Bills
| 3.23.22

Should Corporations’ Tax Rates Increase if Executives are Paid Excessively? (S. 2849)

Do you support or oppose this bill?

What is S. 2849?

(Updated December 17, 2021)

This bill — the Tax Excessive CEO Pay Act — would raise the corporate tax rate on companies that pay their top executives over 50 times more than what they pay their most typical workers. The penalty would rise on a sliding scale, with a minimum of a 0.5% increase for companies with a compensation ratio of more than 50 but less than 100 to a 5% increase for companies with a compensation ratio of more than 500.

The full tax penalty structure under this bill would be: 

  • For companies with a compensation ratio more than 50, but not more than 100: +0.5% increase in corporate tax rate.
  • For companies with a compensation ratio more than 100, but not more than 200: +1% increase in corporate tax rate.
  • For companies with a compensation ratio more than 200, but not more than 300; +2% increase in corporate tax rate.
  • For companies with a compensation ratio more than more than 300, but not more than 400: +3% increase in corporate tax rate.
  • For companies with a compensation ratio more than 400, but not more than 500: +4% increase in corporate tax rate.
  • For companies with a compensation ratio more than 500: +5% increase in corporate tax rate.

This bill would apply to both publicly traded and privately held corporations with average annual gross receipts of at least $100 million for the three preceding years. This would make it the first time ever that such corporations would have to reveal the ratio between their CEO and median worker pay.

To prevent avoidance, this bill would direct the Treasury Dept. to issue regulations to prevent avoidance of this bill’s requirements. The Treasury Dept. would receive a specific grant of authority to address situations where companies manipulate their CEO-to-worker pay ratio due to the use of contractors or any other technique.

Corporations’ compensation ratios would be calculated as a ratio of CEO compensation to median employee compensation, as defined by SEC rules. If a company’s CEO didn’t receive a firm’s largest paycheck (as is the case at companies like Google and Twitter, where CEOs and founders take only nominal annual pay), the annual earnings of the highest-paid employee would replace the CEO compensation in the compensation ratio calculation.

Argument in favor

Corporations that overpay their executives at the cost of fairly compensating the average employee or investing in the company’s long-term growth are short-changing American workers in favor of lining senior management’s pockets. Such companies are contributing to overall economic inequality in the U.S., and should be required to pay a higher corporate tax rate as a penalty for their failure to look out for workers’ best interests.

Argument opposed

Runaway executive compensation is a corporate governance, not tax, problem — and it isn’t the federal government’s job to determine what excessive pay is. If lawmakers are serious about requiring companies to pay workers more, they should look to corporate governance reform, not the imposition of a tax penalty for high corporate executive compensation relative to workers’ pay, to compel corporations to raise workers’ raise.

Impact

American companies and corporations; CEOs and highly-paid executives and employees of American companies and corporations; and corporate tax rates.

Cost of S. 2849

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Sen. Bernie Sanders (I-VT), a candidate for the 2020 Democratic presidential nomination, introduced this bill to rewrite the federal tax code to “tackle the inequality crisis created by corporate America’s unrestrained greed”:

“In America today, ordinary workers at some of the richest corporations are making poverty wages. Meanwhile, we’ve got a class of corporate CEOs who make hundreds—sometimes thousands—of times more than their employees. The last time I checked, corporations got by just fine when CEOs made a million bucks a year—one-tenth of what they make now. All around the world today, large, successful businesses manage to be profitable while treating their workers with dignity and not handing out obscene pay packages to their CEOs. If America’s corporate boards can’t understand the absurdity of paying their CEO friends—in one year—more than their workers will earn in a lifetime, then the Tax Excessive CEO Pay Act will help them figure it out.”

House sponsor Rep. Barbara Lee (D-CA) adds: 

“In the last four decades, inequality has ballooned in our nation and more and more wealth is going to those at the top while workers’ wages, especially for workers of color, have remained stagnant. It is unjust and unacceptable that the CEOs of major corporations are making an average of 287 times more than their average worker – with some CEOs making upwards of 1000 times more. The Tax Excessive CEO Pay Act will incentivize companies to reduce the CEO-worker pay gaps and pay their workers the wages they deserve. Because if companies can afford to pay their CEOs tens of millions of dollars, they can afford to raise wages for their employees.”

Nearly 30 economic justice and workers’ rights organizations expressed support for this bill in a joint letter: 

“The more corporations channel into executives’ pockets, the less they have for wages and other investments. By putting a tax penalty on corporations with extreme pay gaps, the bill would give corporations an incentive to narrow their divides by lifting up the bottom and bringing down the top of their pay scale. The tax would also discourage the outrageous levels of compensation that give executives an incentive to take excessive risks. Wall Street’s reckless 'bonus culture' proved a key factor in the 2008 financial crisis. Current executive compensation practices also contribute to short-term decision making that leaves payrolls, employee training, and R&D budgets slashed. Academic research indicates that extreme pay gaps also undermine business effectiveness by lowering employee morale, which in turn, reduces productivity and increases turnover… This bill would encourage corporations to narrow their gaps, reducing poverty and inequality all across the United States, while holding companies with outrageous CEO pay ratios accountable.” 

