In this dawning age of Government by Gazillionares, it may seem impertinent to whisper that a few of their tax breaks should be revisited. But candidate Donald Trump did pledge to reduce or eliminate “most deductions and loopholes available to the very rich.”
In this context, Sen. Jack Reed (D-Rhode Island) and Rep. Lloyd Doggett (D-Texas) are re-introducing the “Stop Subsidizing Multimillion Dollar Corporate Bonuses Act.” This bill closes the loophole in tax law that allows big businesses to rake in billions of dollars in federal tax breaks every year to subsidize top executive pay packages. Current law that was signed in 1993 (otherwise known as Section 162(m) of the Internal Revenue Code) caps the deductibility of pay at $1 million for top executives at publicly-traded corporations. Anything more is considered excess, such as a three martini lunch. The intent of the 1993 law was to protect taxpayers from subsidizing runaway executive pay. The loophole provides that a bonus tied to some performance metric, approved by shareholders, can be deducted. The problems with letting shareholders decide are many. For starters, it’s not in the interest of an owner to pay more tax. Further, shareholder voting is largely controlled by the same institutions such as mutual funds and other banks that benefit from the subsidy.
The Economic Policy Institute estimates that between 2007 and 2010, a total of $121.5 billion in executive compensation was deductible from corporate earnings, and roughly 55 percent of this total was for performance-based compensation. By closing this loophole, the policy reform would raise $50 billion in revenue over 10 years. That further illustrates both the gravity of the problem as well as the utility of the reform to fund needed programs.
In the House, the Doggett bill enjoys nearly 30 co-sponsors. Senate bill co-sponsor Sen. Richard Blumenthal (D-Ct) argues that, “Even as income inequality rises and middle-class wages stagnate, American taxpayers are subsidizing tens of billions of dollars in corporate bonuses. We should be investing in working families, not using taxpayer dollars for tax breaks to corporations that overpay their executives. ”
Those in the C-suite may argue that these princely payments are wages like all other wages, namely, a legitimate business expense. That turns on the labor theory of value, namely that workers produce value and should be compensated accordingly. But this theory falls apart readily. Current CEOs of the Fortune 500 are paid 300 times what median workers are paid; thirty years ago, the differential was more like 50 times. It’s tough to reckon that the CEOs of the 1980s who developed the first personal computers and cell phones, new miracle medicines, fuel efficient automobiles, that they’re only a tenth as valuable as today’s corporate chiefs.
In reality, the benefactors of these bonuses control the purse strings. It isn’t that pharmaceutical titans such as Martin Shkreli work longer hours than the average worker, or truly create wondrous products that most of us can’t imagine; instead, they game the system. In Shkreli’s case, he used other people’s money to buy a drug company named Valaent, then increased the price of an existing life-saving drug by several thousand percent. In addition to Shkreli’s compensation, Valeant CEO Michael Pearson was compensated $10 million in 2015, all subsidized by taxpayers.
On Wall Street, where the added value to the economy is suspect, the bonus culture has run amok. At JP Morgan’s London office, for example, traders gambled with hundreds of billions of dollars in deposits made cheap by the taxpayer-subsidized Federal Deposit Insurance Corp (FDIC). Sometimes they won, such as when they bet that American Airlines would go bankrupt. Sometimes they lost, such as when they overextended on a bet so complex that the JP Morgan CEO himself could identify the problem for weeks. Instead of being paid double, triple, or even 10 times the average income for US workers, (about $50,000), they received more than 100 times. Their boss, Chief Investment Officer Ina Drew, allegedly prompted the mega-trade to goose her stock-based (taxpayer subsidized) bonus, according to a Public Citizen analysis based on a Senate investigation.
Recently, Wells Fargo showed how the bonus virus—subsidized by taxpayers—led to massive fraud. Faced with termination if they failed to meet a quota of new account creation for existing customers (such as a credit card for a checking account customer, a practice known as “cross selling”), thousands of Wells Fargo employees fabricated these accounts. That led to more than a decade of faux growth reported to shareholders, according to a Public Citizen account. The solid growth in accounts sent the stock price steadily up. And since senior manager pay derived from that stock price—deductible as a business expense—the top brass earned gold. CEO John Stumpf was paid $18 million in 2016, of which $17 billion was deductible, meaning about a third came courtesy of average American taxpayers. Senior officer Carrie Tolstedt was compensation $9 million, with all but $0.7 million deductible.
Sens. Reed, Blumenthal and Rep. Doggett have promoted this reform for years. In the past, this bill entered the concrete of divided government; this time, it becomes part of the chaos theory in which any hypothesis may prove valid.
Support for reform spans the partisan bridge. In 2006, Senator Chuck Grassley (R-IA), the then-chair of the Senate Committee on Finance, stated: “162(m) is broken. …It was well-intentioned. But it really hasn’t worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese. And it seems to have encouraged the options industry. These sophisticated folks are working with Swiss-watch-like devices to game this Swiss-cheese-like rule.”
Key tax policy in the Trump administration may turn on a trio of Goldman Sachs alumni: Treasury nominee Steven Mnuchin, senior Trump advisor Steve Bannon, and National Economic Council Director-designate Gary Cohn. Goldman Sachs, the epitome of the Wall Street that feeds of Main Street, may be an unlikely breeding ground for populist reforms. Moreover, the accessible public record to date on what this trio thinks about tax policy, however, is shorter than this blog. Bannon, for example, has cancelled public appearances following the election.
One can only hope that, now they have their millions, they may feel liberated from financial concern to shape sensible policy.
As tax policy makes its way through Congress, lawmakers including the Trump administration will ideally calculate that the winners in this reform are many.