Why a wealth tax is not the solution to the income inequality gap. A better alternative.

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In the summer of 2016, as the sun painted golden hues across suburban neighborhoods, a shadow loomed over countless households dependent on the life-saving EpiPen. The pen, an authentic Mae West for those with severe allergies, became an unwitting symbol of the insidious consequences of income inequality when pharmaceutical company Mylan decided to jack up its price by $200 during that year.

For families like the Johnsons, a working-class couple with a young daughter, the EpiPen was not just a medical necessity; it was a lifeline. Emma, their seven-year-old, had a severe nut allergy, and the EpiPen was the first and last line of defense against a potentially fatal reaction.

The Johnsons had always managed to scrape together enough to afford the EpiPen’s high price tag, but after Mylan raising it by almost 500% in just a few years, their world crumbled. The cost became an insurmountable barrier, a stark reminder that, sometimes, life-saving medication was a privilege dictated by income.

The EpiPen, once a symbol of security, transformed into a harsh reminder of the gaping divide between the haves and the have-nots.

The Johnsons found themselves facing an impossible choice: risk their daughter’s life or sacrifice essentials like groceries and utility bills to afford the medication. Their story echoed across the nation, where low-income families felt the tremors of a system that prioritized profits over the health and well-being of its citizens. The EpiPen, once a symbol of security, transformed into a harsh reminder of the gaping divide between the haves and the have-nots.

The Income Gap

Yesterday, an Oxfam report exposing how the world’s five richest men have more than doubled their fortunes to $869bn since the COVID pandemic, while the world’s poorest 60% — almost 5 billion people — have lost money, generated a heated debate about income inequality. This report came up just as the wealthiest individuals worldwide convene at the Swiss ski resort of Davos for the annual World Economic Forum meeting, bringing together political leaders, corporate executives, and the ultra-wealthy from January 15 onward. The report found that seven out of 10 of the world’s biggest corporations have a billionaire as CEO or principal shareholder, while 48 of the world’s biggest corporations together raked in $1.8tn in total net profits in the year to June 2023, a 52% jump compared with average net profits in 2018–21. Throughout the same period, billions experienced a sharp decline in living standards as real wages for almost 800 million workers in 52 countries fell, with many others facing just frivolous increases, while disproportionately soaring energy and food costs particularly impacted the poorest families. “People worldwide are working harder and longer hours, often for poverty wages in precarious and unsafe jobs. […] These workers have lost a combined $1.5tn over the last two years, equivalent to 25 days of lost wages for each worker,” the report says.

A frontline worker receiving a $15/hour minimum wage would need about 1,000 years to accumulate the annual earnings of the average CEO in the top 100 Fortune companies.

The disparity between executive compensation and the average worker’s pay has been steadily increasing over the decades. According to the Economic Policy Institute, chief executives of major companies earned, on average, 320 times more than their typical workers back in 2019. In 1989, this ratio stood at 61-to-1. Over the period from 1978 to 2019, compensation for typical workers grew by 14 percent, while it surged by 1,167 percent for CEOs. Ironically enough, during the pandemic’s years, as millions of people struggled to meet their basic needs, numerous companies that faced significant setbacks (or even mismanagement) in 2020 generously lavished their executives with substantial bonuses and compensations. A frontline worker receiving a $15/hour minimum wage would need about 1,000 years to accumulate the annual earnings of the average CEO in the top 100 Fortune companies.

As Aleema Shivji, Oxfam’s interim Chief Executive declared,

“This ever-widening gulf between the rich and the rest isn’t accidental, nor is it inevitable. Governments worldwide are making deliberate political choices that enable and encourage this distorted concentration of wealth, while hundreds of millions of people live in poverty.”

Advanced Proposals

Amid all this turmoil, a handful of solutions have been proposed: reining in corporate power (including breaking up monopolies, legislating for living wages, capping CEO pay, and new taxes on the super-rich and corporations, including permanent wealth and excess profit taxes); revitalizing the state — ensuring universal provisions; reinventing business — creating and promoting a new generation of companies that do not put shareholders first — including worker cooperatives and fair-trade businesses — or where worker representation on corporate boards is ensured.

One of the most championed and repeated claims has to do with implementing higher marginal income tax rates at the very top or setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation. However, as Oxfam’s report shows, this approach has proven largely ineffective, as corporate taxation has in many ways collapsed during the last 40 years in most countries (resulting in actual tax rates that are much lower than the statutory ones, and often closer to zero); as shareholders waged a highly effective war on taxation (through aggressive tax planning), managing to skirt over $160 billion in taxes each year in the US only; and as even governments themselves, in different countries around the world, showed a certain proclivity to corruption and mismanagement of our tax dollars, especially during times of crisis.

The current system of calculating the minimum wage based on living costs has been criticized for not keeping up with the rising costs of living and for not addressing the issue of income inequality.

Most policies focus on increasing the minimum wage (a measure many business groups in the US even lobbied against in 2021). A living wage is the minimum amount of money that a worker must earn to cover the basic necessities of life, such as rent, food, childcare, health care, transportation, and taxes. It is the amount that should ensure that a worker does not go hungry, get evicted, or forgo critical health care. A minimum wage does not provide any extra money for savings, emergency expenses, or small luxuries like ordering out though. The current system of calculating the minimum wage based on living costs has been criticized for not keeping up with the rising costs of living and for not addressing the issue of income inequality.

