They Pretend to Pay Us and We Pretend to Work, and the Business of Excess Compensation in the Internal Revenue Code

They used to say that in the old Soviet Union about the end result of this:

But now, in a little-noticed move, the House Financial Services Committee, led by chairman Barney Frank, has approved a measure that would, in some key ways, go beyond the most draconian features of the original AIG bill. The new legislation, the “Pay for Performance Act of 2009,” would impose government controls on the pay of all employees — not just top executives — of companies that have received a capital investment from the U.S. government. It would, like the tax measure, be retroactive, changing the terms of compensation agreements already in place. And it would give Treasury Secretary Timothy Geithner extraordinary power to determine the pay of thousands of employees of American companies.

Actually, in one way we’ve been here before.

In the Internal Revenue Code there exists the concept of “excess compensation.”  The idea is that compensation above certain limits is not deductible to a corporation, in the same way that dividends are not.  As this post explains, there are all kinds of hoops that corporations go through to get around this limitation, but if Congress really wanted to put the hurts on executive compensation they could pitch these hoops and that would be that.

In closely held corporations, such hoops are harder to fulfil, so this is a constant sword of Damocles over those.  But it’s remarkable that so few Americans know about this.  In the past the Internal Revenue Service has been used to enforce all kinds of social policy, and it will be interesting to see if the Obama Administration will revert to using the IRS in this way on a widespread basis, or will chose to use other blunt instruments (as they have done with all of their bailouts) to impose their will.

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