The Law of Unintended Consequences is set to strike again.
Obama et al. want to cap salaries at $500,000 at those companies that receive government “bailout” money. Why, the argument goes, should executives enrich themselves with government funds?
There is some moral force behind this position. Executives at failing companies should certainly not be rewarded for failing. We have all heard stories of CEOs who negotiate themselves ridiculous golden parachutes, which they receive regardless of company performance. The board members who allow such folly are idiots.
Undoubtedly, it is the bidding war for executive talent—the irrational fear that only this person can run the company—that partly leads to bloated compensation packages. Greed of board members who expect the same will be done for them when it’s their turn also contributes.
Some would like to go farther and cap salaries at every public company. This fits in with their idea of fairness. Limiting salaries for the Big Boys and Girls makes them more like us, they say.
Very well. Limit their salaries if you must. You will feel better, at least for a week or two. Until the government looks into its tax coffers and sees a sudden, and immense, drop in revenue.
This is because the top 1% richest people in the country pay about 40% of all taxes. Those 1% include the people receiving the “unfair” salaries. Take away their money and you necessarily take away their ability to pay taxes.
And since nobody will allow a reduction in services, that means the government must look elsewhere to pay itself. That must mean it will look to you. Your taxes will increase.
To be sure, there will be a host of other unintended consequences—the firms that sell or cater ro rich people will see a diminution in income and therefore employees, for example—but an immediate development is that you will have less money. Take from the rich, take also from the middle class, take also from you.
While it is true that some companies have grossly overpaid their executives, it is also the case that these companies, barring government intervention, will fail or do poorly or do worse than companies that pay their leaders rational salaries. Those competitors will succeed and the others will fail. If left alone.
If not left alone, if the government is allowed to meddle by, say, offering failing companies money just because they are failing, then it follows the government can set the terms of its gift. And if the companies agree, then the government has set itself up to increase its authority later, by increasing taxes and thus its control.
This is happening in New York City right now. Many people are thrilled with the idea that Wall Street bonuses have headed south. “Ha!” is the most common emotion. The rich have been screwed and isn’t that nice.
So nice that the mayor has been forced to cut its budget by more than a billion dollars, which is good. But the mayor has also proposed a host of new tax increases, including upping the sales tax which, needless to say, is a bigger bite for poorer people. See, those bonuses accounted for a large chunk of tax revenues, monies which now have to be made up elsewhere.
Thus, while the rich have become less rich, so will the rest of us, but at a faster rate. Perversely, wealth disparity might actually increase.
Let’s end with a cliche: be careful what you wish for.