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Department of Unintended Consequences – Part III February 1, 2007

Posted by federalist in Taxation.

The tax code is riddled with provisions, such as the Alternative Minimum Tax, the estate tax and any number of phaseouts and caps, that were sold politically as targeting only the “super-rich” but now capture taxpayers of far more modest means.

When it comes to tax code, More Is Less.  Will government ever learn this?  The WSJ editorial board illuminates the Senate’s latest gambit to raise tax revenue by soaking the rich corporate executive:

Ironically, the targets of the law are probably those least likely to be affected by it. Top executives have the standing to negotiate gross-ups to cover their tax liability or to seek other forms of compensation, such as stock options or restricted stock grants, not covered by the cap. As a result, even the $800 million 10-year revenue estimate for this provision is likely to prove wildly optimistic by the time the compensation consultants and tax lawyers get through devising ways around it–for those who can afford their services.

This is, in fact, precisely what happened in 1993, when the $1 million cap on salary deductibility was imposed. In the mid-1980s, the average CEO had no stock options. Today, they are ubiquitous in the executive suites of large companies, and the tax code deserves much of the credit. Bill Clinton campaigned in 1992 on a promise to cap CEO pay by imposing the cap. “Let’s treat everybody fairly again” was his mantra at the time, and Congress took it up with gusto. The result was that the middle class got a tax hike and the executives got stock options.



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