WASHINGTON, DC – Today, U.S. Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT), along with U.S. Representative Lloyd Doggett (D-TX), are introducing the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act. This legislation would close a major loophole in current corporate tax law by putting an end to unlimited tax write-offs on performance-based executive pay. The Reed-Blumenthal-Doggett bill would end special tax exemptions for huge CEO bonuses and prevent publicly traded corporations from deducting the cost of multimillion-dollar bonuses from their corporate tax bills.
Over a ten year window, the Joint Committee on Taxation has estimated this legislation would close a loophole that costs U.S. taxpayers over $50 billion.
Under current tax law, when a publicly traded corporation calculates its taxable income, it is generally permitted to deduct the cost of compensation from its revenues, with limits up to $1 million for some of the firm’s most senior executives. However, a loophole relating to performance-based compensation has allowed many public corporations to avoid such limits and freely deduct excessive executive compensation. To illustrate how this loophole works, if a CEO receives $1 million in cash compensation and $14 million in performance-based compensation in a given year, the public corporation's taxable income would decline by $15 million. With the current corporate tax rate at 35 percent, the corporation in this case would receive a tax give-away of $5.25 million.
The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act puts an end to that give-away and limits public corporations to a single $1 million per employee deduction as was originally intended. Using the same example above, a profitable public corporation could deduct $1 million of the CEO’s $15 million compensation package but could not claim a deduction on the remaining $14 million. So instead of claiming $5.25 million in federal subsidies for the CEO’s pay, this public corporation would pay its fair share just like every middle-class family in America.
“We need to prioritize tax breaks that grow our economy and strengthen the middle class. This bill would eliminate some of the inequity in the tax code. Again, companies are free to pay their executives as much as they want. But the American taxpayer shouldn’t help foot the bill for a CEO’s multimillion-dollar bonus,” said Senator Reed. “The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act puts an end to this give-away and will restore fairness to the tax code and ensure corporations, not taxpayers, are the ones who pay for multi-million dollar bonuses.”
“It is unconscionable that American taxpayers subsidize tens of billions of dollars in corporate bonuses while middle-class wages stagnate and income inequality rises,” said Senator Blumenthal. “We should be investing in working families, not using taxpayer dollars for tax breaks to corporations that overpay their executives. Corporations should be free to pay their executives whatever they wish, but not at the expense of American taxpayers.”
“Our tax code has a perverse incentive for companies: the more you pay your executives, the less you’ll pay in taxes. It is wrong to compel working families and small businesses to foot part of the bill for lavish executive bonuses. This bill lets companies like Wells Fargo know that they can choose to hand their CEO $155 million as they pay billions in penalties for wrongdoing, but don’t expect the American taxpayer to pick up part of the tab.” said Congressman Doggett.
President-elect Trump has acknowledged the problem of excessive CEO pay. During a 2015 interview on CBS’s Face the Nation, Trump stated: “Well, it does bug me. It’s very hard if you have a free enterprise system to do anything about that. The boards of companies are supposed to do it. But I know companies very well. And the CEO puts in all his friends. And so you will take a company like, I could say Macy's or many other companies, where they put in their friends as head of the company, and they get whatever they want, because the friends love sitting on the board. So that's a system that we have. And it's a shame and it's disgraceful. And, sometimes, the boards rule. But I would say it’s probably less than 10 percent. And you see these guys making these enormous amounts of money. It's a total and complete joke.”
Republican lawmakers have long recognized that the law needs to be updated. In 2006, Senator Chuck Grassley (R-IA), the then-chair of the Senate Committee on Finance, stated: “162(m) is broken. …It was well-intentioned. But it really hasn’t worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese. And it seems to have encouraged the options industry. These sophisticated folks are working with Swiss-watch-like devices to game this Swiss-cheese-like rule.”
The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act would allow publicly traded corporations to pay their executives as much as they desire, but compensation above and beyond $1 million would no longer be subsidized by other hardworking taxpayers through our tax code.
Specifically, the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act would:
• Broaden the scope of corporations subject to 162(m) from: “publically held corporations that issue any class of common equity securities registered under section 12 of the Securities Exchange Act of 1934 (the ’34 Act)” to: “any corporation that qualifies as an issuer whose securities are registered under section 12 of the ‘34 Act or that is required to file reports under section 15(d) of the ‘34 Act.” The effect of this would be to capture all corporations that file periodic reports, such as quarterly and annual filings, with the Securities and Exchange Commission (SEC) for the benefit of investors.
• Broaden the number of employees from: “the CEO and the 3 highest compensated officers” to: “all current and former employees.”
• Eliminate the exception for commission-based remuneration and for performance-based compensation.