The key to distributing wealth more equitably

We only build—and sustain—more equal societies when we confront the economic dynamics that generate inequality in the first place.

CEO compensation in the United States may have finally crossed the line—from outrageously unfair to intolerably obscene. In 2018, a new Institute for Policy studies report details 50 major U.S. corporations paid their top execs over 1,000 times the pay that went to their most typical workers.

What can we do about obscenity this raw? Plenty. We can start by placing consequences on the CEO-worker pay ratios that publicly traded U.S. corporations must now annually disclose.

In Oregon, the city of Portland already has. Since 2017, major companies that do business in Portland have had to pay the city’s business tax at a higher rate if they compensate their top execs at over 100 times what they pay their median—most typical—workers.

State lawmakers have introduced similar legislation in seven states, and, earlier last week, White House hopeful Bernie Sanders announced a plan to hike the U.S. corporate income tax rate on all large firms that pay their top execs over 50 times their worker pay. Some context: A half-century ago, few U.S. corporations paid their chief execs over 25 times what their workers earned.

The new Sanders plan has drawn predictable scorn from the usual suspects. One analyst from the right-wing Manhattan Institute, for instance, told the Washington Post that a pay-ratio tax “could dramatically affect industries such as fast food and retail that naturally pay lower wages.”

Corporations pay “what the market demands,” added Adam Michel from the equally conservative Heritage Foundation, “and levying new taxes on high pay will just make U.S. businesses less able to compete globally, expand their workforces, or raise wages of rank and file workers.”

But the idea of taxing firms with top-heavy pay patterns at higher rates also has critics in circles that usually scorn the free-market fundamentalism of conservative think tanks. These critics—like Eric Toder of the Urban Institute’s Tax Policy Center—see the progressive income tax as the more appropriate antidote to CEO pay excess.

High tax rates on high incomes, analysts who share this perspective point out, can dampen excessive executive pay. Corporate boards aren’t going to bother shelling out multiple millions to CEOs if most of those millions will simply end up going to Uncle Sam.

In the mid-20th century, with incomes over $400,000 facing a 91 percent tax rate, that shelling out certainly did dampen. Compensation at the corporate summit flatlined in the decades right after World War II—and even sometimes dipped, as DuPont President Crawford Greenwalt groused to Congress in 1955. His predecessor three decades earlier, Greenwald testified, made twice what he was making in the 1950s.

Corporate attorney Michael Trotter would graduate into this deflated executive-compensation world—from the Harvard Law School—in the early 1960s. The nation’s “high marginal income tax rates,” he would remember years later, “largely kept executive compensation in check.”

But those high marginal tax rates could not be sustained, not in the United States, not in any country in the world that levied high taxes on high incomes in the middle of the 20th century. So what lesson ought we take from our tax-the-rich history? Simply this: Redistribution alone—via progressive tax rates—will never be enough to build and sustain a more equal society. We also need to focus on how societies predistribute our wealth.

The redistribution impulse rests on the notion that we can use steeply graduated tax rates to ease the inequality our market economies generate. Redistribution, in effect, takes inequality as an economic given. Our task becomes cleaning up the mess.

Advocates for predistribution stress the importance of doing everything we can to prevent economies from creating messes—deep inequalities—in the first place. Penalizing corporations that reward top execs phenomenally more than workers advances this predistributive mission, on three key fronts.

The first: If we levy stiff taxes on companies with wide CEO-worker pay ratios, we’ll end up with fewer excessively paid executives—and better pay for workers—as companies scramble to avoid pay-ratio tax penalties by narrowing their pay gaps.

Second: Outrageously high rewards for corporate execs encourage these execs to behave outrageously and do all sorts of things—from outsourcing jobs to slashing worker pensions—that increase inequality. Penalizing corporations that overpay execs would moderate corporate reward structures and reduce the incentive for anything-goes corporate misbehaviors.

Third: Penalizing corporations that pay chiefs unconscionably more than workers would also give a leg up to cooperatives and employee-owned businesses, enterprises that typically pay top managers only moderately more than workers. Denying businesses with wide CEO-worker pay ratios government contracts—or access to government subsidies—would give co-ops and worker-owned enterprises a clear marketplace advantage. With this support, these enterprises could become a basic building block of a new and more equal economy.

Now none of this case for taking predistributive steps to fight inequality obviates the need for also taking redistributive steps. Income excess comes from many different sources, not just corporate pay policies. Great gobs of excess come, for instance, from the wheeling and dealing in assets that deep pockets do. Many other billions in excess come from extracting value out of owned assets, via rents, dividends, and interest. Still billions more come from inheriting grand private fortunes. We need progressive taxes to rein in all these excessive billions.

Predistribution and redistribution together, in short, make for a powerful one-two punch against plutocracy and concentrated wealth. But redistribution alone just can’t cut it. Those who accumulate vast wealth will always be loath to give any appreciable piece of it to tax collectors. They’ll pound away at high tax rates on high incomes until they knock them down, just as they did over the final decades of the 20th century.

How can we prevent the collapse of future steeply progressive tax systems? Only by derailing the corporate enterprises that have become inequality’s locomotive. Pay ratio-based penalties and other predistributive steps would help in that derailing. They would reduce the number—and power—of our awesomely affluent and, in the process, make high redistributive taxes on high incomes much more politically sustainable.

We all recognize that healthy economies need the investments in research and development that go by the tag of “R&D.” About time we recognized that healthy economies also need “R&P”—both “re” and “pre” distribution—as well.

Content licensed under a Creative Commons 3.0 License

Sam Pizzigati co-edits Inequality.org. His latest book, The Case for a Maximum Wage, has just been published. Among his other books on maldistributed income and wealth: 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.

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