Want to Rein In Unlimited Tax Breaks? Define What’s Reasonable

A new report, The CEOs Hand in Uncle Sam’s Pocket, reports that U.S. corporations received $14.4 billion in taxpayer subsidies related to their executive compensation packages.

The report, the 19th annual Executive Excess report by the Institute for Policy Studies, also found that:

  • 25 of the highest paid CEOs received more in compensation last year than the firms they led paid in federal corporate income taxes, and
  • 57 CEOs personally saved at least a $1 million thanks to the Bush tax cuts on their 2011 income above $250,000.

In 1993, Congress sought to define “reasonable business expense” as it pertains to executive pay by setting a $1 million per employee cap. That seems like a really reasonable thing to do. However, they also embedded into the law a giant loophole: something called performance based pay. That loophole resulted in the huge shift toward stock options and other performance based pay that sent overall pay levels soaring.

While businesses can no longer deduct the full cost of a three martini lunch, and none of the cost of skyboxes or premium priced tickets to concerts or sporting events – the IRS deems each of these unreasonable business expenses – CEO pay packages in the tens, or even hundreds of million dollar range remain not only “reasonable” in the eyes of the tax code, but fully deductible.

We see a similar fight happening over extending the Bush tax cuts on income over $250,000. While some suggest that singling out the highest income taxpayers violates the fairness principle of treating all taxpayers equally, they seem to be missing the point that under the President’s proposal ALL taxpayers get a continued tax break on their first $250,000 of income. In fact, the family earning $250,000 gets a tax break of $5,808, nearly seven times more than the family earning $60,000 which would receive a tax break of $865 under the White House plan.

In contrast, according to a tax calculator developed by Citizens for Tax Justice, a House-passed plan would extend the Bush tax cuts at all income levels and would result in a family with $10 million in income garnering a tax break of more than $450,000, versus the same $865 in tax savings received by the family with $60,000 in annual income. Put this way, many voters would see this as unreasonable and unfair.

It’s time to shift the debate away from unlimited tax breaks based on percentages and toward more reasonable absolute dollar amounts of tax savings. Granting all taxpayers a break on their first $250,000 (or another amount of your choosing), passes the fairness sniff test for most people. Explaining it this way opens the door to raising up to $40 billion a year that can be used to reinvest in our country, in all the things we need in order to thrive.

Author: Scott Klinger, Policy Director of Wealth for the Common Good