Would $500,000 buy you the good life in your city?
Let’s get away from editorial nonsense and back into politics. Well, kind of into politics. And also some economics. President Obama recently proposed to limit the salaries of top executives from those firms receiving federal bailout money as a means to reign in white collar pay from the stratosphere. The limit? $500,000 (€384,166.97; £335,358.67; ¥45,713,092.62). What does this buy in New York City, the place where many of these executives reside? Not much, according to an analysis published Sunday in the New York Times.
For those of you who live in the United States, but not in New York, the after-tax net on this income may surprise you a bit, coming in at around $269,000. That is an effective tax rate (tax wedge, as I think it is called by the OECD) of around 46%. Very high New York state and local taxes are the reasons why this NYC-based tax wedge compares well with those from some of the more socialized democracies of Western Europe. Of course, in America, our sales tax is much lower than the VAT that is added on in Europe, so we save some money there. But at least places like Denmark and Sweden provide ridiculously good benefits for collecting all of that money, like free health care and higher education.
Back to the article, the author makes a compelling case for how those poor saps making only a half of a million dollars in Manhattan would not get very far on their $269,000 net income, after paying the mortgage and maintenance fees, private school, hiring a nanny, etc. The article then starts to rapidly lose its credibility when it attempts to throw in other “essential” expenses like maintaining a house in the Hamptons or hiring a personal trainer. Ahh, the burdens of big city life.
Clearly, these decadent indulgences are not necessities. Yet, if all of that “fat” is stripped away from the average NYC budget, it is quite true that $269,000 will still only go so far. Especially if one is intent to live in Manhattan (even Brooklyn, Westchester or Yonkers, these days), actually own one’s residence, maintain some of the smaller frivolous expenditures in which we all like to indulge, and still have enough leftover to save for the kids’ college education (which will likely cost more than $50,000 per year per child; remember what I said about the benefits offered by the über-taxing socialized democracies??). In fact, the article offers the following analysis by the Center for an Urban Future:
- It takes $123,322 to enjoy the same middle-class life as someone earning $50,000 in Houston, TX. -
Therefore, a six-figure salary is required to be middle-class in NYC. Actually, that’s quite depressing. If we use this absolute math, then those executives living in Houston should be required to make no more than $200,000, the equivalent of $500,000 in NYC. That level of compensation doesn’t sound like such a large number to me anymore, when put in perspective. So perhaps there is some wiggle-room on the compensation issue, as I think I am fairly comfortable with the CEO of major international corporations making more than the equivalent compensation of a physician in an east Texas trauma center.
It’s not a perfect world, those CEOs occupy pressure-filled positions, and those who do their jobs well should be appropriately compensated. But as long as firms are receiving public money, rather than requiring low compensation limits, perhaps we need to require external oversight on major financial decisions. Like giving out bonuses. Or sponsoring work retreats to Californian resorts. This external board doesn’t need to even be maintained by the government. Perhaps a board made up of those working on the inside (but not associated with those companies receiving government assistance) and outside of the financial industry could play the role of TARP ombudsman.
Don’t get me wrong, I have no sympathy for those CEOs and executives who paid themselves millions of dollars even when it was clear that the economy and financial sectors were blatantly failing. But sometimes it is too easy to overcompensate in the opposite direction, with regulations, in an attempt to punish those who are easy (and deserving) targets of our wrath. There are still good reasons to believe in a free, privatized economy, so this is no time to potentially stifle future private investment and drive away the remaining decent business talent currently trying to figure out a way to right this ship. I’m all for executive compensation limits. Just not for silly ones that could be a bit out of perspective.