Democratic presidential candidate Sen. Bernie Sanders, I-Vt., has been getting a lot of attention for his campaign promise to slap a wealth tax on America’s richest individuals, but another redistributive measure he champions is getting significantly less coverage. That plan calls for increasing corporate taxes on large corporations with high CEO-to-worker pay disparities and using the revenue to wipe out billions of dollars of medical debt held by U.S. residents.
Sanders is not the first to think of the idea — the city of Portland, Oregon, already imposes a tax on companies with significant CEO-to-worker pay disparities. And several U.S. states and cities have considered or are currently considering the idea, including San Francisco, Washington state, Massachusetts, and Rhode Island. But Sanders is the highest-profile person to champion the idea since public companies started reporting their CEO-to-worker pay gaps in 2018 as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203.
Dodd-Frank introduced the measure to provide corporate shareholders a more informed “say on pay” when they approve executive compensation packages, but several Democratic lawmakers see another use for the information: generating income. In Sanders’s case, he and his cosponsors, Rep. Barbara Lee, D-Calif., and Rep. Rashida Tlaib, D-Mich., anticipate that the Tax Excessive CEO Pay Act of 2019 (H.R. 5066 and S. 2849) could raise $150 billion over 10 years if executive compensation trends remain the same.
Under the proposed legislation, companies that pay their highest-earning executives more than 50 times and up to 100 times their median workers' pay would be hit with a 0.5 percent corporate rate hike. Those with a pay disparity of more than 100 times median pay, but less than 200 times, would be hit with a 1 percentage point increase. The thresholds and tax rates would increase incrementally until CEO pay exceeds 500 times median pay. Anything above that amount would generate a 5 percentage point increase in the corporate rate.
To put these figures in perspective, the average pay ratio across the S&P 500 is 287 to 1, according to the lawmakers, who cited research from the AFL-CIO. And 10 percent of the S&P 500 exceed 1,000 to 1.
The lawmakers are eyeing the largest public and private companies, those with at least $100 million in average annual revenue over a three-year period. Privately held companies are not required to release their CEO-to-worker pay gaps under Dodd-Frank, but the proposed legislation would subject them to the same disclosure requirements and graduated tax increases.
It’s an idea that could be replicated in other countries as governments slowly warm to the idea of public CEO-to-worker pay ratio disclosures. The United Kingdom just implemented a disclosure law, with the first reports to be required this year. And India already has a disclosure law. But the concept, at least based on existing U.S. rules, raises some standardization questions because it is based on new data that has yet to be fully understood. The U.S. Securities and Exchange Commission is granting corporations substantial flexibility in their pay-gap calculations: They can use reasonable estimates, statistical sampling, or other “reasonable methods” to determine their median pay. It is up to corporations to determine what works best given their facts and circumstances. The calculations could generate very different results depending on the method that is adopted. And it seems concerning to base a tax on such variable data.