Inequality and Executive Compensation: Why Thomas Piketty Is Wrong?
40 Pages Posted: 12 Jul 2014 Last revised: 28 Nov 2014
Date Written: November 25, 2014
A group of economists, among whom the French economist Thomas Piketty, produced a massive amount of data and statistics documenting the level and rise of economic inequality over long periods of time and across several countries.
Making use of this information, Piketty wrote a book, which became the darling of the American, even global, left: Capital in the Twenty-First Century. The book paints a vivid picture of rising inequalities and predicts the inevitable concentration of wealth if States do not adopt radical measures.
In particular, Piketty and his colleagues point to the growth in inequalities in "Anglo-Saxon" countries (especially the United States and Great Britain) due, according to them, to enormous increases in "salary" paid to executives of corporations listed on stock exchanges.
According to Mr. Piketty, this phenomenon stems from the fact that, given current governance practices, executives essentially set their own "salary". As result of the evolution in "social standards" since the Reagan and Thatcher era, American and British corporate executives, asserts Piketty, get lavish compensation without facing opprobrium and social push-back.
The corrective measures proposed by Thomas Piketty are dramatic but politically unrealistic: increase in the marginal tax rate to 80% and a global tax on capital.
Indeed, most of the executive compensation in the form of options or stocks is taxable at the rate applicable to capital gains (15% in the United States) and not at the rate applicable to employment income. As well, the humongous income of hedge fund managers and private equity fund managers, usually defined as carried interest is thus shielded from the personal income tax rates. A significant increase in the tax rate on capital gains (not proposed by Piketty) would have a negative effect on investments and economic growth.
Piketty also proposes a global tax on capital. This proposal, which entails an Orwellian process of disclosure and estimation of assets by all individuals, as well as a transnational sharing of the information thereby collected, has only an infinitesimal probability of being adopted.
Piketty and his colleagues therefore propose two measures, one based on a poor understanding of the dynamics of executive compensation and of changes in the financial industry, and the other on a program that is doomed from the start. However, it is possible to take concrete and effective action to have a clear and significant impact on economic inequality.
Here are ten policy proposals that are within the reach of governments or corporate boards.
Keywords: Executive compensation, Thomas Piketty, Inequality, Financial Crisis
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