American taxpayers are living in an unequal world: CEOs make approximately $5,000 per hour while minimum-wage workers make $7.25 per hour. The Koch Brothers make approximately $3 million dollars per hour.
Based on consumer spending surveys and data on pay, we estimate that escalating income inequality suppresses U.S. consumption by more than $1 trillion annually.
This is a huge problem, because our economy is consumer-driven. Those who argue that the top 1 percent are the job creators, whose wealth will eventually trickle down to other income brackets, have the economic cart before the horse. Increasing the salary of average workers generates more consumers. Although they make less money, average families spend much more of their income on goods and services than families at the top. The over $1 trillion decrease in U.S. consumption that arises from the widening income inequality is enough to support 13 to 14 million jobs at $22 per hour.
The depressed consumption has a crippling effect on private investment and opportunity creation in the economy. Companies making up the Standard and Poor 500 now spend more than half their earnings on purchasing back their own stock rather than investing in things like new equipment, research or increasing wages.
In the past, wage increases remained roughly proportionate at all pay levels. Had pay increases continued to grow proportionately since the 1970s, and profits remained the same proportion of GDP, the median full-time worker today would be making $13,300 more annually. Families with one full time and one three-quarter time worker would have gotten about $23,200 higher pay. Think of how dramatically that would have changed the economic circumstances of average families and what those families could have bought with the extra money. Think of the reduction in unemployment assistance, food stamps, and other social programs.
So what is to be done? Proposals from the left often emphasize boosting taxes at the top end of the income ladder, which is next to impossible politically. From the right come calls to spur greater opportunity in the economy and new job creation by lowering taxes on corporations and the wealthy, but we’ve tried this and it doesn’t work.
That’s why we propose a different kind of tax, one that rewards businesses that comply with broad guidelines in paying workers. Companies that:
Pay top management on average no more than 50 times the pay of the median worker and that pay the median worker no more than two times the lowest worker.
Keep workers’ overall pay commensurate with increases in profits.
Pay workers with the same job title and experience similarly regardless of race or gender.
Companies that followed the guidelines would pay much lower tax rates than the current rates. Companies that choose to direct their revenues toward CEO salaries and taking disproportionate profits would pay at a higher tax rate than they do at present.
In effect, less equitable corporations would have higher taxes, more equitable corporations would have much lower ones. Profits would be directed and flow towards the equitable.
Consider what would happen if non-complying companies paid a higher tax rate, say 45 percent, and complying companies paid a much lower rate, say 15 percent. If Walmart complied and lowered its tax rates to 15 percent, its reduced taxes would open up approximately $5.5 billion in revenues, allowing the world’s largest publicly traded employer to raise the bottom pay of its non-management workers up to $13.50 per hour, a raise of 35 percent.
As more companies complied, Walmart would get many more customers to boost their sales. More productive investments as well as more jobs would be created. Taxpayers would be paying much less for social assistance programs. A virtuous cycle would build and lift the entire economy.
To be sure, in the ideal world, the market would distribute both effectively and equitably by itself. We could just let the market determine the amount of pay. However, the pay workers receive no longer reflects the value of their work. The productivity of the workforce has increased by 90 percent since 1973, yet real compensation has remained practically unchanged for a majority of workers while pay at the top as well as profits have more than doubled.
It is not the job of government, of course, to eliminate all economic inequalities. Instead of recommending an overly simplistic solution to a complicated problem, e.g. “free market” or “government intervention,” we want to encourage market forces to lessen, not grow, economic inequalities. Since higher profits motivate corporations, we should give tax breaks to corporations who pay all of their workers more.
John Schwarz is a political economist at the University of Arizona. His most recent book is Common Credo: Path Back to American Success, published by Liveright Press.
Suzanne Dovi is an associate professor at the School of Government and Public Policy at the University of Arizona and a Public Voices Fellow with The OpEd Project.