U.S. Tax Code Encourages Excess CEO Pay

David Moberg

Federal tax code gives CEOs an incentive to take home ever-fatter paychecks.

The recent news that the richest 1 percent captured 93 percent of all income gains in the United States was enough to give most working people indigestion. But they may react even more strongly to a new report that they are effectively paying – through higher income taxes and reduced government services – for the growing and often grotesque paychecks of their corporate bosses.

In its 19th annual report on Executive Excess,” the Institute for Policy Studies, a Washington-based think tank, focused on how U.S. tax laws encourage exorbitant executive pay and then grant tax breaks and reduced rates to those same executives as well as their businesses. For example, last year Apple paid a record $374 million to Timothy Cook, its new CEO, at a time when journalists were reporting on how Apple contract manufacturers in China overworked, abused and underpaid workers making iPhones.

As a result of these incentives in the tax code, 26 out of the 100 highest paid CEOs received more in overall pay than their companies paid in federal income taxes (and many of those corporations actually received tax refunds). With few exceptions, these were profitable companies.

GOP presidential candidate Mitt Romney’s refusal to make public more than two years of his tax returns, his utilization of offshore accounts in tax havens, and his claim that he never paid less than 13 percent in income taxes (which is less than the average rate paid by the top three-fifths of American taxpayers) have turned public attention to the ways the rich can avoid taxes – even as the tax code encourages higher pay.

IPS researchers concluded that, by themselves, low tax rates for the rich make it more attractive for CEOs to take big paychecks, especially compared to times when top marginal rates reached as high as 91 percent. But with a variety of special tax breaks, they write, in effect, we’re rewarding corporate executives for gaming the tax system…[and] helping the CEOs of our nation’s most prosperous corporations pick Uncle Sam’s pocket.”

Ultimately that means picking the pockets of workers whose wages have largely stagnated or declined in real terms. The four most direct subsidies for outsized CEO pay, IPS says, cost every person in the United States $46 a year. At a total cost of $14.4 billion each year, eliminating those tax breaks could pay for more than 200,000 elementary school teachers or 250,000 renewable energy jobs.

Simply by declaring that its pay to the CEO is for his or her performance, a corporation can write off on its taxes any amount, not just up to the limit of $1 million for standard compensation. Taxpayers also effectively pay for other incentives to high CEO pay – unlimited deferred compensation, double standards on accounting for stock options, and preferential treatment for carried interest” in hedge, private equity and other investment funds (where payments that should be taxed like regular income are instead taxed at a much lower rate).

These same CEOs are the major beneficiaries of the Bush-era tax cuts, and would be as well under Romney’s proposals. The Bush-era cuts saved James Mulva, CEO of ConocoPhillips, as much as $8.7 million last year on his taxable income of $146 million.

Corporations, now paying a record-low 7.9 percent of federal revenues, further avoid taxes on the business itself. IPS cites the use of tax havens – where rich individuals have stashed somewhere between $21 and $32 trillion – as places that also shelter corporate profits. Its researchers found that the 100 corporations with the highest paid CEOs operated a total of 537 subsidiaries in tax havens, where accountants can place disproportionate shares of income, for example, by assigning patents and other intellectual property rights to the tax haven.

The study also identifies other problematic rules that allow corporations to reduce taxes, such as accelerated depreciation, research and development tax credits, and tax subsidies for oil and gas development. But even some progressive economists argue that R&D credits – unlike oil development subsidies – may encourage investment, even if inefficiently.

The list of subsidies or means for corporations and highly paid executives to avoid taxes is nearly endless. It’s also shameless. After being bailed out by the federal government, for example, Citigroup lobbied to write the tax code for a special exception that permitted it to get a $144 million tax refund last year. It paid CEO Vikram Pandit $14.9 million, despite poor performance, unleashing a rebellion among stockholders. At the April annual meeting, 55 percent of stockholders voted to reject Pandit’s pay. 

It seems that indigestion from CEO pay abuse may be spreading.

Last year shareholders at 44 companies rejected CEO pay packages; so far this year 55 groups of stockholders have done the same. Unfortunately, the Dodd-Frank financial reform bill that gave shareholders the say on pay” also made it advisory only.

Meanwhile, regulatory delays have held back the implementation of other provisions of Dodd-Frank related to income disparities, such as a requirement that corporations post the ratio of CEO pay to the median pay of employees and the relationship betwreen CEO pay and corporate performance.

Other proposals, some backed by Obama, include eliminating the carried interest loophole, limiting total CEO pay that firms can deduct from taxes (now pay over the $1 million limit for tax deductions is called performance pay” and thus deducted without limits), limiting deferred compensation plans for CEOs, and setting maximum executive pay for federal contractors or recipients of government bailouts.

But perhaps the most effective constraints on CEO excess is the simplest in terms of policy, if not politics: Go back to the Eisenhower-era top marginal tax rates of 91 percent.

David Moberg, a senior editor of In These Times, has been on the staff of the magazine since it began publishing in 1976. Before joining In These Times, he completed his work for a Ph.D. in anthropology at the University of Chicago and worked for Newsweek. He has received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy.

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