In April, President Joe Biden proposed raising the federal corporate tax rate from 21 to 28 percent to help pay for his $2.3 trillion infrastructure program. That increase would only partially reverse Donald Trump’s 2017 epic slashing of corporate taxes from 35 to 21 percent, a policy most economists consider a flopin its intended effect of boosting business investment and economic growth. Yet limited as it is, Biden’s corporate tax hike is not getting enough love in Washington.
Senate Republicans who have expressed some interest in a bipartisan infrastructure bill have also said raising corporate taxes is a deal killer. Their votes might not be needed if Democrats decide to pass the infrastructure legislation through the congressional reconciliation process. But Democratic moderates like Joe Manchin are balking too, saying they’d only be comfortable raising the corporate tax rate modestly, to 25 percent.
At a time when average Americans are profoundly concerned about stagnant wages and strongly favor raising corporate taxes to pay for infrastructure—Democrats by 85 percent, independents by 60 percent, according to a recent Morning Consult poll—it’s more than a little dispiriting that Biden’s proposal isn’t getting more traction in Congress. What he needs is a smarter corporate tax plan, one that would be harder for the likes of Manchin, and maybe even some populist-leaning Republicans, to resist.
Fortunately, there is one—proposed by, of all people, Senator Bernie Sanders. But to grasp its advantages, you first have to understand why Biden’s plan is floundering.
The power of corporate lobbyists in Washington is one obvious reason. But just as important is the argument they make: that higher corporate taxes hurt the little guy. The Business Roundtable, a driving force behind the 2017 law when JPMorgan Chase CEO Jamie Dimon was its chair, released a survey of CEOs in April saying that two-thirds of them believe raising the corporate tax rate would result in slower wage growth for American workers.
Of course, CEOs would say that. But they have some evidence on their side. The consensus view of economists is that shareholders take the largest hit when corporate taxes are raised, but that workers are hurt, too. According to an estimate by career Treasury Department officials in 2012 (a study the Trump administration quashed), shareholders paid 82 percent of the burden, with the rest coming out of lower employee salaries. The Tax Foundation, a centrist think tank, estimates that the split is closer to 50/50. Few economists, however, claim that higher corporate tax rates would have no downward pressure on wages. This fact makes raising corporate taxes a harder sell politically than it might otherwise be.
Sanders’s proposal turns that weakness into a strength. Legislation he introduced in March, along with cosponsors Elizabeth Warren, Ed Markey, and Chris Van Hollen, would base a corporation’s tax rate on the ratio of its CEO compensation to the median wages of that company’s employees. The higher the ratio—that is, the more out of whack the CEO’s pay is to that of the firm’s workers—the higher the federal corporate tax rate that company would be subject to. If shareholders and board members want to lower the firm’s tax exposure—and no doubt they would—they’d have to pay their CEO less, their employees more, or both. Sanders’s plan, in other words, would flip the incentive structure of federal corporate taxes, from dampening the median worker wages to raising them.
The idea behind the Sanders plan was first pioneered in Portland, Oregon. In 2017, the city passed a law that levies a tax surcharge of 10 percent on companies that pay their CEOs 100 to 250 times more than the median worker, and 25 percent on those with a CEO pay ratio above 250. Though the Portland legislation was framed as a tax, it was really an attack on inequality using the lure of a lower tax rate.
“The goal was not to make money,” Steve Novick, a member of the Portland City Council at the time, told me. “The goal is to get employers to raise median wages. We didn’t want to simply punish inequality. We wanted to reduce it.” Nevertheless, the tax has been a modest revenue raiser of between $3.5 million and $4 million per year.
Novick and his fellow Portland councilmembers didn’t believe that the Rose City alone could change CEO or median worker pay. But they hoped that the idea would inspire others, and to an extent it did. Back in 2014, a majority of California state lawmakers had been ready to greenlight a statewide design of the tax, but it foundered on the legislature’s supermajority requirements for tax increases. However, San Francisco passed a similar version in November of last year that covered all companies, not only the publicly listed ones that Portland targeted.
Representative Mark DeSaulnier, a Democrat who championed the California bill when he was a state legislator, has sponsored federal legislation on this since 2016, when he introduced it with Representative Bonnie Watson Coleman of New Jersey. Sanders, with his talent for staking out the left flank in American politics, is now sponsoring his own version in the Senate.
We have the data points on which these proposals stand thanks to a provision of the Dodd-Frank Act, passed after the 2008 financial crisis, that requires publicly listed companies to disclose the ratio of pay between the CEO and the median employee. The Securities and Exchange Commission implemented the provision by regulation in 2015. The idea was to facilitate a national conversation about pay scales. It worked.
