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Tying corporate tax rates to CEO/Worker pay ratios

Since the English translation of Thomas Piketty's book, Capital in the Twenty-First Century, became a best-seller, the national conversation about economic inequality has returned to its proper focus: ratios. 

In a country as broad and regionally diverse as ours, emphasizing absolute income metrics has less relevance than zeroing in on relative ones, such as the CEO-to-median-worker pay ratio. (This blog has talked about it multiple times in the past year or so.) Absolute income metrics, such as a $100,000 salary, become nearly meaningless when one contrasts cost-of-living indexes in, say, New York and South Bend.

Reading the commentary around Piketty's book last week, and especially conservative analyses from open-minded free-marketers (e.g., Pascal Emmanuel-Gobry), I wondered if anyone had yet proposed tying corporate tax rates to CEO/Worker pay ratio.

That is to say, the tax rate would not be based in any way on an absolute number, such as a corporation's profits, but rather based on how the corporation distributes those profits within its corporation.

A large, profitable company with a somewhat compressed compensation scale would thus have a lower tax rate than a less profitable company with a large CEO/Worker pay ratio.

This would incentivize distributive justice on a smaller scale (of the corporation), in order to reduce the need for redistributive justice on a large scale (of the federal government).

In terms of Catholic social teaching, it would emphasize subsidiarity in alleviating the problems of economic inequality. Such a change would increase the flow of capital between citizens and reduce the role of the federal government. 

If we have to do something about the historic levels of inequality in our country, isn't this one of the least worst things we could try?

It turns out that California is considering trying it on the state level. Here's Paul Hodgson at Reuters:

Two state senators want to make sure that companies based in California pay a price for granting super-sized salaries to their CEOs. Businesses that reward their top officials with outlandish bonuses and salaries would be forced to pay a special tax.

The ratio between the pay for a company’s CEO and the median pay of all other employees — known as the CEO/worker pay ratio — has been getting a lot of political attention lately. The most contentious component of the Dodd-Frank financial reform bill has been the CEO/worker pay ratio disclosure requirement — not Say on Pay (the right of shareholders to vote on executive pay), or financial oversight agencies, or creating the Consumer Financial Protection Bureau or even initiating the Volcker rule. More letters have been written by more corporations, shareholders, lawyers and consultants to the Securities and Exchange Commission than ever before, both supporting the disclosure and fighting against it. [...]

The legislation proposed by California state senators Mark DeSaulnier and Loni Hancock seeks to put teeth in the disclosure requirement. If the compensation of a company’s CEO exceeds 100 times the median wage of the workforce, the company’s state corporation tax rate goes up incrementally to a maximum of 13 percent if the ratio is greater than 400 times. If it’s lower than 100 times, the corporation’s tax rate goes down.

The bill passed California’s Senate Governance and Finance Committee last week. But it will need a two-thirds majority in the senate to be signed into law.

Some further details about the bill can be found here.

Is this the kind of effort that could unite different parties? Could Paul Ryan and Nancy Pelosi negotiate such a bill at the federal level?

Indeed, it would make more sense as a federal law, to prevent companies from relocating in order to avoid the new metric. In addition, perhaps requiring two ratios in the law would eliminate possible manipulation of the median figure: the rate could be tied to both the lowest earner and the median earner. Finally, the concept would need a spoonful of sugar (or two!) to help its medicine go down for libertarian-leaning conservatives.  One possibility would be to make the lowest ratio completely tax free. That is, if a corporation's ratio is below X-to-1, its corporate tax rate is zero.

If this were to become a federal idea, it could include non-profit corporations in the mix too. Some of the compensation packages at non-profits have raised eyebrows in recent years. But under a federal ratio-driven policy, the government could say that if a non-profit's ratio exceeds a certain number, it is no longer tax-exempt.

Of course, libertarian-leaning conservatives are not going to like a progressive corporate taxation proposal based on ratios. But they don't like progressive taxation at all. The question is, will the Paul Ryans of the world like this more or less than the current state of affairs?

About the Author

Michael Peppard is associate professor of theology at Fordham University, author of The World's Oldest Church and The Son of God in the Roman World, and on Twitter @MichaelPeppard.



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"the national conversation about economic inequality has returned to its proper focus: ratios."  Sez who?

I'd rather be paid $100,000 than $50,000 no matter what the CEO/median ratio is.  As Robert Solow recently remarked, "you eat your wage, not your share of national income."

And another thing - despite its presumed good intentioms the  California scheme would penalize companies disproportionately hiring low income workers.

