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A Bad Plan

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Here’s a letter to the Washington Post:

Harold Meyerson applauds efforts to punitively tax corporations that pay their CEOs a multiple of 100 or more of what they pay their median workers (“California’s bid to tax CEOs who don’t share the wealth [2],” May 1).  Beware of such schemes.

Consider two companies.  Company 1 pays its median workers $40,000 annually and pays its CEO $3,000,000 annually.  Company 2 pays its median workers $50,000 annually and pays its CEO $6,000,000 annually.  Yet while median workers at Company 2 are better paid than are their counterparts at Company 1, Mr. Meyerson would punitively tax Company 2 (because it pays its CEO more than 100 times what it pays to each of its median workers).

If worker pay and CEO performance were unconnected, taxes of the sort that Mr. Meyerson celebrates might not pose problems.  But in fact top CEOs are especially good at raising their companies’ productivity and, hence, at raising what their companies can afford to pay workers.  This reality means that Mr. Meyerson, in effect, wants to punitively tax those companies that entrepreneurially pay top dollar for inputs – premier CEO talents – that are critical in raising worker productivity and pay over time.  Such a tax is no way to improve the well-being of workers.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030​