Thursday, September 26, 2013

Why The Top 0.1% Should Not Pay Any Taxes

Corporate profits in the US are at an all time high, and wages are at an all time low.  The relationship between low wages and high profits suggest that the high incomes of the top 0.1% are coming at the expense of labor.  Some argue that the tax system should be made more progressive so that those earning over $1 million per year pay for a larger share of the cost of government.  Harry Biswanger, who writes for Forbes magazine, turns that argument around.  He argues that those earning over $1 million are so valuable that they should not pay any taxes.  After all they are the job creators in our society.  Without them there would not be any jobs.  Moreover, employees should be paid as little as possible so that the reward system encourages entrepreneurs to work harder and to create more jobs.

Biswanger's argument is a variation on a popular theme in America.  Instead of criticizing the top 0.1% for increasing their share of the national income at the expense of their employees we should thank them by enabling them to avoid taxes.  That argument is popular is some circles because magazines like Forbes employ people like Biswanger to make those arguments.

The entrepreneur who started Business Insider, and who employees 130 people, has a very different perspective.  He views his employees as members of a team that creates the value that makes his enterprise profitable.  He makes it possible for this employees to share in the value created by the team.  Moreover, he argues that we have made a mistake by increasing the share of value going to entrepreneurs, and top executives, at the expense of other members of the team.  As consumers they have less to spend on the products that are produced by our enterprises.  That is one of the reasons for slower growth in America.

This is a link to the video interview of Biswanger.  He takes the view that labor is a commodity that is sold on a market.  It would be foolish to pay a higher than market price for the labor that the firm rents or purchases.  That argument is usually extended to include the top management.  There is a market for top managers and the high prices that are paid for their skills has been determined by the market.  The implication of that argument is management skills have become increasingly rare in the US.  Otherwise the compensation that they receive would not have risen much faster in the US than it has in the rest of the world.  It also implies that the system that corporate boards use to determine CEO compensation is not rigged in favor of the CEO who appointed the members of the board.

Unfortunately, the institutional investors who own most of the shares in our corporations, are more aligned with the views of Biswanger than they are with the founder of Business Insider.  Labor is the largest cost for most corporations.  The easiest way to gain market share and profits is to keep the cost of labor as low as possible.  They have no problem with the CEO compensation system.  It makes perfect sense to pay a few million more for CEO's who will save many more millions by cutting the cost of labor.  The recession has helped to keep the cost of labor low because jobs are scarcer than labor.  The pool of labor has also been increased by globalization.  Consequently, the market for labor has become a commodity market.  The CEO market is bares no resemblance to the market for labor.

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