Yesterday, the White House announced new plans for letting investors have a say in executive compensation. With this proposal, shareholders of all public companies will be able to vote on the pay levels of the companies’ highest paid senior management. This sounds like a better plan than allowing the government to set absolute compensation limits, but while the shareholders would have a vote, they would have no power to enforce the results of the vote. The companies can decide to ignore the shareholders’ wishes, effectively saying, “Thanks for the suggestion; we will get back to you on that. Don’t call us, we’ll call you.”
Additionally, the executive branch named Kenneth Feinberg as “pay czar.” Feinberg will oversee major expenses for companies that received money from the Troubled Asset Relief Program (TARP).
Will the new legislation giving shareholders votes on executive compensation, if passed by Congress, have any effect?
In a move should sound familiar to readers who have been with Consumerism Commentary since 2003 and to those who have noticed my monthly personal financial reporting, the President and Vice President have used the White House blog to provide updates on the financial condition about each of the Executive Branch families.
President Obama and his wife Michelle seem to prefer investing in the Vanguard FTSE Social Index Fund (VFTSX. Barack’s retirement fund, valued between $50,000 and $100,000, is invested solely in this fund although he is carrying a pension as well. Michelle’s retirement accounts are invested in VFTSX as well. This seems to be a smart choice for the family, with an expense ratio of 0.24%.
Barack also own between $1,000,000 and $5,000,000 in Treasury bills, and for the daughters Malia and Sasha, the Obamas have between $100,000 and $200,000 in Bright Directions 529 college savings plans.
Both the President and Vice President Joe Biden have substantial income from royalties paid by publishers for their books. In fact, right before taking office, Obama agreed to postpone writing his next book until he is no longer in office and to a $500,000 advance for the royalties (from 7.5% to 15% of U.S. sales) to be paid for a new, abridged version of Dreams From My Father for children.
Read the President’s financial disclosure here.
Read the Vice President’s financial disclosure here.
Let’s say you are the chief executive officer of a formerly strong financial company. Either your company has faltered under your leadership or you’ve managed to steer clear of toxic assets but the slumping economy has affected you. Or perhaps you are newly hired, brought in to oversee a struggling shell of a company as it tries to regain its stature.
Either your company desperately needed the funds it has received from the Troubled Asset Relief Program (TARP) or the business was competitively forced to take the handout because you wanted your company to stay on par with your peers who were bailed out.
Now President Obama wants to limit your compensation to a measley $500,000. No fair, right?
It makes sense to limit executive pay when taxpayers have stepped in to propr up your balance sheet, whether the company needed the money or not. But it’s largely symbolic, like when CEOs declare they will reduce their salary to $1 per year. They can do that for two reasons: they’ve already made a fortune, and they’ll continue to make a fortune thanks to stock options, deferred compensation, and other perks worth millions of dollars.
Obama says the CEOs can continue to be compensated above and beyond $500,000 through company stock, restricted from sale until the TARP obligations are complete and the government has been paid. This is a great deal; financial stocks have been pummeled. They may go lower, but this built-in waiting period will almost ensure that CEOs stand to win in the long-run.
What do you think about this $500,000 “limit?”
Updated March 20, 2009: The stimulus plan has become a law, and we’ve rounded up the many ways you can benefit.
President-Elect Barack Obama pitched his economic stimulus proposal to Congress earlier this week. Here are the main points.
- The total cost is $775 billion over two years.
- Tax cuts and breaks will account for $300 billion of that total, including a $500 payroll tax credit, tax breaks for businesses. Companies would be able to write off losses in 2008 and 2009 and other expenses up to $250,000 in 2009 and 2010.
- The proposal would create 3 million new jobs, 2.5 million of which will be private sector jobs.
- Obama is calling for no earmarks to be added to the stimulus bill.
- Stimulus funds will be used to invest in infrastructure around the country, including transportation, roads, healthcare, and education.
What do you think of Obama’s plans? Is this level of spending necessary to pull the United States out of a recession? Are there long-term consequences to running such a high budget deficit?
The company has spent the past few months managing expectations. With the economy tanking and our company’s performance following the trend of all other companies in the industry, there won’t be much in the way of annual raises and bonuses this year. (We receive these incentives a few months after the end of the year in which they are earned.)
Barack Obama is prepared to step in with an economic stimulus that might allow workers to take more money home in paychecks. One proposal includes a tax credit advance to taxpayers. Through changing withholding amounts, employees would see this tax break as an additional $150 or more in each bi-weekly paycheck during the first quarter of 2009. For individuals with salaries below $75,000 or couples earning less than $150,000, a payroll tax credit would be offered, $500 for individuals or $1,000 for couples.
Rather than spreading the credit out throughout the year, the proposal calls for accelerating the credit to be fully provided within the first three months of the year.
Giving more money to taxpayers hasn’t really worked as an “economic stimulus” so far. This seems to be a unique way to approach the problem of stimulating the economy, but I’m not sure it will work on its own. Nevertheless, I can understand how this would be a welcome plan in a year in which companies can’t or won’t offer pay increases. The mantra heard most often now is that one should just be lucky to have a job at all.
