Corporate Tax

Senate Democrats have a giant new thought for corporate tax

US Senator Ron Wyden, a Democrat from Oregon, at a press conference on July 15, 2021. (Photo by Michael Brochstein / Sipa USA) (Sipa via AP Images)

As Senate Democrats struggle to draft a bill to balance the budget that both progressives and moderates can get behind, Senate Democrats ponder a revenue-boosting idea that has the potential to bridge the gap.

The chief steward of tax legislation in the upper chamber, the chairman of the Senate Finance Committee, Ron Wyden of Oregon, has put a bill on the negotiating table, which Senator Bernie Sanders, the Independent of Vermont, first tabled in March, which revised the incentives for executives would structure remuneration. The move would fund the multi-billion dollar welfare and climate change package that Democrats want to pass through reconciliation, the parliamentary process they can use to bypass a near-safe Republican filibuster.

The bill, known as the Tax Excessive CEO Pay Act, would impose a surcharge on corporate tax if the company pays its CEO 50 times or more the average income of its employee.

According to sources familiar with the matter, Wyden doesn’t ditch the idea as a gimmick or negotiating tactic. He is serious. “Wyden’s employees invest a lot of time in the design,” said one person who was briefed on their work. “It’s not just on their option list as populist window dressing.”

Needless to say, it takes some scramble. President Biden’s original proposal is to spend $ 3.5 trillion over 10 years. Senator Joe Manchin, Democrat of West Virginia, appears to be on a much lower spending target, leading to a death issue in the evenly divided Senate.

CEO compensation legislation is based on the idea that tax law can penalize negative externalities to use the economists’ inelegant wording. According to the provision, a company’s tax rate would depend on the ratio of its CEO compensation to the company’s median wage. The higher the quota – that is, the more the CEO gets compared to the employees – the higher the federal income tax. It builds on a provision of the 2010 Dodd Frank Act, which requires listed companies to disclose the ratio between the CEO’s salary and that of the median employee.

As I wrote on these pages in June, the idea has political and political advantages over competing ideas to increase corporate tax. First of all, it builds on public opinion; There is survey data showing that 86 percent of Americans think CEOs are overpaid. Second, the tax on self-proclaimed moderates is plausibly a voluntary one; If a company doesn’t want to pay it, it just has to pay the employees more – or the CEO less.

In theory, the move could actually be a way of meeting both Manchin’s demand for an official corporate tax rate of 25 percent and the progressives’ desire for a higher rate. Companies that pay their CEOs at or below the 50 to 1 ratio would pay the 25 percent corporate tax rate, while those who exceed the ratio would pay more (Wyden has not committed itself to any particular ratio).

Finally, it would create an incentive for companies to raise workers’ salaries to avoid paying the higher tax rate. This would not only be popular with voters and would reverse the decade-long trend towards income inequality. It would also answer the main objection some economists (one that prevails with many moderate lawmakers) to traditional corporate tax increases: that they make companies pay workers less.

Senate officials said the bill was revived during the reconciliation negotiations due to pressure from Sanders and the general popularity of taxing CEOs, a fact that has not escaped progressive advocates.

Public interest groups that have railed against skyrocketing CEO salaries, such as the AFL-CIO, Americans for Financial Reform, and Take On Wall Street, have turned these ideas into a rallying point for activists interested in tackling wealth and income inequality. “Any of these proposals would generate significant revenue while curbing a major cause of skyrocketing inequality in our country – excessive CEO salaries,” these groups wrote in a letter to Wyden. “Americans across the political spectrum have long been outraged by overpaid CEOs.”

Sander’s proposal is just one of several being considered by the Senators, targeting practices and loopholes that benefit executives in particular. Another such idea is a levy on share buybacks, a practice that regulators once viewed as market manipulation but is now a way for CEOs to increase stock prices rather than randomly increasing their own bonuses normally associated with it. A separate measure that is on the table would limit business deductions for individuals who earn more than $ 1 million a year.

One final provision on Wyden’s list is to close the carried interest loophole, a particularly outrageous provision that primarily benefits Wall Street private equity barons, already some of the richest people in the world. President Obama once took a step to get rid of it, which led Stephen Schwarzman, CEO of private equity giant Blackstone, to liken the attempt to the Nazi invasion of Poland in 1939. Even Donald Trump criticized the loophole as part of his false populism, but he never ended it.

“The public investment proposals on the table in budget balancing negotiations, from universal childcare to free college, would dramatically reduce the appalling inequality in our country,” wrote Sarah Anderson, director of the Institute’s Global Economy Project for Policy Studies. “Paying them with tax reforms that address key factors in inequality – including runaway CEO salaries – would take us even further along the path to a just society.”

She is right. If Democrats – moderate and progressive alike – want to deliver a massive budget bill while also making tax laws fairer, a hugely popular idea is just waiting for them. There’s no reason why they shouldn’t take it.

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