Earlier this month, the struggle to reduce US economic inequality took one modest step forward. Senator Bernie Sanders (I-VT), chair of the US Senate Budget Committee, introduced the Tax Excessive CEO Pay Act, which seeks to curb runaway executive compensation, an accomplishment that eluded reformers during the Great Recession a decade ago.
In testimony to the committee on March 17th, Sarah Anderson, director of the Global Economy Program at the Institute for Policy Studies, described how executive pay has run amok:
In 1980, big company CEOs averaged 42 times more compensation than their typical workers. These gaps rapidly expanded in the 1990s, as wages stagnated for most workers and stock-based executive pay exploded. During the 21st century, the annual [ratio] between CEO pay and typical worker pay has averaged about 350 to 1. This growing pay divide has been a significant driver of gender and racial disparities. Women and people of color make up a disproportionately large share of today’s low-wage workers and a distressingly tiny share of corporate leaders.
Beyond the ratios, in real income, the Economic Policy Institute (EPI) reports that inflation-adjusted earnings for CEOs climbed 1,167 percent from 1978 to 2019 (i.e., a 12-fold increase), while worker earnings in that period climbed a measly 13.7 percent. As a result, as of 2019, $10 million is a below-average CEO salary among 350 leading companies. According to EPI, the average CEO among the group earned $14.5 million if stock options are valued at the time that they’re given to CEOs and $21.3 million if you count the value when the options are vested and cashed out.
Under the bill’s provisions, businesses with pay ratios between 50-to-one and 100-to-one would see their tax rate increase by one half of one percentage point. At 100:1, the increase climbs to one percentage point; at 200:1, by two percentage points, and so on up to 500:1.
The current top corporate income tax rate is 21 percent. This measure would increase the top rate for corporations with CEO-worker pay ratios that exceed 500:1 to 26 percent. (It should be noted that prior to 2017 the top corporate income tax rate was 35 percent.) Corporate federal income tax revenue, which peaked during World War II at seven percent of GDP, was only 1.1 percent of GDP in 2019, or $230.2 billion. The measure by Sanders is but a modest corrective to a long-term trend of declining corporate taxes.
According to Sanders, an additional $150 billion over ten years would be raised by the measure. Specific examples, as reported by Truthout and based on 2019 data, illustrate the measure’s economic impact: Walmart, for instance, would have paid up to $854.9 million more in taxes; Home Depot, up to $550.8 million more; JPMorgan Chase, up to $172.8 million more; Nike, up to $147.7 million more; McDonald’s, up to $69.5 million more; and American Airlines up to $22.6 million more.
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The revenue this tax would raise is not trivial, but beyond revenue, a broader aim of the legislation is to change corporate management practices that have resulted in business leaders making decisions that prioritize short-term stock value (and hence CEO earnings) while sacrificing long-term investments and worker pay that may generate long-term value but at the cost of reducing near-term corporate earnings.
Sanders and his Senate and House cosponsors see this proposed legislation as one part of a larger effort to close a growing wealth gap that has left too many working families out of the nation’s prosperity. US Representative Barbara Lee (D-CA), who has introduced a companion bill in the House, emphasized this larger perspective: “As millions of families struggle to keep food on the table during a global pandemic and economic crisis, it is more important than ever that we close the CEO-worker pay gap and ensure that companies pay their workers the wages they deserve.”
In her congressional testimony, Anderson hit a similar chord, noting, “Even in the world’s richest nation we will never eliminate poverty as long as so much of our nation’s resources are flowing to the top, siphoning funds away from needed social programs and enriching a powerful elite that works to block policies that would help reduce inequality.”
The precariousness of far too many families was illustrated when the Federal Reserve found almost 40 percent of US households could not pay a $400 unexpected expense. As Anderson points out, while executives have prospered, “the majority of American families are just a month or two of lost paychecks away from financial ruin.” She adds, “Even with COVID relief assistance, more than 18 percent of US adult renters soon fell behind on their rent and faced the risk of homelessness within nine months.”
Anderson also reminded the Senate Budget Committee of the broader reform agenda her working group has sought to enact, which seeks to empower workers and narrow the wealth gap through strengthening labor union rights, increasing the estate tax (including subtracting out capital gains before stocks are transferred on a “step-up basis” to heirs), raising capital gains tax rates to equal those on wage income, raising general corporate income tax rates, cracking down on offshore tax shelters that enable the wealthy to avoid taxes, canceling federal student loan debt, and establishing a “baby bonds” program to help narrow the racial wealth divide.
This isn’t a new agenda, but might it get a hearing now? After her testimony, NPQ asked Anderson to share her thoughts. She believes the COVID-19 pandemic and its economic impact create new opportunities for action. Anderson pointed to federal contracting as one area where the Biden administration has the ability to make substantive changes, even in the absence of legislative action. For example, Anderson cited proposals to require firms doing business with the federal government to pay their workers at least $15 an hour. She also noted that the Biden administration is contemplating further measures that might restrict the ability of firms that offshore jobs or have excessive executive salaries to obtain federal contracts.
Anderson concluded by offering, “We can and must do better, as a nation, than accept a corporate business model that creates prosperity for the few and precarity for the many.”
