How to Ruin a Perfectly Good CEO Pay Reform

Does the GOP tax plan now hurtling through Congress have, in the final analysis, any redeeming social value? Does anything at all remain of the “populist” — in the traditional sense of “anti-elite” — pledges that candidate Donald Trump made on the 2016 campaign trail?

The President’s most ardent admirers are currently bending over backwards to frame the GOP tax package as “populist” to the core. And they can point to at least one provision in the tax legislation that, at first glance, looks like a legitimate hit on the overpaid CEOs that candidate Trump railed against during his campaign.

This provision knocks out of our current tax code an infamous loophole that lets corporations deduct off their corporate income tax — essentially without limits — all those tens of millions in pay they bestow upon their top execs.

This loophole has appeared in the tax code’s section 162(m) ever since 1993, Bill Clinton’s first year as President. Clinton had denounced excessive CEO pay in his presidential campaign, just as Trump did in his. Once in office, Clinton administration officials moved to discourage that excess by denying corporations the right to deduct any executive compensation over $1 million off their taxes.

Robert Reich, then Clinton’s secretary of labor, championed this common-sense reform, but more corporate-friendly administration figures carried the day. The CEO pay deduction “reform” that ended up in the tax code did set a $1 million deductibility limit. But the reform also gave corporations a ridiculously easy workaround: Firms could still deduct any executive pay over $1 million that reflects a reward for “performance.”

What happened next? The absolutely predictable. Corporations established $1 million as the basic CEO salary minimum, then larded onto that $1 million all sorts of ostensibly “performance-based” rewards. American corporate CEO pay then went on to continue its relentless upward climb.

CEOs at America’s 350 biggest firms pulled in an average $2.8 million in 1989, in today’s dollars, an Economic Policy Institute report noted earlier this year, up from $1.5 million in 1978. By 1995, after the “performance-based” CEO pay “reform” had kicked in, top executive earnings had jumped to $5.9 million. By 2016, that average sat over $15 million.

In all, after adjusting for inflation, CEO pay has soared 936.7 percent since 1978. The worker pay increase since then: 11.2 percent.

How to turn around this enormous imbalance? In their latest executive pay report, analysts at the Economic Policy Institute note a host of useful reforms, including moving to “remove the tax break for executive performance pay that was established early in the Clinton administration,” a step widely endorsed in the CEO pay reform community — and the exact same step the new GOP tax bill takes.

So does that mean that Donald Trump has kept his promise to rein in CEO pay?

The President and his admirers can, of course, make that claim. But the GOP tax plan’s move to ax the “performance-based” pay loophole isn’t going to make a dent on excessive CEO pay.

Why not? A little analogy might be useful here.

Suppose we had a well-heeled — and just convicted — tax avoider standing before a judge waiting for his sentence.

“You have committed a crime against the American people,” the judge thunders. “I sentence you to ten years in jail. Let this be a lesson to would-be tax cheats wherever they may be.”

The audience in the courtroom gasps. One tough-cookie judge!

“Your honor,” the dazed tax-avoider asks, “where will I serve my sentence.”

“Oh, don’t worry,” the judge suddenly smiles. “I’ve made a reservation for you at the best five-star hotel in Tahiti. You’ll have the president’s suite, all-expenses paid.”

Corporate America, under the GOP tax plan, gets that five-star suite. Yes, under the GOP plan, corporations do lose the ability to deduct excessive executive pay off their taxes. But this same GOP plan slashes the tax rate on corporate profits from 35 to 20 percent — and adds in a variety of new loopholes that will sink the actual tax rate corporations pay considerably lower.

What will the total GOP tax plan mean for CEO pay?

Let’s consider the CEO pay prospects for Apple. In 2016, Apple CEO Tim Cook collected $3 million in straight salary. Apple can only deduct $1 million of that salary off its corporate taxes. But Cook, Bloomberg reports, also realized $136.1 million in gains from stock awards that vested in 2016.

A major chunk of these gains, about half, rate as “performance-linked,” notes Fortune. Apple can under current law deduct that half off its corporate taxes, saving somewhere around $24 million off its tax bill in the process.

Apple loses that $24 million savings under the GOP tax plan, since the performance-pay loophole will no longer exist. But Apple gains breathtakingly more from the rest of the GOP plan.

Let’s do the numbers. Apple had $64 billion in pre-tax profits in 2016. That same profit in a future year, under the GOP tax plan, would face a tax no higher than 20 percent, down from today’s 35 percent top rate. That difference would hand Apple an off-the-top tax savings of about $10 billion — and that savings would come before calculating in all the other corporate tax breaks the new GOP plan offers.

Against that over $10 billion in tax savings, the measly millions that corporations like Apple would have to pay in added tax on their CEO pay excesses would be no more than minor nuisance.

Would Apple, in this lucrative new environment, turn around and cut CEO Tim Cook’s compensation? How would Apple’s board of directors justify that move to Cook? Sorry, Tim, we’re going to have to cut your pay because it’s costing us a bunch of extra millions in taxes at a time when our overall tax bill has dropped by bunches of billions?

The GOP tax bill deserves no credit for eliminating the performance-based CEO pay loophole. This legislation doesn’t “reform” the tax code. It enriches our elites.

Sam Pizzigati co-edits Inequality.org. His latest book: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970.