The just-released Republican tax bill would take long overdue action to close a loophole that encourages excessive executive compensation. But while I’ve been calling for this loophole to be closed for 20 years, I’d much rather see it remain in place than have it eliminated as part of a GOP tax bill that would be devastating for our country.
In an op-ed for Politico, I explained the origin of this CEO pay loophole: a 1993 tax bill that amended Section 162 of the code to set a $1 million limit on the amount corporations can deduct from their federal income taxes per executive for the expense of executive compensation. Unfortunately, lawmakers undermined the intent of the law by including a huge loophole for so-called “performance” pay. Essentially, this means the more corporations give their executives in stock options and certain other bonuses, the less they pay in taxes.
For example, Trump economic advisor Gary Cohn, one of the architects of the GOP tax plan, received more than $72 million in fully deductible “performance” pay in 2016 as president of Goldman Sachs. That payout for just one man lowered Goldman Sachs’s IRS bill by an estimated $25 million.
According to an Institute for Policy Studies report, between 2010 and 2015 the top 20 U.S. banks paid out more than $2 billion in fully deductible performance bonuses to their top five executives. At a 35 percent corporate tax rate, this translates into a taxpayer subsidy worth more than $725 million, or $1.7 million per executive per year.
Section 3802 of the Republican bill would eliminate the “performance” pay loophole. In other words, corporations could deduct a maximum of $1 million per top executive, regardless of the form of the compensation. Unfortunately, the bill does not extend this strict cap to employees beyond the CEO, CFO, and the three other highest paid employees. As a result, pay above $1 million going to Wall Street traders, celebrities, and other highly paid non-executives would remain fully deductible.
This Republican proposal builds on the Affordable Care Act, which eliminated the “performance” pay loophole for the health insurance industry and lowered the cap to $500,000. (Ironically, the failed GOP health care proposal of earlier this year would’ve eliminated those tighter limits.) Similar restrictions were also applied to financial bailout firms.
The Joint Committee on Taxation estimates that if the GOP bill becomes law, closing this loophole would generate $9.3 billion in revenue over 10 years. That’s considerably lower than the $50 billion JCT revenue estimate for a Democratic bill, the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, which would eliminate the “performance pay” exemption and cap the deductibility of compensation at $1 million for every employee.
And this $9.3 billion is peanuts compared to the staggering cost of the GOP’s proposal to slash the federal corporate tax rate from 35 percent to 20 percent. The Tax Policy Center has estimated that the rate cut would cost $2 trillion over 10 years.
I’ve long argued that eliminating this “performance” pay loophole would not only generate revenue fairly but also provide an incentive for lowering overall CEO compensation. But these benefits would be completely negated by other parts of the GOP plan.
Instead of encouraging more rational pay levels at the top, the legislation would be a huge jackpot for CEOs and other top earners. For example, they would benefit from the drastic cut in the corporate tax rate, since most executive pay today is in the form of stock options or other stock-based pay, which will be inflated by this move. Many top earners will also benefit from the huge reduction in the rate for pass-through entities, including hedge funds and private equity funds.
Closing this perverse CEO pay loophole would be nice — but not if it comes at the expense of the colossal damage that would be inflicted on the poor and middle class by the GOP’s tax giveaway for the wealthy and big corporations.
Sarah Anderson directs the Global Economy Project and co-edits Inequality.org at the Institute for Policy Studies. @Anderson_IPS