Greg Mankiw, the former economic adviser to Mitt Romney, is out with a new paper that aims to “defend the 1 per cent” and the status quo of income equality in the United States.
In the 23-page paper, Mankiw attempts to tackle the question of whether more redistribution is needed to spread income gains more equally.
Specifically at the start of his paper, Mankiw addresses stats that have shown the enormous growth in income shares for the top 1 per cent (from 7.7 per cent in 1973 to 17.4 per cent in 2010) and the top 0.01 per cent (0.5 per cent in 1973 to 3.3 per cent in 2010). These numbers, in no small part, precipitated movements like Occupy Wall Street, Mankiw writes.
In one of his key points, Mankiw brushes back on the common suggestion that CEO pay his risen astronomically in comparison to the average worker because boards of directors are too cozy with CEOs:
Take the example of pay for chief executive officers. Without doubt, CEOs are paid handsomely, and their pay has grown over time relative to that of the average worker. Commentators on this phenomenon sometimes suggest that this high pay reflects the failure of corporate boards of directors to do their job. Rather than representing shareholders, the argument goes, boards are too cozy with the CEOs and pay them more than they are worth to their organisations.
Yet this argument fails to explain the behaviour of closely-held corporations. A private equity group with a controlling interest in a firm does not face the alleged principal-agent problem between shareholders and boards, and yet these closely-held firms also pay their CEOs handsomely. Indeed, Kaplan (2012) reports that over the past three decades, executive pay in closely-held firms has outpaced that in public companies. Conqvist and Fahlenbrach (2012) find that when public companies go private, the CEOs tend to get paid more rather than less in both base salaries and bonuses. In light of these facts, the most natural explanation of high CEO pay is that the value of a good CEO is extraordinarily high (a conclusion that, incidentally, is consistent with the model of CEO pay proposed by Gabaix and Landier, 2008).
Mankiw also attempts to tackle the suggestion that the rich should pay more in taxes because they benefit disproportionately from government services and infrastructure. In this section of his paper, Mankiw addresses President Barack Obama’s now-infamous “you didn’t build that” campaign line from 2012, which suggested that the rich achieved their wealth in large part due to benefits from good and services the government provides.
But Mankiw writes that the “average person” in the top 1 per cent pays more than 25 per cent of all federal income taxes, and he argues that this is fair compensation.
“In the end, the left’s arguments for increased redistribution are valid in principle but dubious in practice,” Mankiw writes.
“If the current tax system were regressive, or if the incomes of the top 1 per cent were much greater than their economic contributions, or if the rich enjoyed government services in excess of what they pay in taxes, then the case for increasing the top tax rate would indeed be strong. But there is no compelling reason to believe that any of these premises holds true.”
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