Greed Tax

No one in America seems to understand the transforming effect that the Reagan and Bush tax cuts have had on our country. We occasionally discuss the terrible deficit, which is non trivial, but hardly the most devastating impact that the tax cuts have had on the social fabric of our country. Over the last twenty years America has become a country few of us recognize, yet none of us seem to understand why things have changed.

We used to have a tax code that effectively placed an upper limit on how much a corporate executive or indeed anyone could make in a given year; it was not an outright prohibition, but only a progressively greater disincentive to taking more and more. Reagan in his folksy way frequently told the story about the actor who in a year of great popularity “could not afford to make any more movies” because all the additional income would go in taxes, a stilted exaggeration but not entirely untrue. The top marginal rates of the progressive income tax in this country were once in excess of 90%; for all intents and purposes we had a tax on greed. When an executive got to the top of his organization he had a limo, free use of the corporate Sky Box, honored standing in his community, the respect of his employees (assuming he had any degree of character) and a very nice income. But he had no incentive to suck as much money as he could out of his company, because he knew he would pay almost all of it out in taxes.

Our high marginal tax rate tended to encourage and support stewardship on the part of corporate executives by reducing the temptation to take too much. The system was far from perfect, but in effect we taxed greedy behavior and, as economists and politicians know, if less of something is wanted, the rule is tax it. As the top income tax rate has plummeted from being confiscatory to mild by global standards, the built-in disincentive to greed has vanished. Our former tax structure reduced the need for a tough, comprehensive system of “corporate governance” since the incentive to rip off one’s organization was largely capped by the tax structure. When Reagan’s tax cuts radically changed the incentive structure for corporate executives, board members, under the long established, gentlemanly system of corporate oversight, could only look on with polite acquiescence.