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CEO Pay Loopholes Cost Taxpayers $20 Billion Each Year |
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A new report shows tax and accounting loopholes allow top executives and corporations to avoid paying about $20 billion a year in taxes. The report, Executive Excess 2008: How Average Taxpayers Subsidize Runaway Pay, released this week by the Institute for Policy Studies and United for a Fair Economy, calculates the annual cost to taxpayers of the five tax and accounting loopholes that encourage excessive executive pay. Even worse: Many large corporations are not paying any taxes at all.
The authors point out that the average CEO of a large U.S. company last year received $10.5 million in total compensation, 344 times the pay of the average U.S. worker. Thirty years ago, the ratio was 35:1. The top 50 private equity and hedge fund managers in 2007 pocketed an average of $588 million each, or 19,000 times as much as the average worker.
If this trend continues, the report says, the gap between CEO and worker pay will grow wider since industries that are adding the most jobs have far wider pay gaps than those losing the most jobs. The best solution to narrowing this gap, the report says, is for Congress to pass labor law reforms that help more workers to exercise their freedom to bargain collectively for fair compensation. The Employee Free Choice Act, which working people have made a key issue in the 2008 election, would allow workers to freely choose how they want to form a union.
The Executive Excess report builds on a Government Accountability Office (GAO) report released earlier this month that found two-thirds of both American and foreign companies doing business here end up avoiding all income tax obligations to the federal government, despite corporate sales totaling $2.5 trillion. Each year from 1998 to 2005, an average of 68 percent of the foreign companies operating in the United States paid zero federal income taxes. During the same period, 66 percent of U.S. domestic corporations paid no federal income taxes to the government. (Click here to read the GAO report.)
According to Executive Excess, the most expensive CEO pay tax loophole is something called the stock option accounting double standard, which is a discrepancy in accounting rules that allow companies to value stock options on their grant dates, not on the day executives cash them in. Since the value of the stocks usually rise, the company avoids paying taxes on the higher value. The report estimates that this double standard accounts for half of the $20 billion in lost tax revenue.
The other loopholes and their cost to taxpayers include:
- Preferential capital gains tax treatment of “carried interest,” a pay practice for private investment fund managers that allows them to count significant income as capital gains instead of professional fees. The report says this practice costs taxpayers $2.6 billion in unpaid taxes a year.
- Unlimited deferred compensation accounts, a perk for CEOs at large companies, which costs $80.6 million in lost revenue. The median value of top executives’ deferred payments is $4.5 million, according to Equilar, a pay analysis firm, yet most taxpayers are limited to a $15,500-a-year maximum they can shield in a tax-deferred 401(k) account.
- Even more deferred compensation is stashed in offshore accounts. The study says it costs taxpayers $2.1 billion a year, but a recent Senate investigation pegs the price at $100 billion a year.
- Unlimited deductibility of executive compensation, which allows companies to deduct the cost of executive compensation from their income taxes, as a business expense, which costs $5.2 billion annually.
Says Sarah Anderson, one of the co-authors of Executive Excess:
It’s outrageous that our tax dollars are inflating executive paychecks. Surely, in these troubled economic times, we can find better ways to spend our nation’s wealth.
This is the 15th annual report on CEO pay issued by the Institute for Policy Studies and United for a Fair Economy. Click here to download the report.
To learn more about the crisis in CEO pay, visit the AFL-CIO 2008 Executive PayWatch site here.
2 Comments
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The Boards of Directors at these companies sit on each other’s boards and the “good ol’ boys” standard still reigns: You rub my back and I’ll rub your back (you okay my salary raise and perks and I will do the same for you). Everything is done behind closed doors and it is really hard to find out the grand total on CEO pay because it is hidden in several places: maybe a few bits of information on the company website, more in SEC filings and more in the stockholder’s proxy statement.
Granny’s law: The smaller the print in the proxy statement, the more important you read it.
As long as the BOD’s are free to rubberstamp any amount and companies can use creative accounting to disguise the amounts, it will keep going on…and getting worse. They are siphoning off company funds that should be providing benefits for the real workers in the company and not just top management….
The best way to stop this legal embezzlement is to copy Norway’s law: 40% of the Board of Directors is workers, voted in by their fellow workers. Secrets don’t hide behind closed doors there…
And I can’t get $300 for each of my children from the stimulus rebates, because they were not eligible for the child tax credit, because they are over 17 years of age. It doesn’t matter that I still supported them and was helping to put them through college. Worse, is that they received statements from the government saying that they would receive the rebate because they both filed tax returns and both paid taxes. Anyway, it would have helped.