Cash Rules Everything Around Me

First, the question of the rich:

Daniel Gross in Slate:

As if market forces and malevolent actors weren’t enough, the rich are now finding themselves targeted by politicians. Strapped for cash, states, cities, and the federal government are seeking to soak the rich—or at least to make them pay taxes at the same marginal rates as they did in the Reagan years, which many on the right regard as an act equivalent to executing landed gentry. Some politicians have even suggested that we fund health care by slapping a surtax on people with annual incomes of more than $1 million.

This tactic isn’t likely to work, in large part because people who make a lot of money are quite effective at swaying public policy. What’s more, the wealthy have many defenders who argue that taxing the golden geese will cause them to fly away. In May, the Wall Street Journal op-ed page argued that millionaires fled Maryland after the state legislature boosted the top marginal state income tax rate to 6.25 percent on the top 0.3 percent of filers. “In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April,” the Journal notes. “This year there were 2,000, which the state comptroller’s office concedes is a ‘substantial decline.’ ” The Journal uses this small sample to warn the federal government and states with progressive tax structures and lots of rich people—New York, New Jersey, California—to heed the lesson. Tax the wealthy too much, and they’ll leave.

Such logic makes sense to the Journal’s op-ed page staffers, who inhabit an alternative universe in which people wake up in the morning and decide whether to go to work, innovate, or buy a bagel based on marginal tax rates. But if people were motivated to choose residences based solely on high state income taxes, then California and New York wouldn’t have any wealthy entrepreneurs, venture capitalists, or investment bankers—and the several states that have no state income tax, which include South Dakota, Alaska, and Wyoming, would be really crowded with rich people. Maybe Maryland’s rich folks just had a crappy year in 2008. Robert Frank, who chronicles the ultra-rich economy for the reality-based portion of the Journal, notes, citing data from the Institute on Taxation and Economic Policy, that there’s “evidence that [the state’s] millionaires didn’t disappear because they moved, they disappeared because they are no longer millionaires.”

Max Boot in Commentary:

But are millionaires all they’re cracked up to be? The term was coined in the 19th century. The Oxford English Dictionary credits Lord Byron with inventing it in 1816 (”He is still worth at least 50-000 pounds being what is called here [sc. Evian] a ‘Millionaire’ that is in Francs & such Lilliputian coinage”). At the time, a million pounds (or even a million francs) was a vast sum. This was a time when the average English worker earned less than 55 pounds a year. (Today the average full-time worker in the United Kingdom takes home almost 25,000 pounds a year.) But times change, and a million pounds ain’t what it used to be. Neither is a million dollars.

Comparisons of monetary value over the centuries are necessarily inexact because there are many different yardsticks one can use, and it’s hard to account for changing standards of living. But employing this handy website, my research associate, Rick Bennet, calculated that a million pounds in 1830 would be worth 73 million pounds today (or $120 million). A million dollars from 1830 is worth $24 million today. (That’s based on the Consumer Price Index. Utilizing other measurements, today’s dollar equivalent is even higher.)

If only someone had been clever enough to coin a term for today’s truly wealthy — those who make $120 million a year, or at least $24 million. Not that they should be hit with more taxes either. But at least if we’re going to talk about “the rich,” let’s talk about those who are wealthy in today’s terms rather than employing a metric that is 200 years out of date.

Kejda Gjermani in Commentary:

America desperately needs these energetic entrepreneurs to expand our technological frontier, but our tax system penalizes their risk-taking behavior. A million dollars or a sum in that range to them may be the culmination of many years of fervent effort toward materializing a business or product no one else has conceived of — years in which they have forgone the income obtainable from salary positions. When and if their efforts finally do pay off, not only does the time value of money erode the real worth of their lump-sum payment, but being treated under a high marginal tax rate further evaporates their earnings unduly. Unlike corporations, individuals cannot spread their losses over time in the eyes of the IRS. Therefore, the government is incentivizing a lifestyle dedicated to steady moderate earnings over one in pursuit of an open-ended, risky large payoff after years of financial sacrifices.

Because most taxpayers, at whom this “millionaires’ surtax” political pitch is aimed, are wage earners themselves, they can scarcely relate to the immense risks and sacrifices often involved in earning anything close to a million dollars. But entrepreneurial activity and the financial benefits accruing thereto are higher in America than anywhere else in the world. Ergo, a significant proportion of the millionaires burdened by the proposed surtax will be young entrepreneurs of unsteady income whose fruits of hard work are already embittered by our progressive tax code.