Howard Gleckman, author of and a senior fellow at the Urban Institute, argues that taxing companies to limit executive compensation doesn’t work: 

“If lawmakers think businesses are paying corporate execs too much, they probably should focus on corporate governance, not tax issues. If they do want to use the tax code to punish highly-paid managers, they’d be better off just raising the individual income tax on all very high-income taxpayers. Sanders, of course, has proposed that too, with a wealth tax and a high individual income tax rate. But if he thinks a tax penalty will reduce the pay gap, he may be disappointed with the outcome.”

Alex Edmans, a Professor of Finance at London Business School, warned against the politicization of CEO pay in a July 2016 article in which he argued that CEO pay is a shareholder problem that should be left to shareholders to fix: 

“[E]xecutive compensation has suddenly become a hot topic for winning the public’s approval… Politicians typically make two suggestions for pay reform. First, to cap, or at least force the disclosure of, the ratio of CEO pay to median employee pay. Second, to put pay packages to an employee vote, or… put workers on boards. While I agree that a) in many companies, pay is far from perfect and ought to be reformed, and b) that political leaders are right to be concerned about how wealth is distributed in society, there are a number of problems with the proposed approaches. It is shareholders who bear the costs of paying the CEO, and so it is unclear whether the government should intervene. A common argument is that high pay has indirect costs — in particular, it incents CEOs to take actions that hurt society. However, there is no evidence that the level of pay indeed has these effects… A second motivation to lower pay is to reduce inequality. However, attempts to curtail pay through regulation may backfire. Kevin J. Murphy describes how the entire history of executive compensation regulation is filled with unintended consequences. For example, the forced disclosure of perks in 1978 increased perks as CEOs could see what their peers were receiving; the 1984 law on golden parachutes – a response to a single contract at one firm — catalyzed the adoption of golden parachutes by alerting CEOs without them to their existence; and President Bill Clinton’s $1 million salary cap led to CEOs below the cap raising their salaries to above it, and those above merely reclassified salary as bonus. Thus, while the motivation to reduce inequality is sound, a focus on pay ratios may have similar unintended consequences – and could even increase inequality. A CEO might reduce his company’s pay ratio by firing low-paid workers, converting them to part-time status, or increasing their cash salary but reducing their non-financial compensation (such as on-the-job training and superior working conditions)... The bottom line is that, to the extent pay is a problem, it should be shareholders, not politicians or employees, who fix it.”

Low-wage employers argue that the nature of their industry determines their wage structure. They contend that it doesn’t make sense for them — as operations with large part-time, season, or entry-level employee pools — to have the same compensation ratios as corporations with higher-skilled (and therefore higher-compensated) employees.

This legislation has one Senate cosponsor, Sen. Elizabeth Warren (D-MA), also a candidate for the 2020 Democratic presidential nomination. Its House companion, sponsored by Rep. Barbara Lee (D-CA), has 18 Democratic House cosponsors.

28 major economic justice organizations, including the AFL-CIO, Americans for Democratic Action, Campaign for America’s Future, Center for Popular Democracy, and Service Employees International Union (SEIU), support this bill. Additionally, 13 academics, including professors from Cornell University, the University of Delaware, and American University, have expressed their support for this bill in a joint letter.


Of Note: Sen. Sanders’ office notes that, according to research by the AFL-CIO, CEOs of successful U.S. corporations in the 1970s received about $1 million in annual pay — which worked out to roughly 20-30 times the average pay of their companies’ middle-class workers. Today, the typical Fortune 500 CEO is paid about $20 million a year — which works out to 200-300 times the average pay of a typical worker at their companies.

At some companies, the pay disparities are much larger than the already-high average:

  • Tesla’s Elon Musk makes 40,668 times more money than the median Tesla employee; and
  • Gap CEO Arthur Peck made 3,566 times more than the median company employee (who made only about $5,800).

Today, the average McDonald’s employee would have to work for over 2,000 years to earn what the company’s CEO was paid in 2018. A retail worker at Gap, meanwhile, would need to work for more than 3,000 years to reach the pay rate of former Gap CEO Art Peck.

According to a nationwide survey, over half of all Americans (62%, including 52% of Republicans and 66% of Democrats) support capping CEO pay relative to worker pay. In that survey, the typical respondent favored capping CEO pay at no more than six times the pay of the average worker.

In a letter expressing their support for this bill, 13 academics from a range of American higher educational institutions explain that the “explosion” in CEO, CFO, and other executive officer compensation is “part and parcel” of the “degeneration of the American economy from productive and labor-rewarding activity to stock-manipulating, bubble-blowing games of the rich and powerful.”

If current pay trends continue, this bill would raise about $150 billion in new taxes over the next decade. Had this bill been law in 2018, Walmart (which had a pay gap of 1,076 to 1) would have had an additional federal tax liability alone of $794 million.

Some local jurisdictions have already applied their own tax penalties on companies with wide pay gaps. In 2018, Portland, Oregon became the first jurisdiction to apply a tax penalty on publicly-traded companies with wide executive-employee pay gaps. Under the penalty, over 500 corporations — including Goldman Sachs, Oracle, Honeywell, Wells Fargo, and General Electric — that do business in the city are subject to the Portland pay ratio surtax. 

In March 2020, San Francisco will have a ballot measure for a CEO pay gap tax on the ballot. Additionally, legislators in seven states (California, Minnesota, Rhode Island, Connecticut, Illinois, Massachusetts, and Washington) have also introduced pay-ratio tax legislation like this bill.


Media:

Summary by Lorelei Yang

(Photo Credit: iStockphoto.com / Yumi mini)