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The Terrible Things That Happen When Santa Claus Visits CEOs

A 20-year-old rule intended to control CEO pay has bloated executive paychecks while draining tax revenue and widening inequality.

A 20-year-old rule intended to control CEO pay has bloated executive paychecks while draining tax revenue and widening inequality. (Photo: Bank Santa via Shutterstock)

This week marks the 20th anniversary of an epic boondoggle in US policy-making history. On Dec. 20, 1995, a tax rule went into effect that was supposed to rein in CEO pay. Boy, did it backfire.

That year, the gap between pay for large company CEOs and average workers ran 180 to 1. Today, it stands at 373 to 1.

How did this reform go so very, very wrong? The idea was to put a $1 million cap on corporate tax deductions for executive pay, with the idea that boards might be loath to send pay levels into the stratosphere if it meant a corresponding spike in their IRS bills. The problem is that the new rule, Section 162(m) of the tax code, included a massive loophole. The $1 million cap didn’t apply to so-called “performance pay.”

It wasn’t hard for corporations to rejigger their pay plans so that (voila!) most of the money became fully deductible. The more companies paid their CEOs, the less they paid in taxes. So why not deliver them even bigger boatloads of pay?

Meanwhile, the rest of us got stuck with the bill. American taxpayers who have seen their wages stagnate have been forced to subsidize the pay of those who sit atop the largest businesses.

According to a report we’ve just co-authored, this “performance pay” loophole allowed 10 US corporations alone to cut their 2014 tax bill by more than $182 million through CEO pay-related deductions. And this is just part of their total subsidy, since loophole applies to four top executives at each company.

One CEO was off the charts. McKesson CEO John Hammergren pocketed $112 million in fully deductible “performance pay” in 2014. This included more than $60 million in stock options and more than $50 million in stock and bonuses tied to performance criteria. That translates into a $39 million taxpayer subsidy for the pharmaceutical company, assuming a 35 percent corporate tax rate.

The stock-pay incentives created by this loophole have also played a powerful role in deepening wealth inequality. Fortune 500 CEOs collectively owned more than $270 billion of their companies’ stock, according to Center for Effective Government analysis of proxy statements. This represents $550 million in stock wealth per executive. In contrast, the median total net worth of the average American household is only $81,400.

Obamacare closed the performance pay loophole – but only for health insurance companies. Big insurers like UnitedHealth and Cigna can deduct no more than $500,000 in pay per executive, with no exceptions. The reasoning is that these companies should not pass off increased profits from the public program into the pockets of their executives.

But other companies that have benefited from the expanded pool of insured customers, including pharmaceutical firms like McKesson, are not subject to the same deductibility cap. That’s obviously nuts. But the real solution is to eliminate the perverse performance pay loophole for all firms.

The Joint Committee on Taxation estimates that eliminating this loophole would generate $50 billion in revenue over 10 years. Several bills have been introduced that would do just that.

Most recently, Senator Elizabeth Warren introduced the Seniors and Veterans Emergency Benefits Act, which would use revenue from eliminating the loophole to provide about 70 million seniors, veterans, people with disabilities, and others a one-time payment equal to 3.9 percent of the average annual Social Security benefit, or about $581. According to the Economic Policy Institute, 3.9 percent is the average raise received by CEOs of large US corporations enjoyed last year.

By closing this loophole, we could make progress toward creating a fairer society and generating funds that could be used for greater public purpose. After 20 years, it’s time to pull the plug on this policy disaster.

Help us Prepare for Trump’s Day One

Trump is busy getting ready for Day One of his presidency – but so is Truthout.

Trump has made it no secret that he is planning a demolition-style attack on both specific communities and democracy as a whole, beginning on his first day in office. With over 25 executive orders and directives queued up for January 20, he’s promised to “launch the largest deportation program in American history,” roll back anti-discrimination protections for transgender students, and implement a “drill, drill, drill” approach to ramp up oil and gas extraction.

Organizations like Truthout are also being threatened by legislation like HR 9495, the “nonprofit killer bill” that would allow the Treasury Secretary to declare any nonprofit a “terrorist-supporting organization” and strip its tax-exempt status without due process. Progressive media like Truthout that has courageously focused on reporting on Israel’s genocide in Gaza are in the bill’s crosshairs.

As journalists, we have a responsibility to look at hard realities and communicate them to you. We hope that you, like us, can use this information to prepare for what’s to come.

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In addition to covering the widespread onslaught of draconian policy, we’re shoring up our resources for what might come next for progressive media: bad-faith lawsuits from far-right ghouls, legislation that seeks to strip us of our ability to receive tax-deductible donations, and further throttling of our reach on social media platforms owned by Trump’s sycophants.

We’re preparing right now for Trump’s Day One: building a brave coalition of movement media; reaching out to the activists, academics, and thinkers we trust to shine a light on the inner workings of authoritarianism; and planning to use journalism as a tool to equip movements to protect the people, lands, and principles most vulnerable to Trump’s destruction.

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Today, we’re asking all of our readers to start a monthly donation or make a one-time donation – as a commitment to stand with us on day one of Trump’s presidency, and every day after that, as we produce journalism that combats authoritarianism, censorship, injustice, and misinformation. You’re an essential part of our future – please join the movement by making a tax-deductible donation today.

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