As the Democratic party gathers in Denver one issue that should be frontand center is the staggering inequality of our times. And one of the most damning symbols of our New Gilded Age is exorbitant executive pay.
In 2007, the average S&P 500 CEO’s pay package was $10.5 million, 344times greater than the typical US worker. The top fifty private equity andhedge fund managers pocketed an average of $588 million–19,000 timesgreater than the typical US worker. Thirty years ago, the averageexecutive salary was just thirty to forty times greater than the average American worker’s pay.
Senators Barack Obama and John McCain both propose greater shareholder say over CEO pay. But when it comes to taking realaction to close the loopholes that subsidize these obscene, reckless,and super-sized salaries neither candidate is aggressive enough.
A timely report from the Institute for Policy Studies (IPS) and United for a Fair Economy—Executive Excess 2008– shows how CEO compensation not only exacerbates our economic divide,but that the US taxpayer annually subsidizes it to the tune of more than$20 billion. As Institute for Policy Studies fellow and Nationcontributor Sarah Anderson, a lead author of the annual reports, told me: “It’s hopeful to see the presidential contenders from both parties responding to the widespreadpublic outrage over the problem of excessive executive pay, but theirsolutions fall short. Both support boosting shareholder power overexecutive compensation. This reform, known as ‘say on pay,’ could shamesome boards away from offering truly obscene pay packages, but it hashad limited effect in other countries. Real executive pay reformdemands tougher legislative action. And step one should be to plug thetax loopholes that currently encourage and subsidize runaway pay. Weneed to be asking our lawmakers–how much longer are you going to allowour tax dollars to wind up in the pockets of top executives?”
Executive Excess hones in on five proposed reforms to the loopholeswhich currently result in the $20 billion annual subsidy. It’s worthnoting that Senator Obama has voiced support for one of the fiveproposed reforms, while Senator McCain supports none of them.
The first reform would end preferential capital gains treatment ofcarried interest. Hedge-funders are largely paid by taking a cut of theprofits when their companies sell assets. This “carried interest” is taxed at a capital gains rate of 15%, so mega-billionaires end up being taxed at a lower rate than their secretaries. The House passedlegislation to close this outrageous loophole and tax this pay asordinary income (currently 35 percent for the highest tax bracket). It stalledin the Senate after more than twenty lobbying firms worked Congress. The Joint Committee on Taxation estimates that the federal government would have received an additional $2.6 billion in revenues in 2008 had the measure passed. Obama supports the reform and spoke out forcefully against his own party’s leadership for its failure to rallyaround it. McCain opposes it.
Unlimited deferred compensation allows most CEOs to shield theircompensation through special deferred accounts set up by theiremployers. Most ordinary taxpayers can annually defer just $15,500income through 401 (k) plans, but there is no such cap on wealthy CEOs.They enjoy the privilege of depositing unlimited pay into these accountsand are untaxed until they begin making withdrawals. In 2007, theSenate Finance Committee Chair, Democratic Senator Max Baucus, and theranking member, Republican Senator Charles Grassley, proposed to limitthe annual executive pay deferral to a not-so-modest $1 million. TheDemocratic Policy Committee estimated that it would have generated $806million over ten years had it passed. It was killed in committee, butSenator Baucus has vowed to bring it up again.
Offshore Deferred Compensation accounts allow executives and companiesto avoid any US tax liability. Hedge Fund Research estimates that ofthe $1.86 trillion invested in hedge funds, $1.25 trillion is kept infunds registered offshore. Most hedge funds have offshore subsidiesthat make these tax-avoidance schemes more readily available. The JointTax Committee estimates that if offshore deferred compensation accountswere eliminated the federal government would collect $2.1 billion thisyear. A bill to close this loophole passed in the House but thelobbyists got to it and it failed to pass in the Senate.
Unlimited tax deductibility of executive pay allows corporations todeduct unlimited “performance-based” pay. As a result, corporationsnormally set salaries at about $1 million, and then add “performance-based” perks to arrive at the exorbitant pay packages. The more the corporations pay, the more they can deduct from their own taxes. Representative Barbara Lee’s Income Equity Actwould cap the amount corporations can deduct to 25 times more than thelowest compensated full-time worker at any given company. In additionto the issues of fairness and needed revenues, this legislation wouldencourage companies to raise pay at the bottom of the pay scale in orderto attain higher deductibles for salaries at the top. Based on an IPSsample of the top five executives at 1500 US firms, the current subsidyfor unlimited deductions on executive pay is estimated at $5.2 billionannually.
The stock option sleight-of-hand allows companies to list the cost ofstock options on their grant date, while taking a tax deduction for thevalue of the stocks when executives cash them in. Companies thereforeclaim tax deductions on options-related costs that are far higher thanthe costs reported on their annual financial statements to Wall Streetand investors. (In 2005, the gap between the cost of stock options forcorporations and the higher amount they deducted was $61 billion.) In 2007, Senator Carl Levin, chair of the Senate PermanentSubcommittee on Investigations, estimated that between $5 billion and$10 billion in additional revenues could be generated annually byeliminating “unwarranted stock option deductions.”
In addition to closing the five tax loopholes above, the report notesthat a key reform to restoring some sanity to the wage scale would be topass the Employee Free Choice Act. EFCA supports workers’ right to organize and bargain collectively. Fifty years ago, over one-third of workers were unionized. Today, only 7.4% of private sector workers are unionized. Unionization is a checkon excessive top-heavy compensation, raises benefits for union members,and leads to deals that also serve as models for non-union shops.Senator Obama strongly supports this legislation, Senator John McMansionMcCain, of course, does not. The Democratic Party platform also has good and strong language on empowering workers.
If we are to restore some sanity to our fundamentally unfair tax structure and wages, the first step is to elect Obama and win enough seats in the Senate to overcome the GOP’s filibuster tactics. But electing a new President and more Democrats isn’t enough. We’re going to need to organize and expose the injustices of our current system. A smart and independent populist movement, allied with bold political leaders who understand that our economy must work for all rather than the very few, is the only way wewill create real and lasting change.