Wages are stagnating while corporate profits are hovering around record highs. So it’s easy to see the logic behind Hillary Clinton’s latest economic proposal, which she unveiled Thursday in New Hampshire: a tax cut for companies that share their profits with their employees. It is also easy to see reasons one might be wary of the idea.
As the Clinton campaign puts it, corporate profit-sharing is supposed to be a “win-win” for employees and businesses. When workers have a vested interest in whether their company earns money, they should theoretically work harder and become more productive. And, in fact, there’s apparently some evidence this happens. Clinton’s proposal is meant to get this virtuous cycle started; she would offer companies with profit-sharing programs a two-year tax break to help them “overcome any initial costs of setting up” the plan. After that, hopefully, the benefits would be so obvious that companies would make the distributions permanent. The total cost of the initiative would be $10 billion to $20 billion over a decade.
It’s feel-good capitalism. But it’s also not hard to imagine unintended consequences. What happens, for instance, if companies see a tax break, and decide to try to replace some of their wage bill with profit-sharing? As Allison Schrager noted earlier this week at Quartz, that would be a raw deal for many middle-class workers who rely on the consistency of a regular paycheck, since corporate profits are often erratic. Wealthy executives can weather the ups and downs of performance pay, but your typical employee isn’t prepared for the risk that their income will shrink if Q4 sales come in a little bit weaker than expected. Take the thought experiment a little further, and it’s also easy to see how truly widespread profit-sharing could intensify a recession by exposing workers to the whims of the economy.
There are ways to get around these issues. One is to give employees an equity stake in their company, either by encouraging more worker cooperatives or employee stock-ownership plans, which can hand them more direct control over management and pay policies. Clinton’s plan doesn’t contemplate those ideas, however—it’s purely about prodding corporations to spread the wealth around, rather than giving workers more power as shareholders. To head off any nasty side effects, Clinton would tell the Treasury Department to come up with “protections against abuses—such as stopping any firms from limiting or gaming wages and benefits to get the credit.” Maybe the government would come up with surefire regulations to stop cheating, maybe not.
For another perspective, I called up Joseph Blasi, a sociologist at Rutgers University’s School of Management and Labor Relations, who’s written extensively on profit-sharing and employee ownership plans. He was a bit more excited about Clinton’s announcement, in part because it will at least give the idea some time in the public spotlight, and because he thinks the tax credit will force more companies to at least consider the concept, and compare their performance with that of competitors that use it. He told me that while it’s possible that companies would game the system to get a tax credit, employers that have already adopted profit sharing typically use it as a bonus on top of base wages, not as a substitute. “If a company does profit sharing and reduces their employees’ wages, they’re not going to have any incentive to improve the company, they’re going to find it unfair, they’re going to be upset with their company, and word is going to get out,” he said.
That may be true. But it’s easy to imagine companies introducing profit sharing with the help of a tax credit, then holding back on raises, or hiring new workers for lower pay. Though he doesn’t think it would be a large problem, Blasi told me he that we’d still have to think of ways to stop companies from essentially replacing wages with a bonus structure. “If we have [profit sharing] economy wide, it’s an important issue to raise and have a policy solution to.”
Of course, all of this is assuming that companies will care much about what, in the end, is a fairly modest, two-year tax-break, that should theoretically require them to redirect profits from shareholders to employees. The bigger problem with Clinton’s idea might not be that it will have unintended consequences, but that it won’t have any consequences at all.