Geithner wants to raise corporate taxes

Posted by Marc Hodak on January 29, 2009 under Executive compensation | 3 Comments to Read

Actually, Carl Levin and other congressional democrats want to raise those taxes, and it looks like Geithner will go along.

What?  You haven’t heard any proposals for a tax increase being bandied around by the Obama administration?  Well, no, Obama is not agitating for higher corporate taxes.  Neither is Geithner, per se.  But Geithner did tell Levin that he would “consider extending at least some of the TARP provisions and features of the $500,000 cap to U.S. companies generally.”

That would be a $500,000 cap on the tax deductibility of all senior executive compensation.  Without any exceptions.  At every public company in America.

This policy is nominally intended to penalize firms for paying their top executives “too much,” the premise being that boards can pay their top people whatever they feel like, so if Congress penalizes them for paying over $500K, they’ll think twice about doing so.  Nice theory.

But what if the pay of executives is actually largely set by the market?  What if the market actually values their services at $1 million, or $5 million, $10 million?  Sure, there are many people worth much less, some of whom pass our laws, who can’t conceive or accept that certain people can be worth that much.  But what if that were possibly the case?  Then corporate boards would simply have to pay it.  They would have to, in accordance with their fiduciary duties to their shareholders to secure the valuable talent.  And their shareholders would be left coughing up the tax money.

In other words, the greedy executives negotiating for their out-sized pay packages won’t be the ones penalized by this exercise in congressional outrage.  The companies will, via a much higher marginal tax rate on compensation.  This will not be the first time a congressional bullet aimed at top corporate executives ends up hitting the shareholders.  When it comes to executive compensation, Congress is the gang that cannot shoot straight.

In a time when most sober economists agree that cutting corporate taxes would be the single most effective way to help our struggling economy, it’s ironic that our top economic agent in government, the Treasury Secretary, would basically be supporting higher taxes on corporations.