One of the drivers of the unacceptably high levels of economic inequality in the United States is excessive CEO pay. In 2019, CEOs of the largest corporations were paid 320 times what average rank-and-file workers were paid. The chasm between executive pay and worker pay has grown exponentially: In the 1960s, CEOs were paid 21 times more than typical workers. It is also much worse in the United States than in other countries. CEOs and other corporate managers represent a significant share of the top 1 percent, whose incomes have skyrocketed while real wages for rank-and-file workers have stagnated.
In recovering from the pandemic, we must build an economy that works for everyone. The Build Back Better agenda of investing in key areas that generate inclusive prosperity while making the wealthy and corporations pay their fair share of taxes will grow the economy, boost wages, and reduce inequality. There is no single solution that will fix the growing inequality in America and the exorbitant pay increases that CEOs have enjoyed the past few decades. Progressive tax reform can, however, be an opportunity to address excessive executive pay. An important idea in solving this problem is the Tax Excessive CEO Pay Act, introduced by Sens. Bernie Sanders (I-VT), Elizabeth Warren (D-MA), Chris Van Hollen (D-MD), and Ed Markey (D-MA) and Reps. Barbara Lee (D-CA) and Rashida Tlaib (D-MI). The bill would raise the tax rates for corporations whose ratio of CEO-to-median-worker pay is more than 50 to 1, with incrementally larger increases for corporations whose ratios are even higher. The legislators should be commended for their focus on this issue and for putting forward a potentially very powerful tool to restrain excessive executive pay.
As these leaders work to build a more equitable economy and reform U.S. tax code, the Tax Excessive CEO Pay Act merits serious consideration. This should include a congressional hearing; an analysis of the effect of the smaller-scale but similar policy that Portland, Oregon, adopted in 2016; and an analysis of how firms are likely to respond to the incentives created by tying their tax rate to a CEO-to-median-worker pay ratio, such as any downside risk that some would manipulate the ratio by outsourcing relatively low-wage functions.
There are also several other ways to use tax reforms to restrain excessive executive pay. These include further limiting executive pay deductions by applying the $1 million deduction limit to all corporate officers and employees or imposing additional surtaxes on excessive pay; increasing top tax rates in general, which has the salutary effect of reducing executives’ incentives to pad their own pay while raising revenue from them and other members of the richest 1 percent; ending tax preferences for stock buybacks, which corporate executives increasingly use to reward themselves at the expense of their firms’ long-term interests; and raising corporate tax rates and closing loopholes for all large, profitable corporations to curb corporate power, raise revenue for critical investments, and end offshoring incentives.
The Center for American Progress Action Fund has also proposed tax reforms to boost workers’ bargaining power, including denying corporations deductions for anti-labor expenses.
Tax policy is one tool to restrain excessive executive compensation and empower American workers, but it is far from the only tool. To narrow the pay chasm between executives and workers and foster broad-based growth, fiscal policies must be complemented by policies to reform corporate governance and strengthen unions and workers’ bargaining power.