Sunday, November 25, 2012

Two Laws

Law and economics go hand in hand and both affect our lives tremendously. So much so that the basic principles of both these subjects should be mandatory, if not in school, then at least for graduation. (I am one of those unfortunate ones who is close to illiterate in both these life sciences.)

The Political Brain mentions two very interesting laws. Both are mentioned in the American context but can very well apply to India as well. As a novice reader i thought both the laws made sense (one more so than the other). Of course, the devil is in the details. But do you think these laws make sense, at least in principle? Will there be any improvement due to them? Do they break any key economic principles? Would you support these laws if they ever reach the Parliament? What riders, safeguards, improvements would you suggest?

Speak up people!

A Parent's Bill of Rights. When a corporate executive flies his private jet to meet with a client, that's a business expense, and it's a tax deduction. But when working parents take their children to day care, or when they invest in their children - and their country - by paying school or college tuition, that's their problem. That isn't right.
Child care expenses, tuition for children with working parents who are trying to get the best education for their children, and college expenses are not disposable income, and they should not be taxed. At all. We don't tax business expenses, and putting your children in day care so you can go to work is a business expense.

The Fair Salaries Act. The average income, bonus, and retirement packages of CEOs have skyrocketed in the last decade. CEOs are receiving annual pay increases of 15 percent on top of additional perks, whereas their workers are receiving salary increases averaging about 3 percent a year, which doesn't even keep up with inflation.
Corporations can't simultaneously argue that they don't have the resources to pay workers a higher wage or as much of their health benefits while lavishing huge salaries and bonuses on their executives. The performance of CEOs is directly related to the performance of those who work for them.
So we will reward companies that close the income gap between workers - from the assembly line up to the middle managers - and senior management with tax breaks, and will impose strict tax penalties on companies that continue to escalate the size of the packages they give their CEOs. 


All Talk and No Action said...

Neutral on the 1st in, nothing to add.

About the second law - while I understand the need to check the crazy pay cheques of American CEOs, enacting a law is kind of extreme. Moreover, I don't understand why we can't find more nuanced answers.. that lie on the middle... rather than going for extreme measures...

also, what's wrong with workers' compensation and benefits being de-linked from that of CEOs? There is a reason why a person is a CEO, in the first place. I'm not saying one shouldn't look at the humonguos bonuses these guys take home... especially in the financial sector, where it is at the expense of many stakeholders. But overall, I find the idea of closing the gap rather harmful to the idea of 'competition' and 'meritorious performance'.

siddhya said...

Yes it seems like the Government will be meddling too much in the internal affairs of a Company. But its true that performance of CEOs is linked to the people that work under them, so does it make sense for the bonuses to be so asymmetric? Does this represent a market failure due to information asymmetry (CEOs know how much the company can afford to pay, so are in a much better position to negotiate)?
If this is indeed a market failure, then is there any other way of solving this, than regulation?

Nikhil Joshi said...

Current status could be seen with this perspective: Individuals get tax exemption for running a business called 'personal life' and it is known as 'standard deduction'. Following that argument, it could be argued that the standard deduction is exactly the amount earmarked for expenses like food and education expenses of the family. It could very well be counter-argued that the limit should be raised. It should not be proportional to number of children so as not to give incentive for having multiple children. Whatever pain people have to bear for having more children (e.g., their education expenses), an exemption proportional to the number of children would lighten the financial burden of having more children and could promote having more children.

In general, management cost grows faster than the growth of any entity. That is the hallmark of any system with more and more complex processes. Therefore, paying less hike to managers could take us to the utopian decentralization envisioned by Gandhi. Agile methodology involves no manager but it can handle only a limited size of team, it is not scalable.