Mytheos Holt for the R Street Institute: High-end electric car consumers, rejoice. If you want to buy one of the famous Tesla cars and you live in Massachusetts, you can now do exactly that. Massachusetts’ Supreme Judicial Court decided to lift the ban on Tesla sales within the state, following a lawsuit brought by some of the state’s auto dealers. As you may have guessed, the dealers lost.
At first glance, it’s easy to see where the dealers got the idea for their lawsuit. Massachusetts law prohibits car manufacturers from also operating dealerships in the state. Given that Tesla never bothered with the whole “dealership” business model, it would seem that Tesla’s “direct sales” would be illegal.
Or at least, that’s how you might think about it if you’re a rent-seeking group of middlemen trying to protect your business model against innovation. Fortunately, the Supreme Judicial Court wasn’t persuaded, pointing out that the law as written was clearly designed to prevent auto companies that already partnered with dealerships from competing abusively with their own dealers. Because Tesla never employed dealers, the law never applied to them. …
So one has to wonder why the dealerships cared in the first place.
The most likely answer is that they cared because they feared that Tesla’s business model – one without dealerships – would actually work. And not just work, but make Tesla a higher profit margin than the very auto companies whose products these dealers bring to market. What this would mean in practice is that many other companies might decide to phase out dealerships altogether, cutting out the middlemen.…
It’s important to remember that vanishing industries do not represent harms for the government to correct. The French economist Frederic Bastiat outlined the absurdity of arguments like the dealers’ in a satirical letter from a candle-maker to the French government asking the government to blot out the sun because it was unfairly competing with his candles. …
If Tesla’s cars do outclass their competitors in the same way that the sun outclasses candles, then the law should not be allowed to keep them from American buyers simply because of the persistent inefficiency of one particular special interest group. As Justice Louis Brandeis said, sunlight is the best disinfectant. If Tesla is the sun in Bastiat’s metaphor, it may be about to disinfect armies of inefficient candle-makers.
HOW BILLIONAIRES USE THEIR POWER
Richard V. Reeves for the Brookings Institution: In his new book, Billionaires — Reflections on the Upper Crust, Darrell West dissects the origins and consequences of super-wealth. He gives us plenty to worry about.
For one thing, “billionaire activism” can distort the political process. You might want sharp cuts in taxes or welfare; you might want to legalize same-sex marriage. Either way, you probably don’t want these decisions being so heavily influenced by huge infusions of cash from a handful of individuals.
“Wealth in and of itself is not problematic,” writes West. “It is how rich people convert financial might into political power for their own benefit that creates problems.”…
West cites evidence that two out of three wealthy individuals are from humble origins. They worked, thought and innovated their way to the top of the pile — and likely had a some good luck along the way, too. So you might expect that they would be fierce advocates of policies to promote opportunity. Sadly not. While most of the population agree that “government should spend what is necessary to ensure that all children have good public schools,” only a third of the richest 1 percent do.
One reason the wealthy may not care about public schools is that their own children won’t attend them. They can opt out of the public system and spend a great deal on private education. The danger here is that elite status is perpetuated, as the wealthy do whatever it takes to prevent their own children from being downwardly mobile — essentially buying a “glass floor” to put beneath them — while public schools remain, for too many, inadequate. …
Of course, billionaires make up a tiny fraction of a tiny fraction of the super-wealthy. But as West demonstrates, their political influence contributes to the “wealthification” of politics. There may also be implications for social mobility, if high status becomes an inherited rather than earned attribute.
DEDUCTION FOR CEO PAY NOT A SUBSIDY
Kyle Pomerleau for the Tax Foundation: Rep. Chris Van Hollen, D-Md., has introduced a bill called the “CEO-Employee Pay Fairness Act.” This bill would prevent a corporation from deducting the cost of compensating CEOs if the corporation did not raise the wages of all employees who earned less than $115,000 by a specific formula based on inflation and productivity growth.
He argues that the current tax code subsidizes CEO pay by “allow[ing] corporation[s] to deduct unlimited amounts of ‘performance-based’ pay for executives regardless of whether their employees’ wages increase.”
This is a mischaracterization of a tax deduction and how the tax code works. In fact, the tax code limits the deduction for executive compensation, rather than subsidizes it.
The corporate income tax is a tax on corporate profits. The 39.1 percent corporate tax rate should apply to a corporation’s revenues, minus its costs. A large part of these costs is its labor compensation for both typical workers and executives. For example, if a company has sales of $100, but spends $50 in labor compensation, the company’s profits are $50. The tax is applied to that.
A subsidy would be a deduction that is larger than the actual cost of labor compensation. This would drive down taxable income and taxes paid, while the company’s true pre-tax profits would remain the same. Current law is not a subsidy.
In fact, current law goes in the opposite direction. … Section 162(m) disallows any deduction for executive compensation that surpasses $1 million. The only exception is for performance-based pay: a company can deduct stock options that exceed the $1 million threshold.
What this means is that companies that pay executives more than $1 million in non-performance-based pay actually overstate their taxable income and pay taxes on more than their true pre-tax profits.
Van Hollen’s bill would further limit the deduction by applying it to performance-based pay, pushing current law further from being a subsidy and even further from being neutral.
