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Christopher Dennett, a listener of Riverton, Utah, asked:
What impact would a national maximum wage have? For example, when the highest paid person in a company couldn’t earn more than five times the lowest paid person.
As US workers’ wages stagnate and inequality worsen, lawmakers, activists and workers advocate higher minimum wages. The push has gained momentum in recent years with moves like the Fight for $ 15 that supported this week’s McDonald’s strike.
Congress last raised the federal minimum wage 14 years ago, the longest period without an increase. Some Democrats tried unsuccessfully to include an increase in Congressional’s latest COVID-19 bailout package despite the fact that President Joe Biden was able to raise the minimum wage for federal entrepreneurs to $ 15 an hour by order of the executive branch.
But what if, as Dennett asks, we look at the reverse of that and put a cap on how much business leaders make?
In 2019, the CEO-to-typical employee compensation ratio was 320 to 1, with CEO compensation increasing 940% since 1978.
The pandemic has exacerbated and brought into the limelight income inequality in this country. Billionaires got even richer in the past year. According to Americans for Tax Fairness and the Institute for Policy Studies, their total wealth rose by $ 1.3 trillion in the first eleven months of the pandemic. Meanwhile more than 82 Million Americans have applied for unemployment benefit since March last year.
How a maximum wage policy could work
Proponents of a maximum wage or some form of it are legislators and journalists. One of them is Sam Pizzigati, co-editor of Inequality.org and author of the book “The case for a maximum wage”.
Pizzigati said our current compensation system is an incentive for CEOs to “act rude,” and noted how executives have benefited from the pain reliever OxyContin, which played a role in the country’s opioid crisis.
To be clear, when proponents speak of “maximum wage”, they are not just talking about salaries. They believe this policy should encourage caps on total executive compensation, including stock options. To achieve this, corporation tax could be levied on companies whose executives earn more than a certain amount – relative to their poorly paid workers.
Michael Reich, an economics professor at the University of California at Berkeley, said via email that the US already has a top wage. As of 1993, CEOs could not deduct more than $ 1 million from their taxes unless that compensation was performance-based.
However, he pointed out that after this policy came into force, stock options would have a much larger share in executive compensation. (The Tax Cuts and Employment Act, passed in 2017, removed this performance-based gap.)
Vermont Senator Bernie Sanders, along with other Democratic leaders, recently unveiled the Tax Excessive CEO Pay Act, which provides tax rate increases of 0.5% or more for companies whose CEO / median wage ratio is above 50% 1.
The effects of a maximum wage
“A maximum wage would convey the message that there is more to life than chasing ever larger amounts of money,” said Pizzigati. “Less inequality, less concentrated wealth, less power among a small elite would be good for our democracy.”
For Pizzigati, the ideal ratio for CEO to employee remuneration would be 10 to 1. “If we want a society in which people can recognize each other’s humanity, we have to be close enough in terms of income to them can really see and understand the life they lead. “
He said we got closer to that formula in the 1960s when it was around 20 to 1.
However, Ioana Marinescu, an assistant professor at the University of Pennsylvania, says a maximum wage policy could have potential drawbacks. This could encourage companies to eliminate poorly paid employees and instead hire contractors or freelancers to do the same job without officially being part of the company.
That would narrow the pay gap between executives and direct employees of the company, she explained, and create the impression that everyone is well paid.
And even at a higher tax rate, Marinescu said, what will companies do with the money they save if companies are not encouraged to lavishly pay top executives? Instead of passing it on to poorly paid workers, Marinescu said it could be used to reward shareholders.
Politics in practice
Although some lawmakers are pushing for federal restrictions on CEO pay, some cities have introduced their own levies in recent years.
In late 2020, San Francisco decided to add a 0.1% surcharge to a company’s annual tax liability if its top executive earned 100 times the median employee value. If the manager earns 200 times that amount, the bonus increases to 0.2%.
This overlaps with a similar law passed in Portland, Oregon in 2016. The city imposes a 10% tax surcharge on companies that pay CEOs 100 to 250 times more than their average employees.
These Portland and San Francisco surcharges apply to the taxes a business owes in each city, not the total tax liability. While San Francisco taxes both public and private companies, the Portland Rule only applies to publicly traded companies.
Portland raised $ 3.5 million in 2017 and $ 4 million in 2018 through these policies.
Samuel Brunson, a professor of tax law at Loyola University in Chicago, told NBC News that the bill does not generate as much revenue and that it does not appear to affect CEO pay.
Marinescu said a surcharge may not be charged on a large portion of a company’s business or tax liability because it is done at the city level.
“It’s symbolic, but it wouldn’t necessarily do too much, I think, to actually lower wages,” she said.
With all of the complications associated with paying, Marinescu believes the most efficient way to accomplish this is to increase marginal taxes on top incomes.
Pizzigati believes that individual tax rates can also be viewed as a form of maximum wage. He said that in 1942 President Franklin Roosevelt asked for a 100% tax on income over $ 25,000, which would now be about $ 400,000 adjusted for inflation.
Pizzigati said Roosevelt was unable to achieve this, but noted that the marginal tax rate reached 94% during World War II and stayed at around 90% for the next 20 years.
When it comes to reducing inequality, the debate often leads to taxes being used to achieve that goal. There’s a reason “Tax the Rich” has become a popular all-out call.