A fair way to shrink the wealth gap
SEATTLE AND SAN FRANCISCO
The new Democratic-led Congress has already made great strides on its ambitious legislative agenda. From hiking the minimum wage to cutting interest rates on student loans, Democrats have won impressive bipartisan support for their legislative goals.
Not included on the agenda, however, is any proposal designed to address what may be the most fundamental problem facing America right now: an alarmingly high degree of inequality.
Currently the top 10 percent of income earners in the US own 70 percent of the wealth, and the wealthiest 5 percent own more than the bottom 95 percent, according to a Federal Reserve Study. The ratio of average CEO pay to worker pay in the US shot up from a mere 301-to-1 in 2003 to 431-to-1 in 2004. The average CEO now earns $11.8 million per year, versus the paltry $27,460 for the average worker. As America tries to grapple with soaring healthcare costs and lack of universal coverage, UnitedHealth Group CEO William McGuire received an obscene $124.8 million in compensation in 2005. He's just one of many grossly overcompensated kingpins of the US economy.
Adding insult to injury, taxpayers actually subsidize these bloated CEO salaries. The federal government gives tax breaks to corporations for those salaries, to the tune of hundreds of millions, if not billions, of dollars.
We used to call this by another name: the Gilded Age.
The level of inequality and unfairness has risen to such eye-popping levels that it is attracting attention from unlikely sources. Ben Bernanke, Federal Reserve Board chair, has called rising inequality "a concern in the American economy." Mr. Bernanke's esteemed predecessor, Alan Greenspan, has said that disparate income distribution is "not helpful for a democratic society." President Bush's Treasury secretary, Henry Paulson, has noted, "[M]any Americans simply aren't feeling the benefits" of the US's recent economic expansion.
No doubt Democrats would agree. Oddly, however, in this country that was founded at least in part on the principle of equality for all, economic disparity has become a third rail of American politics.
Democrats don't dare touch the issue for fear of being labeled "tax-and-spend" liberals or being blamed for igniting class warfare. America needs to get over these rhetorical rigidities. Government has a role to play in restoring another fine American value: fairness.
Here's a first step toward fairness – a modest legislative solution to the problem of excessive executive pay. The Income Equity Act, first introduced in 1997 and most recently reintroduced in 2005, would amend the tax codes to deny corporations a tax deduction for payments of excessive compensation.
Excessive compensation is defined as pay that is greater than 25 times the pay of the lowest full-time worker in a company. For example, if the lowest paid worker at a business is the filing clerk who makes $15,000 a year, the business will only be allowed to deduct $375,000 (25 times $15,000) in salary and bonuses per executive.
If the Income Equity Act were passed, corporations would still be free to pay employees whatever they wished, but taxpayers would no longer be subsidizing these excessive amounts. The legislation would be a fiscally prudent way to respond to Americans' indignation over stratospheric executive pay. It would create some downward pressure on top-level executive salaries, while also saving taxpayers hundreds of millions of dollars.
Of course, Congress could also address this problem in an even simpler manner – by reimposing higher tax rates for people with very high incomes. But such a proposal seems to be beyond the current political pale. Even Democrats in Congress apparently are not about to use up their political capital on such a controversial enterprise.
In the 1st century BCE, the great Jewish Rabbi Hillel asked, "If not now, when?" A similar question could be asked with regard to the Income Equity Act and inequality in general: If wealth inequality is not addressed in the early days of this Congress, then when will it be addressed?
Given the importance of the inequality issue, the broad popular support for restraint on executive compensation, and the savings to taxpayers that the Income Equity Act would bring, passage of this bill should be a no-brainer.
• Dmitri Iglitzin is a labor-law attorney in Seattle and a lecturer at the University of Washington School of Law in Seattle. Steven Hill is director of the political reform program of the New America Foundation and author of "10 Steps to Repair American Democracy."