The Revenue Reconciliation Act of 1993 denied public companies any tax deduction for the cost of regular compensation in excess of $1 million dollars a year. It also raised the top tax rate to 39.6%.
This caused companies to direct more compensation from salary to performance pay in the form of stock options, which became increasingly popular. Due to the stock market performance in the 1990’s this proved to make these executives far more money that they would have earned with a lower tax and no deduction limit.
It is a common theme that the social tinkering that passes for economic and tax policy often has the reverse effect intended. Two reasons come to mind.
First, the economy is far too complicated to be effectively planned by any elitist policy wonk no matter how over credentialed they are. The law of unintended consequences is just another way of saying these planners know far less than they think about the economy they try to regulate. But there is a never ending supply of moral supremacists and self anointed masters of the universe who think that they will succeed where their intellectual clones failed.
Secondly, the private sector attracts far more competency and talent than the public sector. That means that for every effort from the regulatory authorities to mold society and behavior to their supreme moral vision there is a better educated, better motivated, more creative and just smarter counterpart in the private sector who will find a way to obtain their objective. They will often just smile as they come to realize that their pockets end up being lined by the same foolish bureaucrats who sought to fleece them.
But not all of the unintended consequences are good. Many of the larger businesses with their covey of tax advisors find ways to work around or benefit from the regulations, but smaller privately held businesses do not benefit from new rules on stock options. Having to devote so much effort to circumventing confiscatory regulations just detracts from the time they should be devoting to serving new customers or improving their business. Increasing regulations is often pushed by those who curse bigness, yet their very regulations usually ends up serving bigger companies at the expense of smaller ones.