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Does Tax Policy Affect Executive Compensation? Evidence from Postwar Tax Reforms

52 Pages Posted: 28 Feb 2011  

Carola Frydman

Northwestern University; National Bureau of Economic Research (NBER)

Raven Molloy

Board of Governors of the Federal Reserve System

Date Written: February 2011

Abstract

The trends in executive pay and labor income tax rates since the 1940s suggest a high elasticity of taxable income with respect to tax policy. By contrast, the level and structure of executive compensation have been largely unresponsive to tax incentives since the 1980s. However, the relative tax advantage of different forms of pay was small during this period. Using a sample of top executives in large firms from 1946 to 2005, we also find a small short run response of salaries, qualified stock options, and bonuses paid after retirement to changes in tax rates on labor income--even though tax rates were significantly higher and more heterogeneous across individuals in the first several decades following WWII. We explore several potential explanations for the conflicting impressions given by the long-run and short-run correlations between taxes and pay, including changes in social norms and concerns about pay equality.

Suggested Citation

Frydman, Carola and Molloy, Raven, Does Tax Policy Affect Executive Compensation? Evidence from Postwar Tax Reforms (February 2011). NBER Working Paper No. w16812. Available at SSRN: https://ssrn.com/abstract=1769510

Carola Frydman (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Raven Molloy

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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