I'm glad to see that Patrick Molloy has been reading Robert Solow. But the sentence he quotes comes from a review of Piketty's book in which Solow, a Nobel Prize–winning economist, affirms that income and wealth ratios are indeed something that a democratic country has to concern itself with—that is, if it wants to remain democratic. As Solow writes, "If the ownership of wealth in fact becomes even more concentrated during the rest of the twenty-first century, the outlook is pretty bleak unless you have a taste for oligarchy." Here's a link to Solow's review, which appeared in the New Republic.

Pascal Emmanuel-Gobry is quick on the response!  Writing on the Forbes blog here:

CEO Salary excesses are one thing ..another is the fact that most CEOs have unlimited expence accounts that take care of their every day spending. We plebs spend for meals out, townhouses  entertainment,[sports, theater etc]  travel, [air and car], gas, subscriptions, tips, gifts to family and friends..and whatever.CEOs charge it to the corp.

See GM CEO Jack Welsh's divorce filings and then try to figure what he spent his huge  salary on.,   his ex wife listed how all his/hers daily expences were charged to his GM expense account. All his meals at the GM townhose were charged to GM by the 4 star restaurant on the ground floor of the condo complex.. I bet he used the GM account to give the door man the annual Christmas bonus too.   

It's an interesting idea.  I agree with Emmanuel-Gobry that it is questionable that CEOs would just take a pay cut and like it (and I think it's still less likely that firms would respond by raising their workers' wages).  As Emmanuel-Gobry points out, CEOs would find non-wage ways of being compensated, a treasure hunt at which they are already experts.

I saw in a recent interview with Piketty that he believes there is some sort of overall negative correlation between CEO pay and worker pay.  Perhaps at the macro-macro levels that Piketty looks at there is some evidence of that, but I'm skeptical that's it's a rule that almost always obtains, or that there is some compelling reason that things must work that way, such that a highly paid CEO will have low-wage workers and vice-versa.  I expect we can find many instances of firms that exemplify each of the different possible permutiations/combinations: high-CEO/low-worker; low-CEO/high worker; high-CEO/high worker; low-CEO/low-worker.  My view is that CEOs of major companies are in a completely different labor market than the average joes and worker bees, and what prevails in the one labor market has little or no impact on what happens in the others.

There is this, too: a couple of times in the past when we've discussed high executive compensation here at dotCom, we've talked about how outrageous it is that the CEOs at firms like JC Penney and Home Depot made gazillions in compensation while their companies were doing poorly and laying off workers.  It seems to me that Michael's proposed CEO/worker ratio tax could be ineffective from that perspective.  After all, the entity being incentivized/disincentivized by Michael's proposed tax is not the CEO but the firm.  It's not difficult to imagine that there will be some CEOs who frankly don't care whether the firm pays higher taxes (perhaps even resulting in layoffs), as long as it does not effect the CEO's personal compensation. 

Emmanuel-Gobry's reply points to a variation on Michael's idea that might have some merit: rather than attempt to tie worker compensation to CEO compensation, base both the CEO's and the workers' compensation, at least in part, on profitability and customer satisfaction.  If the firm is growing and customers are happy, the workers whose work made those good things possible can share in the rewards.  And if the firm is not doing well, everybody suffers at least a bit.  This is not a radical idea.  Many firms pay their workers this way already.  But perhaps there are fiscal-policy levers that can make this idea more widespread.


Whatever the merit of the particulars of this proposal it has the great merit of recognizing that a fair wage is fair *relative to other wages* paid by the company.  It's not just the character of the work that has to be taken into account.  

And while the Congress is inventing this new law it should be careful to outlaw "golden parachute" severance payments in cases where an executive has run a company into the ground or been fired.

I do have one theoretical problem with this:  some executives are far more valuable than others, and in effect putting a cap on their earnings would not be fair.  But it seems to me that problem might be worked out somehow.. 

That just seems like a recipe for rounds of increasing the complexity of corporate structure and compensation followed by increasing the complexity of the law to close loopholes.

I'd prefer to keep it simple. If you are worried about the disparity between CEOs and the median worker, raise taxes on high earners and redistribute the money. If you are concerned about the increasing share going to capital, raise capital gains taxes and eliminate sources of rents. If you are concerned about dynasties accumulating wealth, raise the estate tax.

Indeed, [taxing excessive CEO-to-median-worker ratio wages] would make more sense as a federal law, to prevent companies from relocating in order to avoid the new metric.

Thinking of relocations as being constrained by such flimsy barriers as oceans and national borders is so last century.  Here is John McCarron on what seems to be a growing trend: inversion, aka moving headquarters overseas as a tax avoidance scheme.


