Monday, November 23, 2009

Wall Street Salaries Are Too High

Everybody is talking about Wall Street salaries being too high, but this article in the Washington Post by the organization that runs the Rhodes scholarship program is what put me over the top. He says that the huge differential between business salaries and public service or academic pursuits is pushing more and more Rhodes scholars into the business and financial world, which means that a big percentage of the America's best talent is going to one place, and areas that need the best people -- to keep us out of war for example -- don't get any.

Something needs to be done. I don't see how you can regulate salaries in general to get at the huge salaries in business and finance, although a very few are being regulated under the bailout program. The problem is really the huge gap between them and everybody else, even including doctors and lawyers, according to the article. So, I propose a huge tax on huge incomes. It could start at say $1 million annual income. Increase the marginal tax on income over $1 million at something like 50%. Then maybe tax income over $10 million at 70%. Annual income over $100 million at 90%. These rich people will have so many loopholes, deductions, credits, etc., that the actual net tax on them will be much lower.

In addition, to level the income gap, there should be less preference for income generated from financial transactions and activities. Capital gains and dividends should be taxed at a higher rate. One old justification for lower capital gains taxes was inflation, but there is no inflation anymore. Another argument is that low capital gains taxes encourage innovation and entrepeneurship. Okay, but limit that advantage to income that actually comes from innovation. Give the break only to those who fund startups. There shouldn't be a lower tax for people who buy IBM or Walmart today and sell it for a profit in a week or even many years later; they didn't create IBM or Walmart.

Similarly, an argument for dividends is that corporations already pay income tax, and thus dividend income is taxed twice. But like rich individuals, few corporations pay anything like the full corporate tax (35%?) on their full gross income. They have many credits, deductions, writeoffs, etc. You could also tax the first relatively small amount of dividends at a lower rate, to encourage investment by individuals, but tax dividends at a higher rate for individuals who receive more than $10,000 or $20,000 annually in dividends.

It's easy to tax people who earn a salary, but difficult to tax people's income from business and financial activities. Thus, you can be pretty sure what an average worker's gross income is, but it's much more difficult to know for someone involved in business and finance. That argues for even higher taxes on the rich, because they will evade taxes anyway.

The recent dust-up about people who were hiding money in secret bank accounts overseas and not paying taxes on the income is just one example of the problem.

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