Boxing and taxes

Posted by Marc Hodak on April 16, 2010 under History, Unintended consequences | Be the First to Comment

The top marginal tax rate in post-war America on income over $400K was so high that anyone making large, but lumpy income would have a strong incentive to insure that the lumps were spread out across tax years:

The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theaters.  A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965). Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966. You can look it up.

Of course, tax-driven behavior continues to create unintended consequences.  In a lecture I gave today in Switzerland, I pointed out how the U.S. government’s elimination of tax deductibility of salaries over $1 million created a growing shift in the mix of executive pay from salary toward bonuses and equity.  The mix went from about 70/30 (salary versus bonuses/equity) before the tax law to about 10/90.  This change in the mix of pay contributed significantly to the huge growth in total CEO pay we saw in the ensuing ten years.  And that is how American tax policy intended to reduce CEO pay actually led to its increase.

Something about other people’s high pay just drives congressmen a little nuts.

Hat tip:  Marginal Revolution