Onto executive compensation, Deborah Solomon in WSJ:

The U.S. pay czar, now preparing to vet the compensation at businesses receiving major federal aid, will push to renegotiate contracts that he views as excessive or seek other ways to reduce overall outlays, said people familiar with the matter.

The role of the government in setting pay is reaching a pivotal moment. Seven banks and industrial companies that received significant bailouts must submit proposals for their compensation packages by Aug. 13.: Citigroup Inc., Bank of America Corp., American International Group Inc., General Motors Co., Chrysler Corp., Chrysler Financial and GMAC Financial Services Inc.

Daniel Indiviglio in The Atlantic:

If you had signed a contract to be guaranteed a certain amount of money, would you be so quick to abandon that contract? I doubt many will. I think that’s especially true for bankers guaranteed large pay packages in groups that had nothing to do with the financial crisis, such as mergers and acquisitions. They’ll just argue that it wasn’t their fault. Should they be penalized for the stupid/negligent/evil actions of others?

Stephen Grocer at the WSJ:

Wall Street compensation is once again making headlines.

The U.S. pay czar, Kenneth Feinberg, will push to renegotiate contracts that he views as excessive or seek other ways to reduce overall outlays at institutions receiving big dollops of federal aid, the WSJ reported Monday. That followed closely on the heels of a WSJ article regarding Citigroup trader Andrew J. Hall and his push for the financial giant to honor a 2009 pay package that could total $100 million.

Hall is the head of Phibro, Citigroup’s energy-trading unit, which occasionally accounts for a disproportionate chunk of Citigroup income. Citigroup needless to say is one of the firms that has received federal aid. The troubled bank is contractually obligated to pay Hall based on Phibro’s profits. And Phibro has been highly profitable for Citigroup. So much so that a number of people believe Citigroup stands a better chance of repaying the U.S. money with its Phibro unit humming.

Peter Cohan at Daily Finance on Citi bonuses.

Roger Ehrenberg

Naked Capitalism:

First, to the “sanctity of contracts” bit. I don’t seem to recall many, or frankly any Wall Street types going on about sanctity of contracts when agreements with the UAW were reworked to save GM. So tell my why should big financial firms that would be toast other than by virtue of the munificence of the suffering American taxpayer be any different? The case that is getting everyone exercised is Andrew Hall of Citigroup, which is the lead candidate in the zombie bank casting call. Hall would have NO contract had nature been permitted to run its course. That inconvenient fact does not seem to be acknowledged by Hall defenders.

Being at a firm means all boats rise and fall with the fate of the firm, That construct was well understood in the days of partnerships and has gone completely out the window in the era of public ownership, aka Other People’s Money. If you did an A job in a C year, you did worse that if you did a C job in an A year. Unfortunate, but those were the breaks.

My beefs about Hall’s pay are not the level per se but the structure. He appears to have a firm within a firm, an arrangement that often leads to bad ends (Mike Milken at Drexel and the AIG Financial Products Group are the poster children, but I have seen smaller scale variants that also wound up causing trouble for the organizations housing them). He refused to comply with efforts to integrate his unit into the asset management group, which presumably would have been better for the bank, so he clearly wants to have his cake and eat it too: enjoy the advantages of Citi’s cheap borrowing costs (an important advantage in his business) and infrastructure (he is relieved of much of the hassle of running a business) and can focus on a year long horizon rather that worrying about Sharpe ratios and monthly NAVs. And his deal appears extraordinarily rich, with the cut for his group below but presumably not much below 30%, well above hedge fund norms.

More Naked Capitalism

And today, from WSJ:

The vote in favor of executive compensation legislation by the House Financial Services Committee gives lawmakers the chance to partially advance at least a portion of President Barack Obama’s ambitious financial regulatory revamp before adjourning for the August recess. The House of Representatives is scheduled to vote on the measure on Friday.

The bill, approved in a 40-28 vote, authorizes federal regulators to restrict “inappropriate or imprudently risky” pay packages at financial companies, though firms with under $1 billion in assets would be exempted.

The legislation also gives shareholders a greater ability to weigh in on executive compensation packages and ensures that board compensation committees are made up of independent directors.