Only a Reasonable Experiment

Screen Shot 2016-04-14 at 8.56.59 AMI have been stewing over Thomas Frank’s indictment of President Obama in Listen Liberal. He very effectively argues that the President shrank from his authority to pursue his view of a Presidency willing to compromise. And then, in reading a piece by Luigi Zingales it suddenly struck me, “Why not?” Let me explain…

Let’s try a little experiment. The IRS already makes it abundantly clear that

To be deductible, your employees’ pay must be an ordinary and necessary business expense and you must pay or incur it. These and other requirements that apply to all business expenses are explained in chapter 1.

In addition, the pay must meet both of the following tests.

  • Test 1. It must be reasonable.
  • Test 2. It must be for services performed.

The form or method of figuring the pay doesn’t affect its deductibility. For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible.

and then goes on to discuss implication where corporations are excessive

If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive dividend to the employee-shareholder. The excessive part of the salary wouldn’t be allowed as a salary deduction by the corporation. For more information on corporate distributions to shareholders, see Pub. 542. ”

In essence, though any executive action would be eventually tempered by judicial review, reasonable AND necessary is quite the hurdle if one thinks about it, especially where the burden would appear to be on the tax payer.

So why not imagine, for at least enough moments to savor the possibilities, the circumstances where the Administration places a cap on business employee deductions. Now such a move would NOT stop corporations from paying whatever they chose, but it would prohibit those corporations from dropping those inflated compensation packages from their profits, and more profit means a greater chance of collecting some revenue from corporate tax dodgers. Clink, clink, clink…

So will all these John Galts stalk away from their corporate welfare rolls? Will their corporate masters flee the country?  Not likely, as we have recently seen at least one company, Pfizer, decide that such a response was maybe NOT in their best interests.
So let’s have some fun and argue, for the hell of it, that the Presidency is the most important and toughest job on the planet. That job pays $400K plus perqs worth another $170K.  The CRS suggests that the cost to a federal employer of a pension is about 23% of salary.  So lets posit that we add an additional 25% of $600K to a total cap, bring that to $750K. Period.

If you are not snarfling in your beer, you are soon going to be seeing a much smaller pay packet 😉


Entrepreneurship, Luigi Zingales Luigi Zingales is the Robert C. Mc Cormack Distinguished Service Professor of. “Why We Should Tax and Shame Excessive Corporate Lobbying.” Evonomics, April 13, 2016. Accessed April 14, 2016.
Frank, Thomas. Listen, Liberal: Or, What Ever Happened to the Party of the People? Macmillan, 2016.

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