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Executive Pay and the Great Tax Dodge

Before the deficit reduction “super-committee” embarks on a $1–2 trillion course of human slashonomics, it should take a hard look at the Institute for Policy Studies’ (IPS) eighteenth annual executive compensation report, which details how corporations are rewarding CEOs for aggressive tax avoidance—to the tune of at least $100 billion in lost tax revenues every year.

Executive Excess 2011: The Massive CEO Rewards for Tax Dodging reveals that last year twenty-five of the 100 most highly paid CEOs took home salaries greater than the amount their companies paid in 2010 federal income taxes. And it wasn’t because the corporations weren’t making dough—they averaged global profits of $1.9 billion, and only seven reported losses in US pre-tax income.

But these twenty-five companies shielded their profits in 556 tax haven subsidiaries in places like the Cayman Islands, Isle of Man, and Singapore, which proved to be a lucrative tax dodging strategy for the CEOs themselves: the twenty-five CEOs averaged $16.7 million in compensation, compared to $10.8 million for their peers in the S&P 500.

“What we’re seeing here is tax dodging, pure and simple,” says Sarah Anderson, who directs the global economy project at IPS and has coauthored the Executive Excess report for eighteen years running. “And tax dodging that’s benefiting the CEOs of these companies personally.”

It’s not that the corporations are breaking the law. Indeed, the report co-authors emphasize that tax dodging isn’t illegal. But Anderson points out that the laws are “the result of a corrupt system where hundreds of millions of dollars spent lobbying can result in these kinds of crazy, corporate tax loopholes.”

That’s why twenty of the twenty-five companies who paid their CEOs more than they paid in federal income taxes also spent more on lobbying lawmakers, and eighteen contributed more to the political campaigns of their preferred candidates than they paid to the IRS.

“GE is sort of our world champion when it comes to tax dodging," says Anderson. “They were also number one in lobbying and political campaign spending, with about $42 million spent on that last year.”

GE paid CEO Jeff Immelt—who also is chairman of President Obama’s Council on Jobs and Competitiveness—$15.2 million. The company had more than $5 billion in US profits, yet reaped $3.3 billion in federal income tax refunds. (You should be receiving your thank-you note in the mail any day now.)

Report co-author Chuck Collins, who directs the IPS program on inequality and the common good, notes that the offshore tax havens have created a “two-tier” corporate system in which domestic businesses that pay closer to the 35 percent statutory rate are competing against global businesses that game the system.

“This is really bad for business and bad for local domestic businesses in particular,” says Collins.

IPS is working with business allies to close loopholes, broaden the tax base  and reduce rates, creating a fairer system. Collins also points out that the common conservative argument that US companies pay one of the highest tax rates in the world at 35 percent is a canard. In fact, thanks to all the gimmicks courtesy of corporate lobbyists and an obliging Congress, the effective rate was 25 percent in 1988 and has plummeted to 10.5 percent today—among the lowest in the world.

“Two generations ago some of the CEOs of these very same companies would have been embarrassed to be so lavishly compensated while at the same time reneging on their responsibility to pay their fair share in taxes,” says Collins. “It’s not just a trend in terms of compensation and tax avoidance. We’re looking at a multigenerational ethical shift away from a civic and corporate leadership.”

The Stop Tax Haven Abuse Act sponsored by Senator Carl Levin and Congressman Lloyd Doggett would plug up some of the corporate-preferred offshore mechanisms and secrecy jurisdictions. IPS has a petition in support of the legislation, and members of Congress should also be contacted and urged to cosponsor. The voices of small-business owners in particular are an important counter to corporations that claim they need these tax havens to create jobs.

The report also illustrates that exorbitant CEO salaries—fueled in part by these tax avoidance schemes—have led to a dramatic increase in the gap between CEO and average worker pay: it was 263:1 in 2009, and shot up to 325:1 last year. Anderson notes that the ratio was just around 40:1 in the 1980s.

“It’s clearly not due to some huge increase of talent at the top—some kind of managerial brilliance,” she says. “Instead it’s the result of a perverse system where CEOs are outrageously rewarded for short-term thinking: tax dodging, reckless investments, slashing jobs, cooking the books or using accounting tricks. Meanwhile, board members approving the pay packages are often executives at other companies who don’t want to rock the boat, or who find the rising compensation mutually beneficial.”

Fortunately, as a result of the Dodd-Frank bill, shareholders now have a right to an annual (though non-binding) “say-on-pay” vote on executive compensation packages, and Anderson says about forty have been rejected.

“This is a growing area of activism,” says Anderson. “But we can’t just leave it to shareholders to solve all the problems.”

Other key proposals that need citizen-activists’ support include California Congresswoman Barbara Lee’s Income Equity Act that would deny corporate tax deductions on any executive pay that runs over twenty-five times the lowest-paid employee, or $500,000, whichever is higher.

There is also a need for citizens to get involved in an underreported fight over the Dodd-Frank requirement that corporations disclose the gap between its CEO and median worker’s pay. The potential for public backlash has led corporate lobbyists to make repeal a priority before the disclosure takes effect. The House will likely vote to repeal, and there is concern that conservative Democrats in the Senate will see it as a bone to throw to Big Business contributors heading into the 2012 elections.

Already, this report has had a positive impact: it led Maryland Democratic Congressman Elijah Cummings to call for hearings “to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today” and “the extent to which our tax code may be encouraging these growing disparities.”

Executive Excess has also received coverage from the Washington Post, the New York Times, Reuters, MSNBC, the Atlanta Journal Constitution and Bloomberg, among others—and that’s just on the first day of its release. 

IPS has done a real service in drawing these connections between CEO pay and an absurdly unfair tax system. It’s time for street heat, letters to the editor, calls to Congress, and driving this issue into 2012. It’s time to restore some sanity to pay equity and corporate taxes.

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