The city council of Portland in Oregon will vote on Wednesday whether to impose a tax on companies whose CEO’s pay exceeds the median salary of their workers by a ratio of more than 100-to-one.
The measure, which was proposed by Portland city commissioner and former environmental lawyer Steve Novick, will take advantage of the fact that new Securities and Exchange Commission (SEC) rules will require companies to disclose their executive pay ratios for the first time beginning in 2017.
If it passes, experts said the tax would be the first of its kind.
Novick said that he was inspired by a similar measure proposed by the California state senate in 2014, which failed to reach the supermajority needed to make changes to the state tax code. He was also inspired by reading French economist Thomas Piketty’s book Capital.
“To me, after global warming, income inequality is the biggest challenge we face in our society,” Novick said. “It’s been absolutely frightful to see the divide between regular folks and the richest-of-the-rich. It’s economically destabilizing, it’s politically destabilizing, it’s unhealthy.”
The measure could gain support from both sides of the political spectrum. As candidates, Donald Trump and Bernie Sanders – diametrically opposed on many issues – both pointed to the “rigged system” that supported the wealthiest one percent as a problem, Novick said.
The disparity between workers’ and CEOs’ pay has been rising sharply since the 1960s, when the average ratio was around 20-1. It now stands at above 200-1.
Novick’s proposal would increase current corporate income taxes by 10% if a company CEO had a salary ratio of above 100-1, and by 25% for CEOs with a ratio of 250-1 or higher.
He said that he was “95% confident” that he had the three votes needed to pass the measure through the five-person council.
“What I find quite interesting is that it seems [to be] the first tax that targets inequality as such,” said Branko Milanović, a former lead economist at the World Bank and a professor at New York University who specializes in income inequality.
For Milanović, the idea was novel because “it treats inequality as having a negative externality like taxing carbon emissions”.
Steve Seelig, a senior regulatory advisor for the corporate risk management advisory firm Willis Towers Watson, said that “this isn’t the first place and won’t be the last place” to try to impose such a scheme.
“Unlike current CEO pay disclosures that don’t really get a lot of attention from the rank-and-file, this one will,” Seelig said, referring to the new SEC disclosure rule. “It’ll be in the local newspapers, talked about at the water cooler, and companies need to be poised to deal with their workforce.”
Seelig said that workers were in some cases likely to go through “the stages of grief” upon finding out how much their CEOs are being paid. “Shock; then when they wake up the next day they’ll be angry, they’ll say how does this affect how much I am paid?”
“That’s going to present a lot of challenges to companies that don’t do a great job of explaining that proposition,” he added. Of Portland’s move, Seelig said it probably wouldn’t meaningfully affect companies’ bottom lines, but that it was “a matter of raising awareness”.
