A Tax Response to the Executive Pay Problem
62 Pages Posted: 14 Oct 2011 Last revised: 17 Jan 2012
Date Written: October 14, 2011
Many observers believe that that the public company executive labor market is deficient and results in systematically excessive compensation. This Article accepts that premise and considers potential regulatory responses. Specifically, this Article proposes and analyzes a two-pronged tax response to the problem of excessive executive pay – the imposition of a surtax on executive pay in excess of a threshold combined with investor tax relief. These two prongs respond to the chief concerns raised by excessive executive pay. The imposition of a surtax would reduce the after-tax income of executives, which would directly address the unfairness of excessive pay and the effect of excessive pay on inequality of resources. Investor tax relief would tend to reverse the inefficient distortion in capital allocation that results from excessive pay and would ensure that these distortions were not exacerbated by companies increasing executive pay to offset the surtax.
Keywords: executive compensation, surtgax, tax incidence, managerial power
JEL Classification: G34, H22, H24, J33, K22, K34, M52
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