Dear NY Times: Beware of Unintended Consequences

Editor, The New York Times

620 Eighth Avenue

New York, NY 10018

To the Editor:

Floyd Norris wisely warns against the unintended consequences of tax policy - in this case, a one-time tax break on overseas profits that backfired ("Tax Break for Profits Went Awry," June 5).

But the ill and unintended consequences of another piece of tax-policy social-engineering needs greater attention. I speak of Internal Revenue Code section 162(m), a 1993 brainchild of Bill Clinton. Aimed at reducing what Mr. Clinton divined was excessive executive salaries, 162(m) eliminated the tax-deductibility of executive pay in excess of $1 million UNLESS such pay was performance-based.

Alas, as found by economists James Wallace and Kenneth Ferris, "One unintended consequence of the legislation was that executives' total compensation actually increased in the post-1993 period."* The reason is that a greater portion of executive pay was shifted into performance-based stock-options - which are both less transparent to shareholders than are annual salaries, and which give executives greater incentives to rig short-term results in ways that raise executive pay even as this rigging increases market volatility and reduces dividend yields.

* “IRC Section 162(m) and the Law of Unintended Consequences” (Nov. 2006):


Donald J. Boudreaux

Don Boudreaux is the Chairman of the Department of Economics at George Mason University and a Business & Media Institute adviser.