Section 162(m)

by Don Boudreaux on March 27, 2009

in Intervention,Reality Is Not Optional,Seen and Unseen,Taxes

In the public-choice seminar that I teach this semester at GMU Law, my class and I had a splendid conversation yesterday about Sec. 162(m) of the U.S. tax code. (Most of the splendor of the conversation was supplied by my students, not be me.)

This tax-code provision was created in 1993. It prohibits firms from deducting from their taxable incomes amounts above $1M paid to top corporate executives unless these excess amounts are compensation for meeting performance-based measures.

Want to speculate on the unintended consequences of this Clinton-administration effort to "rein in" executive salaries?!

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Guest

Yes, Don, and let us not forget the triumphant achievement of such legislation as Sarbanes-Oxley, which limited stock option payouts, and (supposedly) prevented option backdating.

Glad we’ve fixed all that.

Since I work in the financial industry, and have forked over ½ of my bonuses for quite a few years now, I’m looking forward to getting paid in ground beef.

Which will be taxed by the pound, no doubt.
Steve

I think the term "unintended consequence" is too much of a euphemism...

if a politician gets drunk, drives and kills someone is that considered an "unintended consequence"?
John V

ha.

figures.
BoscoH

Taleb makes a similar point in this week's podcast. The execs of these firms are compensated with bonuses in years 1 - 9 and have nothing at risk in year 10 when things go bad.

The nefarious part is that the tax penalty ends up being a stigma that costs more than the risk of aligning compensation to the short term. Your company and its execs have to have balls of steel to stand up and take the tax hit on a high base salary. Try pulling that when some PERF shows up at your shareholders meeting demanding divestment from Elbonia and a living wage for seasonal temps.
MnM

Why is that DC doesn't seem to understand that incentives matter?