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The Fleecing Taxpayers Bait-and-Switch

Research & Commentary
March 06, 2011

by Sam Pizzigati

Lavishly paid corporate executives, flush with tax-deductible taxpayer dollars, have plenty of reason to relish the right-wing assault on ‘overpaid’ public employees. But we can wipe that grin off their faces.

Somebody is getting rich off our tax dollars. That somebody, governors in Wisconsin, New Jersey, and a host of other states would have us believe, just happens to be our neighbor the public employee.

Teachers, fire fighters, cops, and case workers, have become, in effect, the new “welfare queens.” Ambitious pols the nation over, taking a page from the Ronald Reagan playbook, are creating mythic tax dollar-gobbling stereotypes that demonize Americans just struggling to get by.

These stereotypes do more than demonize. They distract. They shove off the political radar screen the fortunates who really are getting rich off our tax dollars. Fortunates like William Swanson, the CEO of Raytheon, the high-tech giant.

CEO Swanson has taken home $97.8 million over the past five years. His company gets 27 percent of its revenue from federal contracts.

Swanson’s rival, Lockheed Martin CEO Robert Stevens, has pocketed $111.1 million over the past five years. The company he runs gets 37 percent of its revenue from federal contracts, with most of that coming from the Pentagon.

And don’t forget Louis Chenevert, the chief exec at United Technologies, the Connecticut-based company that ranks as the 21st biggest federal contractor. News reports last week revealed that Chenevert made $22.1 million in 2010, a 7.7 percent jump over the $20.5 million he pulled in the year before.

Chenevert “bolstered” the United Tech bottom line, says the Hartford Business Journal, “in part through job cuts and plant closings.” The $1.5 billion in tax dollars his company collected from federal contracts did a bit of bolstering, too.

Companies like UT, Lockheed, and Raytheon don’t just lavish our tax dollars on their top execs. They deduct all the multiple millions they lavish on these execs off their taxes. In other words, the more CEOs pocket, the less their corporations pay at tax time — and the heavier the tax burden on average Americans.

Top executives at America’s biggest corporations, in effect, get us coming and going. Our tax dollars pump up their pay. Then they deduct their pay off their corporate tax bills, a move that enhances their corporate bottom-line “performance” and sets them up, in turn, for even bigger executive paydays.

A half-century ago, American taxpayers could count on a much better deal. Back then, our law and our courts did not accept, as a given, a corporate executive right to get rich at taxpayer expense.

Back in the 1950s, Indiana corporate executive Frederick Ernest thought he had that right. Poor Ernest thought wrong.

Ernest served as the top exec at a 1948 start-up in the machine tool trade. The Korean War, beginning in 1950, had made that trade a hot one. The revenues at Ernest’s company had soared from $213,400 in 1949 to $3,237,000 in 1952.

Executive pay had soared, too. The company’s four top officers saw their take-home jump over ten-fold to $85,000, the equivalent of over $700,000 today.

Accountants at Ernest’s hot new company claimed this executive pay as a “reasonable” corporate outlay and an appropriate corporate tax deduction. But the IRS rejected that claim. A displeased Ernest would take the IRS to court.

The legal dust wouldn’t settle until 1961. A federal appeals court that year ruled that Ernest’s machine tool firm could only deduct $35,000 — about $300,000 today — of the $85,000 each of the top four execs received in compensation.

These execs, the court concluded, owed their fabulous pay increases to the demand the Korean War created for industrial retooling, not any individual business “sagacity and industry.” Consequently, their company had no right to claim their huge paychecks as a reasonable and deductible corporate expense.

Corporate executives today face nothing remotely close to that sort of scrutiny. Major corporations can now deduct any executive pay up to $1 million, no questions asked, and any compensation over $1 million as well, so long as they define that excess over $1 million as a “performance-based” incentive.

A small but valiant band of lawmakers has been trying to shut this gaping “pay for performance” loophole ever since Congress legislated the current deductibility standard in 1993.

In the last Congress, Rep. Barbara Lee from California proposed legislation that would, if passed, have denied tax deductions on any executive pay that runs over $500,000 or 25 times the pay of a company’s lowest-paid workers.

Rep. Lee’s proposed Income Equity Act didn’t go anywhere. But Congress, in the landmark health care reform enacted last year, did opt to deny health insurers tax deductions on any executive pay that runs over $500,000 a year.

Will this limit in the health care reform legislation turn out to be the first step toward ending taxpayer subsidies for excessive executive pay? That outcome now seems, for the first time in ages, somewhat politically plausible.

What’s changing the plausibility calculus? A newly launched — and incredibly imaginative — “US Uncut” grassroots campaign against corporate tax avoidance has, for starters, begun to build some appreciable political momentum.

Couple this momentum with the energy cascading out of Wisconsin — from the massive push back against demonizing public employees — and a sense of real change, not just spring, suddenly seems to be breaking out all over.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.

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