Multiple Dimensions of Compensation

Money is a one-dimensional linear tool for exchanging goods and services and measuring wealth. We develop unfortunate misperceptions when we when project the linear one-dimensional nature of money onto wealth, or quality of life, which are non-linear multidimensional concepts. We've already looked at the multidimensional nonlinear nature of wealth and the major dimensions by which we spend our money. Now we wish to consider the various dimensions by which we acquire our money. These dimensions will have implications for tax policy, money policy, or stimulating the economy.

Draft: May 2012

 

Major Dimensions

We can start by enumerating the major dimensions for which people receive money. We will see that sources of compensation come primarily in three forms personal contributions, property exchanges, and zero-sum exchanges.

Personal Contributions

  • Time given: All we have in life is time. No matter who we are, we only have 24 hours in a day, 7 days in a week, and a finite number of healthy days to work. The time we spend at work is time we are not doing something else. Even if we are required to be at work, but due to circumstances unable to produce, we are still giving up our part of our lives. This is the opportunity cost of work.
  • Productive labor & specialized skills: Most discussions of economics start with a discussion of the value of labor. To earn we must produce. If we have specialized skills we can produce goods or services that others highly value. Certain skills will be worth more to the community and thus will receive higher rewards.
  • Risk & stress: Some jobs involve serious risks. Workers can be killed or suffer serious injuries. Naturally they will want compensation for those risks. Stress may be either physical or mental. Stress impacts health and quality of life. People will want and deserve compensation for accepting stress into their lives.

Property Exchanges

  • Property sold or rented: Property is a primary means of acquiring money. But simple ownership property does not require giving up one's time, suffering stresses, or taking personal risks. Ownership of property does not require productive labor or specialized skills. We must remember that we are speaking in terms of how the seller perceives the transaction, not the buyer. When a farmer sells his goods he is selling the output of his own productive work. When an investor sells stocks, he is merely selling property. He put no work into the value of the stocks. When we talk of money from property exchanges, we are referring to all profits from sales where the profit was not the result of work on the part of the seller.

Zero-sum Exchanges

  • Winnings, gifts, charity, and inheritance: All of these involve receiving money without contributing work or property. As we proceed we will recall that charity is primarily received by the poor, gifts by family and community, and inheritance by the rich. Zero-sum transactions occur at all economic levels.
  • Status: Status adds zero-sum elements to exchanges which otherwise involve personal contributions or property. A person may receive much larger compensation for the same work simply for being famous or of high status. He does perform greater accomplishments, but the difference between what he gets, and what someone else would get for the same work constitutes status pay. Status pay includes part of celebrity fees, executive compensation and golden parachutes. Similar people with the same accomplishments do not receive the same rewards.

Related pages at this site

 

Implications:


1: Wages vs. Earnings
In popular discussion, the words for acquiring money (wages, salary, income, earnings, etc) are commonly interchanged. Some even argue that they all mean the same thing. But acquiring money through personal work, risks to health, and stress is not really the same as acquiring money simply through ownership of an investment. And both of those are quite different from acquiring money through processes that involve neither real work, nor real ownership. Wages and earnings are not the same. Productivity and profitability are not the same.

We can develop this idea with a few examples somewhat typical of American SES.

  • First, we have Chris, a member of the chronically poor. He was born into a poor family in a neighborhood where the factories had all closed. Neighborhood poverty affected the schools and limited his education. As an adult he finds no way out of poverty or even out of his neighborhood. As a result most of his income is roughly $20,000 a year received from welfare and charity. But he does odd jobs in the neighborhood earning about $5000 more each year.
  • Next, we have Larry, a member of the working class, who grew up in a working class family, completed high school and found employment in labor. Over his life he averages about $30,000 directly from work. But as he ages and persists in the same company he gains seniority pay, averaged over his life time amounts to about $3000 each year.
  • Third, we have Mike, a member of the middle class who puts himself through college. His college degree gives him both specialized skills and status. He finds work averaging $70,000 each year. Of that, about $10,000 results from status within the company the rest results from his specialized skills. He invests some of his savings, which in the long run "earns" him about $2000 a year.
  • Finally, we have Wally, born into a somewhat wealthy family. His parents send him to a prestigious college and pay roughly $150,000 to get him his degree. Over the course of his life he receives gifts and inheritance from his family amounting to about $20,000 each year. He gets his job through business connections his father had. He averages about $300,000 each year. But when considering the work he does, at least $200,000 of that results from his status in the company. With this high income he can invest most of his earnings. Over his life time, his investments "earn" him an average of $50,000 each year.
Laborer Larry and Middle Class Mike earn most of their income from personal effort, work. Wealthy Wally earns most of his income from zero-sum processes. Throughout his life, Wealthy Wally actually receives more in gifts-charity than chronically poor Chris.

The examples show us how the term "earnings" gets used inconsistently. The mere financial risk taken by investing in stock is in no wise comparable to the health risks associated with labor. The bonus an executive gets even when the company is down-sizing under his leadership is not the same dimension as the bonus an engineer gets when he develops a better product. One is compensation for status, the other is compensation for productive skills. The inheritance that a child of the rich get is more similar to welfare given to the poor than it is to wages given to the middle class. Inheritance and charity are both zero-sum gains. Wages are earnings from productive work.

2: Implications for tax policy

When we consider tax policy we should consider both the opportunity cost of taxes and what is actually being taxed. To do this, we can start by looking at our examples.
When we tax the chronically poor individual, we tax charity regardless of what taxation method we use. When we tax the laborer, we tax productive work regardless of what taxation method we use. When we tax our middle class individual most of what we tax will be productive work. But a tax on the wealthy individual is primarily a tax on status and on profits from property.
These implications will carry into the aspects of taxes commonly discussed. The estate tax ("death tax") is a tax on zero-sum gains. The individual being taxed did not work for the income. Although the income tax is primarily a tax on productive work, the marginal tax in the rich is largely a tax on status. The capital gains tax is on profits from property. No productive work need be done to "earn" a capital gain. Currently in America, the tax on productive work is higher than the tax on profit from property.

 

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