Paul L. Caron

Monday, April 7, 2014

Fleischer Presents Innovation, Equity Compensation, and the New Inequality Today at Pepperdine

Fleischer Vic (2013)Victor Fleischer (San Diego) presents Sweat Equity: Innovation, Equity Compensation, and the New Inequality at Pepperdine today as part of its Tax Policy Colloquium Series hosted by Paul Caron:

How people get paid—not just how much—explains the rising income inequality in the United States. Company founders, corporate executives, real estate developers, venture capitalists, and private equity fund managers often get paid in “sweat equity.” In exchange for labor, they receive equity in a venture largely financed with other people’s money. Globalization, technological change, and other factors have created economic conditions such that when companies are successful, those with sweat equity can receive unprecedented increases in income and wealth, and these gains are increasingly concentrated among a select few. For the rest of us, wages have stagnated.

The culture of equity-based pay has proven highly successful as a solution to the fundamental problem of entrepreneurial economics: how to get people with financial capital to share it with those who have the talent, motivation, and ideas. From the oil fields of Texas to the garages of Silicon Valley and the trading desks and boardrooms of Wall Street, sweat equity aligns the incentives of managers and investors. It is the engine of American innovation and economic growth.

But sweat equity is also rocket fuel for economic inequality. Economic gains increasingly flow to a lucky and talented elite, the one percent of the one percent, leaving everyone else behind. Our tax code aggravates the inequality problem, leaving sweat equity lightly taxed while taxes on wages have increased dramatically. The common recommendation of the political left—raise taxes on the rich—misses the target by focusing on ordinary income rather than sweat equity.

Addressing the problem of inequality will require finding fair methods of redistribution that do not disrupt the complex economic, legal, institutional and cultural infrastructure that forms the foundation for American innovation and entrepreneurship. Possibilities include redesigning the capital gains tax, adopting a progressive consumption tax, redesigning the estate tax, and increasing incentives for charitable giving. We must achieve enough redistribution to ensure some social mobility and some equality of opportunity, but not so much that the next generation of founders finds the risk and reward of entrepreneurship unattractive.

Update:  Post-presentation lunch:


Colloquia, Pepperdine Tax, Scholarship, Tax | Permalink


"Economic gains" is not the same thing as "income"; "inequality" is not the same thing as "income inequality", "leaving behind" isn't descriptive of the massive gains in overall welfare that the world has enjoyed these past 30 years, and pre-tax, pre-govt benefit income is not really the best measure upon which to propose big changes.

Posted by: Yo Gabba Gabba | Apr 7, 2014 4:06:44 PM