The drums sound as to income and wealth inequality as an issue for the 2020 Democratic Presidential primaries. The loudest voices calling for increasing taxes on owners, investors and entrepreneurs – with a view that raising taxes on high-end income families is a good in of itself.
All this jawing on hiking taxes on owners/investors/entrepreneurs comes at a time when the nation enjoys good economic growth, unemployment levels at the lowest in decades and increase in wages for low and middle income workers – outpacing wage growth for higher earners. Those advocating for a tax increase for increase sake are too often whistling by the graveyard as to the possible negative impact of such tax increases.
The proposals to tax our way to greater equality regardless of the possible impact on the current strong economy – brings to mind Prime Minister Margaret Thatcher’s brutal putdown to a Labour MP – “he would rather that the poor were poorer, provided that the rich were less rich.”
There is a better way.
I would suggest that the better policy (and more importantly -- one that could actually pass Congress) is putting more wealth (significantly more wealth) into the hands of working families through employee ownership and profit sharing – and less emphasis on trying to shake the wealthy.
A recent study from Rutgers – “Building the Assets of Low and Moderate Income Workers and their Families: The Role of Employee Ownership” provides a wakeup call to the enormous possibilities of wealth creation for working families by encouraging employee ownership and profit sharing.
Highlights of the study (based on a series of interviews with employee owners) include:
"ESOP [Employee Stock Ownership Plans] employees we studied earning less than the national household median income had greater wealth for retirement than did their counterparts in the nation . . . The greatest difference can be seen in those who are closer to retirement in the 60-64 age range. The ESOP workers we interviewed in this income range have over 10 times the median savings of employees nationally."
"Women and people of color in the ESOPs studied here are faring much better than women and people of color nationally in building wealth. For example, the median wealth of Latinx ESOP employees in our sample is nearly 12 times the wealth of the national median for Latinx households. Black ESOP employees have approximately 3 times the wealth of Black households nationally."
Additional benefits the Rutgers study found include: employees more likely to benefit from job training; enjoy greater job security; increasing retirement security; improved financial skills; intergenerational wealth transfers; reducing, although not eliminating, gender and race wealth inequality; and general enhancing quality of work life and improved overall economic and social stability.
Also finding good results and outcomes for employees from employee ownership -- particularly on retirement savings -- is this 2017 study by the National Center for Employee Ownership (NCEO) -- finding 92% higher median household wealth and 33% higher income from wages for sampled employee-owners workers ages 28-34.
Wow. More please.
To the promised land. ESOP and Beyond
ESOPs have enjoyed bipartisan support and have been the traditional vehicle for Congress encouraging greater employee ownership. Congress should look at expanding the possibilities of ESOPs but also considering new, more expansive, means to broadly encourage employee ownership/profit sharing.
On the ESOP front, the Main Street Employee Ownership Act (signed into law in August 2018) and championed by Senator Gillibrand (D-NY) directed the Small Business Administration to support employee ownership through loans and technical assistance. Similarly, Senators Roberts (R-KS) and Cardin (D-MD) have introduced helpful legislation this Congress that includes making easier for ESOPs to qualify for 8a status as well as dealing with S corps status and ESOPs and favorable treatment of interest received from banks for ESOP loans. Congress should also consider the interesting proposal by Bill Parks (Tax Notes – July 8, 2019 – “A Better Way to Encourage ESOPs”) to deal with the issue of loans by allowing the owner to delay purchasing the replacement securities until receiving the funds from the ESOP.
While more should be done to encourage ESOPs -- Lawmakers should have their eyes open though that it is not all sunshine and puppies for ESOPs – see the Charleston Post and Courier series of stories on the sad journey of the Piggly Wiggly/ESOP. Consideration should be given to whether additional steps might be taken to protect workers in ESOPs. In addition, lawmakers should think about the fair concern about retired workers in ESOPs having a disproportionate amount of savings in the company (how about allowing for a tax-free divestment for workers of ESOP shares upon retirement?).
Beyond ESOP
Strengthening and encouraging ESOPs will only carry so far in terms of bringing about significant employee ownership. Given the enormous benefits – swing for the fences. To that end, policymakers should look hard at tying the last yard of tax cuts for C Corporations and pass-through business owners under Section 199A to that company providing profit sharing/stock ownership (and/or maybe full matching IRA/401k?) to their rank and file employees.
Hand-in-hand -- employee ownership/profit sharing should be treated (with a reasonable cap) as tax-free (say 5 – 10k) and allow for tax-free diversification at a certain age to avoid all-eggs-one-basket problems. Further giddyup would be provided by treating employee ownership/stock options on a (somewhat) similar basis as the compliance tests for 401(k) participation (particularly the top heavy test -- to make certain it isn’t just the senior management that feels the love). The compliance tests for stock options/shares should especially be considered for large businesses. The wide-ranging impact (and merit?) of a compliance test applied to stock grants/options was underscored by The Wall Street Journal’s recent article highlighting that significant CEO salaries are often markedly underreported and at the same time reinforcing how much of CEO compensation is in the form of stock. Ownership shouldn't be just for those on the top floor.
The end goal should be attainable and achievable goals for employee ownership/profit sharing for companies reflecting best practices. The costs for such policies (especially when tied to businesses receiving the current last yard of tax cuts) can be drafted to be minimal if not zero. Modest reforms can be made that will have owners and board members thinking about compensation/ownership/incentives for all workers –with a dramatic impact on millions of families in terms of wealth, savings and retirement. Time to share the love.