A Singular Solution

In this article, we intend to propose a unique approach, which by itself can significantly reduce the income inequality (while addressing the tax avoidance issue too), although its impact may be even higher when combined with other strategies like the ones already suggested above.

Rather than forcibly capping the CEOs’ pay or taxing it harder, the key step consists in tying the minimum wage to the CEO-to-worker compensation ratio and to the shareholders-to-worker earnings ratio in general. This approach would establish a direct link between the organization’s financial results, executive pay, shareholders distributions, and the wages of the lowest-paid employees. Such a measure would promote greater equity and improved worker well-being, while increasing employees effectiveness and company performance (as an Oxford study and a Harvard Business School study indicate, in harmony with the Equity Theory), reducing the growing gap between the wealthy and the working class, and ultimately boosting consumer’s spending — a fundamental stimulus for economic growth.

THE STRATEGY

To ensure the effectiveness of this new strategy, here are a few key principles to consider:

1. Establish a Minimum Wage Formula: Devise a formula that calculates the minimum wage based on a predetermined ratio between company financial results, CEO pay, shareholder earnings, and the average worker pay. This benchmark should be based on industry standards, company size, and economic factors to ensure it is both realistic and reflective of responsible corporate practices.
2. Define Minimum Wage Tiers: Create a tiered minimum wage structure that is directly linked to the established ratios and accounts for the different levels of qualification, skills, responsibilities, and outputs of the workers.
3. Regulatory Framework: Establish a clear regulatory framework to implement and enforce the minimum wage formula and adjustment mechanism. This would ensure consistency and prevent companies from circumventing the intended purpose of the strategy.
4. Regular Adjustments: Implement a system for regular adjustments to the Wage Formula and consequently to the minimum wage tiers. This could be based on economic indicators, inflation rates, and overall corporate performance. Regular reviews would allow for adaptability (upward or downward — without ever dropping below the living wage) to changing economic conditions.
5. Transparency and Accountability: Implement transparent reporting mechanisms that publicly disclose the CEO-to-worker compensation ratio and shareholder-to-worker earnings ratio for all companies. This would promote accountability and encourage companies to align their executive compensation practices with the overall well-being of their workforce.
6. Incentivize Fair Practices: Provide incentives, such as tax breaks or other financial rewards, for companies that maintain fairer CEO-to-worker and shareholder-to-worker ratios. This encourages businesses to adopt responsible compensation practices, stimulating a more equitable distribution of earnings.
7. Government Oversight and Penalties: Establish a regulatory body or empower existing ones to oversee compliance with the established ratios. Companies failing to adhere to the set benchmarks could face penalties, creating a strong incentive for compliance.
8. Public Awareness Campaigns: Launch public awareness campaigns to inform citizens about the strategy and its benefits. Engage with businesses, labor unions, and other relevant stakeholders in the development and implementation of the strategy. This would strengthen collaboration, address concerns, and ensure that the strategy is well-aligned with the needs of all parties, leading to a societal understanding of the importance of narrowing income gaps for overall economic well-being and social stability.

ADVANTAGES AND BENEFITS OF THIS STRATEGY

Implementing a minimum wage strategy tied to CEO-to-worker and shareholder-to-worker ratios can offer several potential benefits and advantages:

1. Reduced Income Inequality: The primary goal of this strategy is to directly address and reduce income inequality by ensuring that compensation at the top of an organization is more proportionate to the wages of average workers.
2. Fairer Corporate Practices: Tying minimum wage to ratios promotes fair corporate practices, encouraging companies to adopt more responsible and equitable compensation structures.
3. Improved Corporate Culture: A commitment to fair compensation practices contributes to a positive organizational culture, fomenting collaboration, innovation, and a sense of shared purpose among employees. This, in turn, can positively impact productivity and organizational performance.
4. Higher Productivity and Organizational Performance: When employees feel fairly compensated, they are likely to experience higher job satisfaction and morale, contributing to increased productivity and efficiency. In addition, fair compensation practices can reduce absenteeism and employee turnover rates, improve talent attraction (enhancing competitiveness on the market), and lead to more strategic costs management.
5. Enhanced Employee Well-being: A more equitable distribution of wages ensures that employees can meet their basic needs, reducing financial stress and contributing to improved overall well-being.
6. Consumer Confidence: Demonstrating a commitment to fair compensation practices can enhance the company’s reputation as a socially responsible employer, strengthening its brand and attracting customers who value ethical business conduct.
7. Long-Term Social Stability: Addressing income inequality can contribute to social stability by mitigating socioeconomic disparities (risk mitigation) and reducing the tensions between different income group as well as the likelihood of disruptions due to employee dissatisfaction or public backlash.
8. Economic Stimulus: A more equitable distribution of income can contribute to a healthier and more sustainable economy by providing increased purchasing power to lower-income individuals, thus benefiting global economy, the overall quality of life, and shareholders’ gains themselves.
9. Public Accountability: Public disclosure requirements and oversight mechanisms promote accountability, allowing consumers, investors, and the public to make informed decisions that align with their values.
10. Adaptability to Economic Conditions: Regular adjustments to the benchmark ratios and minimum wage tiers ensure adaptability to changing economic conditions, preventing stagnation or adverse effects during economic downturns, and positioning organizations for sustained success.

While challenges and complexities may accompany the implementation of such a strategy, the potential benefits suggest that it could contribute to a more just and sustainable socioeconomic landscape.