Taxes and Wages -- What Does The Fed Think? ~ Steve Blitz Morning Notes
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Monday, July 13, 2009

Taxes and Wages -- What Does The Fed Think?

Looks like the Fed's staff has given Bernanke, and by extension the White House, an economic policy go signal to raise taxes on the upper end of the income spectrum. Rummaging through the Fed's working papers is a great way to get a read on the Fed's thinking -- especially so since Bernanke became Chairman. In a paper posted in June "Does Tax Policy Affect Executive Compensation? Evidence from Postwar Tax Reforms" by Carola Frydman and Raven S. Molloy. the authors find . . . . well the abstract speaks for itself:

Evidence since the 1980s suggests that the level and structure of executive compensation in U.S. public corporations are largely unresponsive to tax incentives. However, the relative tax advantage of different forms of pay has been relatively small during this period. Using a sample of top executives in large firms from 1946 to 2005, we find little response of salaries, qualified stock options, long-term incentive pay, or bonuses paid after retirement to changes in tax rates on labor income--even though tax rates were significantly higher and more heterogeneous across individuals in the first several decades following WWII. To explain this lack of response, we find suggestive evidence that concerns about within-firm equality may have limited firms' ability to differentiate top executives' compensation packages based on their marginal income tax rates.

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