Wednesday, May 11, 2005

Labor supply and status

This article notes that Morgan Stanley's chief executive is paid $22 million and his new number two will be paid $20 million. But after taxes they're each taking home probably $13 or $14 million. This is generally true: salaries are always described pre-tax. So when comparing income people don't actually look at what people have to spend. Perhaps this is done because it is simply easier to not figure out a person's tax liability, but there is something else at work. Using a pre-tax figure means that the status of income is derived from the headline number ($20 million or whatever), and not the actual income. Given that you can reduce a worker's motivation to three parts -- income, status, and other -- it means that at least one of those isn't sensitive to marginal tax rates (insofar as different marginal tax rates don't impact compensation packages).

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