How Our Tax System Subsidizes Bloated CEO Pay

File photo dated 18/04/08 of offices of Citigroup, one of seven banks subpoenaed in the US over possible Libor interest rate
File photo dated 18/04/08 of offices of Citigroup, one of seven banks subpoenaed in the US over possible Libor interest rate manipulation.

For decades we've heard about CEOs who garner more in a day than their average employee earns in a year.

The sad fact is our current tax code encourages these runaway pay packages -- and even subsidizes the excess in a number of ways.

CEO pay also reduces a corporation's tax bill, providing a perverse incentive for short-term compensation grabs and aggressive tax dodging.

A new Institute for Policy Studies report, that I co-authored, looks at interaction between excessive CEO pay and tax avoidance. The more they dodge, the more they get paid.
The study found that 26 CEOs, out of the 100 highest paid CEOs in 2011, received more in pay than their companies paid in federal income taxes.

Their average pay was over $20 million per year. Seven of these companies had the same trend in the 2010 including Boeing, Ford Motor, International Paper, and Chesapeake Energy.
Low corporate taxes at these companies are not the result of low profitability. On average, the 26 firms had more than $1 billion in U.S. pre-tax income but still received net tax benefits that averaged $163 million.

Two of the firms that paid their CEOs more than Uncle Sam -- Citigroup and AIG -- owe their very continued existence to taxpayer bailouts.

Our present U.S. tax code is a prime enabler of this behavior through generous tax loopholes and the aggressive use of the "off shore system" that enables corporations to hide U.S. profits in countries like the Cayman Islands. The 26 companies that pay more to one executive than in U.S. taxes have 537 subsidiaries in tax-haven countries such as the Cayman Islands, Bermuda and Gibraltar. These artful corporate tax dodgers pretend their profits are earned in low-tax or no-tax jurisdictions -- and then feign losses from their U.S. operations at tax time.

In addition to global tax dodging, many of the corporations we studied aggressively use corporate tax loopholes. Four of the biggest corporate tax loopholes that encourage runaway CEO pay cost taxpayers an estimated $14.4 billion every year, according to our report. One of these is the unlimited tax deductibility of excessive pay. The higher the CEO pay, the greater the corporation's tax deduction. Proposals to cap the deductibility of excessive pay are pending in Congress.

In addition to their corporate tax dodging, these CEOs have personally benefited from the 2001 and 2003 Bush tax cuts for upper income taxpayers. In 2011, 57 CEOs at major U.S. corporations saved more than $1 million last year on their personal income tax bills as a result of the Bush tax cuts.

These tax code problems can be fixed. Congress could decide today to pass the "Cut Unjustified Tax (CUT) Loopholes Act" (S. 2075) that would close a variety of loopholes that facilitate tax dodging through the off shore system. The Income Equity Act (H.R. 382) would deny firms tax deductions on executive pay that exceeds 25 times the pay of a firm's lowest paid worker.

Unlike the majority of U.S. businesses, some transnational companies pursue a "built to loot" business model that focuses on shifting costs off their own balance sheets and onto the rest of us. Until we summon the political will to change the rules, our tax code will continue to encourage short-term CEO pay.

Chuck Collins is a senior scholar at the Institute for Policy Studies and author of 99 to 1: How Wealth Inequality Is Wrecking the World and What We Can Do About It.