Employee ownership advocates maintain that if more citizens were owners of businesses, then wealth inequality, and perhaps income inequality, would decrease. I believe it would, too. But I also say it depends.
The History of the ESOP
Taking note that the most common form of having employees be “owners” is the employee stock ownership plan, often referred to as an ESOP, a brief word on the history of this model of employee ownership is required.
In the last half of the 19th century, the US economy morphed from an agricultural base to one dominated by industry. There was no Social Security and no private sector retirement savings plans. A few corporate leaders of multistate businesses, most prominently Mr. William Procter and Mr. James Gamble, decided their companies should set aside stock to distribute to retired employees when they could no longer work.
When Congress drafted the Internal Revenue Code in 1921, Congress sanctioned setting aside company stock for employees by not taxing the value of the stock when set aside in a trust, which could be a profit-sharing or stock bonus plan.
In the early 1970s, Congress looked to redefine pension law. This was partly a response to evidence of corrupt use of funds that had been set aside for employees to have retirement security, coupled with the bankruptcy of the US car company Studebaker, which had funded its employee retirement plan solely with Studebaker stock. In doing so, the House Labor Committee included a provision that no such plan could have more than 10 percent of its assets in company stock.
Not surprisingly, when corporations were faced with the threat that a practice that many of them had engaged in for decades was to be outlawed, they led a successful advocacy campaign to have the House Tax Committee adopt a compromise. Businesses conceded that a retirement savings plan that promised a level of retirement benefits for retirees could not have the trust funded with more than 10 percent company stock. This is when the term defined benefit plan was established in federal law.
Back in the 1970s, nearly all pensions were structured as defined benefit plans. Under such plans, vested employees would receive a guaranteed annuity on retirement for the rest of their lives, with the amount set at some percentage of their pre-retirement salary level. But if a specific benefit level was not promised, then, businesses argued, it was okay if that pension invested more heavily in company assets. Such pensions are known as “defined contribution” plans. These, too, date back to the 19th century and were included in the first Internal Revenue Code of 1921.
The reform bill, enacted by Congress in 1974, ultimately carried the title of ERISA: the Employee Retirement Income Security Act. ERISA governs both tax-qualified defined compensation plans and defined benefit plans. For a variety of reasons, ever since ERISA passed, far fewer US corporations sponsor defined benefit plans in favor of defined contribution plans, the most common of which is the 401k.
Anyhow, for employee-ownership advocates, getting Congress on board to permit company stock contributions at any level was important, but insufficient to enable the expansion of ESOPs. In fact, another provision threatened to eliminate the small number of ESOPs, then known as Kelso-plan companies, that did exist. Back in 1974, fewer than 250,000 workers had ownership stakes in Kelso-plan companies. And getting that far required workers to buy company stock using “borrowed” money, a practice that ERISA would largely forbid.