Two important progressive organizations, the Institute for Policy Studies and the Campaign for America's Future, today jointly released Fix the Debt" CEOs Enjoy Taxpayer-Subsidized Pay. You will at that link find a description of this new report, and link to download the PDF.
Fix The Debt was cofounded by Alan Simpson and Erskine Bowles, and is very proud of its CEO Fiscal Leadership Council. Yet while these CEOs call for call for cuts to Social Security, Medicaid, and more, they continue to benefit from subsidized pay.
The report is the first to put a price tag on the tax breaks specific corporations have enjoyed from a loophole that allows unlimited deductions for executive stock options and other “performance-based” pay.
Among the key findings from the report ‘Fix the Debt’ CEOs Enjoy Taxpayer-Subsidized Pay:
• The 90 publicly held corporate members of the ‘Fix the Debt’ lobby group raked in at least $953 million — and as much as $1.6 billion — from the “performance pay” loophole between 2009-2011.
• UnitedHealth Group enjoyed the biggest taxpayer subsidy for its CEO pay largesse during this period. The nation’s largest HMO paid CEO Stephen Hemsley $199 million in total compensation, of which at least $194 million was fully deductible “performance pay.” That works out to a $68 million taxpayer subsidy – just for one individual CEO’s pay. A just-released proxy reveals that Hemsley pocketed another $28 million in “performance pay” in 2012, which computes into a tax break for UnitedHealth of nearly $10 million.
• Discovery Communications stood next in line for a government handout. CEO David Zaslav pocketed $114 million in total compensation, $105 million of this in exercised stock options and other fully deductible “performance pay.” That translates into a $37 million taxpayer subsidy.
• Caesars Entertainment has hemorrhaged money in recent years, driving CEO Gary Loveman’s stock options underwater. Despite his poor performance, Loveman has managed to take home $9.6 million in cash bonuses, generating taxpayer subsidies the firm can cash in to lower its taxes in years to come.
I have not had time to fully digest the report, having received an embargoed (until 12:01 this morning) copy late yesterday evening. The authors bring a wealth of experience and knowledge to the task of this report, including among other the co-directors of CAF, Robert Borosage and Roger Hickey, and from IPS Sam Pizzigatti and Scott Klinger.
Some history is in order. In 1993, fueled by disgust over excessive compensation for CEOs, Congress limited the deductibility from corporate taxes of CEO compensation to $1 million dollars. But the new legislation left a huge loophole - exempted from this limitation was compensation for performance. In effect, large corporation, including those whose CEOs are advocating for the austerity programs that include cuts to social insurance programs, are exploiting the U.S. tax code to send taxpayers the bill for the huge rewards they’re doling out to their top executives. Remember, the nominal corporate tax rate is 35%. Thus executive compensation of $11 million, of which the first million would still have been deductible but the additional 10 millions is considered performance pay or stock options, the taxpayers would eat $3.5 million in taxes not paid on that additional compensation. The loophole led to a huge explosion in "performance-based" compensation, including stock options, with the total compensation of CEOs hitting extraordinary levels.
I want to quote from the description at the page at which you can find the link to download the report:
Corporate boards of directors touted this new surge in stock options as a means to align the interests of executives and shareholders. In practice, options align only greed and the tax code. If a firm’s shares decline in value over time, shareholders lose wealth. But executives with stock options lose nothing. In fact, during stock slumps, executives often receive boatloads of new options with lower exercise prices. In 2007, for instance, Goldman Sachs gave executives options to purchase 3.5 million shares. In December 2008, after the crash had driven Goldman shares to record lows, the bank’s top executives received nearly 36 million stock options, ten times the previous year’s total. This new grant positioned Goldman executives for massive new windfalls even if the bank’s shares never regained their 2007 price level.I am not going to quote more from either the summary or the report itself. You should read the report.
On the upside, stock options gains have no limit, a reality that encourages reckless, short-sighted executive behaviors designed to jack up share prices by whatever means necessary. What sort of reckless behaviors? Over the past two decades, the Institute for Policy Studies has documented the connections between massive CEO options payouts and corporate tax-dodging, excessively risky financial gambles, and accounting fraud.
Stock options also provide huge personal tax advantages for executives. If executives hold onto their shares for more than two years after the grant date and more than a year after the exercise date — the point at which the stock is transferred to the executive — they pay only the long-term capital gains tax rate on this income. This rate will rise from 15 to 20 percent as a result of the “fiscal cliff” deal, a rate still far lower than the new 2013 top marginal rate of 39.6 percent on ordinary income.
The performance pay loophole, in short, serves as a critical subsidy for excessive compensation. The larger the executive payout, the less the corporation pays in taxes. And average taxpayers wind up footing the bill.
Instead I want to offer a few remarks about the implications of this practice.
- executives are being rewarded even if their actions do not benefit the shareholders
- this practice leads to increasing shifts of wealth to those already quite well-off, who are able to use that additional wealth to further tilt the political playing field to their advantage
- the costs of running the government, and the costs of the tax breaks that underwrite this excessive compensation, is shifted to the rest of us who are paying taxes
- for all their bloviating about how we can't "afford" the social safety-net programs such as Social Security and Medicare - into which we have been paying based on a supposed commitment of benefits - none of these people have to worry about the impact of cutting benefits whether by using chained-CPI or by raising age for eligibility.
The problem is that most Americans do not understand what is going on. The mainstream media does a poor job of explaining any of this. And of course increasingly those in broadcast and cable media are less connected to the ordinary people and do not grasp the impact of what those in groups like Fix The Debt are doing to the rest of us.
We can hope that the thoroughness and clarity of this report will begin to change the discussion. Providing clear examples of how those advocating for limitations on social programs on the grounds the nation cannot afford them while simultaneously benefiting from tax breaks not available to the vast majority show the hypocrisy of the entire approach.
We do not have to be totally dependent upon the main stream media to make the argument.
We can use the tools available to us to make sure more people know about this report.
For example, not only am I posting this blog entry, I am sending the link directly to federal office holders I know, to candidates for political office asking them what they plan to do about it should they gain the offices they seek.
If we do not restore real fairness to the American economic system, we will not long retain even the trappings of a democracy.
We can start with honesty about government finances, including how many of those advocating for fiscal austerity are simultaneously and hypocritically benefiting from their sucking at the public teat of tax breaks they have that the rest of us do not.