Corporate America Suddenly OK with Paying Taxes…

This past May, the Wall Street Journal released a bombshell report on trends in American CEO pay. According to the Journal’s analysis, median CEO pay at American S&P 500 companies rose to a record-setting $14.7 million in 2021, with the 25 highest-grossing CEOs earning at least $35 million and the top nine each at least earning a whopping $50 million.

The Journal has now just published new numbers that add another shocking layer to our ongoing national executive pay horror. Turns out that our top corporations, outfits that have been claiming for years that taxes on corporations disincentivize hiring and R&D, actually don’t mind paying higher taxes — so long as they can line CEO pockets in the process.

Over the past three years, the new Journal analysis shows, roughly three dozen major corporations paid a combined total of just under $2.1 billion in corporate taxes on executive compensation they could not claim as a legitimate business expense. One of those companies, Tesla, forked over $447 million in one recent three-year period for nondeductible compensation, 40 percent of the company’s entire tax expense.

How did all this happen? One of the few progressive pieces of the hugely regressive 2017 GOP Tax Cuts and Jobs Act limited corporate tax deductions for all forms of executive compensation to $1 million. Previously, that $1 million deductibility cap did not apply to stock options and other forms of so-called “performance” pay. In other words, the bigger the bonuses firms awarded their executives, the less they paid in taxes. The 2017 law closed that perverse loophole.

If S&P 500 companies really cared about keeping their tax bills modest, if they really cared about having enough cash on hand to hire new workers and explore new products, they wouldn’t be continuing to pay higher taxes to engorge their top officers. By my own calculations, for every $100 a corporation dedicates to nondeductible executive pay, the corporation and its executive pay a combined $58.81 in corporate profit and individual income taxes at the federal and state levels. In other words, to keep their top execs on the easiest of easy streets, corporations are paying state and federal taxes on their nondeductible executive pay at nearly a 60 percent rate.

On the other hand, for every $100 a corporation uses to increase a worker’s annual pay from $40,000 to $50,000, the corporation and its employee would pay just a combined $26 in federal and state taxes. The tax rates go even lower for companies that choose to use their cash to raise the pay of minimum-wage workers to $15 an hour or hire additional workers at annual salaries of $40,000.

Why do corporations pay their executives so handsomely even when paying workers would be much more cost effective? Two words: corporate greed. Companies like to claim they pay executives generously because marketplace competition leaves no choice: To attract top executive “talent,” companies have to pay top rates. But the facts don’t bear that out.

According to the Journal’s May CEO pay report, six of the 25 highest-paid top executives in 2021 failed to exhibit much magical “talent.” The companies they managed saw decreases in shareholder returns.

The right of a business to deduct its “ordinary and necessary” business expenses has, of course, long been a bedrock assumption of our tax code. The non-deductibility of exorbitant executive pay reflects the determination of a Republican Congress that pay in excess of $1,000,000 by large corporations should not be considered an “ordinary and necessary” business expense.

But what we see with excessive CEO pay doesn’t at all reflect judgments about “ordinary and necessary” business expenses. Excessive executive pay, in the end, boils down to ultra-wealthy corporate board members doing favors for their ultra-wealthy executive peers. Board members will continue to shamelessly shell out for their own even when that excessive pay ends up slapping their firms with tax bills in the billions, even when execs don’t do a decent job,

Corporations should end this shameful cycle of never-ending CEO pay hikes and instead invest that money back in their workforce. In no world real or imagined can a CEO be “worth” a thousand times more to their firms than a typical employee. Pay scales should reflect that.

Paying workers more might hurt company bottom lines in the short term, but fair pay — in the long term — will always pay off. Better-paid employees stay on the job longer, feel more committed to their companies’ success, and work more productively — and have more money to buy their companies’ products. And, as the Journal data show, companies that pay worker more and execs less will have smaller tax bills.

If the folks running America’s S&P 500 corporations really had their focus on efficiency, their decisions would reflect that it pays — literally — to pay workers more. But the folks today  running our corporations don’t seem to be in any hurry to limit their own pay.

The fix for this problem? Congress could pass the proposed Tax Excessive CEO Pay Act and condition the tax treatment of executive pay on the ratio of that pay to worker pay. Instead of merely setting the deduction for CEO pay at an arbitrary dollar amount like $1 million, lawmakers could instead make a corporation’s tax rate dependent on the ratio of executive pay to worker pay. Taking that step would align the pay incentives of corporate executives with better pay for all workers, leaving both workers and the companies that pay them much better off in the long run.

Bob Lord, an Institute for Policy Studies associate fellow, currently serves as a Patriotic Millionaires tax policy senior advisor. Emily McCloskey is a communications associate at Patriotic Millionaires.