Legal Commentary

Verity blogs below about NFL (and Major League Baseball) efforts to avoid disclosing the salaries of their top executives, as required by federal tax law.  Since she uses almost all of my buzzwords (federalism! compensation! nonprofits!) I have to chime in here. 

As those who read my posts during my last stint (hi, grandma) may recall, I think that many efforts by the very rich to obscure their pay are part of an effort to avoid redistribution.  In this case, the professional sports leagues probably want to resist demands for re-slicing of the pie by lots of folks, including players, fans, cities who subsidize teams, and governments that both set individual income tax policy and permit massively profitable institutions like the NFL to be non-profit organizations (although the teams themselves are taxed, mostly as partnerships).  And there is likely a consumption value for some individuals in keeping their earnings private.

So that's not a mystery.  What about Verity's other interesting question -- whether it makes sense to regulate pay schemes, and if so whether to do so nationally or locally.  I actually think that's an easy one -- regulate, and do it at the national level. 

Salary constraints are a logical and necessary implication of the non-distribution constraint -- the rule that makes non-profits not for profit.  The constraint, at its most basic, says that n/p firms cannot sell equity stakes or pay dividends.  Well, any tax planner will tell you that it's easy to convert dividends into compensation, or vice-versa.  So, assuming we have good reasons for wanting a non-profit sector, that sector can only meaningfully remain non-profit if there are also compensation limits. 

Local regulation of compensation, though, would probably be a disaster.  Assuming that managers have substantial influence over where a n/p firm does business, states would have incentives to loosen compensation limits in order to attract n/p firms.  And monitoring by the stakeholders of each n/p firm is plagued by free-rider problems, so that the only strong overseers of the rules for n/p's are probably national coalitions devoted to good n/p governance.  Those coalitions can do a much better job monitoring one set of federal law than 50 sets of state law.   

The rules for n/p compensation also can generate what we might call psychological externalities.  Part of what allows n/p's to compete for top talent, notwithstanding their inability to offer profit-based incentives, is a community norm of public service and self-sacrifice for the greater good.  Lax regulation in one state can undermine this norm for the national community.  More generally, compensation structures in one state shape the positional arms race for wealth nationally, which to my mind justifies not only the n/p rules but also nation-level redistributive tax and corporate law policies.  We can't rely on the market for corporate control to control these effects, since they are largely public goods. 

In short, good post, Verity.