Introduction

Public discourse on economic inequality often highlights the disparity between CEO compensation and that of ordinary workers. While some argue for direct limits on CEO pay, this approach may not fully address the root causes of economic imbalance. This article explores an alternative strategy: limiting the tax subsidies provided to corporations based on CEO-to-worker compensation ratios.

The Current State of Compensation Ratios

CEO-to-worker compensation ratios have been growing exponentially in recent decades. While some companies argue that these ratios reflect market forces and necessary incentives, others see them as a child's view of the economy, driven more by grandiose lifestyles and perceived necessity than by rational market dynamics.

The Problem with Market-Driven Compensation

Addressing this imbalance through market-driven solutions may be insufficient. As stated in the University of Chicago Journal of Economics, setting wages arbitrarily can lead to distortions, akin to central planning or socialism. Such interventions often fail to produce positive outcomes, as seen in historical examples like the former USSR, Cuba, and some Soviet satellite states. The idea that companies deliberately set wages low to allow CEOs to earn more is overly simplistic.

A Proposal for Limiting Tax Subsidies

To mitigate this disparity, a more refined approach is suggested: limiting the tax deductions companies can claim on CEO compensation. This proposal would level the playing field without setting arbitrary wage limits.

Implementation and Basis

The proposal involves capping the amount of CEO compensation that can be expensed for tax purposes. This cap would be based on the ratio of CEO-to-worker pay, keeping it in line with historically observed ratios. For instance, if the historic ratio in the USA was 50:1, and a janitor (whether directly or indirectly employed) is paid $35,000 annually, the CEO compensation expense for tax purposes would be capped at $1.75 million ($35,000 x 50).

The Benefits of This Approach

Implementing this approach would have several beneficial effects:

Revenue Generation: Capping taxes on corporate compensation can raise significant revenue to pay down national deficits or fund public programs. Incentive for Pay Increases: This would incentivize firms to increase the pay of their lowest-paid employees, reducing reliance on public assistance programs and improving workers' financial wellbeing. Emphasis on Full-Time Employment: The move can discourage the practice of hiring low-wage, part-time workers by making it less financially advantageous for companies to do so.

Addressing Corporate Lobbying Concerns

Despite its promise, this proposal faces significant opposition from large corporations, which would likely employ thousands of lobbyists to resist it. However, the potential benefits warrant serious consideration. National and international cooperation can help mitigate such opposition.

Conclusion

While not perfect, capping the tax deductions related to CEO compensation offers a balanced and effective way to address economic inequality. This approach respects market forces while incentivizing fairer compensation structures within corporations.