On intended effects

It's certainly a plus to see Stephen Gordon mention corporate governance issues as part of his latest Economy Lab piece. But there are a couple of points that demand far closer scrutiny.

First, there's the disconnect between how Gordon wants to assume executive compensation works as a general rule, and how he observes it working in practice:

(H)igh earners are different. There aren’t many of them, and they have market power that most workers do not. If their tax rates go up, they will try to leverage that bargaining power and obtain a salary increase that at least partially offsets the higher tax burden.

An extreme example of this sort of effect occurred when the UK government imposed a 50 per cent bonus ‘supertax’ on banks last year: banks simply doubled the size of the bonus pool so that after-tax bonuses would stay the same.
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Corporate governance issues certainly deserve closer scrutiny. Again, if properly-informed shareholders are satisfied with executive pay, then it`s not obvious that there’s a policy problem to solve. But if corporate structures are sufficiently opaque as to separate ownership from control, then there may be little to stop insiders from exploiting their position for personal gain.

Now, the supertax example looks to me to be about all the disproof one would need for the assertion that actual compensation levels are proportionate to contributions to a corporation. After all, the employees receiving bonuses weren't contributing any more value to the banks involved as a result of the supertax - meaning that there was no reason based on free-market principles why they should receive an additional dime. And at the very least, one would expect any costs from the supertax to be distributed among the bonus recipients and other actors.

But as Gordon notes, upper-level employee expectations trumped any consideration of institutional benefit. And while that may signal the limitations of personal income tax hikes detached from any other policy changes, I'd think it also serves as a compelling indication that the corporate governance issues demand immediate attention, rather than an off-hand comment.

Meanwhile, Gordon also presumes the futility of top-level tax increases based on exactly the mistake most free-marketers warn us to avoid: a complete focus on how much top earners take home as a matter of envy, rather than attention to wider inequality issues.

Even if we assume that every dime of any personal income tax increase will be passed along to shareholders and employees, that doesn't negate the fact that more money is indeed being collected in taxes through the personal income tax system than would be gathered through other taxes applicable to those actors (whose rates have been slashed in the name of promoting business interest). And so the worst we can say about a high top-level personal income tax is that it's not clear how much will actually be redistributed from the absolute top end into public coffers, and how much will instead come from the not-quite-top end.

Which means that even on Gordon's account, there's reason to think a tax targeted toward top-end income earners would indeed both reduce inequality, and provide added funds for social priorities. And if the worst-case scenario is to shine a spotlight on executive capture of wealth which leads to corporate governance being dealt with more seriously, then that's hardly a result we should want to avoid.

[Edit: fixed wording.]