Do Pay Caps for CEOs Make Sense?

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The question whether CEO pay is excessive or adequate often leads to heated discussions. In an election year in Germany, the Social Democratic Party of Germany has recently made this topic the subject of headlines with their plan to cap CEO salaries. The argument that is usually brought forward in favour of CEO pay caps is a push toward “social justice”. This poses four important, consecutive questions: First, how can it be determined how much pay a manager deserves for his work? Second, do CEOs currently earn more than they deserve? Third, if so, at the expense of whom does this rent extraction occur? And fourth, would a cap on CEO salaries resolve potential issues? Continue reading “Do Pay Caps for CEOs Make Sense?”

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Some New Insights on Inequality

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This week, international leaders from business and politics meet for the 47th World Economic Forum in Davos, Switzerland, to discuss pressing global issues (and improve their networks). In the face of inequality, one of the topics that is on top of this year’s agenda is to design new economic systems that ensure more equally distributed and inclusive economic growth. The organisers of the forum have recognised the disrupting role that the Fourth Industrial Revolution will play in these developments. The importance of issues of inequality has been emphasised by new findings and data that have been published in recent weeks, although situations differ substantially between countries and available data is still highly imperfect. Recent political developments might spell trouble for any collective international efforts to curb inequality. Continue reading “Some New Insights on Inequality”

Daydreaming About Inequality – A New Income Tax System

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This article reflects my personal opinion.

The taxation of income often becomes a controversial issue in election debates (given that those debates actually revolve around factual topics). However, the proposals put forth mostly concern new regulations, new special rules, exceptions and deductions and small rate hikes or cuts and often are nothing more than half-hearted gifts to certain interest groups. In the long run, this leads to a progressively complex tax system that, combined with a similarly proliferating social welfare system, results in a bureaucratic leviathan that can paralyse a society and economy and at the same time fails to mitigate inequality. What if one started from scratch and intended to create an income tax system that is simple while being comprehensive and aims to mitigate growing income inequality and was not afraid of experimenting with somewhat unfamiliar ideas? In this article, I want to briefly explore a little thought experiment and imagine a new income tax system  (I will sometimes use Germany as reference case). Continue reading “Daydreaming About Inequality – A New Income Tax System”

Football and Money: Income Inequality in the German Bundesliga

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Annual incomes of 454 players that played in the Bundesliga in the 2014/15 season (in thousand Euros); data source: see footnote

“Football is a simple game. Twenty-two men chase a ball for 90 minutes and at the end, the Germans always win.” While being an accurate assessment, this statement by English record world cup scorer and part-time philosopher Gary Lineker hides another truth about football: some Germans win more than others. Thus, the beginning of the new Bundesliga season on Friday will not only spur discussions about tactical details and whether or not the referee has chosen the wrong profession, but also about the justification of skyrocketing footballers’ salaries and whether the earnings are fairly distributed among teams and among players. To shed some light on these issues, I have built a data set that comprises the incomes of all 454 players that stepped on the football field during the 2014/2015 Bundesliga season (the most recent season where good data is available). Most of the income data was obtained from the site fussball-geld.de and some additional estimations and calculations were conducted (See the footnote for a summary of the data collection process). Because players and teams do not disclose their contracts, all data has to be based on expert estimates and market-value approximations and should not be understood as hard facts (In general, think of this as an economist’s version of bar-room philosophy rather than a dead serious academic article) . Nevertheless, they offer a unique way to think about issues of income inequality and its implications. Continue reading “Football and Money: Income Inequality in the German Bundesliga”

You Can’t Always Get What You Want: Some Thoughts on Inequality

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This article reflects my personal opinion.

The economic article published here two weeks ago gave a short introduction to income inequality and showed that it has been on the rise again for the past decades in most developed countries. And while there is less reliable data available, the same is most likely true for wealth inequality. Inequality of opportunity has probably been stable and hence failed to work as a countermeasure. These developments have led to movements around the globe fighting for more equality and demanding a higher contribution to society from the rich and wealthy. Their voices are increasingly being heard and some of them have developed inspired, constructive propositions to reshape societies, with the recently most prominent one being the campaign of Bernie Sanders in the United States. However, at this point in history, one can assess that perfect equality is neither achievable nor desirable. While it might work in small, very homogenous communities, every time it has been tried on a larger scale it led to oppression and persecution of dissidents and the formation of a new, politically legitimised elite. So given that inequality is not inherently bad, the question arises: When does inequality become a problem that should be tackled by society? Continue reading “You Can’t Always Get What You Want: Some Thoughts on Inequality”

Alive and Well: Income Inequality

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Top one percent income shares of total national income for ten countries, before taxes and excluding capital gains (%, interpolated for missing values); data source: Alvaredo et al. (2016)

In recent years, economic inequality has become one of the most dominant topics in the public debate in various countries and is seen by many as one of the driving factors behind increasing political polarisation. It has also spurred academic discussion, at the latest since the publication of Thomas Piketty’s groundbreaking book “Capital in the 21st Century” in 2014. Economic inequality is often intertwined with social, racial or gender inequality and can be further broken down into income and wealth inequality, with both categories again being closely connected. And while there is a lot of work being done on investigating wealth distribution and inequality, e.g. by Saez and Zucman (2014) on the US, currently, our understanding of income distribution is more evolved. A lot of data has been gathered in recent years by Alvaredo et al. (2016) that makes it possible to take a look at the development of income inequality in various countries and helps to understand its possible drivers and consequences. Continue reading “Alive and Well: Income Inequality”