Tuesday, October 21, 2008

Back To The Future

The Prime Minister’s recent proclamations on the evil of greed and so called “extreme capitalism” have been met with a chorus of agreement from the ordinary everyday people who are likely to suffer most in an economic downturn. Sure, the corporate high fliers might suffer losses adding up to lots of dollars, but most of them are not going to be wondering if they can buy groceries next week. But the battlers and the pensioners have little or nothing to fall back upon so that any downturn can cause serious hardship.

It’s not true that excessive executive salaries have caused the financial crisis, but they are a symptom of the problem. The problem is that bad decisions have been rewarded in the short term with these inflated payments. I have always maintained that there is nothing wrong with anyone being well paid for a job well done. But when it comes to executive salaries, it is too often the case that the reward is out of all proportion to the effort, and not directly related to the best interests of the company, its shareholders or its customers.

While the idea that the Government could somehow regulate or cap executive salaries is attractive to many, it is contrary to the ideals of a free market. It should rightly be left to the board of directors, acting on behalf of their shareholders, to set executive remuneration at a responsible and a sustainable level. The trouble is that doesn’t seem to have worked.

It has now emerged that the Government is considering introducing a new top level tax bracket for incomes of $1 million or more, at a rate of 50%. This is nothing new. In fact this is a return to the way things used to be. A generation ago, the top tax rate was 60%, but to be in that tax bracket an individual had to be earning almost 20 times average income. Today’s average income is a little above $60 000 a year, so 20 times that is $1.2 million, around the ballpark that is now being discussed.

This proposal makes sense, in every respect. With more than 5000 Australians earning over a million dollars a year, the increased revenue is substantial. What’s more, the proposal is in keeping with the proper functioning of Government in that tax is an instrument to be used for influencing behavior. Governments should offer tax relief to activities it wishes to encourage, and increase tax on activities it wishes to discourage. It provides an incentive for companies to reduce excessive payments and redirect the money more productively.

Just as importantly, it also sends a signal to the battler that the top end of town is also expected to carry its share of the load.

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