Executive Pay and Taxes

This article about the subject was written 5 years ago, but it remains relevant. All quotes that follow are from it.

The Internal Revenue Code was changed about 24 years ago while Bill Clinton was President to change the taxation of executive pay. Section 162(m), which applies to publicly traded corporations, limits the corporation's deduction for executive compensation to $1 million per covered individual, with an exception for "qualified performance-based compensation." That means things like stock options and stock appreciation rights. See the Components table at the above linked page.

After a few years Section 162(m) was criticized for its unintended consequences and encouraging the proliferation of stock options. "[B]oth academic and practitioner research has shown a dramatic increase in executive compensation, with little evidence that it is more closely tied to performance than before. ...   Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions and continue to pay nondeductible executive salaries." ... "For all that Section 162(m) is intended to limit excessive executive compensation, it is the shareholders and the U.S. Treasury who have suffered financial losses." It has "more holes than Swiss cheese." 

The deduction limit only applies to compensation to the CEO and the next three highest paid individuals. Bonuses, which would seem to offer the most direct way of rewarding performance, are not considered pay for performance under Section 162(m) and are thus subject to the limit. What sort of idea is that?

Executive pay was down significantly in 2008-10, but that was the Great Recession. Lower stock prices lead to both fewer options being exercised and the gain from exercising them less. Suppose an executive has an option with a strike/exercise price of $70. With the stock at $100 per share, the option gain is $30 per share. With the stock at $80 per share, the gain is $10 per share. A 20% lower stock price translates to a 66.67% lower gain on the option.

"The belief of this author is that executive compensation will recover in the near future, exceeding levels seen in 2007. Some of that increase will be in the form of deductible performance-based compensation, but the level of non-performance-based compensation will increase as well." His prediction was good. Stock prices have risen dramatically since 2012. The value of options rose more. Executive pay has probably likewise risen. (Witness the amount of talk about income inequality and income of the top 1%.)

See the graph of federal government revenues here. There is a strong correlation between stock prices and federal income tax revenues. Higher stock prices lead to more taxable income from realized capital gains and stock option exercises. (Bill Clinton is often given credit for reducing the federal deficit, but I believe most of the credit goes to the stock market.) I suspect the correlation is much stronger than the (negative) correlation between unemployment rates and federal income tax revenues. Media folks often assume the latter correlation is strong.

Presidential Tweets

Barack Obama tweeted about the incident in Charlottesville, VA. The New York Times reported it as the Most-Liked Tweet Ever. What did he say? Obama: "No one is born hating another person because of the color of his skin or his background or his religion..."

Duh! No one is born hating anybody, period. That's typical Obama talk -- flowery, shallow, pablum. Also, he took it from Nelson Mandela's autobiography. I'm confident Obama meant it about alt-right people. Would he say it as well about Antifa people or Islamic terrorists?

The Times' motto is: "All the news that's fit to print."  ❗😉

In order to not be accused of bias (hopefully), I will comment on some tweets by President Trump, too. Another New York Times story concerns his tweets about Amazon's paying taxes. The Times is far more correct about this than the President's falsehoods and half-truths. President Trump probably feels the need to take pot shots at Amazon because Amazon's founder-chairman-CEO Jeff Bezos owns the Washington Post (since 2013), a nemesis of Trump.

Ballot Issue on Drug Prices

On the ballot in November in Ohio will be this issue. The linked page defines the issue and what groups are urging yes and no votes. The Yes on Issue 2 group and No on Issue 2 group have been sponsoring many televisions ads urging viewers to vote for their side.

One of the ads for the No on Issue 2 group is deceptive. If you click on the ‘Who’s Behind the Ballot Issue’ and ‘Who’s Paying for the Yes Campaign’ on this webpage, it describes Yes supporter and bill author Michael Weinstein. He is the president of a non-profit that buys and sells drugs mainly to AIDS patients, but the ad says he is the CEO and omits saying non-profit. It says his company gets 80% of its revenues from selling drugs, AIDS not mentioned. It can give the impression that his organization is a high-priced drug manufacturer. 