It has always been known that there is a vast inequity even in the US.  Ditto that it has always been known that this happens because of Middle Class agreement. This happened because the Middle Class felt reasonably compensated. That reasonable compensation may be the reason why the Middle Class will not tolerate this now. 

And there is the glaring fact that no one had the courage to jail the big bankers who were the principal culprits for  the Great Recession.

Ryan --

I agree that taxing the over-paid executives would be good idea, certainly better than capping their earnings someow.  It seems to me that most competitive business people are motivated not so much by the desire fo be able o buy a lot of stuff but by the competitive urge to beat their opponents, and their earnings become their way of keeping score. and the highest-paid execs are the winners.  Let them have their glory -- they might even deserve some of it, and a few might deserve a lot of it.   But tax them and see to it that their poorly paid employees get theirs.

Given my druthers, I'd go with Ryan Rowekamp's "keep it simple" and tax them. That's what we used to do, by the way.

But, given our political-economic divisions, the CEO-to-median ratio is something worth looking into. The devil will be in the details, though. For an obvious example, when Bill Gates was a CEO his contributions went well beyond management, since he practically invented the company. Of course the kind of company he invented made a lot of median-salary workers rich, too, when it went public.

For less obvious examples, back when I used to follow corporate governance, there were dozens of examples of a $10 million executive running a company into the ground and being succeeded by a $10 million executive who turned it around and saved it. I'd say the second guy was worth a premium over the standard for a well-performing CEO in a well-performing company.

BTW, The best-compensated yacht-owner and CEO in the USA these days runs a company that is getting the blame for screwing up Oregon's heath insurance computer program to a fare-thee-well.

A big change in the inequity reality came when mutual fund managers and hedge fund managers took over American finance.  A famous story occurred in the 90s when a mutual fund manager approached Arthur Ryan head of Chase. The manager told Ryan that he had to do something to raise the stock value of Chase. Ryan promptly laid of thousands of employees as a way to reduce cost, thereby elevating the stock price. 

Shareholders should not have the preeminent position they have now. This system favors those who have capital against those who have not. Thus acquisitions occur, the employees are cut, the stock goes up and the company is sold again. Many times it leads to the detriment of the company and employees. 

A world in which only shareholders have rights is the problem. A reasonable return on investment is fine. But the returns are beyond reasonable disenfranching the majority of the population.

@ed gleason -- Welsh (sic) was CEO of General Electric, not General Motors.

@bill mazella -- Chase was the dog of NY bank stocks, underachieving in almost all measures of performance.

@michael peppard -- Pikkety's book is full of logical errors and risible economic thinking.  Most glaringly, as pointed out in the financial press, he has made a wild and baseless assumption on "the return of capital" from the time of Moses into the distant future.  As I said, risible and not to be taken seriously. 

I think the idea is compelling.  However, I think that it would need to be married to another absolute metric, so that it only kicks in if the average income of the company were under a certain level.  So, a company can have a high ratio as long as everyone is paid well.  Essentially, the tax penalty would only apply to companies that both pay their CEOs exorbidently and their workers poorly.

So, a company can have a high ratio as long as everyone is paid well.

I've argued in the past that this is consonant with a preferential option for the poor.  On the other hand, in another recent thread, an article was referenced in the comments that described some of the social and moral dangers of inequality, even considered apart from the problem of poverty.   For example, inequality puts the social fabric at risk as the ultra-wealthy tend to wrap themselves in enclaves.   Inequality is not nothing.

Essentially, the tax penalty would only apply to companies that both pay their CEOs exorbidently and their workers poorly.

Boards of directors are supposed to (at least, morally and ethically they are supposed to) provide appropriate governance, such that the firm's performance, the executives' compensation and the workers' compensation are all aligned.  If boards were functional, the ratio might happen as it is supposed to.  I don't believe for a moment that legislation could be written to take into account all the possible factors that lead to "fair" or "unfair" executive compensation.  I believe we need to do a deeper dive on the governance of corporations in order to find workable remedies.  New laws or regulations might well be part of the solution, but they might work by placing some constraints or limits on what boards can pay their executives, perhaps by making it contingent on profitability and employment.  For example, there may be times when workers must be laid off or worker wages frozen, but executives should also take a compensation hit when that happens.




"@bill mazella -- Chase was the dog of NY bank stocks, underachieving in almost all measures of performance."

Right, John Walton. Now Chase is doing very well since it has raped the country out of billions while paying nominal fines. Making hundreds of billions while being fined only a few billion and avoiding jail. Any criminal will take that tradeoff any day.

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