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REVEALED: This Crazy Loophole Forces Taxpayers to Fund CEO Pay

The next time someone says America is broke and we have to cut spending, ask them if they approve of their tax dollars subsidizing CEO pay.

According to a recent report from the Institute for Policy Studies (IPS), America’s richest CEOs are reaping huge bonuses thanks to US taxpayers. As long as corporations give their top executives bonuses in the form of “performance-based” compensation, they’re allowed to write off that total amount from their federal income tax bill. This essentially incentivizes Wall Street banks, tech companies, and oil & gas conglomerates to give their CEOs enormous year-end bonuses in order to get out of paying hundreds of millions of dollars in taxes.

As this chart from the Wall Street Journal shows, some of the most highly-paid CEOs in 2014 were from the big multinational banks most responsible for the 2008 financial crisis. CEO pay was the highest for Lloyd Blankfein of Goldman Sachs, which is widely seen as most culpable for the crisis:


Between 2012 and 2015, the top five executives at the top 20 banks were paid a total of $2 billion in performance-based bonuses. Had these bonuses been subject to taxation at the standard 35 percent rate, the U.S. Treasury would have collected $725 million in tax revenue during those years. This amounts to roughly $1.7 million per executive, per year, in lost tax revenue. That $725 million makes up roughly 41 percent of the U.S. Securities and Exchange Commission’s requested budget of $1.781 billion. IPS also calculated that the $725 million in tax dollars lost to performance-based bonus write-offs could have hired 9,000 elementary school teachers.

The IPS report also tears apart the myth of “performance-based” pay, as the executives who earned these enormous bonuses did so despite their company’s stock still underperforming targets. IPS argues that paying executives large bonuses despite poor performance only encourages more reckless behavior like the kind that led up to the 2008 financial meltdown:

Between 2010 and 2015, the top executives at the 20 leading U.S. banks pocketed nearly $800 million in stock-based “performance” pay — before the value of their firm’s stock had returned to pre-crisis levels. In other words, with shareholders who had held on to their stock still in the red, executives were reaping massive rewards that their banks could then deduct off their taxes.

As the Washington Post reported, President Bill Clinton attempted to change the tax code to limit how much compensation could be legally written off of a corporation’s tax bill. While the Clinton administration limited compensation deductions to $1 million per year, the tax code never mentioned performance-based bonuses or stock options, which corporations effectively turned into a giant loophole to get out of paying taxes. As this chart from Vox shows, performance-based deductions skyrocketed after Clinton implemented the changes to the tax code:


As Congress debates a spending bill to fund the government, any arguments about America not having the money to pay its bills should be met with a healthy amount of skepticism. As is plain to see from this single example of subsidized CEO pay, the U.S. Treasury is missing out on lots of revenue that could be used to ensure the stability of federal agencies and public infrastructure.

Read the full report from IPS here.


Zach Cartwright is an activist and author from Richmond, Virginia. He enjoys writing about politics, government, and the media. Send him an email at [email protected] and follow his work on the Public Banking Institute blog.


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