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
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.
- 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 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
- 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
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
- 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
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
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