Law with an option: Overpay CEO, you get taxed

Last week, a committee of the California Senate not only talked about economic inequality - everybody's doing that - but actually did something about it. By a 5-to-2 vote, it recommended to the full Senate a bill that would cut the state's taxes on companies with lower ratios between their chief executives' pay and the pay of their median workers, and raise taxes on companies with the kind of insanely high gap between chief executive and median worker pay that has become the norm in American business.

To the best of my knowledge, the bill - SB 1372 - is the first in the nation that seeks to mitigate economic inequality through corporate tax reform. At a time when all the traditional institutions that enabled workers to win raises have broken down, it offers a way forward for those who'd like to see workers make a fair day's pay for a fair day's work. (The likelihood of the bill passing the whole Senate - it requires a two-thirds vote - is slim but not unimaginable.)

In the post-World War II decades of broadly shared prosperity, the men (they were almost always men) who ran America's great companies made relatively low multiples of what their workers made. In 1965, the ratio was 20 to 1, according to studies by the Economic Policy Institute. By 2012, that ratio had risen to 273 to 1, though no one contends that today's chief executives are 14 times better, or today's workers 14 times worse, than those of 50 years ago.

Rather, the way to explain this change might be called a tale of two unions. While workers' unions have atrophied to the point that collective bargaining in the private sector is all but dead, CEO "unions" - that is, the corporate compensation committees composed disproportionately of CEOs' fellow CEOs - have continually raised chief executives' pay.

The bill now moving through the California Senate doesn't compel CEOs and their corporate boards to either raise their employees' wages or cut their own. It merely presents them with a choice. Those who overpay themselves and underpay their employees can continue to do so but thereby subject their company to higher taxes. Or they can diminish the discrepancy in compensation and thereby lower their company's taxes.

The proposed legislation wouldn't exactly plunge CEOs into poverty. It would reduce, on a sliding scale, California's corporate taxes - currently set at 8.84 percent of net income - for any company paying its chief executive less than 100 times the pay of its median worker, and raise them, also on a sliding scale, for any company paying its CEO more. (Under the terms of the Dodd-Frank financial reform act, the Securities and Exchange Commission is required to publish the CEO-median worker pay ratio for every publicly listed company. The SEC is expected to begin this practice this year.)

Once upon a time, American workers had more direct ways to win raises. In the decades after World War II, nongovernmental institutions such as unions diminished levels of inequality. Today, in the absence of both unions and full employment, using the corporate tax code to boost employees' pay and limit CEOs' is one of the few remaining avenues that could enable workers to regain some of their lost income.

In a recent Wall Street Journal column, William Galston, once the leading intellectual light of the centrist Democratic Leadership Council, argued that corporate tax rates should be lowered for companies that boost their employees' pay in line with productivity increases and raised for those companies that don't. Between 1947 and 1973, workers' productivity rose by 97 percent and their median compensation rose by 95 percent. Since the mid-1980s, however, as unions have weakened, all the gains from increased worker productivity have accrued to the wealthiest 10 percent of Americans.

Congressional Democrats should emulate their California counterparts and take a cue from Galston and propose corporate tax reform keyed to rewarding workers for their productivity. In the current political climate, it may be the kind of popular and populist cause the Democrats badly need.

Harold Meyerson is editor-at-large of The American Prospect. He wrote this for The Washington Post.

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