Different Bargains:
In a simplified model of a corporation, there are four different roles, each with their own risk and reward profile:

1. Shareholder
2. Director
3. Management
4. Employee

Shareholders
Shareholders invest their capital to form the company (or, in companies that already exist, to grow the company or provide liquidity for exiting shareholders).  Their bargain is simple: I will put in my money, and I expect a return on my investment.  That return can come as dividends (profits paid to shareholders) or increased share price (i.e., the company becomes more valuable).  Their reward is based on the value of the company, and their risk is limited to the amount of money they paid for their shares.  (If they invest $10, they can only lose $10–the company cannot force them to invest more.)  Their incentive is to make the company as profitable as possible to maximize the return on their investment.

Directors
Directors have an unusual bargain–not one you should take without legal advice.  They are hired by the shareholders to oversee the strategic development of the company and select and oversee management.  Their reward is usually cash compensation and/or stock awards.  Their risk is that the company, the shareholders, the government or other directors will sue them, and they will be personally liable for the Company’s conduct.  (Most companies indemnify (agree to defend and reimburse) their boards for this, but certain conduct, if later deemed illegal is not covered.  The point is that the director can be liable for the company’s conduct, not just their own.)  Their reward is based on the value of the company and their risk is unlimited (i.e., incarceration).  Their incentive, therefore is to make the company as profitable as possible, within the known bounds of the law.

Management
Management is a hybrid of Employees and Directors: they are charged with conducting the day-to-day management of the company, but are also focused on growing the company long-term.  Like directors, they can be held personally, criminally liable for conduct that is later determined illegal.  Their rewards are their salary, as well as stock-based compensation (which usually vests over a period of 3 to 5 years) and bonuses based on performance metrics (like increase revenue, increased margins, etc.).  Their risks are (a) being incarcerated; (b) being fired (not laid off, fired) if the company does poorly, and (c) their stock grants being either taken away or being worthless (an option to purchase the stock granted at $10 is worthless if the stock price is $9.99).  Their incentive, then, is to maximize the profitability of the company within the bounds of the law over both the short (bonus and not being fired) and long (stock award) time frames.

Employees
Employees have the simplest bargain: they perform a job and are compensated whether the company does well or poorly.  In many companies, employees receive stock grants and bonuses, but the overwhelming majority of their compensation is a fixed salary or hourly wage.  Their reward is compensation for their work, their risk is limited to being terminate if they or their company performs poorly.

So among the four actors, from most risky to least is, Management, Directors, Shareholders then Employees.  Management can lose their job, their investments and their personal liberty.  Directors, similarly can lose their liberty and their directorship, but it is not usually their only source of income.  Shareholders have their capital at stake, and Employees, generally are only responsible for their own conduct, but can be laid off if the company performs poorly.

So the question is, should those who have the most to risk be compensated more than those who have relatively little?  Or, put another way, should reward be linked to risk? I will address that in Part 3.

1. Conservatives (not read as “rich,” but principled) argue that most people don’t pay income tax.  We all know about payroll tax, but that is earmarked for a particular program.  The fact that lower income people are tax payers because they pay into social security and medicare does not make misleading the argument that they do not pay into the general Treasury.  That’s like two people traveling cross country, one paying for gas and tolls.  When he complains that his companion is not paying his fair share, his companion says, “That’s a lie! I’ve paid for all my own meals.”
2. Same lie in a different context.  Lumping in FICA and Medicare in a conversation about income tax is bringing a squeegee to a gun fight.
3. More number fudging.  In 1960, the top 400 tax payers were a larger slice of the population.  Twice as large in fact, as there were only 180 million people in the U.S. 50 years ago.  Secondly, the fact that the top 400 pay less in taxes merely means that the high income tax base is spread out over more individuals.  The top 4 running backs had more yards in the NFL in 1960 than the top 4 do today–there are more backs and more teams.
4. Ignoring the corporate form and law is fertile ground for propaganda. Hank Paulson did not earn that money, his hedge fund did, and so long as the fund retains the money, it remains at risk.  Risk of investment losses, and more importantly, risk of the funds’ creditors.  Substitute Paulson for Maddoff (a trade many would argue is like for like) and you can see the huge difference.  Maddoff would have been wiped out, but instead he took the money out of the fund (paid taxes on it) and bought personal and real property with it.  Letting the money ride is the privilege of owning a business, and without it, the credit crunch would have been that much worse as more capital bled into taxed oblivion.  So too, leveraging.  The reason the tax code sees the McCourts as paupers is because they are.  They no longer have any legal right to the revenue that they have leveraged.  Their lifestyle may be quite nice, but on paper they have no income because–and this is important–THEY HAVE NO INCOME.
5. I don’t know how this would be a secret–most people appreciate that, as societies develop, the capital owners become more wealthy.  Risks and costs reduce, allowing the owner of a good company to exact a higher margin.  If you build a better mousetrap factory, you should make more profits in the mousetrap business. There is no requirement in this country that the boss share the wealth.  There is in other countries, it’s called socialism.  There’s a reason socialist countries have few billionaires and fewer productive companies.
6. No one disagrees that the tax code is a labyrinth of deductions and dim witted incentives.  Corporations are legally bound (to their shareholders) to fight for every legal advantage and preserve the capital invested in the company for business purposes.  As much as it hurts the tender sensitivities of liberals, there is no legal requirement to maximize your tax burden.  The fact that Congress, in its microscopic wisdom, continues to enact deductions and offsets cannot be blamed on the corporations that benefit from them.
7. This is just arguing out of both sides of your mouth. David complains in #4 that evil hedge fund managers refuse to take money out and be taxed, but here he claims higher taxes would encourage them to do just that.  Higher taxes have not lead to a single job outside of the federal government. Companies have an incentive to make money, not jobs.  If it is more profitable to move jobs from humans to machines, they will (and are obliged to their shareholders to).  So to, if it is more profitable to outsource jobs internationally.  By the way, allowing companies to “repatriate” funds is a uniquely American concept.  Only the IRS believes that it has the right to tax taxpayers wherever their profits are made–every other taxing authority leaves taxes to the local jurisdiction.  Why should a company that employs its personnel in, conducts its business in, services customers based in, owns its factories in and benefits from the police, fire and courts of Singapore be required to pay taxes in Washington?  Because it’s corporate parent was formed in Delaware 100 years ago? If you really want to emulate Germany, let’s do that–a German citizen can move to Dubai, make gobs of money at a lower tax rate, and retire in Germany with full health care, never having paid a penny of German taxes on the Dubai “windfall.” No American can do that legally.
8. All politicians like taxes in the same way that hookers like prophylactics. They won’t admit it, but they need them to get on with their business (in both cases, screwing people). Reagan’s increase to social security was because he saw the insolvency coming.  That surplus is now a deficit and it grows every year. Would you rather he had taken the Obama approach and cut FICA in half just when it began to take in less than it put out every year?
9. So move to Germany.  Singapore has immaculate streets, should we adopt a penal code that imposes caning for littering?  Senator McCain suggested a fix to the health care issue, which Obama & Biden called the largest tax hike on the middle class in history. And then they proposed it themselves a year later, only without the offsetting tax deduction. Health care is only tied to jobs in the US because of wage freezes imposed by Democrats during World War II.  Rather than allowing competition for employees (which would have raised wages), Congress froze pay and that meant employers could only compete on fringe benefits, like dental and health care coverage.  Idiotic policies have consequences.

