As they struggle to put together a budget reconciliation bill that both progressives and moderates can get behind, Senate Democrats are considering a revenue-raising idea that has the potential to help bridge the gap.
The chief steward of the tax code in the upper chamber, Senate Finance Committee Chair Ron Wyden of Oregon, has put on the negotiating table a bill that Senator Bernie Sanders, the Vermont Independent, first introduced in March, which would restructure the incentives around executive compensation. The measure would fund the multi-trillion-dollar social services and climate change package that Democrats intend to pass via reconciliation, the parliamentary procedure that lets them circumvent an almost certain Republican filibuster.
The bill, called the Tax Excessive CEO Pay Act, would impose a surcharge on corporate income tax if the company paid its CEO 50 times or more what its median employee earns.
According to sources familiar with the matter, Wyden isn’t throwing the idea out there as a gimmick or negotiating tactic. He’s serious. “Wyden’s staff is putting real time into drafting this,” said one person briefed on their work. “It’s not just on their options list as populist window dressing.”
Needless to say, it is going to take some wrangling. President Biden’s initial proposal envisions spending $3.5 trillion over 10 years. Senator Joe Manchin, Democrat of West Virginia, seems set on a much lower spending target, creating a do-or-die matter in the evenly divided Senate.
The CEO pay legislation is built around the idea that the tax code can penalize negative externalities, to use economists’ inelegant phrase. Under the provision, a corporation’s tax rate would depend on the ratio of its CEO compensation to the median wage at the company. The higher the ratio—that is, the more the CEO gets compared to the employees—the higher the federal income tax. It builds on a provision in the Dodd-Frank law, passed in 2010, that requires publicly listed companies to disclose the ratio between the pay of the CEO and that of the median employee.
As I wrote in these pages in June, the idea has political and policy advantages over competing ideas to raise the corporate income tax. First of all, it builds on public opinion; there’s survey data showing that 86 percent of Americans think CEOs are overpaid. Second, for self-professed moderates, the tax is, plausibly, a voluntary one; if a company doesn’t want to pay it, it need only pay workers more—or the CEO less.
Indeed, in theory, the measure could be a way to meet both Manchin’s demand that the official corporate tax rate not exceed 25 percent and progressives’ desire for a higher rate. Companies that pay their CEOs at or below the 50-to-1 ratio would pay the 25 percent corporate tax rate, while those that outstrip the ratio would pay more (Wyden hasn’t settled on any ratio in particular).
Finally, it would create an incentive for corporations to raise employee pay to avoid paying the higher tax rate. This would not only be popular with voters and reverse the decades-old trend toward income inequality. It would also answer the chief objection some economists lodge (one that holds sway with many moderate lawmakers) against traditional corporate tax increases: that they lead companies to pay workers less.
According to Senate staffers, the bill was resurrected during the reconciliation negotiations because of pressure from Sanders and the general popularity of taxing CEOs, a fact not lost on progressive advocates.
Public interest groups that have railed against skyrocketing CEO pay, such as the AFL-CIO, Americans for Financial Reform, International Brotherhood of the Teamsters, and Take On Wall Street, have turned these ideas into a rallying point for activists interested in tackling wealth and income inequality. “Each of these proposals would raise significant revenue while curbing a key driver of our nation’s skyrocketing inequality—excessive CEO pay,” these groups wrote in a letter to Wyden. “Americans across the political spectrum have been outraged about overpaid CEOs for a long time.”
Sanders’s proposal is just one of several being considered by the senators that would take aim at practices and loopholes that benefit executives in particular. Another such idea is a levy on stock buybacks, a practice that regulators once deemed market manipulation but that is now a garden-variety way CEOs boost share prices and, not coincidentally, their own bonuses, which are usually linked to them. A separate measure on the table would restrict business deductions for people making more than $1 million per year.
A final provision on Wyden’s list is to close the carried interest loophole, a particularly outrageous provision that benefits mainly Wall Street’s private equity barons, already among the richest people in the world. President Obama once made a move to get rid of it, prompting Stephen Schwarzman, the CEO of the private equity giant Blackstone, to compare the attempt to the 1939 Nazi invasion of Poland. Even Donald Trump criticized the loophole as part of his faux populism, but he never ended it.
“The public investment proposals on the table in the budget reconciliation negotiations, from universal child care to free college, would dramatically reduce our nation’s staggeringly high levels of inequality,” wrote Sarah Anderson, director of the Global Economy Project at the Institute for Policy Studies. “Paying for them with tax reforms that tackle key inequality drivers—including runaway CEO pay—would move us even further down the path towards an equitable society.”
She’s right. If Democrats—moderate and progressive alike—want to deliver on a massive budget bill while making the tax code more equitable and just, there is a wildly popular idea just waiting for them. There’s no reason they shouldn’t seize it.