Rep. Keith Ellison (D., Minn.) believes that the government needs to do something about the pay gap between CEOs and regular employees, saying that he thinks government regulation of CEO pay “is a very good idea.” In fact, he had his staffers compile a report about the problem, with some statistics and some policy prescriptions for solving this “problem.”
This report uses information put out by companies as required by the SEC under the Dodd-Frank law, called the Pay Ratio Rule. For reasons that only Progressives can appreciate, this rule requires companies to disclose the ratio of pay between their CEO and their median worker. Worse, Obama’s SEC decided that companies must include all part-time, seasonal, and temporary workers in the pool of employees used to determine the median wage, without annualizing their salaries or including any benefits for any of the employees. This creates serious methodological flaws off the top of the analysis, as this article explains much better than I can. Of course, Ellison’s staffers find ways to applaud the SEC for standing firm in its faulty methods in the face of rational opposition. So, let’s just move on from there, since the SEC rule isn’t going away anytime soon.
For a moment, let’s just assume the methodology is reasonable and correct, and that “the average CEO to median worker pay ratio among all 225 [reporting] companies is 339:1” is an accurate statement of fact. I know, but just bear with me. My first question is, who cares? Why especially should government care? These are private companies, with shareholders to answer to, who can really do what they want. If they feel that the years of experience; the often 60+ hour work weeks; the ability to make decisions that effectively balance risk vs reward to maximize performance; and the ability to accept the very weighty responsibility of holding the livelihoods of often hundreds or thousands of employees and, by extension, the solvency of their families in their hands at all times is worth millions of dollars in order to attract and keep the right person for that job, it’s really nobody else’s business, and especially not the government’s.
This point deserves more explanation than that, though. One of the policy prescriptions in Ellison’s report is, predictably, raising taxes on the rich. The report states a correlation between the highest marginal tax rate of 70% and lower CEO compensation rates, although the first thing anyone in a basic statistics course learns is that correlation does not equal causation. The report then references the Progressive saint, Thomas Piketty, in claiming that “the optimal tax marginal rate for U.S. incomes today would be about 83%.” Optimal how, though? That isn’t really discussed, the report only bemoans the fact that the top tax rate was recently lowered instead.
Let’s once again set aside any methodological issues that Piketty’s paper may include and instead address other issues. For example, the Laffer Curve explains that there is a point at which higher taxes lead to lower revenue. While there is broad disagreement between the left and right on what that tipping point is (and while a study by leftist Economics professor and chairman of Barack Obama’s Council of Economic Advisors Christina Romer and her husband showed that rate to be far lower than previously believed at only 33%), no one has ever posited that it is as high as 83%. But then we already knew that they weren’t talking about maximizing tax revenue when they talked about an “optimal tax rate,” right? Because Obama himself admitted that he wanted to raise the Capital Gains rate, despite the hard evidence that doing so would actually lower tax revenue, because “fairness.” And in fact, although the report bemoans the fact that tax rates have been lowered, it has already been shown that doing so has in fact raised tax revenues. So, obviously they were never talking about maximizing government tax revenue when talking about an optimal tax rate.
It’s pretty obvious at this point that the goal of Ellison, Piketty, and other socialist-thinkers like them is equality of outcome, and nothing else. The point of government regulation of CEO pay is to cut them down to size, and move toward a more equal pay structure, through the force of government might. Art Laffer, the author of the Laffer Curve, explains that the problem with income redistribution is that it leads to a reduction in total income. “And the greater the redistribution of income the greater the loss will be of total income.” And of course, as a result, the greater the loss of government tax revenue, because when there is less income to tax, there is less tax revenue by extension. While Conservatives and Libertarians want a smaller government, we certainly don't want it achieved by bankrupting the government and killing the economy. Socialists think that making everyone more equal is a great idea, but making everyone equal in poverty is anything but.