UPDATE

Mr. Johnston,
Thank you for your comment. From what I’ve read of your writing, I think we both agree that the tax code is bloated, inefficient and unfair. Where we disagree is that I do not think it is fair to blame the wealthy or the corporations for taking advantage of a system put in place by a corrupt legislature and an increasingly broken form of government.

My view is that a decent accounting firm and an army of lawyers is the only corporate defense against waves of populism that attempt to make capitalism a four letter word. I would rather we reduce the tax code to 25 pages and let all of those intelligent people accomplish something far more productive.

As for who is to blame, I do not exempt George Bush or even Reagan from their fair share of blame for complicating the tax code. Republicans are just as guilty as Democrats for ruining the tax code, they’re just not so damn sanctimonious about it.

My remark about Germany was not an ultimatum, but a way to make a point. I don’t know the statistics, but I would bet that far more Germans emigrate to the US than the reverse. My point is that their taxation has consequences that many Americans would reject. Moreover, although Germany’s GDP may be growing quicker, most of the incremental increase is due to exports, which benefited from a weakening Euro. On average, German workers are less productive than their US counterparts. Meaning that the US economy, if not run into the ground, should outperform Germany in the long run. Moreover, the government benefits you endorse are unsustainable. The UK is facing riots as it tries to extricate itself from free universal college education and European health care is not a model to be aspired to.

Regarding your claims about the top 400 taxpayers, your clear implication that the rich keep getting richer, a 2007 Treasury report showed that the top of the taxpayer base is not constant. The top 25% of taxpayers change from year to year as businesses succeed and fail. As the Wall Street Journal put it, the “rich are not the same people over time.”

I also disagree with your points about FICA. The fact that the government can and does raid the coffers of social security and Medicare, does not suddenly make those revenues part of the general treasury. The treasury bonds put in the trust fund will have to be paid by income tax and other general revenue sources. And that income tax is paid by a smaller and smaller percentage of people.

The fact that social security has collected $2 trillion more than it has paid out does not mean that the Treasury has that money free and clear. Those funds were paid into the social security system by people who have not yet retired or begun to draw benefits. As I’m sure you are aware, the 2010 trustee’s report projected a $7.9 trillion deficit for social security. Claiming the past $2 trillion as “excess” is like allowing an insurance company to spend the premiums they collect because the policy holder has not died yet. We can argue about whether or not this is a lie, but it sure is not being honest.

People who only pay FICA and Medicare can claim their money was wrongly used (or more accurately, loaned) for general spending, but they cannot claim to have supported the federal budget directly. That is the same as my mortgage bank claiming they bought my house. You know as well as I do that a loan is not an equity interest. Saying otherwise is indeed a lie. The fact remains that the burden of supporting the wrongheaded, ineffective and wasteful federal bureaucracy falls on a minority of earners, even though the largess is aimed at the majority. That is a moral hazard, and raising taxes on the “rich” will only make it worse.