arguing with complete strangers, rather than

  • Teaching a typing class
  • Helping out folks with their English
  • Tutoring children with spelling

You could be doing those things right now. But, you’re not.

Therefore, according to your logic, we should all f— you, Jack Batty (whatever that means) and if you don’t agree to that, you are a greedy whiner.

Yes? No? Pretty straightforward logic…according to you, anyway.

123

Well I’ve got no dog in this fight, but I do tend help people out, usually fellow students, with computer problems. Since I also have a business repairing computers, this ends up being pro bono work.

Although if they make it a habit I start charging. I only have so much time.

Anyway the point being I’m studying computers for love of the profession, not love of money.

I would avoid a doctor who didn’t become a doctor for love of medicine like the plague, because a plague is probably safer. Now it’s a demanding field to get into, and a demanding field to stay current, so they do deserve good pay, and free time for their own sanity, but a doctor who values money over practicing medicine is a bad doctor.

124

Sounds like you’ve made your choice about what’s valuable to you, and your hypothetical doctor has made a choice about what is valuable to him/her.

And you’ve agreed to not conduct business as a result. Fine.

See? See what is possible in a free society? People can choose, or not choose, to conduct business with others or not, as they see fit.

Isn’t that neat?

125

The point of contention, it seems to me, is, should a person have access to any doctor, even if they’re uninsurable or can’t afford it?

Medical care access can be a life, death, or needlessly crippled problem. Therefore it’s a common opinion that society should finance access to medical care. If that one doctor/patient combo don’t want to interact fine, but the patient should have access to a doctor’s care. Following this train of thought the question then becomes “how should funds to finance access to healthcare be raised?”, which brings us to this tax thread.

In other words you can’t get blood from a turnip, if your health is going to fail without treatment and you don’t have money, how do you “choose” to do business with a doctor?

What isn’t an option isn’t a choice, and that’s why your simplified language isn’t reflective of reality. For many their only healthcare choices if something goes wrong is death, or untreated crippling condition.

Not really much of a choice, is it?

126

Right because a global race to the bottom is the answer.

The one advantage America has on this front is that it is still America and people don’t really want to leave for some tax haven, they just want their income sourced in those tax havens. We tax Americans on their worldwide income regardless of where they live. If you remounce your citizenship and move to another country we still tax you on any built in capital gains you realize for the next 10 years.

127

I don’t disagree much with the tone of your post (I am in favor of graduated taxes). However, I’m against the attitude of “soaking the rich” just because they have a lot of money, which is what the OP (apparently) is in favor of.

I’m not holding up the rich as demigods, just people like you and me. My disagreement with your argument is that a Chinese peasant could likely level the same charges at you. Compared to a large percentage of people in this world we are insanely wealthy. Perhaps you should be soaked to pay for roads build in Saharan Africa.

128

You need to understand why execs get paid as much as they do. There are a number of good economists who have studied CEO compensation and why it is the way it is.

Take a company like, say Motorola. They have line engineers working for maybe $80K per year. Fine. Now they need a lead engineer. This guy will be responsible for his team. He still has to do his own engineering work, but now he’s got added responsibilities. He’s got unpleasant non-engineering tasks like direct reports to the next level of management for each employee, employee evaluations, interviewing for new team members, firing people who can’t do the job, etc. Also, he’s generally one of your better engineers, so he’s worth more in the first place. So maybe you pay him $110K.

Now you’ve got four teams on your project. You need a project manager. He’s going to get paid more than the team leads, and has even more responsibilities. He’s also probably going to be asked to travel a few times per year to attend management meetings or meet with customers. He’s the guy who’s getting yelled at if a schedule slips. So you’re going to pay him maybe $150K. Maybe more.

Now you’ve got a Product Manager, who oversees the engineering manager, the sales manager, and others. This guy is one of your best people - decisions he makes can easily cost you millions of dollars. If he makes a bad product decision or gets the manufacturing requirements wrong, he can easily add several months to a project schedule that costs maybe a million dollars a month in salaries. If he makes good decisions, he can make the product worth millions more. So this guy might be worth $200K, maybe $250K. He is going to be on the road all the time, working with customers, attending upper management meetings, etc. He’s expected to stay current on the industry, know the ins and outs of all his competitor’s products, do strategic long-range planning for multiple generations of his product, etc. Much of this will be on his own time, because he’s got more than enough other duties to occupy him during the day.

I know one of these guys quite well. He just got a divorce because he was never home. If he wasn’t traveling, he was working in the office until midnight to catch up on what he missed while he was away. His life is hellish.

