Redistribution—via the tax code—has been central to the progressive vision ever since the original Gilded Age. Let’s tax our wealthiest, this traditional approach urges, and use the resulting revenues to underwrite initiatives that can help “level up” those without much wealth at all.
But critics from the left see a fatal flaw in redistribution as traditionally practiced. This redistribution takes the inequality-generating economy as a given and essentially accepts that this economy will end up advantaging some and disadvantaging others. That acceptance leaves egalitarians playing a mop-up role: They work to even up outcomes, to smooth out advantages.
The advantaged, unfortunately, seldom cooperate. They push back against the smoothing.
The British economist Faiza Shaheen uses a medical analogy to describe what typically happens next. Over time, she explains, viruses can develop resistance to antiviral medications. The rich, like viruses, also develop resistance, in their case to redistributive taxes. They use their wealth and power to carve out tax loopholes and lower tax rates. Their fortunes balloon. Inequality grows.
Smart public-health officials stress prevention. Smart social and economic policy, says Shaheen, would stress prevention as well. This policy wouldn’t solely rely on our ability to tax income and wealth that concentrate at the economic summit. This policy would instead move to prevent income and wealth from concentrating in the first place. Inequality simply matters too much to let it dig in.
We need, in short, to battle for economies that generate less inequality, not just for redistributive measures that aim to clean up already-made messes. We need to place as much emphasis on the “predistribution” of wealth as its redistribution. We need to identify the institutions and policies that guide excessive rewards to the rich and powerful—and make them over.
But just how could we—how should we—“predistribute”? The predistributive focus is zooming in on the steady decline in the share of national income going to worker wages.
This shrinking share makes no rational economic sense. Fewer coins in worker pockets mean either less demand for goods and services or huge increases in household debt—or both. Firms in low-wage environments, meanwhile, have little reason to invest in productivity enhancements. With so much cheap labor available to hire, why go to that trouble? Low wages also mean fewer customers who can afford to buy the goods and services that productivity enhancements would help companies produce. So companies end up awash with cash that has no place productive to go, cash that ends up fueling an endless stream of mergers and acquisitions that enhance monopoly power—and ratchet up the profit share of national income.
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Our sinking worker-wage share has periodically animated various initiatives designed to “make work pay.” But corporations have shown little inclination to play along. Why should they? A low-wage economy may make no economic sense for society as a whole. But low wages make perfect sense for individual corporate executives. The smaller the worker share, the greater the corporate profit, the more generous the rewards for top corporate brass. And these rewards have no limit. The more that executives exploit, the more they can pocket. An ability—and willingness—to exploit workers becomes what makes executives attractive and valuable.
In early 2017, no executive in North America struck investors as more attractive and valuable than Hunter Harrison. This veteran corporate chief demanded—and won—a $230-million four-year pay package to take the reins at the railroad giant CSX. What made him worth that windfall to the CSX board of directors? Harrison, as the CEO at Canadian Pacific, had “turned around” a lackluster operation. The secret to his success? He slashed the workforce—over 17,000 employees at the start of his CEO tenure—by 34 percent.
Cutting jobs can be strenuous work. Harrison made sure he received adequate compensation for it. During his Canadian Pacific tenure, he collected $89 million over four years, more than double the pay his CEO predecessor at Canadian Pacific had received for the same length of service.
Corporate boardrooms today are overflowing with executives like Hunter Harrison—and corporate directors eager to reward them. Between 1978 and 2015, the Economic Policy Institute calculates, major corporation CEO compensation increased about 941 percent, a rise “substantially greater than the painfully slow 10.3 percent growth in a typical worker’s compensation over the same period.”
In 1965, major CEOs in the United States averaged 20 times more compensation than typical American workers. They now average over 300 times higher. Their annual jackpots have emerged as the single largest contributor to the skyrocketing income share of America’s top 0.1 percent. All told, the rewards corporate and banking power suits rake in have accounted for two-thirds of the top 0.1 percent’s outrageously good income fortune.
Executive compensation has essentially become the locomotive of our contemporary inequality. To “predistribute” wealth more rationally, we would need to slow that engine down.
Who could do that slowing? Many corporate-pay reformers look to shareholders for salvation. They seek to give shareholders a “say on pay,” the right to take annual votes on executive pay packages, and also call for changes in corporate governance rules that would give dissident shareholders a better shot at unseating CEO-friendly corporate-board incumbents.`
Other reformers question the viability of any strategy that relies on shareholders—and shareholders alone—to restore common sense to executive compensation.
“Why should we let shareholders be the ultimate arbiter on the size of CEO rewards,” an Institute for Policy Studies report asks, “when these rewards can and do create incentives for CEO behaviors that hurt people who aren’t shareholders?”
Consumers, workers, and communities all have a stake in how corporations pay CEOs. Shareholders count as just one stakeholder among many, and their interests may not necessarily align with the interests of other stakeholders.
In developed market economies, we already recognize this divergence of stakeholder interests. We do not, for instance, leave to shareholders the responsibility for making sure that corporations refrain from fouling the environment. Instead, we legislate into law rules on how corporations can behave environmentally.