I am not defending Weinstein. He has no qualms about using the strong arm of government to impose price controls on drug manufacturers. He pushed the same ballot issue in California, where it lost. His foundation, which is tax-exempt, operates pharmacies in competition with drug stores that are not tax-exempt. 80% of its revenues are from the pharmacies.  In 2015 revenues minus expenses, i.e. profit, was $55 million (link). He has brought anti-trust and other lawsuits against drug manufacturers. The No side claims his foundation uses funds for political purposes unrelated to the foundation's purposes. His foundation has provided near all the monetary support for the Yes side.

The spokesman on one of the ads by the Yes on Issue 2 group is Bernie Sanders. It shows several people who allegedly can’t afford to pay for their life-saving drugs. He describes drug manufacturers as only greedy (like Weinstein does) and gives them no credit for making life-saving drugs.

I’ve seen different ads by the No on Issue 2 group (website). Spokespersons include veterans, nurses, doctors, and pharmacists. One of the supporting groups is the Ohio Pharmacists Association (OPA). This webpage states their view of the issue. It shows how complicated the market for prescription drugs is, with so many parties involved, reimbursements, and discounts. The OPA mentions that passage of Issue 2 would adversely affect reimbursement amounts to pharmacies, but I don’t know how that works.

On first seeing deceit in some No on Issue 2 ads, I was repelled more than attracted to that side. Then I saw the ad from the other side with Bernie Sanders, which I found more deceptive and repulsive. His message is that passing Issue 2 will “take on the greed of the drug companies and significantly lower the cost of prescription drugs” (link) for the companies' "victims." Neither pharmacies nor insurers (who pay for most drugs) are mentioned. He is an expert demagogue.

The guy is a simple-minded wanna-be-dictator who shows no understanding of economics and markets. He sees a "pie," decides how much he feels government is entitled to take or take control in order to help “the victims.” He believes the pie will always be there, no smaller than before. He probably has no idea why or how the pie exists other than there are drug manufacturers. Like Weinstein, he has no qualms about using the strong arm of government to impose price controls on drug manufacturers. Of course, he doesn’t say passing Issue 2 will (allegedly) drive prices lower to rich people who buy and use prescription drugs, too. 😉

Such simple-mindedness also overlooks the complexity. The difference between what the ultimate consumer pays and what the drug manufacturer gets are lost in that complexity.* Medicare, Medicaid, whatever other insurance the consumer has, co-pays, deductibles, discounts, distributors, and pharmacy benefit managers are all involved.

On the other side, the No on Issue 2 ads tell people that the consequence of Issue 2 passing will be to raise the price of the drugs generally. However, there is no explanation of why that’s so in terms of markets -- supply and demand and price formation. It doesn't say that government dictating maximum prices too low leads to shortages. (In print the No side does say passing Issue 2 will reduce patients’ access to needed medicines.) Of course, I recognize the time constraint for television ads, and the No on Issue 2 website says more about the economics. 

* This reminded me of a TV ad for Hillary Clinton’s 2016 presidential campaign. Clinton verbally attacked “predatory drug pricing” and said she would crack down on it. Then she introduced a woman who was taking a drug for which there was a big price hike by the manufacturer or distributor. What wasn’t revealed was that most of the cost was being paid by the woman’s insurer. Not only that, she had refused a much cheaper generic substitute. She said she didn’t care what her insurer had to pay. When the deceit was noticed and critics responded, they stopped showing the ad.

Detroit, the movie

We saw the movie. It was directed by Kathryn Bigelow, who also directed The Hurt Locker and Zero Dark Thirty that we had seen. It is based on an incident that took place at the Algiers Motel in Detroit in 1967.

The ratings on Rotten Tomatoes are pretty good. The critics’ ratings are higher than the audience’s. I thought it was pretty good. The average audience rating of 3.7/5 suits me. It hasn't fared well at the box office so far.

It is a story in which three black teens were killed and several others tortured and humiliated. Pretty clearly the Detroit policemen behaved badly, but none are found guilty in court. It is easy to sympathize with the victims and blame the Detroit policemen.

The incident occurred in a tense place and time, but what amazes me is that the incident was triggered by a misunderstanding. I won’t say what it was about since the reader might consider that a spoiler. The Wikipedia article about the Algiers Motel incident mentions it, but does not use “misunderstanding.”

