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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

The trends in executive pay and labor income tax rates since the 1940s suggest a high elasticity of taxable income with respect to tax policy. By contrast, the level and structure of executive compensation have been largely unresponsive to tax incentives since the 1980s. However, the relative tax advantage of different forms of pay was small during this period. Using a sample of top executives in large firms from 1946 to 2005, we also find a small short run response of salaries, qualified stock options, and 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. We explore several potential explanations for the conflicting impressions given by the long-run and short-run correlations between taxes and pay, including changes in social norms and concerns about pay equality.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16812.

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Date of creation: Feb 2011
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Publication status: published as Frydman, Carola & Molloy, Raven S., 2011. "Does tax policy affect executive compensation? Evidence from postwar tax reforms," Journal of Public Economics, Elsevier, vol. 95(11), pages 1425-1437.
Handle: RePEc:nbr:nberwo:16812

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Cited by:
  1. Geir H. Bjertnæs, 2012. "Promotion rat race and public policy," Discussion Papers, Research Department of Statistics Norway 686, Research Department of Statistics Norway.
  2. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," Annual Review of Financial Economics, Annual Reviews, Annual Reviews, vol. 2(1), pages 75-102, December.
  3. Dana Andersen & Ramón López, 2012. "Do Tax Cuts Encourage Rent-Seeking by Top Corporate Executives? Theory and Evidence," Working Papers, University of Chile, Department of Economics wp360, University of Chile, Department of Economics.
  4. Frydman, Carola & Molloy, Raven, 2012. "Pay Cuts for the Boss: Executive Compensation in the 1940s," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 72(01), pages 225-251, March.
  5. Geir Bjertnaes, 2012. "Promotion Rat Race and Public Policy," CESifo Working Paper Series 3781, CESifo Group Munich.

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