In 2018, an American city made history by introducing the world’s first tax penalty on companies that pay their CEOs more than 100 times their median wage. Portland, Oregon, now levies a 10 percent surtax on firms that surpass that level. It rises to 25 percent on firms with pay gaps exceeding 250 to 1.
Portland officials have just shared preliminary results for 2018. Of the 337 returns processed so far, 153 corporations had to pay up. Abercrombie & Fitch had the widest gap between their CEO and median worker pay, at 3,431 to 1.
The initiative has raised $2.4 million, with another million or so expected once they’ve processed returns for 163 remaining corporate filers, and the city plans to spend the revenue on affordable housing and other pressing local needs.
These millions might seem like small potatoes in the grand scheme of things. But the potential is huge: Imagine if governments across the United States—the federal government included—applied the Portland model to their own corporate-tax systems.
At the Institute for Policy Studies, we have further analyzed what could happen if one pending federal pay-ratio proposal was taken up. The plan, proposed by Representative Mark DeSaulnier (D-CA), seeks to increase tax rates from 0.5 percent on firms that pay their CEO over 100 times what median employees make, to 3 percent for pay gaps of more than 400 to 1.
By these rules, S&P 500 corporations alone would pay an estimated $8 billion per year in additional corporate taxes—unless, of course, they responded by narrowing their pay gaps. That, too, would be a welcome move that would help start unraveling our dangerously intense concentration of income, wealth, and power.
“In Donald Trump’s America, the rich get richer and working families get nothing,” notes the champion of that federal bill, Representative DeSaulnier. “We need to shift the paradigm, narrow pay gaps, and ensure workers get what they have earned and deserve.”
Economist Dean Baker of the Center for Economic and Policy Research is proposing a slightly different twist on pay-ratio taxes. With the overall corporate-tax rate now down to 21 percent, Baker suggests restoring the pre-Trump 35 percent rate on corporations with pay gaps over 50 to 1.
At the Economic Policy Institute, meanwhile, Lawrence Mishel and Jessica Schieder conclude their latest analysis of surging CEO compensation—up 17.6 percent last year over the year before—with a call for higher corporate-tax rates on unequal firms. They also support a cap on CEO compensation, enforced by a tax on anything over that threshold.
Curiously, bipartisan support for these policies doesn’t seem to be out of the question. One Stanford survey found that 52 percent of Republicans want to see a fixed cap on CEO pay relative to worker pay—which is more radical than just slapping a tax penalty on large disparities.
But don’t underestimate powerful lobbies. Corporate flacks (who, ironically, probably make orders of magnitude less than the executives they work for) will pitch these taxes as bad for workers, and recycle arguments from their unsuccessful five-year campaign to undo the provision of the 2010 Dodd-Frank Act that requires US companies to reveal the ratio between their CEO and median worker pay.
One argument we can expect is that corporations seeking to avoid these taxes will respond not by lifting up the bottom or bringing down the top of their wage scale but by axing their lowest-paid employees. This argument collapses when we apply some real world math.
At Walmart, for example, the CEO pocketed $22,791,276 last year, while typical workers earned just $19,177. To avoid a tax penalty on gaps over 100 to 1 without lowering CEO pay, the big-box giant would have to cut enough of their lowest-paid workers to raise their median to $227,913.
At McDonald’s, median worker pay would have to jump from $7,017 to $217,610. Gotta wonder who’d still be around to keep shelves stocked and tables clean, especially since most big companies have already outsourced as many jobs as makes corporate bottom-line sense.
The DeSaulnier bill also undercuts such arguments by imposing an extra tax penalty on firms that are offshoring or subcontracting jobs. Philanthropist and investor Steve Silberstein, on his part, points out that the Securities and Exchange Commission’s regulations on calculating pay ratios already create a disincentive for offshoring. Under the SEC rules, corporations must take their offshore workers into account when they calculate their median pay. So shifting still more work to low-wage countries would actually lower their median wage and increase their tax liability if pay-ratio taxes went into effect.
In the real economic world, these taxes would help workers at the bottom of the corporate pay ladder because they would change executives’ incentives. CEOs today have an enormous personal motive—namely, their pay—to keep the cost of labor low. The more unpaid value they extract from their workers, the higher their own compensation.
And that compensation can be staggering. In 2017, a Bloomberg analysis shows, the CEOs at 28 US corporations made over 1,000 times the pay that went to their typical workers. Twenty of these 28 companies sit in the consumer-discretionary sector, a category that includes big retail and restaurant chains, America’s chief low-wage employers.
Back in the 1960s and into the 1970s, few US corporate execs walked off with more than 40 or 50 times their worker pay, and Peter Drucker, the founder of modern management science, considered that gap much too wide. He called for CEO-worker pay ratios no wider than 20 or 25 to 1. Average Americans today, according to the Harvard Business School’s Michael Norton and the University of San Francisco’s Bhavya Mohan, would like to see an even narrower margin. Their research shows that Americans believe a ratio of just 7 to 1 to be ideal.
Low-wage employers consider all this ratio talk beside the point. The nature of their industries, they argue, determines their wage structure. Why should they—as operations with large part-time, seasonal, or entry-level employees—have to pay a ratio tax that corporations with higher-skilled, higher-paid employees may not?
Wheaton College economist John Miller counters that the way a company structures its workforce is a choice. Thirty-one percent of retail employees work part-time, a share “far greater than the 17 percent for workers in other industries.” Major retail- and restaurant-chain employers, in effect, have opted for business practices that “perpetuate inequality.”
We can also expect apologists for our current corporate-pay patterns to trot out the timeworn argument that high CEO pay simply reflects superior performance. Any tax on corporations with wide CEO-worker pay ratios, in this worldview, would rate as “bigotry against the successful.”
And yet when the corporate compensation consultancy firm Pearl Meyer analyzed more than 2,000 corporations this past fall, they found “no correlation between the CEO pay ratio and company performance.”
Without a coherent political case, corporations may launch legal challenges against pay-ratio tax levies. One company, Columbia Sportswear, has already threatened such action. Former Portland city commissioner Steve Novick, the Harvard-trained lawyer who led the charge for Portland’s ratio tax, finds such threats preposterous.
“Let me get this straight,” Novick said in an interview. “It’s perfectly legal for New York and Virginia to give Amazon huge tax breaks, but CEOs think there must be something illegal about a tax that targets corporations’ contribution to galloping inequality?”
Legislators have so far introduced pay-gap tax bills in six states. Besides California, the roster includes Connecticut, Illinois, Massachusetts, Minnesota, and Rhode Island. And action on the pay-ratio front isn’t brewing just in the United States.
In the UK, the Labour Party is pushing consequences for wide ratios, as is the Scottish SNP.
“It isn’t about increasing the size of the cake, it’s about sharing it out more equitably,” Glasgow SNP activist Mary McKay told a party conference this past June. “Wage-ratio legislation is an idea whose time has come.”