I have several quibbles with this article. Actually, major foundational issues.

When I first saw Piketty’s income inequality chart which you reproduce above……my first thought was “hmmmmmm…that seems odd, like it must have been cherrypicked for a reason. Why not use the GINI ratio, which is the OECD standard for measuring income inequality?”

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Using the GINI index, which was indeed flat during the 1950’s and 1960’s, we see that the slope up in inequality did not correlate with the Reagan Tax Packages, but rather started up in the late 1960’s. The Reagan period simply continued a trend towards inequality that had started long before he took office.

So, if you use the GINI Index rather than Piketty’s more creative “Share of Top Decile of National Income”, the following statement from the above ….

Reagan’s tax cuts kicked up both the GDP and income inequality. Notice in the first graph that income inequality had dropped after the Great Depression until those Reagan years. The right policies can end income inequality. It was done then and can be done again.

….becomes false.

Further, it’s rather difficult to tie anything to the “Reagan Tax Cuts” when in fact Reagan never cut taxes. :-). What Reagan did was cut the marginal rates AND flattened the tax code; the tax shelters that were previously in the tax code that the rich used to lower their AGI’s were removed. The result was a relatively flat environment from the perspective of effective rates, or what people were actually PAYING. To wit:

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Now, the one thing that jumps out at you from that chart is that although the top marginal rate jumps around quite a bit, the effective rates have a tendency to stay quite steady. The 1%-ers paid 22.6% in taxes when their marginal rate was 70% under Carter; when Reagan got finished reforming the system, they were paying 21% on a top marginal rate of 28%.

22.6% to 21% effective tax rate. That’s a cut……but certainly nothing that would drive the inequality through the roof.

What’s even more interesting is if I extend that chart through to current data:

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Again…..even if you take into account a tax cut for the 1% during the Bush years (then restored by the Obama/Boehner deal in 2012, which returned the rich to the Carter/Reagan effective rates), and compare that to the above GINI ratio chart, you see *again* that that top rate on the rich really has very little do with inequality. The top rates have returned to their Carter-era levels….and inequality has continued to rise, as you point out.

Further, one can clearly see how the US tax code over time has become more progressive and beneficial to low wage earners over time. The lowest quintile now pays a substantial negative interest rate (meaning they get back a tax refund greater than withholding)and the same is true for the middle quintile, whose rate has decended from 7.4% under Carter to 2.6% currently; while at the same time, taxes have RISEN to the top quintile and top 1%.

The Tax Foundation’s Scott Greenberg also disputes the notion that today’s 1% er tax burden is unusually low, and thereby disputes the notion that low rates are connected to inequality:

So, in fact, income inequality is a problem that is not connected to tax policy. It is far more connected to systemic factors such as automation, globalization, and immigration policy (Sweden, incidentally, is one of the five or so nations that has experienced a jump in inequality greater than that of the US. The reason is their lax immigration policy, which adds in thousands of low-income immigrants, thus creating a statistical inequality that is unconnected with increases at the top earnings end.)

Trickle Up Economics: The Golden Age Of CEO Pay Yet To Come

Hmmmm. As you point out, very little of exorbitant CEO pay is paid through salary, due to Clinton-era restrictions which made salaries above $1M non-expensable items. The vast majority of CEO pay comes from stock options, which are paid for by the shareholders directly though dilution. So, your own graph does NOT show what you say it does:

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….although CEO pay rose in the Reagan years incrementally, it EXPLODED during the Clinton years, because the Clinton reforms, which were intended to rein in CEO pay as you mention, had the opposite effect; the corporations realized they could actually mint their own money by issuing more shares and giving them to their executives.

And, btw, that was NOT a loophole; it was intentionally designed to be that way in order to align CEO compensation with performance. It worked……very well, far better than the politicians imagined it would. :-)

So, the unintended consequence of wanting to align CEO pay with stock options itself had the unintended consequence of jacking up CEO total compensation, and the unintended consequence of taking an (even more) short term view of the equity markets by the CEO’s, who want to get paid on a stock price bounce.

