Gold for Executives, Contempt for Taxpayers

by GERALD E. SCORSE

Jamie Dimon took high heat over his 74% mega-raise, but he’s not at fault. The blame goes to a 1993 boondoggle for bigwigs—a boondoggle that’s cost taxpayers by the billions ever since. Congress should call a halt, and the country’s mood could push it to do just that.

Ironically, the law that launched the boondoggle started out aiming to do the opposite. Lavish corporate pay packages had turned off many Americans as the 1990s began. To fight the trend, the ’92 Clinton-Gore campaign proposed a $1 million cap on the tax deductibility of salaries paid to a firm’s top echelon. Companies have an absolute right to set executive pay. Congress likewise has the right to limit the amount that qualifies as a corporate tax write-off. Once elected, Clinton moved to enact the reform.

The final result—Section 162(m) of the Internal Revenue Code—ended up delivering gold to the corporate elite and a slap in the face to America’s taxpayers. The statute did impose a $1 million deductibility cap on publicly-held corporations, but it also created a huge loophole. It wrote into law what quickly became the most gilded words in the gilded world of executive compensation: performance-based pay.

As long as the pay meets IRS benchmarks for “performance-based,” its deductibility is unlimited. Boards of directors routinely find ways to hand out mega-million packages of stock grants, stock options, profit-sharing, stock appreciation rights, every imaginable kind of executive sweetener. Twenty years on, after three presidencies and six Administrations, Section 162(m) stands as a classic example of good intentions leading to bad endings.

A 2012 study by the Economic Policy Institute estimates that Section 162(m) is costing the Treasury about $5 billion a year. A fair number of companies ignore the salary cap and pay more in taxes, but that revenue gets swamped by the shortfall from deductible corporate pay. The Treasury’s wounds from 162(m) have festered forever. With inequality soaring, a few in Congress are finally going after a law that works overtime to drive it higher.

In August 2013, Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT) introduced the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act. Blunt title, blunt purpose: “This legislation would close a major loophole in current corporate tax law by putting an end to unlimited tax write-offs on performance-based executive pay.” The bill calls for a blanket $1 million deductibility cap. As Senator Blumenthal noted, corporations are free to “pay their executives whatever they wish, just not at the expense of American taxpayers…”  (The same thinking, under the heading “Stop Subsidies for Excessive Compensation,” appears in the tax reform plan unveiled late last month by the GOP members of the House Ways and Means Committee.  That plan takes aim as well at the huge salaries paid out by non-profits. )

Rep. Lloyd Doggett (D-TX) introduced a House version of the Reed-Blumenthal bill earlier this year. “Most Americans,” the Congressman said, “would probably be surprised to learn that multimillion dollar executive bonuses are currently tax write-offs.”

Most Americans might be surprised, but legislators in both parties know only too well. Chuck Grassley (R-IA) formerly chaired the Senate Finance Committee. As the 2006 chair, he admitted that Section 162(m) “really hasn’t worked at all. Companies have found it easy to get around…It has more holes than Swiss cheese. And it seems to have encouraged the options industry.” Options play a big part in performance pay; in 2009, Senators Carl Levin (D-MI) and John McCain (R-AZ) co-sponsored a bill which would have extended the current $1 million cap to options awards.

Section 162(m) has failed as tax policy, but it does two things to perfection: it runs up federal red ink, and it shows contempt for taxpayers. Better late than never, Congress should act to stop the bleeding and end the long, long insult.

Gerald E. Scorse helped pass the bill requiring basis reporting for capital gains. He writes articles on tax policy. 

This article originally appeared in The Hill.

Like What You’ve Read? Support CounterPunch
July 29, 2015
Mike Whitney
The Politics of Betrayal: Obama Backstabs Kurds to Appease Turkey
Conn Hallinan
Ukraine: Close to the Edge
Joshua Frank
The Wheels Fell Off the Bernie Sanders Bandwagon
Stephen Lendman
What Happened to Ralkina Jones? Another Jail Cell Death
Rob Wallace
Neoliberal Ebola: the Agroeconomic Origins of the Ebola Outbreak
Dmitry Rodionov
The ‘Ichkerization’ Crime Wave in Ukraine
Joyce Nelson
Scott Walker & Stephen Harper: A New Bromance
Bill Blunden
The Red Herring of Digital Backdoors and Key Escrow Encryption
Thomas Mountain
The Sheepdog Politics of Barack Obama
Farzana Versey
A President and a Yogi: Abdul Kalam’s Symbolism
Norman Pollack
America’s Decline: Internal Structural-Cultural Subversion
Foday Darboe
How Obama Failed Africa
Cesar Chelala
Russia’s Insidious Epidemic
Tom H. Hastings
Defending Democracy
David Macaray
Why Union Contracts are Good for the Country
Virginia Arthur
The High and Dry Sierras
Jon Langford
Mekons Tour Diary, the Season Finale, Mekonception in Redhook
July 28, 2015
Mark Schuller
Humanitarian Occupation of Haiti: 100 Years and Counting
Lawrence Ware
Why the “Black Church” Doesn’t Exist–and Never Has
Peter Makhlouf
Israel and Gaza: the BDS Movement One Year After “Protective Edge”
Carl Finamore
Landlords Behaving Badly: San Francisco Too Valuable for Poor People*
Michael P. Bradley
Educating About Islam: Problems of Selectivity and Imbalance
Binoy Kampmark
Ransacking Malaysia: the Najib Corruption Dossier
Michael Avender - Medea Benjamin
El Salvador’s Draconian Abortion Laws: a Miscarriage of Justice
Jesse Jackson
Sandra Bland’s Only Crime Was Driving While Black
Cesar Chelala
Effect of Greece’s Economic Crisis on Public Health
Mel Gurtov
Netanyahu: An Enemy of Peace
Joseph G. Ramsey
The Limits of Optimism: E.L. Doctorow and the American Left
George Wuerthner
Bark Beetles and Forest Fires: Another Myth Goes Up in Smoke
Paul Craig Roberts - Dave Kranzler
Supply and Demand in the Gold and Silver Futures Markets
Eric Draitser
China’s NGO Law: Countering Western Soft Power and Subversion
Harvey Wasserman
Will Ohio Gov. Kasich’s Anti-Green Resume Kill His Presidential Hopes?
Jon Langford
Mekons Tour Diary, Episode 4, a Bowery Ballroom Blitz
July 27, 2015
Susan Babbitt
Thawing Relations: Cuba’s Deeper (More Challenging) Significance
Howard Lisnoff
Bernie Sanders: Savior or Seducer of the Anti-War Left?
Martha Rosenberg
Big Pharma’s Profiteers: You Want Us to Pay What for These Meds?
Joshua Sperber
What is a President? The CEO of Capitalism
John Halle
On Berniebots and Hillary Hacks, Dean Screams, Swiftboating and Smears
Stephen Lendman
Cleveland Police Attack Black Activists
Zoe Konstantopoulou
The Politics of Coercion in Greece
Patrick Cockburn
Only Iraq’s Clerics Can Defeat ISIS
Ralph Nader
Sending a ‘Citizens Summons’ to Members of Congress
Clancy Sigal
Scratch That Itch: Hillary and The Donald
Colin Todhunter
Working Class War Fodder
Gareth Porter
Obama’s Version of Iran Nuke Deal: a Second False Narrative