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We're All Subsidizing Free Lunches for America's CEOs

August 20, 2012 ·

It's time to close the tax loopholes that subsidize runaway executive compensation.

A generation ago, on National Secretary's Day, America's top corporate executives used to take their prized office assistants out to lunch.

Times change, and National Secretary's Day has become Administrative Professionals' Day. But something else has changed. These days, CEOs are getting the free lunches. Secretaries and all the rest of us are picking up the tab. And not at Burger King either.

Our current tax code has everyone in America essentially subsidizing the pay of millionaire and billionaire CEOs. Deductions, tax credits, and other executive-compensation loopholes total $14.4 billion annually, the equivalent of $46 for each of America's 311 million citizens.

That figure appears in "The CEO Hands in Uncle Sam's Pocket," a new report we helped write for the Institute for Policy Studies. Our research team dug deep into the tax code's weeds and pulled out one glaring example after another of tax code provisions enriching our already rich — at the expense of average Americans.

Belt-Tightening Time, an OtherWords cartoon by Khalil Bendib.

Our tax code, for instance, lets corporations deduct all "reasonable" costs of doing business. But what's "reasonable"? Over the years, corporate chiefs have stretched that definition beyond all reason. Years ago, they even claimed three-martini lunches as "reasonable" business expenses.

Congress eventually cracked down on that unpopular giveaway. Back in 1993, amid rising public outrage over sky-high executive compensation, lawmakers also tried to crack down on tax deductions for CEO pay. Under a new rule, corporations could only deduct up to $1 million on their tax returns for any individual executive's annual pay.

Unfortunately, this new rule came with a built-in loophole. Any executive pay over $1 million linked to "performance" could still be deducted. You can guess what happened next: an explosion of "performance-based" CEO compensation.

Corporate titans soon started landing annual performance pay deals worth tens of millions. Last year, Larry Ellison pocketed $76 million in "performance-based pay" for running Oracle, the giant business software company. That ploy saved Oracle $26 million in taxes. Overall, unlimited tax deductions on CEO pay cost U.S. taxpayers nearly $10 billion a year.

CEOs regularly partake in a variety of other tax-avoiding games that all share one element in common: CEOs always win, the rest of us always lose.

How outrageous have these CEO victories become? Try visualizing this: The IRS offers you a refund on all the taxes you've previously paid and then informs you that you also won't have to pay taxes on your future income for years to come. Sweet deal. Corporations get it all the time — by paying their executives in stock options.

That's just what Facebook did in a move that saved the company an estimated $5.6 billion, including an approximately $500 million return of previously paid taxes. But let's not pick on Facebook. Apple used this loophole to save $260 million on its 2011 taxes alone, and hundreds of other corporations have played this same game.

Add up all the Facebooks and Apples out there, compute the cost of the tax giveaways they use to stuff the pockets of their top executives, and you end up with corporate tax bills over $14 billion a year less than they should be. With this $14 billion, our nation could provide health care for 7.3 million low-income kids or rehire over 200,000 laid-off public school teachers.

Warren Buffett famously quipped that he has a lower tax rate than his secretary. But that's an understatement. The secretaries of America's CEOs are actually subsidizing their bosses' pay.

Let's end this free lunch for CEOs. It's time to close the tax loopholes that subsidize runaway CEO pay.

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Scott Klinger
Associate Fellow
Global Economy