Time for a high income super tax?
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Should governments regulate executive pay? Well, there’s regulation and there’s regulation. The fashion in executive pay regulation for most of this decade has focussed on shareholder votes, either binding or non-binding. “Say on pay” started in the UK, and the Howard Government was a reasonably early adopter here. Sweden, Norway and the Netherlands went down a similar route, although the latter two went for binding shareholder votes. An effort by up-and-coming Illinois senator Barack Obama and Barney Frank to introduce non-binding votes in the US remains mired in the US Senate. In November, Malcolm Turnbull proposed that we shift to binding votes here. Yesterday Lindsay Tanner sounded sceptical about it but didn’t rule it out. Both the Government and the Opposition talk big on executive remuneration but don’t seem in a rush to do anything serious about it. Given non-binding votes have been available in Australia for four years, the current level of outrage suggests they have not acted as a restraint on executive remuneration. And in fact there’s a school of thought that argues greater disclosure and/or non-binding votes act to increase remuneration levels. But there needs to be a good case for governments going beyond the current shareholder-focussed approach (Adam Schwab discusses termination payouts here) and directly intervening in remuneration issues, which in effect amounts to interference in private property. Regulation is rarely cost-free and can lead to perverse outcomes. The Australian Shareholders’ Association maintains shareholders are best placed to keep pay in check. But perceived excessive executive remuneration, particularly at a time of rising joblessness, when business is seen as failing to provide its principal benefit of employment, will have long-term effects. Eventually political opportunists will try to take advantage of public anger, or governments will be forced to embrace ill-considered positions. It has already happened with gambling, which is why we have a populist like Nick Xenophon holding a swing vote in the Senate. What’s the bet Pauline Hanson raises this issue in her latest attempt to enter public life? Nor is it always the case that shareholders’ interests align with those of the community. Just ask anyone whose shares have gained in value because the company announced sackings. And the arguments against regulation don’t stack up. The evidence is very mixed on whether large bonuses lead to better company performance (try here and here for starters). The financial crisis has undermined — or more correctly blown away — the notion that high remuneration is essential to attract top international managerial talent, since the pacesetters in remuneration, the US and the UK, were at the very centre of the crisis and some of those countries’ highest-paid CEOs proved the most incompetent. In any event, it is likely to be several years before there’s once again a seller’s market for executive skills. Regulation is easier said than done, however. The drafting of water-tight regulations capable of withstanding the determined efforts of executives and remuneration consultants to evade them, and their effective enforcement, would be significant challenges. Invariably, it would create perverse incentives and prevent appropriate rewarding of some successful executives. And ASIC and APRA would appear to have their plates full without devoting resources to checking whether Sol Trujillo deserves his millions for overseeing the tanking of Telstra’s share price and the gutting of its workforce. The Greens, who have been pushing this since well before the financial crisis, have proposed a couple of approaches. The most recent was to effectively shame executives by requiring them to explain excessive remuneration if they retrench employees, which would have limited effect. Public outrage hasn’t slowed the growth in remuneration in recent years. They’ve also tried to amend other bills in recent months to require shareholder approval of termination payouts and link receipt of government assistance to curbs on executive salaries. Bob Brown has also recently considered removing the tax deductibility of executive salaries above $1m, meaning excessive salaries would no longer count as a business cost. Linking access to industry assistance, tax rebates and other forms of corporate welfare to limits on salaries would represent an appropriate quid pro quo: if you need access to taxpayer largesse to run your business, then you should abide by community standards when it comes to rewarding executives. It might make the industry handouts in the Government’s ETS more palatable if companies could only receive free permits if they complied with Government remuneration guidelines. Retrospectively, too — if Don Voelte wants handouts for LNG, he can cop a big paycut. A high income super tax, however, would avoid any problems of governments trying to judge appropriate remuneration levels for individual sectors or even companies. A tax rate of 50% for incomes over $1m pa would be a start. It wouldn’t raise a great deal of money but it could be hypothecated, say, to protecting employee entitlements (hypothecation is a dud idea in general but it is useful as a sales gimmick). It would also prevent populism and envy politics from creating pressures for genuinely counter-productive regulation. |
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16 Comments
Myself and Woz Buffet live modest lifestyles but that doesn’t mean we like paying tax nor do we like to be ‘tethered” to our workers no matter how ‘keane’
I’ve been thinking that a reparation tax on those who have earned far too much at the expense of the rest of us would be a really good idea. How about your 50% on existing incomes over $1 million, a 98% tax on any pay rise that is over the CPI for those with salaries over $1million, and the same level of tax for any bonus which is more than a nominal amount.
