Thursday, March 14, 2013

Timothy Taylor — Top Incomes, Marginal Product, and Rent-Seeking

In thinking about what marginal tax rates to impose on those with the highest incomes, a key question is the extent to which those top incomes reflect outcome that is actually produced.For example, one story that economists often tell about  higher inequality is that, because of developments in information and communications technology, and globalization it has become possible for those with superstar skill levels to produce much more--and their higher incomes reflect that increase in production.
An alternative story about higher inequality is that those at the highest income levels have considerable discretion a bout negotiating their compensation, and that when a wave of deregulation, globalization, and new technology disrupts the existing arrangements for top-level pay, those with top incomes will find themselves in a position to award themselves a larger share of the pie.
Conversable Economist
Top Incomes, Marginal Product, and Rent-Seeking
Timothy Taylor | Managing Editor, Journal of Economic Perspectives
In some ways, I would be happier with a rule that any company can pay anyone whatever they wish, but the compensation needs to be in the form of straight salary and bonus, paid each year. No deferred pay, or hidden perks, or golden handshakes, or stock options to be cashed in later. I suspect that paying top executives in this way would reduce pay for many of them considerably--which implies that those top earners have found ways to be compensated that even they are not willing to contemplate too openly.
Unfortunately, Taylor does not envision actually re-introducing the concept of economic rent into the economic debate, which was central to classical economics, and studying it carefully in terms of the various forms of economic rent — land rent, monopoly rent, financial rent, and unearned gains resulting from crony capitalism — as some heterodox economists like Michael Hudson have done already.


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