New Tax Law Penalizes Corporations with CEO Pay Exceeding Worker Pay by 50-to-1

The Tax Excessive CEO Pay Act of 2025 is pretty straightforward: If a corporation pays its top executive more than 50 times what its average worker makes, that company is going to pay a higher federal income tax rate. This isn’t about capping salaries; it’s about hitting the corporate tax rate—currently 21%—with an additional penalty if the pay gap gets too wide. Think of it as a financial disincentive for extreme internal income inequality.

The 50:1 Line in the Sand

This bill uses a metric called the “pay ratio,” which is the compensation of the highest-paid employee divided by the average worker’s compensation. If that ratio crosses 50:1, the corporation gets dinged. What’s interesting here is how the ratio is calculated: it uses a five-year average of compensation, not just a single year. This five-year lookback (SEC. 2) is smart because it prevents companies from gaming the system with one-time bonuses or temporary salary dips. For example, if a CEO gets a massive stock payout one year, the tax penalty is smoothed out over five years, providing a more stable and accurate measure of the ongoing pay structure.

Who Has to Calculate This (and Who Doesn’t)

If you’re a large, publicly traded company already reporting your pay ratio to the SEC, you’re already in the system. But this bill expands the net to include large private companies, which is a major change. If a private corporation has average annual gross receipts of $100 million or more over the preceding three years, they must now calculate and report this ratio for tax purposes. This means a lot of big, privately held firms—from large regional construction companies to major food distributors—will suddenly have new compliance work on their hands, even though they aren’t public. On the flip side, smaller private businesses with less than $100 million in revenue are explicitly exempted from this tax hike, so the local manufacturer or mid-sized software firm doesn’t have to worry about this particular regulation.

The Real-World Impact on Your Wallet and Your Job

For the average worker, this bill is designed to apply pressure on corporate boards to distribute wealth more evenly. If a company faces a higher tax bill because their CEO makes 100 times the average employee salary, the board might be incentivized to either raise the average worker’s pay or reduce the top executive’s compensation to avoid the penalty. For shareholders, this means that if you invest in a company with a high pay ratio, you need to factor in a potentially higher tax rate for that company, which could reduce its overall profitability and your returns. The exact penalty isn't specified here—the law refers to a “penalty table” that dictates the exact percentage point increase—but the financial pressure is real. Since these changes kick in for tax years starting after December 31, 2025, companies have a runway to adjust their compensation strategies before the new tax structure takes effect.