Why Subsidize CEOs?

Why Subsidize CEOs?

Performance bonuses are tax deductible and subsidies for executive excess add up to over $14 billion a year. Enough is enough.


By now, most Americans recognize—and resent—that top corporations compensate their executives in ways that are simply indecent. Eye-popping salaries. Outlandish bonuses. Lavish stock options. Golden—nay, platinum—parachutes. What fewer realize about this obscene compensation is that we’re all paying for it. Literally.

Last week the Institute for Policy Studies released a blockbuster report exposing how US taxpayers subsidize executive compensation, and revealing some of the worst offenders.

Those tax subsidies for executive excess add up to over $14 billion a year. That equals 12 percent of the planned savings from the deficit deal sequesters, 211,732 times the annual cost of hiring an elementary school teacher, or $46 for each American. In other words, says co-author Scott Klinger, “Every man, woman and child in America is buying a CEO lunch.”

Equally disturbing: twenty-five companies paid their CEOs more in total compensation last year than they paid in taxes. “That was a bit surprising to us,” says Klinger, “because corporate profits are at a fifty-year high.”

Among the loopholes IPS identifies: “Performance-based” executive compensation is tax deductible; five companies alone gave out $232 million in such pay (never mind their actual performance). Compensation can be tax deferred; five companies alone deferred $48 million. Corporations can show different accounting records to the IRS and to their shareholders; just five companies cut down their tax bills by over $682 million this way in 2010. And preferential treatment of “carried interest” keeps 1 percenters’ tax bills low.

“No laws have been broken,” says Klinger. “And that in itself is very troubling given the results…. The tax system and the CEO compensation system are very broken.”

The report has drawn gratifying levels of mainstream media coverage, and all-too predictible pushback from some of the named companies, like Abbott Laboratories. “We clearly stuck a nerve with this company,” said co-author Sarah Anderson. “They say they had more than 40 percent of their sales in the US market last year, but only 7 percent of their profits.”

“What we’re trying to do here in this report is really rebut this idea that we’re hearing so much of today that our country is broke…,” says Anderson. “We’re actually a very rich country, but so much of our wealth is being diverted into the pockets of top executives.”

Can the 99 percent take that wealth back? From the boardroom, to the Occupy encampments, to the halls of Congress, IPS sees cause for hope.

Anderson says the Occupy movement “created new openness in the media and in the halls of Congress” to talk about inequality and corporate excess. She says IPS now senses “a turning point in terms of public perception…. the moment majorities of people feel [loopholes] are no longer legitimate, that’s when you get the sense that real action and real change are possible.”

There’s precedent. IPS Director John Cavanagh recalls how public outrage and political pressure led the IRS to crack down on corporate deductions for expenses like skyboxes and lavish lunches. More recently, Anderson notes that tighter executive compensation tax treatment for specific industries was included in both Obamacare and Dodd-Frank. “We think that with a big public push,” she says, “we could get that extended to all companies in the country.”

So far this year, shareholders at a record fifty-five companies have already voted to oppose proposed executive pay packages. Those votes, which were made possible by the Dodd-Frank law, are only advisory for now, but they show the breadth of discontent, and an increasing awareness that the interests of the CEO may not match those of the company—let alone the public. “We need to make these votes of shareholders binding,” says Klinger. Meanwhile, Congresswoman Barbara Lee has proposed a bill to cap deductible total compensation at $500,000 or twenty-five times the pay of a company’s lowest-paid worker, whichever is higher. (The requirement that companies disclose their CEO-to-worker pay ratio is one of several executive pay rules that were included in Dodd-Frank but are currently stalled.)

Anderson says the Republican ticket also offers a unique opportunity to talk tax loopholes: Mitt Romney won’t share the tax records that show which loopholes have padded his wealth, and Paul Ryan won’t share which tax loopholes he claims he’d close to pay for tax cuts for the rich.

For years, says Anderson, people believed there was nothing that we could do about executive excess, and that it didn’t affect them directly. Both of those myths are being dispelled. “When companies are not paying their fair share of taxes because of all the deductions for CEO pay,” says Anderson, “that means the rest of us are picking up the bill.”

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Katrina vanden Heuvel
Editorial Director and Publisher, The Nation

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