Everybody's talking about inequality, but some California legislators actually mean to do something about it. A bill by two state senators, Mark DeSaulnier (D-Concord) and Loni Hancock (D-Berkeley), would raise the state's corporate tax rate on companies whose chief executive officers make more than 100 times the wages of their median employee, and lower it on corporations whose CEOs make less than 100 times their median worker's wage.
The legislation, SB 1372, has passed one Senate committee by a 5-2 vote and will come before the Appropriations Committee this week. To the best of my knowledge, it is the first bill in the nation that seeks to diminish economic inequality through corporate tax reform. Odds are it won't be the last.
The gap between the compensation packages of CEOs and their employees' pay is a relatively new phenomenon. In 1965, according to a study from the Economic Policy Institute, CEOs made 20 times what their median employee made. By 2012, the ratio had risen to 273 to 1.
That could mean that today's CEOs are 14 times better than their mid-20th century predecessors, or that today's workers are 14 times worse.
Since that defies credulity, however, here's another explanation: Since 1965, workers unions have all but disappeared from the economic landscape. Currently, just 6.7% of American private-sector workers are unionized, essentially eliminating workers' ability to bargain for raises. During the same period, CEOs' "unions" — the corporate compensation committees composed disproportionately of CEOs' peers — have repeatedly raised chief executives' pay.
The bill moving through the state Senate is what political theorist Cass Sunstein would call a "nudge." It doesn't compel CEOs and their corporate boards to raise their employees' wages or cut their own. It merely presents them with a choice. Those who overpay themselves, and perhaps underpay their workers, can continue to do so, at the price of causing their companies' taxes to rise. Those who reduce this disparity, or who have kept it to a less mind-boggling level, will see their firms' taxes lowered.
California's corporate tax is set at 8.84% of companies' net income; that rate could drop as low as 7% for companies in which the CEO-median worker ratio is no greater than 25 to 1; or go as high as 13% when the ratio is higher than 400 to 1.
Critics have argued that the bill, if enacted, would be one more reason corporations would flee the state. There's no question that the legislation would be less subject to evasion if enacted on the federal level, but that doesn't mean this kind of corporate flight would be easy.
Imagine a CEO explaining to his employees that they're losing their jobs or having to move across the country because he's unwilling to make no more than 100 times what they make. Or, should the company stay put, explaining to his shareholders why the company's taxes must rise because he's unwilling to make no more than the 100-times multiple. Besides, he has an alternative to cutting his own pay: giving his workers a raise.
In the three decades after World War II, when America experienced an unprecedented level of broadly shared prosperity, workers' incomes increased at a higher rate than the incomes of the rich. Since then, as taxes on the rich were lowered, as union membership eroded and collective bargaining effectively vanished, most of the ways the nation once held economic inequality in check have vanished too.
Using corporate tax rates to nudge companies to boost workers' wages is one of the few public policy options left that could begin to re-create a vibrant middle class. Besides keying taxes to the CEO-median worker ratio, legislators could also cut taxes on corporations that give their workers raises commensurate to the annual increase in the nation's productivity and raise taxes on companies that don't.
Between 1947 and 1973, when collective bargaining was the norm, workers' productivity rose by 97% and their median compensation rose by 95%. Since then, all the gains from increased productivity have gone to the wealthiest 10% of Americans.
At a time when economic inequality has reached levels not seen in 100 years, and when concrete actions to diminish it are few and far between, SB 1372 is both an important conceptual breakthrough in our national economic discussion and a way for California to affirm its egalitarian ideals.