Posted 6:32 PM by steve

Per Ramesh, the Congressional Budget Office is projecting that executive pay caps will 'cost' almost $11 Billion over ten years in the form of foregone tax collections.

And that doesn't make sense to me... and for a couple of reasons. Yes, capping an executive's pay reduces his taxable income and with it, the amount of taxes he or she would pay. But at the same time, every dollar not paid to an executive raises the corporate earnings by the same amount. And as corporations pay federal taxes at about the same rate as highly compensated employees, I figure the cap ought to be pretty much a wash.

And the amount of 'lost' tax revenue also doesn't make sense. For example, in 2010, the taxes not paid is estimated to be $604 million. Using a 36% tax rate, and ignoring my above point, that corporate tax collections would offset the taxes not paid by executives, that's close to $1.7 Billion in executive compensation that would have been paid (and taxed) but for the cap on compensation. Yes, Wall Street does pay out billions in bonuses every year, but the compensation cap, as I understand it, applies only to the very top of the corporate ladder and only to firms having received federal support. It doesn't apply to employees further down the food chain nor does it apply to financial firms (such as hedge funds) who haven't taken federal funds. Can the CBO really be figuring that the compensation foregone by these executives really adds up to almost $2 billion a year?

Finally, the caps only apply so long as the firms haven't repaid the federal aid, so the CBO's estimate must assume that these firms are going to go the rest of the decade in debt to the government, that they're not going to recover and pay the government back anytime soon. I know the CBO is not one for dynamic modeling, that they assume what is true now will remain true for eternity, but to assume that these firms stay indebted to the federal government for a decade is a rather pessimistic view of the economy.