Obama Proposes Higher Taxes on the Wealthy – Some Facts

Introduction

In my last article, I suggested new taxes to close the US government deficit. I also said it is not yet time for austerity: wait for the recovery to gain momentum. I planned to focus in this article on Obama’s plan to impose higher taxes on the wealthy. However, I just learned from an excellent article by G. William Domhoff that most Americans have no idea just how concentrated US wealth distribution actually is. So this article will provide data on income distribution in the US, and I will discuss Obama’s tax proposals in my next piece.

The Distribution of US Income

Income inequalities are greater in the US than in other developed countries, and they always have been. Americans believe one should receive the “fruits of one’s labor”, with little regard for just how much that might be. The feeling is very different elsewhere. Table 1 provides “Gini Coefficients” for a selection of developed countries. A Gini Coefficient of 0 means everyone earns the same income; a Coefficient of 1 denotes total income inequality. Relative to other developed countries, incomes are unequal in the US.

Table 1. Income Inequalities, Selected Countries

Country Gini Year
Sweden 23 2005
Norway 25 2008
Austria 26 2007
Finland 27 2008
Germany 27 2006
Belgium 28 2005
Denmark 29 2007
Australia 31 2006
Netherlands 31 2007
Italy 32 2006
Spain 32 2005
France 33 2008
Switzerland 34 2008
United Kingdom 34 2005
India 37 2004
Japan 38 2002
China 42 2007
United States 45 2007
Brazil 57 2005
Source: CIA The World Factbook

US income inequalities are growing. Woolff finds that while the incomes of all Americans increased 37.1% since 1983, the incomes of the top 1% increased 127.2%. Domhoff reports: “As of 2007, income inequality in the United States was at an all-time high for the past 95 years, with the top 0.01% — that’s one-hundredth of one percent — receiving 6% of all U.S. wages, which is double what it was for that tiny slice in 2000”.

Aggregate numbers can be overwhelming, so in what follows, I focus on executives: idea/entrepreneur executives, hired hands, and bankers.

Idea/Entrepreneur Executives

These are people with good business ideas. Many of them launched their own companies. It is certainly in the American culture that these people deserve all the “spoils” for the risks they took and the effort they have put in over the years. But even here, perhaps we can see shadings of better and worse. In Table 2, I list a number of these people. The total compensation column gives the cash payment received in 2010. The next four columns provide data on the assets the individual has received from his company. And the final column totals the previous five columns.

Table 2. Compensation and Wealth 2010 (mil. US$)

            CEO Accumulated Wealth    
      STK Opt/ Total   Deferred  
    Total Award Equity Lump-Sum Comp. Total
CEO Company Compensation Gains Holdings Pension Balance Assets
Steven P. Jobs Apple 0.0 0.0 1,573.8 0.0 0.0 1,573.8
Warren E. Buffet Berkshire Hathaway 0.5 0.0 46,168.1 0.0 0.0 46,168.6
Steven A. Ballmer Microsoft 1.4 0.0 9,393.9 0.0 0.0 9,395.3
Blake W. Nordstrom Nordstrom 4.3 5.8 100.4 8.5 0.0 119.0
James S. Tisch Loews 5.1 1.2 589.3 16.8 0.0 612.4
Howard D Schultz Starbucks 21.7 24.7 685.8 0.0 88.3 820.5
Frederick W Smith FedEx 7.4 16.8 1,690.7 26.1 0.0 1,741.0
J. W. Marriott Jr. Marriott Intl. 9.6 25.0 2,133.8 0.0 16.8 2,185.2
Lawrence J. Ellison Oracle 70.1 0.0 26,318.4 0.0 10.1 26,398.6

Source: New York Times, “Executive Pay”, April 10, 2011

There is little to complain about how the top three have handled things. Jobs, Buffet, and Balmer have $1.6 billion, $46.2 billion, and $9.4 billion “in the bank”. Jobs is best: his salary is $1 a year, and the New York Times reported he has made no other claims on Apple – no stock options, no stock awards, no pension, and no deferred compensation. Buffet and Balmer are similar to Jobs in “no other claims”, with Buffet taking a salary of $524,000 and Balmer earning $1.4 million annually. I guess Nordstrom, Tisch, and Schultz, all with more than $100 million in the bank, are a little worried about their finances in retirement. So they take annual salaries of $4.3million, $5.1 million, and $21.7 million, respectively.

The last three, Smith, Marriott, and Ellison, all billionaires, are certainly different than Jobs, Buffet, and Ballmer. Ellison is in a class by himself.

Hired Hands

Let us now look at the “hired hands”. These are not idea people or entrepreneurs. These are the bureaucrats brought in to run companies created and built by others. Why do they make so much? Are they better than others that would cost less? No. “Head hunters” work in collusion with corporate boards. The boards fear they will get in trouble if they make appointments that do not work out. Therefore, the head hunters only suggest people that have been CEOs of other large corporations. And when it comes to compensation, have you noticed that 50% of most annual reports/proxies of large corporations are executive compensation reports written by the head hunters? And when new CEOs are hired, he appoints “his” board members, etc.

You think I am exaggerating? Domhoff quotes Edgar S. Woolard, Jr., a retired CEO of DuPont who is now chair of the New York Stock Exchange’s executive compensation committee: “The compensation committee [of the board of directors] talks to an outside consultant who has surveys you could drive a truck through and pay anything you want to pay, to be perfectly honest. The outside consultant talks to the human resources vice president, who talks to the CEO. The CEO says what he’d like to receive. It gets to the human resources person who tells the outside consultant. And it pretty well works out that the CEO gets what he’s implied he thinks he deserves, so he will be respected by his peers.”