So now you’ve got a bunch of product managers. You need someone to manage those people. This person may be responsible for 1000 employees or more, run a budget measured in tens or hundreds of millions of dollars. This person was probably hired from the cream of the crop of the product managers. This person’s probably making $400K or more.

Finally, you’ll have a manger of the division. This person’s not just responsible for the products, but for all the activities of the division. Facilities, accounting, inventory, energy, you name it. In a smaller company, this person would be CEO. Such a person might be making $1 million per year. And we’re not even into the head office of Motorola yet.

CEOs make a lot of money because they’re at the top of a long chain of people, each of which has to make significantly more than the person below them on the org chart in order to entice them to do the job.

Also, by the time you get to the product manager level, other incentives kick in. Stock options, etc. This is done to make sure that the employee’s interests align with the company’s interests. When a person can make a bad decision that costs you $100 million dollars, you want to make sure they have an incentive to make good decisions.

It gets even cloudier than that, because you have the sales force in the mix, and they’re working on bonuses. A top-rate salesman in a technology organization can pull in $500K easily. And you don’t want them making more money than their boss.

Another reason for high CEO pay is known as the “CEO Lottery”. High pay at the highest levels acts as an incentive for everyone below to work harder to try to climb the ladder and get those plum jobs, just like millions of kids work their asses off to get into the NBA, even though only a handful will make it. If NBA members made $40,000 per year, would anyone work their asses off to make it?

So organizations have found that a highly tiered pay structure acts as a strong incentive to hard work and efficiency throughout the organization. If you paid CEOS $500K, you’d have to lower the pay increment between each level on the org chart, and that would lower the incentive for people to move up the ladder, and the organization would suffer. And of course, companies that didn’t do that would attract all the best people who are seeking better opportunities.

The root cause of all this is Pareto’s principle. If everyone were truly equal in productivity, it wouldn’t matter. You could plop anyone in any position, and things would be fine. But in fact, 20% of your people are responsible for 80% of your profit. Efficient organizations are the ones who manage to find the 20% and move them up the chain into positions of increasing responsibility and power. But that takes serious incentives. So 20% of your engineers become your team leads. 20% of your team leads become engineering managers, etc. By the time you’ve gotten to the higher levels, you’ve got people in place who were selected out of hundreds or thousands of other employees, and who have demonstrated their ability to maintain a high level of excellence at each rung of the ladder. Such people are rare, and worth a lot of money to an organization. Therefore, they get paid a lot of money.

It is eminently fair. I find unionized jobs, where everyone gets paid the same regardless of how good they are, to be intolerably UN-fair. I could never work in such a job. The slackers like it, though.

129

Only if you artificially constrain yourself as someone with ‘no choice’. You could cut-and-paste ‘food’, ‘an automobile to drive to work’, or a billion other things into the paragraph above.

We had an FDA discussion a while back whereby a poster (whom I respect greatly) claimed he had a right to canned meat, and therefore if there was only one, unregulated canned meat provider in his grocery store that was not inspected by the FDA, he had ‘no choice’. Therefore, the government had to step in.

You can concoct an infinite number of scenarios whereby you create ‘no choice’ for yourself…and Viola! The government must step in to save the day, presumably by soaking the rich and launching effective, well-run programs with federal employees.

They need to soak the rich, of course, since the $3 trillion of our money they are already spending apparently isn’t enough to solve the particular strawman-of-an-issue created by the SDMB poster.

Slip on a sidewalk on the outskirts of Coos Bay, Oregon and suffer a potentially deadly compound fracture? With only one, privately run ambulance company in town that only takes credit cards? That really leaves you no choice! The government must step in, by soaking the rich.

Get stung by an African honey bee in Cimarron, New Mexico, and (belatedly) determine you’re deadly allergic to its venom? And the only provider of antibodies are two colluding, local pharmacies? You really have no choice! The government must step in, by soaking the rich.

Have an appendicitis attack on a hike near the Porcupine Mountains, in upstate Michigan? Need an airlift to get you the 15 miles back to the trailhead, before the organ bursts and causes death? Hmmmm. There aren’t any such services up there. You have no choice! The government must step in, by soaking the rich.

See? I can do it, too. I can create an infinite number of scenarios where I have made choices that have created, deferred, addressed or mitigated risks to my health. Then I can add a few more exciting elements and presto! I suddenly have ‘No Choice’!

