Compensating the One Percent

Reading the NY Times today, I came across this piece by N. Gregory Mankiw, in which he argues that we are not outraged by the oversized compensation of superstars like Robert Downey Jr. and E.L. James and LeBron James (not related, presumably) because we can see the impact that their singular talents bring to their enterprises, like Iron Man and 50 Shades of Grey.

He then points to the outsized contributions of others, like Steve Jobs, to make the point that superstars exist in fields other than entertainment. Then he cites a survey showing that privately held companies pay their CEOs just as lavishly as publicly held companies, suggesting that the reason CEOs are paid so much is not because of lax board oversight, inadequate regulartion and cronyism, but because CEOs are just that valuable.

FInally, he says, the top one percent pays an effective Federal tax rate of 34 percent of their $400,000+ incomes, while the middle fifth in the income distribution paid just 12 percent, demonstrating thei elite’s greater contribution to society. He likens them to the Avengers, though not out of altruism to they contribute more than their share to advance the public good.

Mankiw’s argument seems to be that because Robert Downey is able to command a huge salary, which seems fair because of the somewhat transparent economics of his relationship with his producers and studio, that other high earners are equally justified earning enormously high salaries. As if a CFO at Yahoo is as hard to replace as LeBron James. And that these high salaries are good for society, since as individuals they collectively pay a higher rate of tax than the rest of us.

This seems to me like a public relations argument. The problem with income inequality is that life and work dynamics are broken. We have more people than there are jobs for them, which forces wages down for those who are easily replaced in whatever job they have. The scandal is that someone can work full time and not be able to afford a basic life, including health care and a nice home and the basic things, like food, without government support like WIC and the earned income tax credit.

While in many cases their employer is booking huge profits, paying scant corporate taxes, and the CEO is taking outsized compensation for engineering the fruits of employee labor away from the employee and to the benefit of stockholders, fund managers and inside executives and their friends.

Talented people deserve to make all the money they can, but it is surely our job as a society to set rules that recognize that the amount of payment a person is able to command is not an absolute measure of their worth. And that our system of laws and taxes doesn’t assist corporate interests make bigger and more concentrating profits while failing to compensate their workers a living wage. In fact, salary/income isn’t anything close to an absolute measure. Our society has set up all sorts of incentives and rewards that accrue to the some and are for the most part unavailable to the rest.

Discussing how this all works and figuring out how to pay to implement the societal support and service we all value (health care, Social Security, police, fire department, food inspections, flight controllers, parks and wild lands, education standards and support, tax collection) is our great challenge today.

Mankiw’s piece seems to be an attempt to foreclose all such talk, and convince us all to applaud the contributions the wealthy make.  The point isn’t that this is totally untrue, but in a system that is clearly out of balance, we need to figure out what services we need and value, and then figure out how to fairly derive revenues to pay for them.

That’s the conversation that needs to be pushed forward.

FWIW, back of the envelope:

A self-employed person who makes $450,000 would pay $150,000 Federal tax and about $15,000 in FICA. State and local taxes vary, so let’s ignore them. Net: $285,000. (Holds onto 63 percent)

A self-employed person who makes $51,000, the median US income, would (according to Mankiw) pay about $6,000 in tax and $7,000 in FICA. Net: $38,000. (Holds onto 74 percent)

(Click to enlarge chart)



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