Obama’s paycheck bonus, Jeanne Sahadi, CNN Money, December 30, 2008
The nonpartisan Tax Policy Center released a report yesterday that explains in detail the effect that a McCain presidency and an Obama presidency would have on the tax bill for American households. The data are stratified by income range and reflect a wide difference in stated policy between the two candidates.
In addition to making the 2001 and 2003 tax cuts permanent, McCain says he would double the exemption for dependents, lower the corporate tax rate, make expensing rules more generous for small businesses and lessen the bite of the estate tax and Alternative Minimum tax.
The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $1,200. That means their after-tax income would rise by 2%…
Obama’s plan would keep the 2001 and 2003 tax cuts in place for everyone except those making more than roughly $250,000, and he would increase the capital gains tax. Obama would also introduce new tax breaks for lower and middle-income groups…
The net result: compared with their tax bill today, taxpayers on average would see their tax bill cut by nearly $160 under Obama’s plan. That means their after-tax income would rise by 0.3%.
It’s also worth noting that McCain’s plan calls for the biggest percentage (that is, most meaningful) tax decrease for the highest earners while Obama’s allows the lowest income earners to receive the biggest break.
This table from the Tax Policy Center study illustrates how after-tax income will change in 2009 if either of the candidate’s tax policies are enacted. A lower after-tax income indicates higher effective tax rates due to a variety of proposed changes to the tax code.
A chart provided by CNN Money defines the income ranges more succinctly and provides hard numbers. I fall in the middle, and would hypothetically see a decrease in my tax bill amounting anywhere from about $1,000 to $2,600 depending on how much I earn and who ends up in office.
|
MCCAIN |
OBAMA |
| Income |
Avg. tax bill |
Avg. tax bill |
| Over $2.9M |
-$269,364 |
+$701,885 |
| $603K and up |
-$45,361 |
+$115,974 |
| $227K-$603K |
-$7,871 |
+$12 |
| $161K-$227K |
-$4,380 |
-$2,789 |
| $112K-$161K |
-$2,614 |
-$2,204 |
| $66K-$112K |
-$1,009 |
-$1,290 |
| $38K-$66K |
-$319 |
-$1,042 |
| $19K-$38K |
-$113 |
-$892 |
| Under $19K |
-$19 |
-$567 |
This speculation is interesting but mostly academic. These figures are not absolutes for three reasons. First, we’re dealing with politicians, so their proposals might change as they hammer out details, talk to advisers, and determine what strategy will get them into office. Second, their opinions may change once the winning nominee is sworn in to office. Third, any policy changes have to find their way through Congress first, where compromises must be negotiated before anything gets done.
So take these predictions and studies with a grain of salt.
A Preliminary Analysis of the 2008 Presidential Candidates’ Tax Plans [pdf], Tax Policy Center, June 11, 2008.
What They’ll Do To Your Tax Bill, Jeanne Sahadi, CNN Money, June 11, 2008.
To help Americans pay for the increasing price of a gallon of gas, Hillary Clinton is suggesting a suspension of the 18.4 cent per gallon tax on gasoline and 24.4 cent per gallon tax on diesel from Memorial Day through Labor Day while enacting a “windfall profits” tax on the oil companies which have been making money hand over fist through out 21st century so far. John McCain is also in favor of a gas tax “holiday,” but Barack Obama calls this strategy pointless and possibly more harmful for the economy.
Obama figures that the gas tax holiday would save American consumers about 30 cents a day while underfunding the federal fund that pays for road improvements. And while we’re in an election year, Obama points out that Clinton and McCain’s positions are political posturing moves rather than good economic solutions.
Ignoring the fact that when a tax holiday is in practice, gas prices might simply rise to negate the savings and match what consumers are willing and able to pay, the 18.4 cent theoretical reduction in a gallon of gas will be almost invisible. With a gallon of gasoline around $3.60 for me here in New Jersey, this 5% discount doesn’t even bring the price down to its level from a few months ago.
Clinton suggests paying for the loss of government income by increasing windfall profits taxes for the oil industry. If there is a gas tax holiday, should oil companies pay for the loss of government income through taxes assessed for earning significant profits in this economy? I feel no pity for the large corporations, and I wouldn’t mind if their taxes increase. However, I don’t think this solution would improve the economy.
As a country, we seem to be willing to continue spending on gasoline no matter what the price, but perhaps that is only because we have little choice. If we stop driving, we stop going to work, earning money, and feeding our families. We’re ready to spend as much on gasoline as necessary to continue our lives, giving oil companies the freedom to keep pushing prices upwards.
The oil industry obviously is not happy about the idea that their profits could be taxed, claiming that taxes would eat into available capital for new production, but their profits are mostly used for buying back stock rather than research and development.
Rather than Clinton’s plan to tax oil companies, McCain wants to freeze or cut spending to pay for the gas tax holiday. Obama thinks these suggestions sound nice to voters but would have little real effect. What do you think?
Photo credit: x-eyedblonde
Obama attacks Clinton’s gas tax plan [AP]
McCain calls for a summer ‘gas-tax holiday’ [AP]
Taxing oil profits: Proceed with caution [CNN Money]
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