How Should We Narrow the Growing CEO/Average Worker Income Gap?
Recent publicity given to the CCPA report on the huge gap between the compensation of CEOs and ordinary workers should prompt some discussion on what should be done about it.
Part of the answer undoubtedly lies in reforms to corporate governance. Shareholders can potentially exert some control over the compensation committees of Boards of Directors who set senior executive pay and options packages. Unfortunately, the large institutional shareholders who might most plausibly be able to play this role have often been part of the problem – ramping up stock options for CEOs in the expectation that this will improve short-term stock performance. However, pension funds and other large institutional investors certainly could and should press for rational executive compensation systems.
Part of the answer may lie in limiting senior executive compensation under the corporate income tax system. Unlike Canada, the US limits expensing of non performance related executive pay on corporate tax returns to $1 Million per executive. This has, apparently, had little impact on bloated pay packets, but at least this provision means that much of the cost of excessive pay at the top is borne by shareholders rather than by taxpayers. (Tax deductibility limits also mean that tax audits can, and have, disclosed abuses of performance pay, such as back-dated stock options.)
The explosion of incomes at the very top of the pay scale at the expense of average worker pay should also prompt some re-thinking about the progressivity of the personal income tax system. Even the Economist magazine recently recognized that there is a case for reducing the rising pay of the top 1% through higher income taxes.
I’ve done a quick calculation (from the most recent CRA income tax data) of the potential revenue that could be gained by introducing a somewhat higher personal income tax rate on very high income earners.
In 2004, just 124,380 taxpayers – just under 1 in every 200 – earned more than $250,000, and 9% of all taxable income. In total, they “earned” $72,802 Million. (If capital gains were included fully in taxable income, that would jump to over $78 Billion.)
The current top federal income tax rate is 29% on incomes of over $116,000. If we introduced a new top tax rate of 31.5% on taxable income of more than $250,000, it would raise $1 Billion in new revenues (more if we fully included capital gains from stock options and other investments in taxable income.) (The revenue gain is based on my calculation that $40 Billion of the $73 Billion in total income for those making more than $250,000 is above the $250,000 threshold.)
An extra $1 Billion would be a useful if modest addition to fiscal capacity, and a higher tax rate would modestly shrink the after tax income gap between CEOs and the rest of us.
Of course, such a proposal would be met with screams of outrage and claims that it would drive our talented CEOs South of the border. However, it is not often noted that federal personal income tax rates on very high incomes in the US are actually higher than in Canada – their top rate is 35% on incomes of over $326,000, and a higher than Canada 33% on incomes over $150,000. True, state income taxes in the US are generally lower than provincial income taxes, but the heavy hitters on Wall Street have to pay a 6.7% NYC income tax on top of the top New York state tax rate of 7.7% – which adds up to a 50% top marginal tax rate.