By the same token, we do not expect shareholders to monitor the fairness of corporate employment practices. We deny government support, for instance, to companies that discriminate by race or gender in hiring. In the United States, such companies cannot gain government contracts. Tax dollars, Americans have come to believe, should not subsidize enterprises that increase racial or gender inequality.
Stakeholder-oriented corporate reformers are extending this analogy to executive compensation. Tax dollars, they maintain, should also not subsidize enterprises that widen economic inequality. Tax dollars today undeniably do. Hundreds of billions of them annually flow—as government contracts or tax breaks or outright subsidies—to companies that pay executives hundreds of times more than their workers. Executives at these companies have no incentive to change this status quo. They benefit too much from it. They win when workers lose. Their victories make inequality ever worse.
We need a new reward structure. Top executives need an incentive to share the wealth their enterprises create. A “maximum wage”—a ceiling on executive pay—could provide that incentive. The “public purse” could make that maximum wage practical.
In the United States, private-sector firms currently take in about $500 billion every year in federal government contracts, for everything from manufacturing military aircraft to serving food and drinks in national parks. Over a fifth of the US workforce, 22 percent, labors for a company that holds one or more federal contracts. Millions of other Americans work for firms with state and local government contracts.
Governments at all levels in the United States also bestow economic-development subsidies on private corporations. Corporate welfare from state and local governments alone had accumulated to at least $110 billion in 2014, with an estimated three-quarters of that total going to fewer than 1,000 large corporations. By 2014, Boeing had pocketed nearly $13.2 billion in state and local subsidies, a total that exceeded the company’s total pretax profits between 2012 and 2013.
Imagine if all this taxpayer largesse came with strings that tied top executive compensation to worker pay: no contracts, no subsidies, no tax breaks for corporations that pay their top executives—in salary, bonus, and incentives—over 25 or 50 or 100 times what their workers are making.
Such strings would be politically popular. No nation on earth has taxpayers who want to see the taxes they pay enrich the already rich. In a 2016 Reuters/Ipsos poll of over 1,000 Americans with stock-market investments with a top asset manager, a survey sample that tilts conservative, just under 60 percent felt CEOs were making “too much,” double the share who felt corporations had CEO pay “about right.” Political campaigns to deny tax support for corporate-executive pay excess would find publics ready—and even eager—to listen.
And if those publics successfully ushered links between corporate-executive pay and government outlays into law, the consequences would be far-reaching. Corporate executives would suddenly have an incentive to raise long-stagnant worker wages and less of an incentive to squeeze consumers or cook the books or do any other dastardly deed that subverts the overall public well-being. What would be the point? A move to outsource jobs or cut corners on product safety still might, of course, increase corporate profits. But those higher profits would translate into executive-pay windfalls only if corporations turned their back on government contracts, tax breaks, and subsidies. No major corporation could thrive without this government support. No rational corporate board would risk losing it.
A predistributive approach to public policy could also reward corporations with the most modest pay differentials between executives and workers. Governments could offer these firms lower tax rates. Or give them preferential treatment in the contract-bidding process. Steps like these would, over the long term, privilege enterprises with pay patterns that help narrow inequalities and place at a competitive disadvantage those enterprises that continue to compensate executives excessively.
The competitive advantage, in this environment, would go to nontraditional enterprises that embrace equity as a central core value. Cooperatives and worker-managed firms would have a better chance of prospering—and proliferating—if tax dollars no longer subsidized corporations that lavished excessive compensation on top executives. Leading egalitarian thinkers like political economist and historian Gar Alperovitz see these alternate enterprises as the key to creating an equitable and sustainable “New Economy.” Placing a “maximum wage” pay ratio at the heart of the intersection between public and private sectors would give these alternate enterprises a powerful leg up—and help “level up” lowly incomes.
That same pay ratio would, over time, depress executive compensation. In 2016, CEOs at America’s top corporations averaged $16.6 million, nearly 340 times what the average US worker takes home. Executive paychecks at that exorbitant level would start shrinking immediately if governments at all levels began rewarding enterprises that maintain a reasonable pay-ratio maximum and penalizing those firms that do not.
Any paycheck erosion at the corporate-executive summit would, in turn, begin deflating the income and wealth of the 1 percent. But huge concentrations of income and wealth would, to be sure, most certainly remain. If pay-ratio maximums swept across the corporate landscape, already accumulated billion-dollar fortunes would continue to throw off tens and even hundreds of millions in annual investment returns. Hedge and private-equity-fund managers would still be wheeling and dealing their way to massive windfalls.
The super-rich would remain with us in societies that leveraged the power of the public purse to cap corporate CEO compensation. But this super-rich, without a steady infusion from the ranks of corporate executives, would stand more isolated and less politically potent. Their declining political influence would open the door to broader initiatives seeking to address the vast incomes that come from the ownership of assets. Societies could, for instance, begin to restructure income taxes along maximum-wage lines. Personal income above specific benchmarks—starting perhaps at 25 or 50 or 100 times the minimum wage—could be subject to strikingly higher tax rates than incomes below those ratios.
Into our sights would soon begin to creep a world without a super-rich. And a dandy world that would surely be.