Much to the chagrin of corporate America, journalists now write lots of stories about CEO pay, whether the 983-to-1 ratio at Walmart, or the $21.1 million that Boeing CEO David Calhoun raked in after a year in which he announced plans to lay off 30,000 employees amid a $12 billion loss. Local news outlets cover the hometown industry’s CEO pay, be it casinos in Las Vegas or health care in Minneapolis.
And much to the chagrin of most Americans, corporations keep giving people reasons to be outraged. The Institute for Policy Studies has just published a report on how the corporations with the lowest median wages found ways to juice CEO pay during the pandemic. The cruise industry virtually shut down thanks to Covid-19, but Carnival, the world’s largest operator, gave its CEO a $5 million bonus, for a total compensation that was 490 times the company’s median wage of $27,151. Investigations by The New York Times, the Center for American Progress, and the shareholder advocacy group As You Sow have come to similar conclusions.
In a letter endorsing the Sanders bill, a group of economists led by Robert Hockett of Cornell University focused their critiqueon how massive pay gaps are both a cause and a consequence of the decline in American executives’ willingness to invest in productive enterprises. The allure of outsize pay packages cause CEOs to act in ways that boost share prices or other short-term metrics, while the resulting compensation reinforces this behavior.
“Either firms act on the change to incentives that comes with this legislation—and they don’t pay CEOs as much—or they pay a premium to society when companies are not focused on productive activities,” Hockett told me.
Branco Milanovic, a visiting professor at the City University of New York and a specialist on inequality, sees this approach akin to a carbon tax—a penalty on an unwanted externality, in this case income inequality. In addition to the moral case, there’s a fiscal rationale: Low incomes force workers to rely on taxpayer-funded programs like food stamps and Medicaid in much the same the way polluters force the rest of us to clean up after them.
Another way to conceive of the legislation—as Portland’s Steve Novick does—is as a tool for raising median incomes at major corporations. A couple of factors suggest that it has the potential to do more than simply to push down CEO compensation to get the ratios in line.
The Sanders proposal could be calibrated for the purpose of incentivizing higher median worker pay, in the manner that large class-action penalties are designed to deter certain behaviors. Or money might be credited back if companies closed the gap in subsequent years. “You could even conceive of a revenue-neutral approach,” Novick said. “The goal is fairness, not simply to raise money.”
Under the current political circumstances, we could at least imagine that the political talking points would emphasize the voluntary nature of the higher corporate levy; the more company boards choose exorbitant compensation and low wages for their employees, the more money there is for infrastructure.
With a pay gap of 983 to 1, Walmart would have paid an additional $855 million in federal taxes under the Sanders proposal. Even for Walmart, which made a $14 billion profit in 2020, those kinds of tax penalties are big enough to affect wage-setting behavior.
CEO pay ratios are likely to continue to attract attention. A 2014 study about attitudes toward executive pay concluded that Americans underestimate the ratios that currently exist, and dramatically so. Their expectations are in the 30-to-1 range. The reserves of latent outrage about CEO compensation remain, without a doubt, enormous.
Remedying the problem would be very good politics, as Gallup has demonstrated. A year after Trump signed the tax cut into law, fully 62 percent of Americans said that “upper-income people” don’t pay enough; 69 percent said the same about corporations. Not many voters outside the 90210-esque zip codes are going to find much objectionable about taxes aimed at inflated CEO pay using the leverage of higher corporate taxes.
Also, these types of CEO pay measurements—the stark contrast between what the suits get paid and what the working stiffs take home—will remain a nettlesome point of bad public relations. As Steve Seelig, a senior regulatory adviser for the corporate risk management advisory firm Willis Towers Watson, observed, the public ratios have the merits of simplicity.
They will get “a lot of attention from the rank-and-file,” Seelig told The Guardian. “It’ll be in the local newspapers, talked about at the water cooler, and companies need to be poised to deal with their workforce.”
For now, Biden and Senate Democrats are struggling to figure out whether they need to negotiate with, fight, or ignore Republicans who want to pare down the president’s infrastructure plan into a small-ball program with no political impact. Rather than look for outside-the-box revenue raisers that might create some novel politics around taxes, they are haggling over how much to weaken Biden’s opening offer in order to bring all Democrats and at least some Republicans on board.
The slogging Senate talks give us all the more reason to have a national conversation now about how we can harness incentives in business taxation to reverse the decades-long trend of stagnant worker incomes. The laboratories of democracy have come up with a good idea for reducing inequality and penalizing bad corporate behavior. It’s time for Washington to seize the moment.
