My paper at this summer's Law and Society Conference in Denver talked about the tax causes of the Financial Crisis. Others have since released papers making similar points, which in the academic world, which values replication of results, has virtues.
The IMF and academic paper in question, like my paper, focus on the biases of the tax code towards excess leverage and executive compensation schemes that give executives an incentive to take excessive risks with someone else's money.
More generally, and I am pleased to see that the Obama administration's non-tax proposals are not immune to this idea, I think that there is public policy virtue in encouraging a more "robust" economy through both regulatory and tax policy. It is proven very difficult to develop policies that encourage consistent unbroken growth or full employment. But, a more modest and perhaps attainable goal is to take as a given that our economy will experience booms and busts, and then create incentives that reduce the harm associated with busts by removing incentives to engage in excessive leverage and risk taking, and to perhaps even encourage or require greater equity cushions and conservative approaches to risks.
In addition to tinkering with tax incentives to incur debt, removing tax incentives to establish "heads I win, tails you lose" executive compensation packages, like stock options, re-examining carry forward and carry back rules for losses makes sense. Post-hoc, loss carry backs look like classic Keynesian stimulus payments. You get a tax refund of taxes paid in prior years because the current year was unsuccessful. But, looking forward, the prospect of not being able to carry back losses creates a stronger incentive to avoid taking risks that could incur losses so bad that there is no surviving entity to carry losses forward to once they are incurred. If carry backs are not permitted, there is an incentive to reduce profits in current years if that can reduce the risk of a "terminal loss" in a future year.
Another area that deserves attention when trying to make our economy more robust is the bankruptcy process and the way that business transactions interact with it. The economy is better off if we can prevent "chain reaction" bankruptcies, where the demise of one firm that has made bad decisions threatens other firms. The Obama plan addresses this at a regulatory level. But, there are other ways to make it easier to let bad businesses fail without taking down other businesses.
One possibility might be to favor trade creditors, i.e. short term credit extended for reasons other than long term investment decisions in the ordinary course of business, over long term investment creditors, who bear a closer resemblance to stockholders. Trade creditors often receive better deals in bankruptcy than they would otherwise be entitled to receive, because their continued happiness is necessary to the survival of an ongoing reorganized company, even under current law. They also tend to be far more numerous than long term investment oriented creditors. A large firm will often have thousands of trade creditors and dozens of long investment creditors (treating bond issues with a identical rights and a single bond indenture trustee with authority to act for everyone purchasing the bond as a single creditor).
Another might be to rethink the preferences in favor of non-purchase money secured creditors (strengthened in the most recent bankrutpcy reforms in 2005), which our bankruptcy system designed to serve publicly held companies with most unsecured debt is ill equipped to deal with, which was highlighted in the Chrysler bankruptcy, and recent retail bankruptcies.
A third might be to shift the balance between base pay and bonus pay for employees. Small business owners, senior executives of larger enterprises, and sales staff typically receive small base pay packages and big bonuses, designed to allow compensation to adjust to available cash flow. But, almost everyone else in the American economy typically receives an inflexible payroll check as almost all of their compensation. In contrast, a typical employee working in a large Japanese company is compensated more like an employee at an American investment bank, with a large percentage of compensation received in a rather flexible in amount annual bonus that serves as a combination profit sharing/cash flow management tool. In a typical year, this may be two to four months of base pay, in a good year more, in a bad year less. Companies with this kind of compensatioon package are less succeptible to failing by virtue of failing to make payroll in a bust year, and hence make the entire economy more robust.
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