Putting the Brakes on Corporate America’s Inequality Engine

Why has the United States become so much more unequal over the last four decades? Any number of factors have been driving our increased inequality. But no single factor may have been more significant than the behavior of the modern American corporation.

Corporations are contributing to inequality on two fronts. On the one hand, they’re systematically depressing incomes for average Americans, via everything from outsourcing to pension cuts. On the other, they’re just as systematically stuffing the pockets of America’s executive class.

These two vile sets of behaviors are relentlessly reinforcing each other. Outrageously huge rewards give corporate executives an incentive to behave outrageously, to squeeze their workers at every opportunity.

So how can we fight these corporate pay outrages? We change the incentive structure. We start giving Corporate America reason to narrow income divides, not stretch them ever wider. New legislation just introduced in Congress does just that.

The legislation — the Tax Excessive CEO Pay Act — raises the corporate tax rate on companies that pay their top executives over 50 times more than what they pay their most typical workers. The wider the pay-gap multiple over 50 times, the higher the tax rate.

Not that long ago, no one could have possibly dreamed that this sort of tax penalty would be so necessary. In mid-20th century America, CEOs at major U.S. firms seldom made much more than 30 or 40 times average worker pay. Today, by contrast, the nation’s top CEOs average nearly 300 times more. In 2018, a new Institute for Policy Studies report details, 50 top execs grabbed over 1,000 times more.

The proposed Tax Excessive CEO Pay Act carries some heavyweight sponsors. In the Senate, Bernie Sanders (I-Vermont) introduced the legislation November 13, the same day that veteran lawmaker Barbara Lee (D-California) and outspoken first-termer Rashida Tlaib (D-Michigan) introduced the bill in the House. And, on the Senate side, Senator Elizabeth Warren (D-Massachusetts) is co-sponsoring the legislation.

Over two dozen national labor, religious, and policy organizations have already endorsed the new Tax Excessive CEO Pay Act. They range from the AFL-CIO and the National Council of Churches to the Coalition on Human Needs and Public Citizen.

“The more corporations channel into executives’ pockets, the less they have for wages and other investments,” the groups note in a joint statement of support. “By putting a tax penalty on corporations with extreme pay gaps, the bill would give corporations an incentive to narrow their divides by lifting up the bottom and bringing down the top of their pay scale.”

“If America’s corporate boards can’t understand the absurdity of paying their CEO friends — in one year — more than their workers will earn in a lifetime,” adds Senator Sanders, “then the Tax Excessive CEO Pay Act will help them figure it out.”

Rep. Lee has been a long-time champion of measures that link executive and worker pay. Her Income Equity Act sought to prevent corporations from deducting off their taxes executive pay that runs over 25 times worker pay. The Tax Excessive CEO Pay Act builds upon that approach on a grander scale — and also plugs loopholes in similar pay-ratio tax bills that have come before legislatures at the state and federal level.

The new bill, for instance, applies to both publicly traded and privately held corporations. Under the legislation, giant privately held corporations would — for the first time ever — have to reveal the ratio between their CEO and median worker pay.

The Tax Excessive CEO Pay Act also recognizes that the most highly compensated executive within a corporation at times might not be the CEO. In firms like Google and Twitter, CEOs have sometimes taken only nominal annual compensation because they gain far more from increases in the value of the millions of shares they hold. At these companies, other top execs are collecting CEO-size windfalls.

One example: At Alphabet, the enterprise that subsumes Google, CEO and co-founder Larry Page holds company stock worth over $22 billion. He takes home $1 a year. In 2018, Alphabet’s highest-paid exec collected $47.5 million, 192 times median pay. Under the Tax Excessive CEO Pay Act, the corporate tax would be tied to that $47.5 million compensation.

The legislation’s corporate tax penalty would add a 0.5 percentage-point increase to the corporate income tax rate for companies with CEO-median worker pay ratios between 50 and 100 times. A firm with a ratio between 100 and 200 times would face a 1 percentage-point increase, with the rate jumping by 5 percentage points for companies with CEO-worker gaps over 500 times.

For corporations with billions in annual earnings, these percentage-point increases would have real bite. Walmart’s tax liability would have soared by $794 million if the Tax Excessive CEO Pay Act had been law last year.

Would tax hikes in the hundreds of millions be enough to convince corporate boards to narrow their vast pay divides? In some cases, probably not. Greed runs deep in Corporate America. But we have other tools we can contemplate, other consequences we can place on enterprises with unconscionable divides.

Some of these consequences have already surfaced in state-level legislative proposals. We can tie the awarding of lucrative government contracts to pay ratios. We can do the same with government subsidies. We can create all sorts of incentives for corporations to do the right thing.

The Tax Excessive CEO Pay Act starts us down that road. What a good start its passage would be.

Sam Pizzigati co-edits Inequality.org. His recent books include The Case for a Maximum Wage and The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970. Follow him at @Too_Much_Online.