Wednesday, December 7, 2016

A Business Surtax on Income Inequality: Target the Proceeds

The medium compensation in 2015 for the 200 highest-paid executives at publicly-held companies in the U.S. was $19.3 million; five years earlier, the figure was $9.6 million.[1] CEO pay compared with the earnings of average workers surged from a multiple of 20 in 1965 to almost 300 in 2013.[2] “Income inequality is real, it is a national problem and the federal government isn’t doing anything about it,” said Charlie Hales, the mayor of Portland, Oregon in 2016 when that city passed a surtax on companies whose CEO’s earn more than 100 times the medium pay of their rank-and-file workers.[3] According to the law, set to take effect in 2017, companies whose ratios are between 100 and 249 would pay an additional 10 percent in taxes; companies with higher ratios would face a 25 percent surtax on the city’s business-license tax. Whether the new law would make a dent in reversing the increasing income-inequality was less than clear.
The most direct route to reversing the trend of growing inequality would be to use the proceeds from the surtax to increase the average incomes of the poor. Cash assistance to city residents below the poverty line, for instance, or increased rent subsidies would qualify. Alternatively, the city council could pass and fund a minimal-income level for local residents. As still another option, the financial assistance could be meted out more specifically to workers in the companies subject to the surtax, or local companies more generally. Unfortunately, the proceeds were set to go into city’s general fund, only part of which increases the incomes of the poor. “City officials in Portland estimated that the new tax would generate $2.5 million to $3.5 million a year for the city’s general fund, which pays for basic public services such as housing and police and firefighter salaries.”[4] If rental assistance is included and expanded, then the inequality of effective income could be impacted locally, though adding more police and firefighters and perhaps even buying more police cars and firetrucks would not affect the ratio.
In short, for the surtax to address the matter of income inequality most directly, the use of the tax revenue would have to be targeted to increasing the effective incomes of the poor (and middle class). Simply increasing the city’s budget dilutes the impact substantially.
On the CEO-pay end, the assumption that the surtax would result in lower CEO compensation figures is also subject to critique. What a board offers a prospective CEO must contend with what that particular labor market will bear. Furthermore, it is not clear that even 25% of a local license tax is enough money to motivate a board to reduce top executive salaries. It is also not clear that $2.5 to $3.5 million would appreciably raise income levels in a city the size of Portland—Oregon’s largest city. Were the city to increase the tax to motivate companies to bring down CEO pay and/or make a dent in the incomes of the city’s poor, companies could simply move; they could even stay in Oregon.
To be sure, Portland’s mayor at the time admitted that the surtax is “an imperfect instrument” with which to tackle the momentous problem of increasing income-inequality in the U.S.[5] A better instrument would be at the State or federal level, with the proceeds going to fund a minimum income for all citizens. Lest such a “Robin Hood” approach be too stark, proceeds could be targeted more closely to the worker-CEO ratio by increasing the incomes or disposable incomes of workers.

[1] Gretchen Morgenson, “Portland Adopts Surcharge on C.E.O. Pay in Move vs. Income Inequality,” The New York Times, December 7, 2016.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.