The money could be used to repair the damage that has been caused to our infrastructure over the years that these people have been living on the hog at the expense of the rest of us. We could get a really good public hospital system going, good public schools, a justice system that is just (wouldn’t that be a novelty!)
well resourced public transport, all the things that make a society work for all of us, not just the privileged few.
Lets watch the piggies scream as their trough gets taken from them.
Wouldn’t it be nice if you we could enforce an upper level of salary, like the minimum wage but the other end. It could be set at $500,000 pa and anyone who can’t live on that could be offered assistance in managing a budget.
The owners and operators of private companies should be able to pay themselves whatever they want, but when a company goes public it should be subject to stringent regulations on executive pay. There has been a complete decoupling between executive performance and pay under self regulation, and as a result we have a global corporate culture overflowing with rorters like Sol Trujillo, more than happy to loot the public blind before jumping ship.
Shareholders determining the pay of executives is a futile and unweildly system, with no logical means of mediation between the two parties should they disagree. A simple and effective solution could be to cap executive renumeration to a multiple of the average employee wage in their company.
Tethering the leaders to their workers will create incentives to keep the organisation lean, to retain the most productive employees, and to pay them well.
David,
What a good idea, and they could be obliged to go to Centrelink, explain why they are having trouble living on $500,000 a year and then be treated with the same suspicion that they might be thieves that the unemployed have come to expect from that wonderful institution.
Can Stephen Mayne tell us why shareholders can not/will not control executive salaries? Also, imposing a 50% tax over m$1 would cause them to make the salaries even higher to compensate for the tax.
If I have to handover yet $5-$10 million to Michael D’Ascenzo, I will personally see to it that that b’strd Rudd is scuppered before the next election……….
Rather than rearranging the deckchairs make every shareholder have just one vote and the majority must approve executive salaries and terminations rather than the number of shares they hold. If one vote one value is good enough to elect this country’s government surely it’s good enough to determine executive salaries?
Quite so! It’s all very well seeking to bring in a high income super tax. But at the level of super rich you are talking about, surely they have bank accounts all over the world.
Being super, super, mega-rich means being able to purchase the world’s best accountants-aka tax consultants-and the world’s best lawyers, not to mention having resources which would may MI6 go green with envy.
Nor do I see that Kevin Rudd had much to do with anything. Of course he will tax the people like us until we are unable to pay for a stamp. Otherwise, he is merely following in the footsteps laid down by all the previous governments. Especially coalition governments.
BTW a 50% tax rate on incomes over $1m pa would be chicken feed to those people, and onerous to the self-funded retiree. (If any such animal has escaped extinction these last few months). These days a minimum start of $1.5m is necessary for those people trying to earn enough money for their retirement. How on earth could they part with a 50% tax levy? A far more equitable deal would be 70% tax on anyone earning more than $5.m a year. Indexed to inflation, of course. 80% for people receiving $6. m pa, and 90% for those on $10.m pa.
Lulz at JamesK. You got spend money to make money James! Every tax commissioner will tell you that!
Let’s not forget that governments have had their eye off the ball over the developing financial crisis just as much as anyone else. They’re now all rushing around saying “We didn’t know” and “The other guys did it”.
That of itself is an object lesson in the real limitation of political control as a a regulatory mechanism. Nothing I’ve read so far (including that self-serving bombast from the Prime Minister in February’s “Monthly”) provides any ground for confidence that governments should have a direct hand in setting executive remuneration.
The way to foreclose on executive greed is through the tax system. You’d have to make that bottom-of-the-harbour safe too. No Houdini excape clauses permitted. But if we agree as a community that obscene levels of private sector remuneration should be limited, then we can also agree that the mechanism to give effect to this policy is already in place.
