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?

Michael Peppard is associate professor of theology at Fordham University and on the staff of its Curran Center for American Catholic Studies. He is the author of The World's Oldest Church and The Son of God in the Roman World, and on Twitter @MichaelPeppard. He is a contributing editor to Commonweal.

Please email comments to letters@commonwealmagazine.org and join the conversation on our Facebook page.

Must Reads

Politics
Religion
Culture
Books
Collections