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.

7 comments

  • In addition to an extra tax bracket (which I agree with though I have nothing wrong with bumping it up to 35% and cutting income taxes across the board elsewhere), might it be possible to classify compensation packages as a different form of income subject to a different tax? If that were the case you could have a 40% tax on the compensation packages and this could apply to gains made off of stock options, etc.

    I’m not a tax expert but I thought I would throw that out there for discussion.

  • Raising taxes will do nothing to lower the gap between rich and poor. The very rich in this country pay zero income tax so raising taxes will do nothing to help the poor.

    The only was to begin to narrow the gap between rich and poor is to take away the right of The Bank of Canada which is owned by international private banker’s ability to print money in Canada. Get rid of the loonie and replace it with a currency that is based on gold and silver. Have gold and silver coins reintroduced as currency in Canada.

    How will this help the poor?

    Once we have a currency that is 100% backed by gold and have gold and silver coins circulating through the Canadian economy people will find that inflation will disappear. They will see over time that prices begin to fall while their wages say the same. People on social assistance will see their cost of living fall over time so they are doing better.

    Inflation is not an accident. Central banker cause inflation by increasing the money/credit supply. They do this on purpose so they cause inflation. They know that inflation is nothing more then a stealth tax on people’s income and saving. Inflation is the real reason that the rich are getting richer and the poor, working class and people on fixed income are getting poorer.

    Gold and silver as money protects the working man/women income and savings from the rich bankers and politicians.

    Deno

  • I’m an archivist, not an economist, but even I know that only a tiny fraction of the total capital in circulation is created as a result of the central bank. The vast majority of capital comes from private banks, stock market IPOs, stock inflation, currency speculation, and other private sector activities. The fractional reserve requirements for chartered banks were ended back in 1991.

    As to the notion that the rich pay zero taxes. If true, that’s justification right there for closing the tax hole.

    No representation without taxation.

    DB.

  • You obviously don’t understand anything about how money and credit are created today in Canada so I won’t bother to respond to your post.

    The rich do not pay taxes because they understand the difference between an artificial and natural person. As a natural person the rich choose to not act as a representative of the taxpayer (artificial person). This right to refuse to act as a representative of the taxpayer is a human right that all Canadians as a natural person have. Unfortunately 99.99% of the population of Canada are ignorant of this fact. Believe me when I say that the super rich in Canada know all about this.

  • Deno,

    You are welcome to contribute your ideas to posts on this blog. But for one with some pretty radical views, I request that you moderate your tone and show some respect for other people.

    In any event, you are confusing the issue. Andrew’s post is about CEO compensation vis-a-vis the average worker. This is not exactly the same as the super-rich who own a great share of the assets of corporate Canada (think Weston, Rogers, Pattison, etc — see Canadian Business’s Rich 100 list that did a nice job of sucking up to them).

    As for your proposal to return to a gold standard, I suspect that would be a pretty major shock given that prevalence of modern fiat money systems. Have you considered the harm such a change would inflict on people in transition? Your deflationary scenario sounds an awful lot like a depression to me. What studies would you recommend to familiarize myself with your perspective on monetary policy?

  • This comment isn’t really related to the post, but I always wondered what someone like Marc’s opinions are with regard to the Capitalist system. You always hear the right wing label CCPA as anti business etc… But if someone has a concern over poverty issues, and social housing etc… that doesn’t make one anti-business or anti-capitalist. I also think the same goes the other way around, if someone is a more free market minded person, that doesn’t mean they don’t have concerns with regard to the well being of others, they might believe the solution lies in other avenues besides government. Although I’ve always been skeptical about the extreme libertarin position of charity can take over welfare. I just don’t think that would be possible.

  • It terms of monetary systems, I think the fiat system is fine. Inflation isn’t a huge problem like it used to be with massive government deficits, and expansionary monetary policies.

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