One difference between the movie and the Wikipedia article is who killed Carl (Carl Cooper in the Wikipedia article; no last name in the movie per IMDb). Wikipedia says nobody was arrested for Carl’s murder and responsibility for the death is unexplained. In the movie Krauss does it and plants a knife by the body. (There is no Krauss in the Wikipedia article. The names of the Detroit police officers per Wikipedia and the movie are all different.) The Wikipedia page on the movie does say, "It has been noted that the film's depiction of the Algiers Hotel Incident was far more extreme than accounts which were given by survivors in a 1968 New York Review of Books article."

How We Know #14: Overview

In Chapter 11 Binswanger presents an overview of the history of philosophy. It is a striking contract of two perspectives on percepts, concepts, and knowledge. The major characters for one perspective are Aristotle and Ayn Rand. The major characters for the other are Plato, Descartes, and Kant.

“The root of the clash between Aristotle and Plato lies in their opposed views on a fundamental.”

“Aristotelians uphold the primacy of perception over conception: perceptual awareness precedes, and supplies the base for conceptual awareness; concepts are abstractions from perceptual material.”

“Platonists assert the opposite position – i.e., the primacy of concepts over perception. Platonists claim that some or all concepts are grasped by some unspecifiable, ineffable form of awareness of ”universals” dwelling in another “higher” reality.”

“Only extreme Platonists hold that the existence of percepts depends on concepts. E.g., Kant claims that perception is shaped by “categories of the intuition,” and in contemporary jargon, perception is theory-laden.” The result in either case is viewing perception as distorted, biased, “merely relative to us,” or not of “things as they are in themselves.”

“The primacy of perception leads to a wider point: knowledge is essentially “bottom-up,” not “top-down.” Conceptual knowledge is acquired by building up from perceptual data.”

A later section, The Kantian Reversal, critiques the ideas of Immanuel Kant. “Kant reversed a crucial distinction, between the what and the how – between what one knows and how one knows it. Kant turns the means of awareness into the only objects of awareness” (385).

Chapter 11 is the last chapter, so this probably is my last post on How We Know.

How We Know #13: Free Will

Chapter 10 is about free will or volition.

Free will has traditionally been thought of as the ability to choose among alternative physical actions. This is not false, but it is quite superficial. The actual primary is the rationality or irrationality of one's mental processes. It is this that is under one's direct volitional control. It is fundamentally an epistemological issue. "Man's free will consists in his sovereign control over how he uses his mind." But sovereign control is not omnipotence. Determinism denies this sovereign control. It claims that one's sense of control is illusory.

One's power to take hold of the mental reins is present as a choice. In Ayn Rand's terms, it is the choice between thinking or not. "Mental focus is wider and deeper than thinking; it is the precondition of thinking." Epistemologically, focus mean rationality.

"Perceptual processes are automatically in contact with the world; conceptual processes are not. Conceptual processes performed out of focus result in mental content that is invalid, subjective, out of touch with reality.

The basic choice of focus is independent of any specific motive.

"Fundamentally, consciousness is navigational: it is identification used to guide action. A prime example is the process of deliberating on alternative courses of actions." It is both intellectual and practical.

Man can reflect on and evaluate his own decision making process, including among others I am too tired now to decide or I need more information, or I'm uncertain but must choose.

A man's character is the net product of all of his choices. Every choice leaves its trace.

Volition is axiomatic. "Volition is not only self-evident -- directly introspectible -- it is fundamental to conceptual cognition" (355, my italics).

How We Know #12: Principles

Chapter 9 is about principles. He defines a "fundamental" as a causal factor on which a multi-level, branching series of effects depends, analogous to a tree. Examples given are the division of labor in economics and natural selection in biology. The only things that are fundamental simplicitur are the axioms of existence, identity, and consciousness. Knowing fundamentals is a source of immense cognitive power and unit-economy. Examples given are the heliocentric model and the decimal number system.

A "principle" is a fundamental generalization that serves as a standard of judgment in a given domain. Principles are needed for an economical long-range view of consequences. Similar to concepts, principles are integrations. They are formed by abstraction by observing similarities and differences. They are contextual and should be treated as absolutes within a context. An example he elaborates is individual rights. They are frames of reference as a to guide a diagnosis of concretes, and should not be imposed mechanically on unexamined concretes.