Table 3. Compensation and Wealth (mil. US$)

              CEO Accumulated Wealth    
      STK Opt/ Total   Deferred  
    Total Award Equity Lump-Sum Comp. Total Income
CEO Company Compensation Gains Holdings Pension Balance Assets @ 5%
Philippe P Dauman Viacom 84.5 5.9 25.2 0.1 0.4 116.1 5.8
Ray R. Irani Occidental Pet. 76.1 11.2 845.6 0.0 0.7 933.6 46.7
Alan R. Mulally Ford Motor 26.5 9.3 256.3 0.0 0.5 292.6 14.6
Samuel J Palmisano IBM 25.2 18.4 144.1 50.0 56.1 293.8 14.7
David N Farr Emerson Elec. 22.9 25.1 82.2 11.4 4.0 145.6 7.3
William C Weldon Johnson & Johnson 21.6 4.2 41.2 44.9 90.7 202.6 10.1
Louis C Camilleri Philip Morris Intl 20.6 22.7 117.6 49.6 3.1 213.6 10.7
Randall L Stephenson AT&T 20.2 14.3 28.8 38.2 10.6 112.1 5.6
Robert J Stevens Lockheed Martin 19.1 2.4 30.4 17.6 41.2 110.7 5.5
Thomas M Ryan CVS Caremark 15.5 50.3 161.7 58.4 72.7 358.6 17.9
Andrew Gold Schlumberger 14.5 6.5 250.9 10.2 7.8 289.9 14.5
W. James McNerney, Jr. Boeing 13.8 3.8 37.1 32.0 2.2 88.9 4.4
Irene B Rosenfeld Kraft Foods 13.5 9.4 37.5 18.2 9.7 88.3 4.4
Steven R. Loranger ITT 10.1 5.6 23.0 12.9 15.3 66.9 3.3

Source: New York Times, “Executive Pay”, April 10, 2011 

The above are hired hands, all getting salaries of $10 million+ with incentives justified by head hunters and approved by their boards. And how well have these gentlemen done for their companies? Weldon at Johnson & Johnson: how many quality control problems have they had in recent years? McNerney: where is the “Dreamliner”? The final column in Table 3 indicates what these individuals would earn if their assets earned 5% annually.

Bankers

The final group I consider are bankers, the CEOs who ran banks that effectively collapsed, pitching the world into the global recession. How are they doing? Table 4 provides the answer. The table is the same as the earlier ones but includes the TARP bailout funds each bank needed as the final right hand column.

Table 4. Compensation and Wealth (mil. US$)

      CEO Accumulated Wealth  
      STK Opt/ Total   Deferred    
    Total Award Equity Lump-Sum Comp. Total  
CEO Company Compensation Gains Holdings Pension Balance Assets TARP
John G. Stumpf Wells Fargo 17.6 0 62.8 14.1 2.2 96.7 25,000
Vikram S. Pandit Citigroup 0 1.3 10.4 0 0 11.7 25,000
Lloyd C. Blankfein Goldman Sachs 14.1 15.3 408.1 0.0 30.6 468.1 10,000
James E. Rohr PNC Financial Serv. 11.6 4.3 51.3 34.6 6.2 108.0 7,600
Richard K. Davis US Bancorp 16.1 3.2 13.9 10 1.7 44.9 6,500
Richard D. Fairbank Capital One Financial 14.9 0.0 133.0 0.1 10.5 158.5 3,500
Robert P. Kelly BNY/Mellon 19.4 2.7 23.7 15.1 0 60.9 3,000

Source: New York Times, “Executive Pay”, April 10, 2011

With the exception of Pandit[1], nothing has changed for these CEOs. Forget about all the foolish investments and risk taking they supervised, their boards have decided to pay each of them $10 million+ with incentives moving ahead.

The Table does not include Richard S. Fuld, Jr., the CEO who ran Lehman Brothers into bankruptcy. In Congressional testimony, Fuld said a compensation system that he estimated paid him about $350 million between 2000 and 2007 even as the company headed for disaster was appropriate.

The Top 400

While executive compensation might be excessive in the US, the executives covered in this article are not the largest US income earners. According to David Kay Johnston writing in Tax Analysts:

“In 2007 the top 400 taxpayers had an average income of $344.8 million, up 31 percent from their average $263.3 million income in 2006. Their effective income tax rate fell to 16.62%. Most of the income going to the top 400 tax returns is from capital. The biggest source of income was capital gains. Gains accounted for 66.3 percent of 2007 income.

The annual top 400 report was first made public by the Clinton administration, but the George W. Bush administration shut down access to the report. Its release was resumed a year ago when President Obama took office. The Statistics of Income Division at the IRS created the top 400 reports at the urging of Joel Slemrod, a business professor at the University of Michigan.”

Conclusion

I quote from Richard A. Musgrave, my public finance mentor cited in my prior tax article:

“Social philosophies or personal predilection with regard to equality or inequality differ. Yet within certain limits there is likely to exist at any time and place more or less widely accepted mores with regard to certain basic aspects of the problem.”

This won’t work if the public is not informed.


[1] Pandit is a bit refreshing. He said he will take a salary of $1 a year and no bonus until Citigroup returns to profitability. And unlike the other bankers, Pandit has accumulated a “measly” $11.7 million in assets from his bank.

The content above was saved on the old Morss Global Finance website, just in case anyone was looking for it (with the help of archive.org):
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