I can even do it for things without medicine. What if poor people in rural areas, who have to drive to work, have car transmissions that break down because they can’t afford the $75 for the filter and fluid change at regular intervals? What should we do? They really have no choice. Let’s create an American for Transmissive Freedom Act, and an associated governing body, to subsidize transmission maintenance for these people. We’ll do it by soaking the rich.

130

Jobs are created by people with the skill to create them. Compensation for those skills drives the process. Take that away, and you take away jobs.

In a free society people are able to move their skills to places that maximize their efforts. I’ve met a number of people who designed and built entire shops from the ground up. I’m talking about the most sophisticated milling machines on the planet. They could just as easily have built a factory in the Philippines and probably will if politicians take away their net income.

131

Sam, to put it politely, you are full of shit. I’ve worked for bigger companies than you have. Guaranteed - I started working for AT&T, the biggest company in the world.
First, it is not true that you have to pay managers tons more than their reports. For one thing, managers come from the ranks, at least at the lower levels. What kind of raise do you think they get when promoted? 50%?
Second, it is not even true that managers get more than their reports in many instances. In the old Bell Labs, MTS salaries had no real top. Many MTS made more than their managers - and not just Kernighan and Richie. I know - I used to do salary administration, and I’ve seen the scatter plots handed out every year.
Third, in many companies the chain from top to bottom has been significantly flattened for excellent business reasons. I work for a Fortune 500 company. I’m an individual contributor now (thank Og) and there are only 3 people between me and the CEO. I am a senior guy - if I weren’t, there would be 4 people. (Our CEOs never got paid too absurdly much, except when our stock was booming and they deserved it.)
Fourth, there are plenty of non-monetary reasons for people to be promoted. In many cases it is ego. Sometimes the payoff is in the long term. The biggest gap down the entire chain is from non-CEO to CEO.
Fifth, this supposed CEO dream is nonsense. I’m glad - that would be like an elementary school kid focusing his life on being an NBA star. Some might, but they aren’t doing anything to help their future. In fact, ghetto kids ignoring schooling, which will help them get ahead, to try to practice their hoops are a big problem, since they are up shit creek when they find they are not quite good enough to even make a college team.
Some people don’t like management, especially second and higher level management. Then, some companies only promote salespeople or marketing people or finance people, so engineers don’t have a shot. (And vice versa for places like Intel.) You think someone working in the IT department of Shearson runs his life to someday make CEO?
I’ve had performance review and clearly planning discussions well over 100 times with my reports, and none of them has ever said that being CEO entered into their plans the slightest bit, and none of them ever acted as if it did. I don’t know if you’ve ever been a manager, but if you have and if your reports were working on being CEO, you’ve had a big problem.
BTW, one guy who worked for me was involved in forming a company, and he wasn’t even CEO of that - not that he wanted to be. Perhaps you’ve watched “How to Succeed in Business Without Really Trying” once too often?
I’ll certainly grant you that the CEO should be the highest paid person in the company. But by how much? When a CEO leaves and the job is taken over by a senior manager who makes millions less, does the company immediately crash and burn? (If it does the CEO sucked at not doing succession planning.) And in many countries and very successful companies - and in ours 30 years ago - there isn’t such a gigantic gap. How do they do it?
I won’t even go into the operations of compensation committees yet again. But consider when this explosion really started. That was when CEO salaries had to be published in order to shame them into not being so greedy. However, as Dan Ariely says, what really happened is that CEOs compared themselves not to others in the company but to other CEOs, and said that not making as least as much as that guy over there was insulting. As Gretchen Morgenson has documented, comparable companies used to help set salaries can be gamed to not be so comparable, or to have worse results than his company. It’s all there if you would take a look at the real world and toss your econ 101 and mgmt 101 texts.

BTW, I am not talking about the CEOs of small companies and startups who are working their asses off for probably less than they could get in big companies. I salute those guys. I’m talking about the ones who get big raises even as their stockholder value goes down, who game the numbers in order to make them and their goals, the ones who Sarb-Ox was written for. I blame the ones who put their company into a hole, and demand higher salaries because they are the only ones who know where the bodies are buried.
I don’t blame people like Bill Gates, who got his money by increasing shareholder
value. (At least I don’t blame him for being rich.)
You should read some behavioral economics. I was pleased to see Krugman coming around last week, and saying that a big reason for economists missing the crash was that they were wedded to their ideal models (on both sides - his too.) Read Thaler and Ariely, and then maybe you’ll see why CEO salaries are explained by your little naive model.

