Thursday, October 16, 2008

Executive Excess: how taxpayers subsidise executive pay

We've remarked on this theme several times. There's now a report from the Institute for Policy Studies and United for a Fair Economy in the US, looking at this issue. The lead headline from our point of view is probably this:

"Average U.S. taxpayers subsidize excessive executive compensation — by more than $20 billion per year — via a variety of tax and accounting loopholes."


and it contains such titillating facts as this:

"Last year, the top 50 hedge and private equity fund managers averaged $588 million each, more than 19,000 times as much as typical U.S. workers earned."

And it asks political questions:

"No one, of course, has ever asked average Americans if they want their government — and their tax dollars — helping the country’s top business executives become phenomenally wealthy. No one has ever asked lawmakers either. Congress has never taken an explicit, up-or-down floor vote on any of the major tax code loopholes that enrich our current captains of industry and finance.

These loopholes, instead, owe their provenance to obscure bureaucratic rulings that lavishly
paid corporate lawyers and lobbyists have stretched and distorted far beyond their original
rationale."

And looks at the historical context:

"The tax loopholes we examine in this year’s Executive Excess have, in some cases, sat lodged in our tax code for many years. But the exploiting of these loopholes — for executive personal aggrandizement — is a much more recent phenomenon, a development that has intensified only since the early 1980s.

What has changed on the American economic scene, over the last three decades, to make these loopholes so exploitable? Economic power, to put the matter most simply, has concentrated in America’s executive suites. The mid 20th century checks and balances of our economic system — the building blocks of post-World War II American middle class prosperity — have been swept away."


It looks at the role of unions:

"In one survey, released last year, researchers found that CEOs at nonunion companies take home nearly 20 percent more than their fellow executives in unionized firms.4 Workers in union companies, meanwhile, make $200 more a week than their counterparts in nonunion firms, $863 a week for union employees, only $663 weekly for their nonunion counterparts."

It looks at the main tax loopholes:

Estimated Annual Cost to Taxpayers of the Five Most Direct Tax
Subsidies for Excessive Executive Pay


1. Preferential capital gains treatment of carried interest $2.66 billion
2. Unlimited deferred compensation $80 million
3. Offshore deferred compensation $2,09 billion
4. Unlimited tax deductibility of executive pay $5,25 billion
5. Stock option accounting double standard $10 billion

Total $20,08 billion

And then it says:

"The tax and accounting loopholes noted above actually deliver a relatively small piece of the taxpayer largesse that every year plops into corporate coffers. The federal government also encourages and supports excessive executive pay indirectly, through a variety of supports that range from procurement contracts to handouts that go by the label of “corporate welfare.” A recent report revealed that two-thirds of U.S. companies paid no federal income taxes between 1998 and 2005, in part because of tax credits. How much of this taxpayer money winds up in the pockets of top executives? No researchers have yet calculated a specific figure. But the sum likely dwarfs the executive pay subsidies that flow through tax loopholes.

Nearly every major corporation in the United States owes a significant chunk of its profitability to interactions with federal, state, and local governing bodies. Executives regularly claim credit — and huge rewards — for their corporate “performance.” Without taxpayer dollars, executives would “perform” nowhere near as well. That reality creates an opportunity that executive pay reformers have seldom appreciated. "

It looks at cases such as the buy-out king Henry Kravis of the KKR private equity fund.

There's plenty more in here. Read on.

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