Just One Minute
Balanced Fare: We Report, You Deride

Tuesday, October 22, 2002

We Are Pleased To Present A Solution to This Problem

What problem? Rising inequality of income. Despite our criticisms of Prof. Krugman's article, we are satisifed that income inequality is rising, and we are inclined to believe that this is not good. Our customary restraint is due to our uncertainty as to causes, and a desire not to inappropriately mingle the baby and the bathwater in an untimely fashion.

That said, a reader has been kind enough to send along a Very Intriguing Idea. Jim Kennedy and his partner, Francesso Vitelli, have been successful businessmen for quite some time. This, I should note, despite an awkward "leftward tilt" to much of Jim's political thinking. So, their thoughts on how to reform the tax code to promote entrepeneurship, promote greater income equality, and provide corporate tax relief - something for everyone! Hey, the rest of you should get readers like this.

The K-F Plan

Few sensible people actively applaud the economic distortions of double-taxation (ie, corporate taxes, then taxes again on dividend income).

Few sensible people actively applaud robber-baron type abuses of corporate power (ie, Kozlowski et al).

Why not tie together a response to both phenomena?

That is, let's gradually reduce and eliminate the taxation on dividends-paid for corporations that meet specified criteria with respect to income-distribution from CEO down to janitor.

Nature loves variations on the same theme over and over again - the Normal Distribution; resistance seems to be futile. Fat tails get squashed one way or the other, eventually.

So let's make some semblance of statistical normality a GOAL, as least with respect to discouraging greedy behavior which generates the conditions for its own eventual punishment. (No robber barons, no FDR, no unfair historical
images of Herbert Hoover -- everybody wins!)

The practical idea is this:

1) Corporations that wish to reduce the tax-burden on their investors apply
for tax relief. They submit income distribution data (including all perks,
options, hidden benefits, etc) for their staff. Deep thinkers study their
college texts and comes up with some simple robust measures which applicants
must satisfy to be relieved of double-taxation on dividends. (Ratio of
highest income to lowest income, skew, fatness of tail, similarity to
log-normality, stability of distribution over time, etc.)

2) Corporations that meet the criteria can pay dividends to investors
knowing the investors will pay no taxes on that money.

3) Corporations that choose to apply for this program but fail to meet it
due to the inevitable accounting and lawyering trickery which will accompany
this new rule must pay a penalty-surtax as punishment for wasting the
people's time and resources. This will spawn a cool industry for forensic
accounting and lawyering to detect the would-be cheaters. Lawyers will try
to split companies into 'classes' just as mortgage-backed bonds are split;
former leftists will earn good money and great satisfaction catching them.
Investors will require management stay away from the tricksters and
concentrate on business.

4) Corporations which rely on exceptional individual efforts and
contributions -- which could not succeed without Michael Jordans or Barry
Bonds on staff -- just keep going along. They will not apply for this
program because they rely on special inputs for their success. They are not
being punished, so they have nothing to complain about unless they choose to
whine (which, no doubt, they will, but that is another story).

Predicted Result:

Corporations operating in genuinely competitive (ie, replicable-work)
industries will be prompted by their shareholders to meet the tax-relief
criteria, and will do so. Corporations which rely on special labor
contributions will not pay dividends.

The distinction in tax-rates between capital gains and ordinary income will
become meaningful. If you think you've got something special on your
company team, like a 10-year Derek Jeter income generator, you hold on and
cash in later at the lower tax-rate. If you are not sure, you meet the
normal-distribution requirements and you pay dividends, your investors pay
no additional tax for the dividends, and cash is freed up to so Adam Smith's
invisible hand can make its optimal investment decisions anew.

And, hey, maybe the janitor can afford to invite the spouse to stay home and
raise the kids right, and still buy the kid a new baseball glove in hopes of
raising the next A-Rod. And maybe the 'dead-peasants' mentality, now
most-wickedly exemplified by COLI scams, that threatens to bring with it the
destruction of our free markets is diminished slowly and naturally by the
nearly-invisible and most-excellent hand of Jim, Francesso, and the IRS....

OK, they're flexible. Instead of tax relief for dividend payments, maybe generic tax relief. But only if you want to qualify by presenting yourself as a "fair-pay" company. Oh, picture the stormy board meetings then - CEO pay really comes out of the shareholder's pocket, the PR is crummy, why are we paying so much in taxes....

OK, my e-mail is above. Some of the obvious objections can, I think, be answered. Others, as they occur to me, are harder. Still, get ready to change corporate America!

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