SubscribeFri 28 Mar 2008
Larry Page, and Sergey Brin of the I will do no evil folks of Google and Megalomaniac Steve Jobs have one thing in common. All three of them of earn a lot less than me in wages. Too bad that isn’t really saying something about me. All three of them take home a salary of $1 per year. Sergey and Larry have been earing $1 for a few years now. Steve has been doing it longer than those two. The nominal salary is intended to indicate a commitment to the company each of them works for (and founded). At the surface of it, it sounds like these CEOs have been able to eschew the greed that is so prevalent in the corporate world. However, like everything in life, it’s not so simple, especially in the case of Steve Jobs.
None of these billionaires are lacking in money. Their wealth is primarily determined by how the GOOG and AAPL stock performs. I applaud a compensation structure that rewards CEOs who truly add value to a company instead of just holding the job. Long term ownership is the key part of a proper incentive structure for senior executives. While I do believe that all three of these men have taken the $1 salary as symbolic gesture of how they feel about their work, I also feel that $1 salary is a bit of a sham.
In the case of Steve Jobs, his $1 salary is particularly disingenuous because he receives particularly generous compensation in the form of stock. The Googler’s $1 salary is a more genuine reflection of their compensation as they are not given gigantic stock grants. They have enough stock as is.
The problem of the $1 salary is that it’s another example of the problem with having two different tax rates for capital gains versus income. I have a problem with this in the realm of private equity, and with further reflection have an increasing problem with it in all aspects. Not only are capital gains taxed at lower rate, but income derived by capital gains avoid payroll taxes as well. The uber wealthy like Jobs and Larry Page can avoid paying social security and medicare taxes. Are they intentionally avoiding these taxes? In the case of Larry and Sergey, I doubt it. Steve Jobs, I’m not so sure of. Regardless of the reason for their compensation structure, it exposes flaws in what should be progressive tax structure.
At the same time I am conflicted. Fundamentally I do understand why it’s good to have a lower capital gains rate - to spur new investment. The problem is really with what is often an arbitrary distinction between regular income and capital gains. Salespeople who are paid by commission have as much income risk as as an executive who is paid by stock grants. Yet their incremental income is viewed very differently by the IRS.
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March 31st, 2008 at 7:07 am
I guess part of the reason for two different tax rates is that corporate income is already taxed. I would be in favor of eliminating corporate income tax and having all dividends and capital gains taxed at standard rates, since that would make it more profitable for the small investor.
As for payroll tax, that’s capped at a fairly low level (relatively) so for these rich guys it barely even counts as a tax. I’ve never understood why it has that cap. I’d vote for a politician who planned to eliminate the social security cap and reduce it to 10% or less.
March 31st, 2008 at 12:02 pm
Jon,
Keep in mind when they cap SS tax they also cap SS benefits. If they didn’t, then multi-ba-zillionairs would also get multi-million $$ SS benefits.
The capital gains treatment of stock options/rewards/grants is limited to company founders AND they have to hold the options more than a year; anyone else has to report stock options gains as regular income.
I do feel awarding stock options after the IPO should be put up to a shareholders vote.
I’m guessing Larry, Serge, Steve & Warren sit on some corporate boards or do something that generates W-2 income. At least enough to pay the SS tax on their first $98K.
I’d favor lifting the capital gains benefits of hedge fund type investors (I think Congress has addressed this) and restructuring corporate tax treatment.
I feel if a American based company produces and creates income and products IN the US, then they shouldn’t have to pay Federal tax. To offset this loss of Fed $$, raise the capital gains tax.
March 31st, 2008 at 7:01 pm
While I do think we could have a simpler and more fair tax structure if we eliminated corporate taxes, I also realize it’s also ripe for abuse for by shady individuals who would use corporations to effectively front their individual income and expenses. Taxes are hard to get right and be fair.
As for capital gains, I do inherently believe in the value of giving both venture capitalist, and company founders tax breaks to spur economic growth, and would be sad to pull that away from them. However, I think we could at least extend the long term holding period out a couple years. One year is hardly long term…
April 1st, 2008 at 10:44 am
Ernesto,
I have a hard time thinking of Social Security as a fair program where you get back what you put in. Perhaps that was the original intent, but now with benefit cuts, constantly rising payroll taxes, and the progressive nature of distributions, today it’s more like welfare for retired people.
With that in mind, I don’t see why people who contribute millions would get higher benefits than someone who didn’t. Rich people don’t get paid any welfare benefits and yet they contribute the most to welfare programs through income taxes.
Dong,
I wish we could find a way for individuals to have the same sorts of deductions so that the abuse you’re talking about can’t happen. If I buy a car, which I need to go to work and make money, why can’t I deduct it, as well as maintenance, gas, insurance, etc? I don’t think it’s hard to make taxes fair, there are plenty of plans that are fair, it’s just impossible to get the people who are currently advantaged to agree to give up that advantage.
April 2nd, 2008 at 11:56 am
Jon,
I would hardly argue that SS is ‘fair’; to qualify a person has to pay in for 40 quarters and then can draw benefits for 40 years. No pension plan could sustain the payin/payout that SS currently uses. Unless the population doubles in the next ten years the system will be broke by 2017-2020 (Hey a light bulb just went off, no wonder so many politicians are pushing for open borders).
All I’m pointing out is that if you’re say, a DH for the Boston Red Sox and make $7M a year OR a computer geek making $98K per year you (and your employer) pay the same SS payroll tax AND receive the same benefit on SS payout (Max at age 70, currently $33,528 per year). Otherwise the Red Sox DH would retire and draw SS benefits of say around $2M per year. Then people would complain about the rich gettings millions from SS benefits.
What Dong is arguing is to raise the tax limit without raising the benefit limit, which would be a shift is current policy more in line with a ‘welfare’ system.