This is a great case for saying that the politicians should leave well enough alone, and not try to micromanage business for short term political gain. In the large scheme of things, who cares if a few hundred corporate executives have stupidly rich comp packages? Plastic surgeons in Beverly Hills can make millions a year just doing boob jobs, after all. We should be creating policy to help Main Street, not to hobble Wall Street.

A geek point: a stock option gives the executives the right to purchase new stock (treasury stock) from the corporation at a fixed price, say $100 per share. If the share price goes up to $200, the executives can cause the corporation to issue new shares to them at $100.

Well, it’s not that geeky. Keep in mind that the corporation has to eat that spread; you say it like it’s free money to the corporation to issue a $100 strike price when the stock price is at $200, but it’s not free, actually.

However, the more shares issued, the less value of each individual share. The trick is how to get the shares and convert them into immediate cash without causing a drop in the stock price.

Well, that’s really not all that difficult, We’re talking thousands of shares used for compensation, when these corporations have hundreds of millions of shares outstanding. It’s a rounding error; the dilution decreases the stock price by pennies.

With the tax incentives, corporate executives are now highly motivated to take as much of their compensation in stock options instead of salary as possible.

Of course. Want to know how to fix that? Make dividends nontaxable.

How’s that work? Well, if dividends are taxable, then investors don’t really want dividends all that much, depending on the rate at which they are taxed. I would RATHER my corporation drive up the share price with share buybacks, because I can plan my selling when it’s the most tax-beneficial for me.

With dividends, I have no control; I take the tax hit the year they’re issued. That’s bad for me, and it’s bad for my investors (if I run a hedge or mutual fund).

And, of course, the corollary to all that is that I don’t care if my corporation uses stock options to incent the executives. It’s pennies to me, netted out against the dollars I’m making as the stock prices rise due to the buybacks.

Now, what if dividends were nontaxable? Suddenly, I WANT THEM. BADLY. NOW. I start to pay attention to what my corporation is paying the executives, because what they get paid GETS SUBTRACTED FROM MY DIVIDENDS.

(Did I mention how badly I want my dividends?)

So, the fix to both the stock buyback “problem” and the CEO comp problem is dividend taxation. And think of all the senior citizens who would benefit if they knew they could simply buy BP or Chevron and get a nice check once a quarter.

Could the government, with all its advisers: sophisticated accountants, the cream of the crop of economists and the best of Wall Street manning the Treasury Department, not have foreseen such a loophole?

Heh. The real question is if the government’s accountants and economists are smarter than Wall Street’s accountants and economists.

I would answer that with a clear, categorical NO. This is why you want to keep policies simple and straightforward, because the government doesn’t pay accountants and economists enough to get the best. The best go to Wall Street and the consulting firms, because they like to fly first class and eat out at the Capitol Grille when they’re traveling on business. Then, add in the fact that the government guys get political pressure put on them to …..not always do things the “right” way.

Bottom line is that the Wall Street Guys will always out-think and outmaneuver the Government Guys, and the more complicated the policies are, the more they’ll be able to outmaneuver them.

Why are the Trump-led Republicans so keen on giving tax credits to corporations that will use them to benefit executives through buybacks?

I’’m not keen on that at all, and neither are the Republicans. What I/they AM keen on is lowering corporate tax rates so that the traditional engine of growth in the US economy, the small to medium sized business sector, no longer has to pay punitive rates. The fact that some (not all) megacorporations will get a windfall can’t be helped. I am not going to support a 1930’s corporate tax system which penalizes the American worker simply out of spite towards the megacorporations.

They have read the writing on the wall. They know that many of them will not be reelected in the 2018 midterm elections. So they have to do as much damage as they can in the short time they have an office. Soon they will go to executive positions in corporations they have well served and be able to take advantage of all the corporate tax benefits they have created — and translate the benefits into cash through stock option compensation and buybacks.

If you can read minds and see the future that well, professor, please put your skills to better use, and tell us, say, who will win the World Series in 2020, or tell us the stock price of SolarCity at the end of 2019.

That entire last paragraph is biased opinion presented as fact, and sullies your entire article.

BTW, I am U of T ’77.

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