The Financialization of America

Your comment that marginal tax rates above 50% are ... really leaves out the entire topic of capital gains taxes. As Warren Buffet is happy to tell you he gets paid $1 a year and the marginal tax rate on that is zilch. And remember that all income of a hedge fund manager (by law - thanks Congress) is capital gains.

Rich people pay capital gains taxes and that is where the discussion of taxes needs to start.

Thirty years ago there was a saying on Wall Street: "Wall Street's only 4 blocks long, but it stretches from coast to coast." What that meant was that if you screwed someone in a deal in the morning, by afternoon everyone on the Street would know about it and you'd have a very hard time ever doing another deal. WS was a hard place on outsiders, but if you screwed someone in the community, your rep was shot and you were toast.

The combination of Reagan's elimination of the top rates and the Maestro's bubble machine changed all that. All you had to do was one big deal, and you kept enough of the $25M, $50M, $100M or whatever to fly off in your Gulfstream to the island you just bought, and everybody else could go fuck themselves.

Result: for the last 15 years there have been legions of 30-something assholes pitching every sort of crap in every misleading way possible. The whole culture has changed. Old-timers hate it because you can't trust anybody's word for anything.

I'm all for raising the cap gains tax and going to 90% on anything over $5Mil/yr.

While I almost always agree with Kevin -- great minds think alike and all that -- we have a few differences. Kevin, you've more than once criticized the idea of marginal tax rates going very high (50% in this post, although I can't recall if you'd named this number or another in the past).

For the life of me, I don't know why you think this. Maybe I missed it, but I cannot recall when you've EVER given anything like a coherent, well-argued reason for WHY a high marginal tax rate is a bad thing. In past postings you've cited emotional arguments, something along the lines that "most people" or "most Americans" "think" or "feel" that anything over 50% or 60% or somesuch is unfair.

But you've never proven that, either as a political fact or as an economic argument.

A poster above notes that as long as we treat capital gains differently from earned income, we will have a problem. That is absolutely true. The almost fanatical Republican obsession with cutting the capital gains rate to zero is one of the most plainly corrupt policies of a generally corrupt Party and ideological movement because -- as has been pointed out so many times -- this would effectively move many, many rich people into the ZERO tax bracket.

But I say that it's not only not enough to start taxing capital gains at exactly the same rates as earned income -- fully integrated into the progressive tax structure -- but that we will NEVER rein in the obscene excesses of Wall Street and corporate compensation generally UNLESS and UNTIL we increase marginal tax rates back to where they were under, at least, Kennedy, if not in fact Eisenhower. Fully indexed to inflation this time, yes, but serious taxation of the rich.

There has been very close to a 1:1 relationship between the effective gutting of the progressive tax code under Reagan, and the skyrocketing corporate salaries and out-of-control greed of Wall Street. The reason is not at all hard to understand: today, when one of these bastards makes $20 million (or $200 million), he gets to keep most of it. They may whine about their taxes, but still there remains plenty of incentive to lard more onto their plates if they can. But back in the 1950s, say, it made almost no sense at all to pay a top executive 300 times what an entry-level worker made ... for the simple reason that after the taxman was finished, the executive would hardly have a nickel more than if he'd been paid a more reasonable 15-20 times what his entry level worker made. And so, for two or three generations, that's exactly what most businesses paid. Neither they nor their compensation boards nor their shareholders could see any particularly good reason to shovel cash from the corporate treasury as transfer payments to the federal treasury. Better that the money be split out and paid as dividends to shareholders, most of whom were NOT in such rarified tax brackets.

I personally believe that the near-destruction of the progressive income tax was perhaps the single most vile, damaging act of the Reagan Era. A direct assault on our American democracy -- by massively increasing the power of the super-rich, pushing us closer to a defacto plutocracy than we've been at least since the Gilded Age. And, also, a direct assault on effective capitalism, too, showed clearly by the massive shift in power from shareholders to top corporate executives. Not that the latter ever lacked power, but at least at one time they were to some extent restrained by shareholders, a fact not nearly so obvious today (I keep thinking about Home Depot's CEO almost single handedly locking out ALL of the company's shareholders a couple of years ago. Would anything quite like that have occurred in the mid-1950s with a Fortune 500 company?).

So, Kevin, I urge you to -- please -- give me some evidence, hard evidence, that a high marginal tax rate really IS a bad idea. More than merely saying "It's politically difficult or impossible," or "It doesn't seem fair." The truth is that the PROGRESSIVE income tax -- complete with high marginal tax rates -- was one of the great accomplishments of the Progressive Movement, and its destruction in the 1980s was an enormous defeat and tragedy for those with progressive ideals.

It's a truism that you can't make any serious money on Wall Street in the daylight, because you can't defend a price premium for a product that anyone can copy.

The solution to reining in Wall Street's size and profitability, and thus as you point out to the Street's ridiculous compensation practices, is to mandate much, much more transparency. No "dark pools," full disclosure of OTC contracts, etc.

The regulatory underlying principle is actually quite straightforward, if potentially complex in its application: all transactions should have disclosure requirements that reveals information to non-party players. That way the marketplace as a whole gets collectively smarter with every transaction.

The whole (Hayekian) argument for markets is that they are the most efficient way yet discovered to aggregate dispersed information from people with an incentive to horde it (or at least no incentive or structured way to share this information). Marketplaces which fail to fulfill this function are not working the way they should, and should be regulated to ensure they fulfill this function.

As Polanyi taught us long ago, the government's role in the economy should not be about picking winners or micromanaging the internal decisions of corporations (including compensation), but rather should mainly be about shaping markets to produce socially optimal outcomes. And mandating transparency on Wall Street is a clear case of what the government should be doing.

And along the way, it will largely solve the compensation problem.