CEO Surprise: Please Raise My Taxes

Netflix CEO suggests alternative to executive pay cap: a 50 percent tax.

February 6, 2009, 4:40 PM

Feb. 7, 2009— -- It's rare to hear anyone say "please raise my taxes," least of all a CEO who makes more than $2 million a year. But in a New York Times Op-Ed piece Friday, that is exactly what Reed Hastings, CEO of the popular DVD rental service Netflix, did when he called on President Obama to raise taxes on corporate executives and other wealthy people.

Executives have come under a harsh spotlight in the financial crisis, with much of the downturn attributed to their irresponsibility and greed. Hastings argues against the pay cap for CEOs that Obama announced this week, suggesting instead that executives' income as well as their taxes be raised.

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If CEOs and others who make more than $1 million annually pay half of their earnings in taxes, he says, it's a win-win: Companies get the best people, executives still get well paid and the country gets a tax boon.

One need look no further than to three of Obama's Cabinet nominees, including Treasury Secretary Tim Geithner, to know Americans are generally opposed to paying high taxes. All of them admitted to not fully paying their taxes

Hastings, who did not return a call from, writes that other attempts at capping executive salaries, including a Clinton initiative to halt executive pay at $1 million, did not work. He does not, however, mention that tax rates in the 1970s for wealthy Americans hovered at around 50 percent and much of the economic growth in the 1980s, conservatives argue, was a result of tax cuts.

As the economy spirals ever downward, liberals and conservatives have each taken up their traditional banners on how to best stimulate growth, with Democrats calling for more government intervention and higher taxes and Republicans calling for tax cuts.

It is no surprise to hear any liberal calling for a tax hike; it is a surprise, however, to hear that call coming from the boardroom.

While Hastings' suggestion might have its supporters, there is no shortage of executives -- especially at companies like Hastings' that do not receive funds from the Troubled Assets Relief Program -- who believe they are entitled to the money they have earned. There is also no shortage of conservatives who believe lower taxes allow private individuals to stimulate the economy through spending.

Cap Is Ineffective

"This is nothing but a back door to raising the marginal tax rate," said Gerald O'Driscoll, an economist and senior fellow at the Cato Institute, a libertarian-leaning think-tank in Washington, D.C. "The salary cap or tax hikes are instructive in the same way: There is no such thing as a free lunch. If you take federal money, the government is going to decide what you have to do with it."

Obama this week capped the salaries of CEOs and other executives receiving government funds at $500,000 through the TARP, the U.S. government's financial assistance program for beleaguered financial institutions. The demand for a cap was reinforced over an outcry that Wall Street firms paid more than $18 billion in bonuses last year while receiving a massive infusion of taxpayer dollars.

For Hastings, who earns an annual salary of $850,000 and more than $1 million in additional compensation, that cap is ineffective because it shames CEOs without any cost benefit for the economy.

Instead, he believes CEOs of all companies, along with everyone else who makes more than $1 million a year ("hedge fund managers, star athletes, stunning movie stars [and] venture capitalists") should pay 50 percent of their earnings in taxes.

"He's not just advocating a 50 percent tax for executive compensation, he makes it clear he wants this for everyone making more than $1 million," said Alan Viard, an economist at the American Enterprise Institute, a conservative think tank in Washington, D.C.

"It's a mistake to single out executives in the tax code," he said. "We're already doing that -- he even mentions it -- and it has essentially accomplished nothing."

Hastings insists that caps do nothing for the economy and serve to prevent the best people from taking CEO jobs.

"The difference between salaries like mine and those of average Americans creates a lot of tension, and I'd like to offer a suggestion," he wrote. "President Obama should celebrate our success, rather than trying to shame us or cap our pay. But he should also take half of our huge earnings in taxes, instead of the current one-third.

"Of course, it's galling when a chief executive fails and is still handsomely rewarded," he wrote. "But with the concept of 'tax not shame,' a shocking $20 million severance package would generate $10 million for the government. That's a far better solution that what we have today, not least because it works with the market rather than against it."

Typical Liberal Reaction

The Hastings' proposal is a retread of typical liberal reaction, O'Driscoll of the Cato Institute said.

"Under the guise of pragmatic response to an issue that's arisen, he's put up this idea," he said. "But we have to remember these people are rich for a reason. Movie stars are rich because they've entertained millions of Americans and millions of Americans have spent money. Taxing them this way defeats the decision of the consumers."

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