Gold for Executives, Contempt for Taxpayers
Twenty years on, after three presidencies and six Administrations, Section 162(m) stands as a classic example of good intentions leading to bad endings.
Jamie Dimon, the current chairman, president and chief executive officer of JPMorgan Chase, 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.
© 2014 Gerald E. Scorse. Scorse's articles on taxes have appeared in publications across the country.
Copyright © 2014 The Baltimore News Network. All rights reserved.
Republication or redistribution of Baltimore Chronicle content is expressly prohibited without their prior written consent.
Baltimore News Network, Inc., sponsor of this web site, is a nonprofit organization and does not make political endorsements. The opinions expressed in stories posted on this web site are the authors' own.
This story was published on March 22, 2014.
Local Gov’t Stories, Events
Ref. : Civic Events
Ref. : Arts & Education Events
Ref. : Public Service Notices
Books, Films, Arts & Education
Ref. : Letters to the editor
Health Care & Environment
10.23 'Blatant Censorship': Trump EPA Abruptly Muzzles Its Own Climate Scientists [profoundly stupid actions–that harm the public–assures corporate bribes continue]
10.22 The story behind a devastating photo of human greed [where were Don Jr. and Eric at the time?]
10.21 Pressure Mounts on Insurance Companies to Consider Their Role in Opioid Epidemic [like Monsanto's practices to make captive agricultural consumers for more profit, non-addictive pain medication is less prescribed versus addictive opioids]
10.20 Introducing Halo Top: the 'healthy' ice-cream taking over America [Uses Stevia as a sugar substitute (not an artificial sweetener) that has no carbohydrates, calories, or artificial ingredients.]
10.20 The case against sugar
News Media Matters
10.23 Ready for Trump TV? Inside Sinclair Broadcasting’s Plot to Take Over Your Local News [escape warped hate news! cancel TV cable service and go 100% video streaming w/ broadband Internet—save $100/mo. too!]
US Politics, Policy & 'Culture'
10.23 Sanders Confirms He'll Remain Independent for 2018 Re-election Run [it would be contradictory for real progressives to join (or be in) a neoliberal-dominated political party]
10.21 51 GOP Senators Just Voted To Cut $1.5 Trillion from Medicare and Medicaid To Give Super-Rich and Corporations a Tax Cut [what makes sociopaths smile?]
10.21 The Tax Debate We Need
10.17 Trump could remake judiciary for ‘40 years’ — with controversial picks [America will become more like Malta; facilitating corporate/mafia criminality to the maximum]
Economics, Crony Capitalism
10.21 Insectageddon: farming is more catastrophic than climate breakdown [short-sighted capitalistic priorities have promoted ecocide]
International & Futurism
10.23 China speeds ahead of U.S. as quantum race escalates, worrying scientists [recently, democracies are more dysfunctional and vulnerable to incompetent or bribed leadership]
10.22 Europe’s Enemies Within
10.22 Tories under pressure over use of UK troops to sell arms to Gulf states [allowed war-profiteering enables capitalism to destroy humanity in all respects]
10.22 Russia accused of supplying Taliban as power shifts create strange bedfellows [is it war profiteering/capitalism, or is there a political power objective? the US supplies arms to dubious countries and militia groups worldwide...]
10.21 Under Trump, Brags Mike Pompeo, CIA Will Be 'Much More Vicious Agency' [imagine an administration made up of willfully ignorant sociopaths—oh, right]