Certain tax breaks for CEOs add to social costs, hurt shareholders and increase government debt. A new report outlines the problem – and the solution.
By Francesca Rheannon
Fast food giant MacDonald sparked widespread scorn recently when it was found to have provided its low wage workers with tips about saving money, like “Breaking food into pieces often results in eating less and still feeling full” and advice on applying for food stamps.
Taxpayers Subsidize Low-Wage Workers’ Pay
It’s advice fast food workers want to be in a position to reject as they demand a wage that would allow them to get by without going on public assistance. (Half of low wage workers receive government help for food and other basic necessities.) They came out in droves last week to demand a hike in pay to $15 an hour.
The demand for a living wage is gaining in popularity. A recent Wall Street Journal/NBC News poll found that 63 percent of Americans “strongly favor” raising the minimum wage to $10.10 per hour.
Americans are also upset that their taxpayers dollars are, in effect, subsidizing the corporate bottom line, allowing hugely profitable corporations like McDonald’s to get away with paying wages at or close to the minimum wage ($7.25/hour) because they rely on public assistance taking up the slack for their workers. It’s a subsidy worth about $7 billion a year in aid for McDonald’s workers alone.
Taxpayers Subsidize CEO Pay
But there’s another way U.S. taxpayers are subsidizing fast food (and other) corporations – and that’s through tax breaks that companies are using to boost executive compensation and decrease corporate tax liabilities, according to a new report from IPS, Fast Food CEOs Rake in Taxpayer-Subsidized Pay.
Among these are full deductibility for “performance pay” and lower taxes for so-called “carried interest,” tax breaks that are costing the U.S. Treasury billions in much-needed revenue. The Economic Policy Institute has estimated that a total of $121.5 billion in executive compensation was deductible from corporate earnings between 2007 and 2010, with 55 percent comprised of performance-based compensation.
Among the report’s findings:
During the past two years, the CEOs of the top six publicly held fast food chains pocketed more than $183 million in fully deductible “performance pay,” lowering their companies&rsquo IRS bills by an estimated $64 million.
- YUM! Brands enjoyed the biggest taxpayer subsidy for its CEO pay largesse. This firm, which owns Taco Bell, KFC, and Pizza Hut, paid CEO David Novak $94 million in fully deductible “performance pay” over the years 2011 and 2012. That works out to a $33 million taxpayer subsidy to YUM! – just for one executive’s pay.
- McDonald’s received the second-largest government handout. As CEO in 2011 and the first half of 2012, James Skinner pocketed $31 million in exercised stock options and other fully deductible “performance pay.” Incoming CEO Donald Thompson took in $10 million in performance pay in his first six months on the job. Skinner and Thompson’s combined performance pay translates into a $14 million taxpayer subsidy for McDonald’s.
Report’s Author Speaks with CSRwire
Sarah Anderson of IPS spoke with CSRwire about her findings.
The report zeroes in on how CEOs are being subsidized by the public through tax breaks. Could you talk about why you decided to shine a lens on that aspect of the whole debate around the minimum wage?
Performance Pay Fully Deductible
How do these taxpayer subsidies work?
The one that we are focusing most on right now is the fact that, while we have a cap on the tax deductibility of executive pay set at $1 million, there’s a huge loophole for performance pay that qualifies it for full tax deductibility – something that was put into the law in 1993 and led to the explosion of executive compensation, especially stock options. And particularly now, as Congress considers painful cuts to programs like food stamps and education, we should be looking at ways to raise more revenue—and do it in a way that is fair.
This is a prime example of a loophole that is benefitting those at the top of our income ladder and it is just a no-brainer that it should be filled. [If we ended this practice,] companies could continue to pay their CEOs whatever they like, but at least taxpayers wouldn't be subsidizing it and we wouldn't have this perverse incentive that means that the more corporations pay their CEOs, the less they pay in taxes.
Shareholder Earnings Negatively Impacted
Are shareholder earnings also affected by manipulating CEO pay-for-performance?
From a shareholder perspective, there are additional reasons why it's a good time to take a tough look at this. The argument back in 1993 was that exempting performance pay encourages pay practices that would more closely align the interests of CEOs and shareholders. But there is a growing body of evidence that the pay-for-performance system has been a sham.
I'd like to point to some very good research done by Bloomberg this year exposing how corporations can easily manipulate performance metrics to help executives qualify for bonuses and also help the company make sure that certain forms of executive compensation are tax-deductible.
Bloomberg looked in particular at a couple of companies, like Exelon, who were examples of companies that were not doing well, but that manipulated their performance metrics in order to enable their executives to get big bonuses.
Shareholders should welcome initiatives like this that are getting to how much of corporate profits are being drained into excessive executive pay. It's not in shareholders interest to have performance awards that are not really rewarding good performance.
A Broader Agenda for Fair Taxation
I can hear the voices coming in protest: if you put reforms like this in place, people will just find a way to shield their earnings by putting them into offshore tax havens. Is there a link you can make between reforms on income taxes in general and this particular reform?
Cracking down on tax havens to conceal corporate profits is something we strongly support and it should go hand-in-hand with this. We need to have this a part of a broader agenda around fair taxation.
Another way taxpayers subsidize executive pay is the carried interest loophole that benefits hedge fund managers, so it should be part of a bigger package of reforms that make sure that we're not creating incentives to offshore profits or continue to have taxpayers support excessive executive pay.
CSR Impact of Taxpayer Subsidies
To step back to the larger picture of corporate social responsibility, what is the impact on society when the wealthy don’t pay their fair share of taxes?
I think that there's this myth out there that America is broke and doesn't have any choice but to cut back on things like Social Security and food stamps that affect the ordinary American. In reality, we are rich country but too much of our wealth has been going into military spending and fighting wars around the world — and also into the pockets of the wealthiest and the most privileged.
The reform that we've been focusing on in this report is just one step toward a fair approach to our budget issues that would help us avoid making these kinds of painful cuts and put us on a more healthy track for the future.
Reed/Blumenthal Reform Bill
Sarah Anderson referred me to a bill currently in Congress that would close the performance pay tax deduction loophole, the “Stop Subsidizing Multimillion Dollar Corporate Bonuses Act” introduced by U.S. Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT).
The legislation would keep the deduction for corporations for pay up to $1 millions but would:
- expand the scope of corporations subject to the rule to include all corporations that “that file periodic reports, such as quarterly and annual filings, with the Securities and Exchange Commission (SEC) for the benefit of investors;”
- apply the rule to “all current and former employees,” and
- “eliminate the exception for commission-based remuneration and for performance-based compensation.”
Sarah Anderson pointed out that precedents existed for the legislation in the TARP bailout and the Affordable Care Act, which applied a firm tax deductibility cap on health insurance companies that received bailout funds. She told CSRwire, “It seems like a very practical approach that could use a whole lot more support.”
With more and more Americans needing government assistance because of falling real wages, putting in reforms like the Reed/Blumenthal bill would not only improve tax fairness, it would help bring in revenue desperately needed for food stamps, unemployment insurance, Medicaid, rental assistance and other such programs—while we wait for the minimum wage to rise to a livable range.
And, by bringing down government debt, it should answer those Scrooges who are always using the deficit as an excuse to take the Christmas goose off Tiny Tim’s table.