Why not tax earnings above a set level (we could call it the Obscenity Threshold) at 99.99999 cents in the dollar? If we wanted to be really radical, we could declare performance bonuses to be unearned income (they mostly are, as the record now clearly shows) and mandate that they be credited to approved and untouchable superannuation accounts.
SUPERFUNDS…and other Myths
Superannuation is beginning to smell very much like a dead horse and is in need a good dose of modernization.
We, the workers have been encouraged to contribute to our retirement all our working lives, while our employers have been ordered to participate.
The funds were then locked away, untouchable for forty or fifty years or so….and held in good faith for the day we retire.
They cant be used for any other purpose and control is entirely in the hands of the funds management ( subject to government legislation).
Hawk and Keating during their previous Labor government interference decided these funds were a source of revenue when they introduced a tax on the interest generated by these locked up super funds.
Then followed the banks etc. who then charged an administration fee to the owner of the fund ( you and I ) to extract the government tax.
What both Hawk and Keating, with their short sighted labor government failed to do was set a reasonable fund limit to superannuation, before it became eligible for the government rip off.
This limit could then have been locked away and guaranteed by the Australian government, thus protecting the common people and their retirement finds from this sort of global melt down.
Who knows? when I eventually retire ( maybe some time in my seventies, should I live that long) someone may step into my job.
I may retire one day from work, but not from voting.
The awful truth is that greedy “we” don’t mind when we are making a quid but we sure as heck mind now we are not! The trouble is that the executives on bonuses haven’t read the change in the wind, or if they have, they have chosen to ignore it. That is why they are all about to face the guillotine. However, not all high income earners should be punished. That is pure communism.
Higher taxes punish the innocent as well as the guilty. If I discover a pollution free energy maker tomorrow and reap the rewards why should I be punished simply because a bunch of crooks in the financial sector created a Ponzi? We have fraud laws for that - they just need to be enforced. We don’t need more regulation when the regulators don’t enforce what we already have..
You’ve all missed the point. If you cap salaries with a Super Tax, people capable of commanding those sorts of incomes will simply move overseas and work elsewhere. Australia the Dumber Country.
Not everyone earning a lot of money is a crook. I send this email from Hong Kong with its glorious 15% flat rate of tax.
I was born, raised and educated in Australia (and paid a shedload of tax there too) but am so glad not to live there with asinine “debates” like this one going on.
Some people are capable of earning a lot of money. Some are not. Get over it.
The answer you seek lies in two directions. One is pursuing people who commit fraud, not punishing those that can earn a lot of money.
The second: my income is linked to my performance. The government needs to think about how to allow shareholders to require the same of the executives who work for them as the owners of the business.
I don’t recall the election promise to turn Australia into a “Democratic Republic” (i.e. communist state) but has anyone taken a look at what happens if one earns 1 cent more than $99,999.99?
I do and we have just had a baby. My wife earns under $50k
“We” get - no family tax benefit (A or B), no baby bonus, no stimulus (1 or 2), no paid maternity leave, only an internationally uncompetitive tax rate. Oh yes, I also pay child support but this is treated as if it were paid from pre-tax rather than post tax dollars (double it please).
My wife is especially miffed that after 22 years of paying tax, she is not only told by the people’s republic she is financially dependant on me (roll over Greer) she will probably return to work just in time to pay tax for everyone else to get maternity leave.
Meantime my ex wife who despite being perfectly able bodied, has chosen not to work for lifestyle reasons, is rolling in all of the above benefits. Her and my son is 17.
Meantime Rudd wants to whack up Medicare to pay for everyone’s teeth (the tooth tax) and also is thinking about means testing pensions so that those that save are penalised and those that can’t be bothered benefit.
Do we really want a society stripped bare of any incentive? If we do, let me know and I’ll stop travelling 4-5 days a week in order to earn that extra cent and give up. Any time you like, Kevin. Any time you like.
Any why isn’t Medicare, pensions and the tooth tax funded by an increment to GST so everyone pays, not just those that can be bothered getting out of bed each morning? After all, we all have teeth or do we want only those with a job to have them? Or is the objective to punish those that earn an income and destroy all incentive?
Theft is theft even if everyone in the office smiles and promises to keep stumpf as they watch it happen.
Then there are modest lifestyles and greedy scrooges like McDuck with the sheer size of attached philanthropy clearly demarcating the two.