How We Pay for CEO "Performance"
A gaping tax loophole pads executive pay and the federal debt.
Federal unemployment benefits for 400,000 Californians out of work since last fall recently dropped 18 percent, a $52 cut out of weekly checks that average $297. Similar cuts are rolling out in other states.
In all, long-term unemployed Americans will on average lose nearly $1,000 each by September 30, the date that ends the 2012 federal fiscal year.
The cause of this squeeze: the $85 billion in federal austerity budget reductions.
Who deserves the "credit" for this meat-axe set of cuts, the now infamous "sequester"? Credit the power suits who occupy corporate America's loftiest perches. These top executives — organized in groups like "Fix the Debt" — have been lobbying relentlessly for deep cuts in federal spending.
But these same top executives, says a new report I co-authored, are actually running up the federal debt — purely to enrich themselves.
The giant firms these execs manage, my colleagues at the Institute for Policy Studies and the Campaign for America's Future and I detail in the report, "are exploiting the U.S. tax code." They're, in effect, sending taxpayers "the bill for the huge rewards they're doling out to their top executives."
Among these top execs: UnitedHealth Group CEO Stephen Hemsley, a "Fix the Debt" endorser who pulled in $199 million between 2009 and 2011.
A convenient federal tax loophole in place since 1993 let UnitedHealth deduct $194 million of that windfall on its corporate tax return. That deduction saved UnitedHealth — and denied the Treasury — $68 million, enough to extend full federal unemployment benefits for the rest of fiscal 2013 to over 65,000 jobless Americans.
The loophole UnitedHealth so lucratively exploited lets companies deduct off their taxes every dollar of "performance pay" they shovel into executive pockets. The 90 corporate giants that belong to "Fix the Debt" shovel quite a bit. Between 2009 and 2011, the deductions they claimed for "performance-based" executive pay added at least $953 million to America's national debt.
"Performance pay" tax games have their roots back in Bill Clinton's 1992 drive for the White House. Clinton campaigned against over-the-top executive pay, and Congress, after his inauguration, passed legislation lawmakers hailed as a check on CEO excess.
This legislation allowed corporations to deduct off their taxes no more than $1 million in compensation per executive. But the law had a huge escape hatch. Firms could exempt any "performance-based" pay from the $1 million limit.
The predictable result? An explosion of "performance-based" compensation, mostly with stock options, that kept CEO pay soaring. CEOs had been averaging 201 times worker pay in 1992. The average gap today: 354 times.
The "performance pay" loophole, our report stresses, has served "as a critical subsidy for excessive compensation."
"The larger the executive payout, the less the corporation pays in taxes," the report explains. "And average taxpayers wind up footing the bill."
That injustice would end if legislation Representative Barbara Lee (D-CA) has introduced ever became law. Her Income Equity Act would deny corporations tax deductions on any executive compensation that runs over 25 times the pay of a company's lowest-paid workers or $500,000.
Interestingly, President Barack Obama's Affordable Care Act sets a $500,000 cap, effective this year, on how much health insurers like UnitedHealth can deduct for executive compensation.
With this cap now law, our report notes, "taxpayers won't have to worry so much about their hard-earned dollars going to subsidize fat paychecks for CEOs like Stephen Hemsley of UnitedHealth."
"But," we sum up, "taxpayers may want to wonder why — at a time of scarce government resources — their tax dollars are subsidizing fat paychecks at any American corporate giant."