With tax reform looming as a major priority, it remains to be seen how the nation’s leaders see a way to resolving the county’s income disparity. David Leonhardt, writing in the New York Times, told the story of George Romney, Mitt’s father, who limited his income to $225,000 per year at American Motors at a time when top executives generally felt it was unseemly to pay themselves more than 20 times the average worker’s pay. Today, the ratio is 271 to 1.
Closer to home is the story of my friend’s father who ran a publicly held major grocery chain and similarly limited his pay. When my friend asked his dad why he didn’t pay himself more in line with what other chief executives earned, his father responded, “Look, I started with this company as a “bagger” and worked there all my life. I have thousands of employees. I know what they go through to earn a living. My income is public information. I would be embarrassed to receive the kind of money I know is common in the business world.”
Where are those empathetic corporate leaders today?
Nowhere, if the statistics tell us anything. From 1946 to 1980, the lower 90 percent of Americans based on incomes enjoyed wage growth compounding at 2 percent per year. The lowest 30 percent helped the average because their pay grew by close to 3 percent. The top 5 percent grew by about 2.5 percent. In the period from 1980 to 2014, the tables turned dramatically. The top 2 percent saw incomes compound at about 2 percent while the rest were stuck at about 1 percent. While a few percentage points here and there don’t sound like much, the magic of compound interest changes everything. The difference between one and two percent compounded over 34 years is what helps that executive pay ratio go from 20 to 1 up to today’s 271 to 1.
The figure to watch as we wade into tax reform will be the treatment of estate taxes. Like the canary in the mine shaft, Congress’s talk about ending the “death tax” will indicate they are not serious about helping middle-class America. Of all the taxes we pay, it’s by far the most benign. After all, we reach a “hand out of the grave” to write the check. Yet, a handful of the nation’s wealthiest families had greased Congressional palms, as of 2015, with over $200 million in lobbying fees to make the entire tax go away. If the whining is successful this time around, there goes a trillion dollars over ten years that will otherwise be paid by the middle class — one way or another.
A few interviews so far with administration officials have tried to unearth where tax reform will be heading, and one of those interviews touched on the estate tax issue. Gary Cohn, the president’s head of the National Economic Council was quoted at the time saying, “only morons pay estate taxes” — a quote that reminded me of hotel baroness, Leona Helmsley, when she said, “only ‘little people’ pay taxes.” The point Cohn was making was that estate taxes were no big deal — a trillion dollars isn’t what it used to be, so if it goes away who will care? It will be interesting to calculate how much Cohn and other wealthy administration officials will save if, in fact, the “death tax” gets buried.
There was a time when the highest marginal income tax rate was 91 percent. That’s probably too high — a laughable level when we add a state income tax of at least some percentage. (Your only hope would be to become a real estate developer or oil well owner.) Not to worry. Under President Johnson the rate dropped to 70 percent and Reagan reduced it to 50 percent. Since 1987, it has hovered between 30 and 40 percent.
Tinkering with tax rates creates a lot of political theater, so we can look forward to seeing if changes amount to a rational attempt to balance personal responsibility with paying the county’s bills — or will the politics of selfishness and the battle over loopholes just present us with an exhibition game.
Steve Butler is the CEO and Founder of Pension Dynamics Company LLC. To read past columns and learn more about his book, visit www.pensiondynamics.com and click on resources.
Published at Mon, 11 Sep 2017 14:00:43 +0000