On Obama raising taxes, reducing CEOs pay

This was a response to a friend's question. I'm curious to see what people think.

My friend's question: I have less than a half-baked economic proposal. Does anyone have any insights as to how it could be improved or why it might not work? Instead of simply raising the taxes on the wealthy to mitigate the disparity between the haves and the have-nots, I propose writing into law (without loopholes) a regulation that restricts the highest paid member of any business or organization to making no more than 50 times that of the lowest paid employee. Currently in the U.S., the average difference between the lowest and highest paid employee is at about 344 times, while in Western European countries the average difference rests somewhere between 25 and 35 times. With such a measure in place, if, for example, a CEO's pay increases, the mail clerk's pay must increase proportionately as well. No longer will the Republicans be able to falsely claim that Democrats want to increase taxes for everyone. Furthermore, it would become far more difficult for Republicans to claim that higher wages would impact the growth and development of business and industry, since the measure would only impact personal wealth. Simply put, the greater the profit margins of a business, the deeper the pockets for all.

My response: It sounds like what you are suggesting is ethical in theory, but doesn’t in fact deal with some the issues we need to address, such as health care, deteriorating infrastructure and poverty, which are some of the main reasons for raising taxes. While your policy reduces the gap between the not-so-rich and the rich, it does not help the poorest part of the population and those who cannot get jobs. True, it will help grow the middle class, but only by pulling people from the top into the middle while keeping the people at the bottom where they are, or perhaps even making them worst off. For instance, a worker at some company might benefit from the pay increase (who wouldn’t otherwise) when the company does well, provided of course, that they are already employed. But how about those who don’t have jobs and can’t get one in the first place? Without higher tax revenues, we would not be able to create programs that help mobilize these people into the work force. And because reducing CEOs’ pay would cut tax revenues, other funds for social services, education, transportation, etc. would be reduced as well.

Obama’s plan of taxing the wealthy is to increase tax revenues in order to provide health care, to repair and maintain infrastructure and to put more money into other services. That is why I think reducing CEOs’ pay is an ethical idea only in theory, but doesn’t help the less-advantaged people in the country.

I would add that the number two reason why this proposal would not work is because it would never be easily accepted by Americans, not only because it violates the core principle of the American libertarian ideology, which treats the market like an individual that must be allowed to run free and wild, but it clearly violates capitalism at its best. Sure not all of us are libertarians, per se, but in theory, many Americans live and pursue this principle whether we know it, like it, condone it or not. Of course, such view can have serious risks and grave consequences. In fact, I believe what we are seeing now is an economy that has pursued that very principle and thus finds itself in this wreck. In spite of that, however, I still believe that the pursuit of freedom is inherently reckless. In the end, I guess my question would not be, What other alternative is there besides capitalism, but rather what kind of capitalism should we pursue?

I am among those who believe that capitalism is only a manifestation of what is inherently built in the human pulse—i.e., the manifestation of our desires, and therefore should rightly be pursued. And as a somewhat romantic, modernist, myself, I believe that desire is our avenue to freedom. When we stop desiring, we mine as well be dead. Well a CEO is a human being like anyone else. The problem with our form of capitalism is that responsibility is not reciprocal between the market and the consumer. Greed is evidently an element from both sides, yet it is still not the whole. Even as I think that immoral behavior should be punished, I think it should be punished by society not by the government. Prison is a societal punishment not a governmental one. The institution is there to facilitate it, in theory of course. So although I am not a libertarian politically, I guess I am one at heart. I happen to believe that the majority of Americans are as well. Let’s face it, Americans don’t believe in government. We believe in an ideology of government, an ephemeral idea of government. Such that, the entity that stands as government now is not an authoritative one, but rather a facilitative one. Limiting how much CEOs can make is authoritative and unjust for that matter. This being said, responsibility should be reciprocal. CEOs need to contribute back to society. That is why taxing them higher is not only fair but responsible.

But my solution, like yours, is also to grow the middle class, though not by pulling the top people down, but rather by lifting people from the bottom up. We can do this by making sure that we properly allocate our taxes, creating innovative programs and jobs, building an economy that is malleable and adaptable, rather than one whose health relies on profiting from externalities. In the end, it’s not about government spending less either, but rather about what it is spending on. This same principle applies to individual Americans as well. It’s not that they should not be taxed, but rather they should stop consuming like pigs and stop being so damn wasteful with their money. Perhaps by doing so, they may actually become richer.

Well, I’m sure I’ve contradicted myself all over the place here, so feel free to rip me apart.

I think it's a great start to the solution. Look at it differently for a minute. The 401k retirement plans that are in affect have done a tremendous amount of good in building wealth for low/middle income workers. The program was put in place so that the executives of a business could create retirement accounts and postpone paying taxes. However, the beauty of the program is that the program must work and include low/middle income workers as well. I've read that for low/middle income wage earners it has more than doubled their potential for wealth building. It's not just their home that contains their wealth, but their 401k plans as well.

Take this philosophy to the income limits of 50 to 1. Now in order for executives to get raises, bonuses, etc. They have to increase the income of the lower level workers. This to me is a great starting point. The issues I have is all workers would make 1/50th of the executives. You have to put more checks/balances into the equation. Also, you must include all benefits (life insurance, cars, bonuses, health insurance) etc. By doing this you would eliminate most of the concerns that you express.

I don't consider this proposal anti-capitalist. I think it fits in well with capitalism. Consider that the government puts laws into place to protect society from the 'excessive greed' of capitalism. Pollution laws are a great example of this. They were considered anti-capitalism but were required to protect society. The same could be said of the 50 to 1 income law. This law would probably eliminate the need for unions, but consider why unions were started and exist to begin with.

I believe very strongly that there are strengths and weaknesses in government and capitalism. Finding solutions that work for both, provides the best solutions of all.

I did not know that the 401K plans were such a sucess, but that makes sense. But I can't tell by your response if you agreed with limiting CEOs pay or if you were in favor of not limiting their pay but raising higher taxes on them.

can make. It sounds good on the surface but you can't enforce that for one company without also enforcing it for others like small businesses where the owner makes 100 thou a year and his employees might only be making minimum wage. You assume that all people who have a lot of money are wasteful. Some people are, yes, but one person's yacht is another person's camping trip in the mountains. I have to admit to being one of those pig like consumers. I do so love my books, music, camping and hiking equipment, and will wear old used clothes, drive an old car and eat out less to be piggish for them.

are wasteful. I was saying that American lifestyle in general is very wasteful. However, that is a whole n'other discussion I would be happy to have with you, but what I wanted to say in this post is that we are in this economic crisis not because of the market and the CEOs entirely, but because of consumer behavior as well. And part of it has a lot to do without how resistant people are to paying higher taxes. I love my books, music and being able to my camping trips as well. But I don't need them as much as I think I do and certainly not at the expense of others. If with the money I save by skipping a camping trip, I pay to taxes that I know will help a few families out of poverty, then I feel thought would be a duty.