Local policymakers are facing pressure to make painful spending cuts. Instead, they should raise taxes on corporations and the wealthy.
Here’s one sign of the unpopularity of overpaid corporate and banking executives: Shortly before heading home to face constituents during the summer recess, members of Congress introduced three bills to crack down on excessive compensation.
Stop Wall Street Looting
The new Stop Wall Street Looting Act would protect workers and communities against the vulture-like private equity firms that have plundered Toys R Us, Shopko, and many other companies. The bill was introduced by Sen. Elizabeth Warren (D-MA), the Co-Chairs of the House Congressional Progressive Caucus, and a bevy of other Democrats, including another presidential contender, Sen. Kirsten Gillibrand (D-NY).
Several provisions in the sweeping bill aim to prevent top executives from lining their pockets while workers and other shareholders suffer. Private equity fund managers, who often earn tens, if not hundreds of millions of dollars per year, make a killing off so-called “monitoring” or “transaction” fees they charge corporations they’ve taken over through leveraged buyouts. The Stop Wall Street Looting Act applies a 100 percent tax on such fees. It would also close the “carried interest” loophole, which allows private equity managers to pay the discounted capital-gains tax rate on their income.
The bill would also set limits on pay for the executives of firms in bankruptcy. Private equity funds have been connected to a rash of bankruptcies in recent years, particularly in the retail sector. A significant portion of the companies that have filed for bankruptcy carried debt loads leftover from leveraged buyouts by private equity firms. This has sparked increased interest in ensuring that executives at distressed firms do not enrich themselves while eliminating jobs and pensions.
The Stop Wall Street Looting Act would build on existing protections in bankruptcy law that ban companies from giving executives “retention” bonus or severance pay that runs over 10 times the average bonus or severance awarded to regular employees in the previous year. The new bill would close a loophole that exempts “performance-based pay.”
It would also ban special payments to high-level executives if the company has not paid promised severance pay to employees or has reduced employee benefits within the year before declaring bankruptcy. Courts would also be blocked from approving bankruptcy exit plans that allow excessive payments to execs.
Make Wall Street Bankers Pay for Wrongdoing
Following the 2008 financial crash, senior banking executives were not held personally responsible for fraudulent activity, leaving shareholders to shoulder the financial penalties.
Rep. Tulsi Gabbard (D-HI), another Democratic presidential candidate, has just introduced the Wall Street Banker Accountability for Misconduct Act, which would require senior executives of large banks to place a substantial share of their pay each year into a “deferment fund” for 10 years. The amount to be deferred is at least 50 percent of all executive compensation that exceeds 10 times median employee pay. In other words, if median pay is $100,000, half of everything the CEO earns above $1 million would be set aside. If the bank faces civil or criminal fines, the payments would come out of this fund.
The bill draws on a New York Federal Reserve proposal and is based on the argument that this approach would help change the reckless culture on Wall Street and motivate managers to police one another.
End taxpayer subsidies for excessive pay
Finally, in the waning hours of the last House working session before the summer recess, another bill was dropped which addresses the perverse incentive in our tax code for excessive pay.
This problem is rooted in a well-meaning 1993 reform to prevent corporations from deducting the amounts that they pay top executives in excess of $1 million per executive. But the law change came with a huge loophole: the $1 million cap didn’t apply to stock options and other “performance” pay. This loophole encouraged corporate boards to hand out massive bonuses that dramatically widened the pay gaps between corporate executives and rank-and-file workers.
The 2017 Republican tax law closed this “performance” pay loophole, but only for compensation going to the CEO, CFO, and the three other highest paid employees. Pay above $1 million going to other highly paid employees, such as senior managers and Wall Street traders, remains fully deductible.
To close this loophole, Sens. Jack Reed (D-RI) and Richard Blumenthal (D-Ct.) and Rep. Lloyd Doggett (D-Texas) have just reintroduced the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, which would extend the $1 million deductibility cap to all forms of compensation for all employees. The bill would generate an estimated $20 billion over 10 years.
While none of these bills would completely solve our executive pay problem, they are important steps towards a more rational, equitable system. As members of Congress begin to spend face time with voters over the summer recess, let’s hope they feel even more pressure to stop the madness.