Ending the Taxpayer Subsidy for Exorbitant Executive Bonuses

How much is enough?
By Lloyd Doggett 

There is an outrage in our tax code and it's costing you money.

Federal law currently gives publicly held corporations a special tax deduction when they pay their executives huge "performance-based" bonuses. The deduction can be worth millions of dollars. The more they shower their executives with such pay, the less publicly-held corporations pay in federal taxes.

And when giant companies don't pay their fair share, that tax burden is then shifted onto small businesses and working families.

Public outcry over huge pay packages and corporate tax dodging has nothing to do with envy. It's based on an understanding that a top-heavy economy -- where more and more money goes to the wealthiest 1 percent and less and less to the middle and bottom -- is not only unfair, it's unstable.

In 1978, when prosperity was still widely-shared in America, an average CEO earned 29 times what an average worker did, according to the Economic Policy Institute. But over the past four decades executive compensation skyrocketed by 875 percent, while the wages of an average worker crept forward by only 5.4 percent. By 2012, CEOs earned 273 times more than an average worker.

The staggering gap between extremely well-compensated executives and everyone else is bad enough -- but our tax code makes the problem worse. Corporations can deduct from their taxes any amount paid to executives in salaries, bonuses and stock grants as long as its labeled "performance based." Companies effectively get a giant tax break for paying their executives outlandishly.

The "performance" required is rarely Olympic caliber and the bar can be always be lowered if it proves too high.

When JPMorgan Chase pays Jamie Dimon $20 million in a year that his bank paid billions in penalties for wrongdoing, "performance" may have a different meaning than most small-business owners assume when trying to grow their companies.

Excessive pay and other corporate tax avoidance often go hand in hand. In a recent study, Anthony Petrello of Nabors Industries topped the list of highest-paid executives, with pay totaling $68.2 million in 2013. Nabors renounced its American citizenship to avoid taxes in 2002, when it moved its place of incorporation to Bermuda, while keeping many of its corporate operations in Houston, Texas.

Walmart is a good example of how this tax loophole has contributed to out-of-whack executive pay. Between 2009 and 2014, eight top executives were paid a total of $334 million, of which nearly $300 million -- or 90 percent -- was supposedly "performance" pay, according to a report by Americans for Tax Fairness and the Institute for Policy Studies. The taxpayer subsidy for Walmart's bonuses: more than $100 million.

Walmart's not alone. The total cost of subsidizing CEO super salaries at America's biggest corporations over the next decade is $50 billion, according to the nonpartisan Joint Committee on Taxation.

That kind of pricey loophole has a lot of company in the corporate tax code. The U.S. House of Representatives may soon take up two expired tax breaks that make it easier for big corporations to ship jobs and hide profits offshore. They will cost taxpayers $80 billion over 10 years. Such loopholes allowed over 100 of the nation's biggest corporations to pay zero federal income tax in one of the past five years, a recent Citizens for Tax Justice study found.

This tax subsidy hurts working Americans in other ways too. The $50 billion cost of this loophole could pay for a lot of things -- educating our kids, rebuilding roads and bridges, finding new cures for dread diseases.

Even in this divided Congress, there has been bipartisan acknowledgement that we must fix this problem. Chairman Dave Camp, my Republican colleague on the Ways and Means Committee, included a similar, though more limited, provision in his draft tax reform plan. When Senator Chuck Grassley was chairman of the Senate Finance Committee he acknowledged that this area of the tax code is "broken."

My legislation to eliminate this loophole would put an end to unlimited tax write-offs on executive pay. It would make the $1 million tax-deduction cap real. There is similar legislation in the Senate. Corporations would still be free to shower their CEO's with huge bonuses if they liked. They just couldn't demand the rest of us help pay for it.

Rep. Doggett (D-TX) is a member of the tax-writing House Ways and Means Committee.