132

Build a better mousetrap, and the world will beat a path to your door. Unless you live in a place with no mice - then you are SOL.

133

I’ve never seen The West Wing but this sounds like a rehash of John Rawls’ Theory of Justice. The rhetorical device I believe is the “veil of ignorance.”

It’s not a very good framework for designing society and has been debunked by philosophers. However, liberals continue to refer to it because it provides sound bites for redistributing wealth.

134

Other countries have CEOs too. In America we pay them many times more than they do. The reason is they determine their own salaries. They load up the Compensation Committee with people they control and the Board of Directors are friends. They do not have to worry about a successful year. They get tons of money, even when the company loses billions. It is a perversion .

135

That’s quite a broad brush you’re painting with. The wage of a CEO is tied to specific financial goals. If the goals are not met then the compensation is not realized and the trend has been going down. The ratio of CEO to Hourly wage has decreased over the last 8 years from a peak of a factor of 525 times in 2000 to 364 last year.

136

I wish that were true. If you were around a few months ago ,you know what kind of compensation the banking CEOs got and they lost billions . They were very unhappy when it was suggested they did not earn their bonuses too. They managed the companies into bankruptcy and huge losses. They should have been publicly fired.
The trend is going down because they were incompetent crooks. Even at that they are much, much better compensation than their counterparts around the world.

137

No; if any American should be soaked for money for those roads it would, again, be the wealthy. They have most of the nation’s wealth and are responsible for the majority of America’s exploitation of the rest of the world. Most Americans are economically closer to that Chinese peasant than they are to Bill Gates.

138

I work for one of the largest companies in the world as well. And I have some experience here just as you do.

You’re right that sometimes there are engineers making more than their managers. That’s because engineers also get paid on ability and some of them don’t want to go into management but the company still needs to pay them what they’re worth.

And no, one promotion isn’t going to move you up 50%. But if you’re the kind of person who gets promoted, you’re probably an ‘A’ employee (or “vital few”, or whatever your company calls them), and have probably been getting raises at least two or three points per year higher than your peers. So by the time you get promoted to management, you’re probably already making 50% more than the lowest paid of your peers, or even more. And if you’re getting promoted because you’re a top salesman or a product manager who produced a highly successful product, you’re probably making a lot more money than your peers in the form of incentive pay and bonuses. So to move you out of that job requires another bump in pay, or the promise of some other form of remuneration in the future.

And if you’ve had direct reports and done employee evaluations, you know as well as I do that there is huge variation in productivity between employees. They are not all equal, or even close to it. Often on a team there are one or two people who are the real drivers - the ones who write the most code, come up with the most ideas, are the ‘go-to’ guys when there are problems that need to be solved NOW, etc. Then you’ve got a bunch of interchangeable guys who can be expected to do the job expected of them, but not much more. Then you’ve got maybe one or two guys that are nothing but hassle. They’re the ones that do the minimum, cause the most bugs, need to be peer reviewed constantly, surf the web when no one’s looking, call in sick all the time, etc.

If the guys at the bottom have to be paid good engineering wages, the guys in the middle have to get more, and the top one or two guys need to be paid enough to keep them happy because they eventually figure out that they could find jobs just about anywhere once they make enough connections and people know what they’re capable of.

Then when you get up into management, the difference is even more stark. A poor manager can lower the productivity of ten people. A great one can keep people focused, create a positive work environment that leads to creative thinking and outstanding products, etc. I’ve been around long enough to see various execs come and go, and the great ones really do have tremendous impact.

As an extreme example, look at Steve Jobs. The day he left Apple, it started to slowly decline. When he came back, Apple had lost over 700 million in the previous quarter. A year later, they were cranking out iMacs and the first iPods, and the company had completely turned around. How much would you say a CEO like Steve Jobs is worth?

139

That’s a not-very-useful response. Care to share with us some of the arguments against it, or against my position in general?

140

Actually it wouldn’t. You are SOL if you focus on being an NBA athlete and fail because those skills are not transferrable to much else. CEOs OTOH tend to be highly educated businessmen. Even if you aren’t good enough to become CEO, you can still do very well for yourself.

And there are, in fact, people who do dream of being a CEO or high level executive. What do you think all those people at business schools like Wharton, Stern or HBS are doing? Studying to be low level corporate functionaries?

For my reports at my Fortune 500 management job, the idea of any of them becomming CEO of anything was as laughable as being an NBA star.

If those reports were CEO material, they would not be working where they work.

Why does everyone think that their annecdotal experience comprises the entirity of the “real world”?