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Does tax policy affect executive compensation? evidence from postwar tax reforms

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  • Carola Frydman
  • Raven S. Molloy

Abstract

Evidence since the 1980s suggests that the level and structure of executive compensation in U.S. public corporations are largely unresponsive to tax incentives. However, the relative tax advantage of different forms of pay has been relatively small during this period. Using a sample of top executives in large firms from 1946 to 2005, we find little response of salaries, qualified stock options, long-term incentive pay, or bonuses paid after retirement to changes in tax rates on labor income--even though tax rates were significantly higher and more heterogeneous across individuals in the first several decades following WWII. To explain this lack of response, we find suggestive evidence that concerns about within-firm equality may have limited firms' ability to differentiate top executives' compensation packages based on their marginal income tax rates.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2009-30.

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Date of creation: 2009
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Handle: RePEc:fip:fedgfe:2009-30

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Keywords: Executives - Salaries ; Income tax;

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Cited by:
  1. Geir Bjertnaes, 2012. "Promotion Rat Race and Public Policy," CESifo Working Paper Series 3781, CESifo Group Munich.
  2. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," CESifo Working Paper Series 3277, CESifo Group Munich.
  3. Geir H. Bjertnæs, 2012. "Promotion rat race and public policy," Discussion Papers 686, Research Department of Statistics Norway.
  4. Carola Frydman & Raven Molloy, 2011. "Pay Cuts for the Boss: Executive Compensation in the 1940s," NBER Working Papers 17303, National Bureau of Economic Research, Inc.
  5. Dana Andersen & Ramón López, 2012. "Do Tax Cuts Encourage Rent-Seeking by Top Corporate Executives? Theory and Evidence," Working Papers wp360, University of Chile, Department of Economics.

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