To break the corporate tax logjam, tax overinflated CEO pay

Key players in the Capitol Hill budget debate are deadlocking over the U.S. corporate tax rate. 

Senate Budget Committee Chair Bernie Sanders (I-Vt.) wants to push that rate up from the current 21 percent to 35 percent, the corporate tax rate before the 2017 Republican tax cuts. President Biden has proposed hiking the current rate to 28 percent. Sen. Joe Manchin (D-W.Va.) has set his sweet spot at 25 percent. 

Those percentage-point differences matter — especially as lawmakers face pressure to raise enough revenue to cover the full cost of an ambitious spending plan.

Manchin’s proposal would raise about $300 billion less than Biden’s, a revenue gap significantly higher than the price tags for White House priorities that range from universal paid family and medical leave to universal pre-K.  

Other than arm wrestling, how could all the players here resolve their differences? They could top off a corporate tax rate increase with a CEO pay surtax — an extra levy on firms that pay their top executives absurdly more than their typical workers.

This approach would have two appealing selling points for Manchin and other moderate Dems. 

First, a CEO pay surtax would be widely popular because overpaid CEOs have become incredibly unpopular. An overwhelming 86 percent of Americans believe the leaders of large U.S. companies make way too much money, a Stanford survey has found. 

That sentiment might be even stronger in Manchin’s West Virginia, where Big Pharma CEOs have made a fortune flooding communities with opioids. Three drug distributors — McKesson, Cardinal Health, and Amerisourcebergen — are facing lawsuits over their role in the state’s devastating addiction rates. 

All these corporations paid their top executives more than $14 million in 2020. Average income in West Virginia is just $26,480. 

Nationwide, Americans across the political spectrum have expressed support for much tougher policies to crack down on excessive executive compensation. Stanford pollsters have found, for example, that 52 percent of Republicans, 64 percent of Independents, and 66 percent of Democrats favor a hard cap on CEO pay relative to worker pay.

A CEO pay surtax would also directly address the global competitiveness of U.S. corporate enterprises.

Manchin and other moderate lawmakers have raised concerns about U.S. corporations bearing a heavier tax burden than their foreign competitors. But U.S. corporations only face a higher tax rate than their competitors on paper. In real life, massive loopholes have U.S. corporations paying significantly less tax as a share of GDP than corporations in any other G7 nation. 

Moderate Democrats eager to improve corporate competitiveness do have a more promising option. They could incentivize U.S. corporations to rein in CEO pay. 

Top American executives today make eight times as much on average as their Japanese counterparts, three times as much as French CEOs, and twice as much as U.K. and German CEOs, Willis Towers Watson data show. 

This executive excess places U.S. firms at a global disadvantage. In study after study, exceptionally high CEO pay correlates with mediocre financial performance. 

The problem turns out to be even greater at corporations with overpaid executives and underpaid employees. A 2018 Harvard Business School study, for instance, found that such disparities drive up employee dissatisfaction and turnover and reduce sales.

Corporate boards have proved incapable of fixing our deeply entrenched, highly ineffective corporate reward structure. In fact, during the pandemic, my research shows that over half of America’s 100 largest low-wage employers moved executive bonus goalposts or otherwise rigged pay rules to inflate CEO pay while their workers suffered. The case for congressional action on the CEO pay front could hardly be stronger.

So how could a CEO pay surtax work? 

Sanders has introduced legislation, the Tax Excessive CEO Pay Act, that could easily be adapted for this purpose. Under this approach, firms with pay ratios of less than 50 to 1 between their highest-paid executive and their median worker pay wouldn’t owe any surtax whatsoever. Others would face graduated tax rate increases, depending on the size of their pay gaps.

Both Amazon and Walmart, for example, awarded their highest-paid executive more than 1,000 times as much as their typical workers in 2020. If a CEO pay surtax had been in effect last year, these firms would have owed an extra $200 million for each percentage point increase in their tax rate. 

The combination of an across-the-board rate hike with a CEO pay surtax would send a powerful message: All large profitable corporations are going to pay their fair share of much-needed public investments, and those that are contributing the most to inequality will pay even more. 

Sarah Anderson directs the Global Economy Project and co-edits Inequality.org at the Institute for Policy Studies.