Does Tax Policy Affect Executive Compensation? Evidence from Postwar Tax Reforms

Frydman, Carola; Molloy, Raven

doi:10.3386/w16812

Cited by 6 publications

(2 citation statements)

References 18 publications

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“…The alternative values for  we consider imply a range for  W between 0.0765 and 0.153 . These values align with the estimates of Frydman and Molloy (2011). They obtain point estimates of  W below 0.1 and reject values above 0.2.…”

Section: B Recovering Measures Of α H and α Ssupporting

confidence: 50%

Taxing Top CEO Incomes

Ales

Sleet

2016

American Economic Review

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We use a firm-CEO assignment framework to model the market for CEO What should the marginal tax rate on top income earners be? Recent research suggests that it should be high, perhaps as high as 70 percent or 80 percent. Underpinning these numbers is the well-known Diamond-Saez formula that relates the optimal marginal tax rate on top incomes to the elasticity of taxable income and a property of the right tail of the earnings distribution. This formula is derived under the assumption that the policymaker's objective is to maximize tax revenues derived from top earners. It abstracts from any positive impact of the efforts of these earners on the incomes of other agents or on tax revenues collected from other sources.1 Our paper departs from this research by taking seriously the idea that the activities of high-earning CEOs, an important group of top earners, have positive spillovers for others. 2 We use a firm-CEO assignment framework to model the market for CEO effective labor. Gabaix and Landier (2008) and Terviö (2008) have shown that such a framework is valuable for understanding recent growth in CEO incomes and the interaction of firm and CEO attributes in shaping this growth. We show that in an assignment model (augmented with an intensive CEO effort margin), the taxation 1 The literature has considered negative impacts such as rent seeking and has modified the basic Diamond-Saez formula accordingly: see Piketty, Saez, and Stantcheva (2014). Saez (2001) also modifies the formula to allow for social concern for top income earners.2 Bakija, Cole, and Heim (2012) report that 60 percent of the top 0.1 percent of earners by income are executives, managers, supervisors, and financial professionals. Our focus on CEOs is also partially motivated by the availability of high-quality uncensored data on the incomes of CEOs. However, we believe that our theoretical and broad quantitative insights carry over to other "superstar" buyer-seller relationships that generate high incomes for sellers. In particular, they are applicable to hedge fund managers and other financial professionals who make complex decisions.

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Section: B Recovering Measures Of α H and α Ssupporting

confidence: 50%

Taxing Top CEO Incomes

Ales

Sleet

2016

American Economic Review

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“…Not only did tax rates change considerably during our sample period (Frydman and Molloy, 2009), but also riskier forms of remuneration (such as stock-based pay and contingent pay) became a larger fraction of the compensation package over time. Thus, the value of compensation to the executive might be different than the trend shown in Figure 1.…”

Section: The Executive's Value Of Paymentioning

confidence: 99%

Executive Compensation

2011

Nonprofit Law for Colleges and Universities

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Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research. JEL-Codes: D310, D860, G340, M120. Terms of use: Documents in

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Does Tax Policy Affect Executive Compensation? Evidence from Postwar Tax Reforms

Cited by 6 publications

References 18 publications

Taxing Top CEO Incomes

Taxing Top CEO Incomes

Executive Compensation

Executive Compensation: A Survey of Theory and Evidence

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