Subsidizing Executive Pay? End it Now.
By Bartlett Naylor
By the time the CEO of a major corporation clocks out after a day’s work, he’s pocketed what the typical American must work an entire year to earn. In the 1960s, a CEO earned about 20 times that of average employees. Now, the ratio is 300. Polls affirm bipartisan opposition to this yawning gap. Among other ills, Americans believe it’s unfair.
In his state of the union address March 7, 2024, President Biden proposed an important reform aimed at the inequity of excessive pay: “I also want to end the tax breaks for . . . massive executive pay. . . . End it now.”
CEO pay has skyrocketed in the last 50 years since the executives essentially pay themselves through control the corporate boards that officially cut the checks. This looting certainly should not count as a legitimate business expense deducted from the firm’s tax bill. “Corporations shouldn’t be able to get out of paying their fair share of taxes by lavishing executives with jumbo bonuses at the expense of taxpayers, workers, and shareholders,” said Sen. Jack Reed, (D-R.I.).
Congress, even when controlled by Republicans, agrees with this policy. Until 2017, corporations could not deduct the pay for the CEO that exceeded $1 million, a law established led by President William Clinton in 1993. A major loophole, however, perforated that change: if a bonus beyond $1 million was performance-based, the deduction would qualify as a deduction. This led many firms to, first, increase base pay to $1 million, then, second, add easy-to-hurdle performance goals.
In 2017 the Republican Congress and President Trump approved a law that was otherwise a sweeping tax giveaway to corporations. But they included a provision increasing the group whose pay beyond $1 million could not be deducted. They added the CFO and the three most highly compensated employees of the firm to the list. This Republican-led law also closed the performance loophole.
Following this, President Biden’s 2021 American Rescue Plan added the next five highest paid employee of the firm to the group. This brought the total to the ten most highly paid executives whose pay beyond $1 million could not be deducted as business expense.
Now, President Biden proposes that this deduction be denied to corporations for all employees paid more than $1 million. The White House estimates this would generate $270 billion in additional tax revenue over ten years. Yearly, generating about $27 billion in new tax revenue, means that corporations are paying the 11th, 12th, 13th, etc. best paid executives a collective $128 billion in compensation (above $1 million each.)
Sen. Reed has long promoted this policy in his important bill, the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, which is also cosponsored by Sens Tammy Baldwin (D-Wi), Jeff Merkley (D-Or), Chris Van Hollen (D-Md), Sheldon Whitehouse (D-RI), Bernard Sanders (I-Vt), and Elizabeth Warren (D-Ma). In the House, Rep. Lloyd Doggett (D-Tx) introduced a companion bill that enjoys 23 co-sponsors.
This tax change can help address the unjust inequality in the tax code. When companies slather pay on the C-suite and deduct it as an expense, that means other hard-working Americans must fill the gap with more taxes. In his budget released March 11, the President explained that the change “would discourage companies from giving their executives massive pay packages.”
Reducing excess pay may require more robust measures, a goal admittedly difficult in this Congress where agreeing to popular bipartisan policy isn’t exactly a daily event. In a more enlightened Washington, lawmakers would improve corporate governance, and we’d see a raft of reforms. For example, pay packages that fail advisory shareholder votes should lead to automatic pay cuts for the board directors who approved them. Corporate boards should also include line workers who would be more judicious with executive pay levels. Taxes should be raised where the ratio between the CEO and median-paid workers exceeds certain levels, and tax rates on compensation above a certain amount should be confiscatory, as they were in the 1950s.
What President Biden outlined in his State of the Union speech is important and should be considered by Congress. Afterall, Congress already agrees that pay in excess of $1 million shouldn’t be deducted as a legitimate business expense. It has already accepted that this not only applies to the pay of the CEO, but to pay of the second, and third and ninth and tenth best paid executive at a firm. It is a small step to move towards this reform and they should take it.
Average Americans should not subsidize overpaid executives. As the president enjoined, “End it now.”