Yesterday, President Obama briefly said that some salaries on Wall Street were more than anyone should earn.
Approximately 160 years ago, John Stuart Mill responded by saying that he wanted to encourage work. Consequently, instead of limiting salaries through a progressive income tax, he supported a moderate proportional tax and high inheritance taxes. “To tax the larger incomes at a higher percentage than the smaller, is to lay a tax on industry and economy; to impose a penalty on people for having worked harder and saved more than their neighbors.” (1848, Principles of Political Economy)
Believing that all too often government distorts incentives, Adam Smith points out that people personally have less to give and spend when taxed. Government, Smith believed, was more likely to poison virtue than spawn it.
Not waiting for government, Ben & Jerry’s capped the salary of its highest paid executives at seven times the lowest pay. In 1994, though, they eliminated the cap when they could not find a new CEO who would accept it.
The Economic Life
Through a Teaching Company series on the history of economic thought, Professor Timothy Taylor discusses the life and ideas of Adam Smith and John Stuart Mill. They provide an ideal foundation to build from or tear down when contemplating salary caps and income distribution.