Wall Street CEO Bonus Loophole
Sarah Anderson at Institute for Policy Studies writes about how the 1993 reform to rein in runaway CEO pay by capping tax deductions of executive compensation at $1 million created a loophole as it did not apply to stock options and other performance pay methods. More-performance-measured-income to executives paid out, the lower the company income tax presently.
What was the impact?
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$2 billion in fully deductible performance bonuses by top 20 U.S. banks to their top five executives over the past four years at a 35 percent corporate tax rate resulted in a taxpayer subsidy of > $725 million or $1.7 million per executive per year.
On-the-hot-plate Wells Fargo Bank between 2012 and 2015 received $54 million in tax subsidies for CEO John Stumpf bonuses. During those years, CEO John Stumpf’s bank faced $10.4 billion in misconduct penalties.
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The same top 20 executives received ~ $800 million in stock-based “performance” pay, before stockholders were out of the red and the bank’s stocks returned to pre-2008 levels.
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Jamie Dimon CEO of JP Morgan cashed in fully deductible $23 Million in bonuses in Feb/March 2010 while the nation was still reeling from the crisis. Since 2010 JP Morgan has received $28 billion in penalties for mortgage misconduct.
The same as Main Street bailing out Wall Street for their malfeasance, Main Street was also subsidizing Wall Street Executive bonuses. Some potential solutions:
Implement Sec. 956 of Dodd-Frank: Rigorous limitation by regulators of Bank excessive risk taking and the banning of excessive bonus based upon risk – “not yet been implemented and this proposal does not go far enough to prevent the type of behavior that led to the 2008 crash.” Sec 956 allows lenient bonus deferrals, weak stock-based pay restrictions, and discretionary enforcement left to bank managers.
Close the hedge and private equity loophole which allows private equity and hedge fund managers to pay a 20 percent capital gains rate on the bulk of their income rather than the 39.6 percent ordinary income rate. The Carried Interest Fairness Act of 2015 (HR 2889/S 1689) requires that the “carried interest” compensation received by private equity and hedge fund managers be taxed at ordinary income rates. Due to a lack of activity by Congress some states such as New York are implementing their own legislation to close the loop hole generating $3 billion in new revenue.
The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act (S. 1127 and HR 2103) eliminates “performance pay” exemptions and caps the deductibility of compensation at $1 million for every employee.
Reference:
Executive Excess 2016: The Wall Street CEO Bonus Loophole, Sarah Anderson and Sam Pizzigati, Institute for Policy Studies, August 31, 2016. “The first report to calculate how much taxpayers have been subsidizing executive bonuses at the nation’s largest banks.”
It has been common knowledge for several decades that legislation written in both houses of the Congress is done so with the helpful guidance of lobbyists who masquerade as experts in the business communities that will be affected by the legislation. It is hard to imagine that specific legislation related to corporate executive legislation would be any less likely to bear the imprint of the “compensation experts” who earn the bulk of their own incomes by assisting corporate America in setting compensation packages for that very same executive class. Corporations hire compensation experts to set up such executive compensation programs and outlines so that they can claim to be compensating their executives at arms length, so to speak. Those same experts surely know a thing or two about executive compensation and the best ways to go about, on the one hand, rewarding executives for good work and, on the other hand, consulting with legislators on the best ways to control executive compensation excess.
Jack:
I guess we could do nothing then . . .
Could just eliminate the corporate income tax….
Anyway, I take exception to the assertion that the law, “did not apply to stock options and other performance pay methods.” In fact, the law specifies exactly what conditions must obtain to make such remuneration deductible.
Wait, a law was written by congress that had unintended consequences? You have got to be kidding me.
This is nice wordsmithing – converting “expenses” that lower profits off of which taxes are based into “subsidies”.
Please stop conflating the hedge fund and private equity “loophole” – they’re two completely different things, mixing them together demonstrates lack of understanding of either issue, and I’ll take the under on new tax revenue generated
Other than “leading to results that we’re not fond of” can someone please provide a neutral definition of a tax loophole?
“I guess we could do nothing then . . . run
What we can do, and the only useful thing that can be done, is to start voting for people who will represent the will of all the people and not look to pacify only their financial contributors. A Congress, both Dems and Repubs, that is occupied almost exclusively by corporatists is never going to pass legislation that effectively limits the excesses of our corporate business community. Smarter voter choice is the only answer to better government.