Eliminating Corporations' Ability to Deduct "Excessive" CEO Compensation From Their Taxes (S. 1843)

What is S. 1843?

(Updated September 2, 2019)

This bill — the Stop CEO Excessive Pay Act — would amends the Internal Revenue Code’s deduction for trade or business expenses to prohibit a deduction for excessive compensation for any employee of the company filing taxes. “Excessive compensation” would be defined as the amount by which services performed by an employee during the year exceeds the lesser of: 25 times the median of the compensation paid for services performed by all employees of the company during the tax year, or $1 million.

It would also amend the Securities Exchange Act of 1934 to prohibit an issuer from paying excessive compensation to an employee unless the compensation is approved by at least 50% of the shareholders. Monetary penalties would be imposed on issuers that violate this requirement. Penalties paid to the Securities and Exchange Commission (SEC) under this bill couldn’t be deducted from a company’s taxes.

Argument in favor

The bonus pay tax deduction is a loophole that essentially serves as a reverse wealth transfer from the poor and middle class to the ultra-rich — it should be closed as it’s both unfair and unjust to expect average Americans to subsidize corporate executives’ paychecks.

Argument opposed

Corporate executives’ pay is a matter for individual companies to set policy on internally. This is not an area where the federal government should play a role — especially since corporate board and shareholders already have the power to reduce executives’ pay on their own.

Impact

Companies; corporate executives; Internal Revenue Service; and the Securities and Exchange Commission.

Cost of S. 1843

A CBO cost estimate for this bill is unavailable.

Additional Info

In-Depth: Sen. Kirsten Gillibrand (D-NY) introduced this bill to close the tax loophole that allows companies to deduct part of the amount they spend on executive compensation and require a shareholder vote to determine whether CEOs should receive substantial raises or bonuses:

“In the last few decades, while the middle class has been shrinking and workers' wages have hardly budged, corporations have been paying their CEOs higher and higher salaries -- more than 300 times higher than regular employees in some cases. In other words, too many corporations have stopped rewarding work, and it is harming our economy. This legislation would take away a major incentive that corporations use to pay extremely high wages to their CEOs, by putting a cap on the level of CEO pay that corporations can deduct from their taxes as a business expense. The government should not be subsidizing CEO pay at the expense of workers and the middle class.”

Ira Kay, writing in the Harvard Business Review, argues that government regulation of CEO pay is inappropriate and unnecessary, and has the capacity to do significant damage to companies:

“[L]egislating and regulating executive compensation has the capacity to do real damage. [R]esearch has shown that the traditional executive pay model using cash and stock incentives continues to work for the vast majority of companies. It motivates leaders to steer their companies toward high performance. Luck plays a part in whether or not the companies actually get there, but the pay-for-performance model certainly sets companies up to succeed. Our research shows that in general, high-performing companies’ CEOs get paid a lot, and low-performing companies’ CEOs get paid much, much less.”

Additionally, as Michael Dorff, a professor of law at Southwestern Law School points out, shareholders and corporate boards are the only people with the power to change CEO pay — and they seem to be okay with current pay levels:

“The people with the power to change CEO pay are corporate directors and, to a lesser extent, shareholders—and for the most part, they appear to be perfectly satisfied with current pay levels. The directors of large public companies approved huge average pay hikes for their CEOs this past year, and shareholders have approved some 98 percent of the pay packages they were asked to review since being given the power to do so a few years ago. Both groups are well aware that CEOs are paid much more than the median worker, but they believe that is what the market for managerial talent demands. In short, a CEO to worker pay ratio of 300-to-1 doesn’t faze them because they believe the right CEO is worth at least 300 median workers, and probably quite a few more.”

The AFL-CIO, Public Citizen, Americans for Financial Reform, and Americans for Tax Fairness support this bill. Frank Clemente, Executive Director of Americans for Tax Fairness, says this bill is needed to fix one of the worst tax breaks in the special-interest rigged tax code:

“The CEO pay loophole is one of the worst tax breaks in our special-interest rigged tax code. This tax deduction for bonus pay makes regular taxpayers subsidize the income of wealthy CEOs, who get paid 300 times more than the average worker takes home. And many of the big corporations these CEOs lead pay tax rates below what the middle-class pays, if they pay taxes at all. This tax loophole is a scam, and it must end!”

There is one cosponsor of this bill, who is also a Democrat.

Of Note: From the end of World War II through the 1970s, as the economy grew, workers were paid more and productivity increased. But in recent decades, worker pay has stagnated even as corporations have continued to pay their CEOs more. According to the AFL-CIO, the average CEOs of the largest corporations in the country make an average of $13.1 million a year, which is approximately 347 times what the average American worker makes. In 1978, CEOs earned an average of 30 times what their average employee made.

Over the past 10 years, taxpayers have paid $50 billion in tax subsidies due to the loophole that allows companies to deduct part of the amount they spend on executive compensation.

Media:

• CBS New York
  
• Votesmart