Monday, September 19, 2011

CEO Excess - How to make more money than your company pays in taxes

In light of the recent begging by Warren Buffett for higher taxes for the rich, I thought that I'd take a look at a recent report by the Institute for Policy Studies entitled Executive Excess 2011: The Massive CEO Rewards for Tax Dodging.  This is the Institute's 18th Annual Executive Compensation Survey and as always, it is both an interesting and maddening read.  This year, in particular, the study outlines just how CEOs are rewarded for minimizing taxes remitted to Washington, a most timely bit of research considering that Washington is relying more and more on taxation of individuals for revenue growth and consistently discussing the lowering of corporate taxes in the name of the creation of jobs.

Let's start off with this interesting fact: 25 major United States corporations actually paid their chief executives more than they paid in federal income taxes.  Sit and think about that for a minute before you read the next paragraph.  Then think about all of the Main Street Americans that you know or are related to that have suffered from long-term unemployment since the advent of the Great Recession nearly 3 years ago.

Now look at this graph:

This shows the ratio of CEO pay to worker pay for the last four years, just prior to and during the Great Recession.  Notice that CEO pay levels have risen to nearly their pre-Recessionary levels when compared to worker pay.  Notice that CEO pay has jumped from 263 times worker pay in 2009 to 325 times worker pay in 2010.  That's quite a nice pay jump if you happen to dwell in the top floor corner office and not so nice if you don't.

Let's now examine just how much America's corporate leadership stuffed into their mattresses in 2010.  It turns out that among the nation's S&P 500 corporations, CEO pay averaged a rather paltry $10,762,304, up a rather infinitesimally minute 27.8 percent on a year-over-year basis.  I, for one, cannot imagine how anyone could live on that kind of money!  How is one supposed to maintain that yacht, private jet, fleet of antique automobiles and 10,000 square foot house?  I also cannot imagine how anyone could get by with just a 27.8 percent annual raise.  On the other side of the spectrum, those of us who sweat while we work averaged $33,121 in 2010, up an extremely Scrooge-like 3.3 percent on a year-over-year basis.  No one can fault the folks in the corner offices for throwing little more that a few shiny baubles and mirrors down the corporate food chain, can they?  After all, they have to preserve both their jobs and corporate profitability and that's a full-time job.

For the purposes of this study, the folks at IPS researched the 100 United States corporations that paid out the most in CEO compensation in 2010.  They then looked at how much federal corporate income tax was paid by these same corporations.  In the case of 25 corporations, it was found that the pay and benefits package for the company's CEOs was greater than the amount of federal income tax remitted.  In fact, as a bonus, even inflated executive pay is a tax deduction through the use of stock-based compensation deductions!  In most cases, the low tax bills faced by these companies were not due to a lack of profitability, rather, they were due to tax avoidance.  Eighteen of the twenty-five firms actually have subsidiaries in offshore tax haven jurisdictions; in fact, among them, they had 556 tax haven subsidiaries in 2010.  These tax havens are estimated to cost the Federal government over $100 billion annually.  While that's chump change compared to the overall deficits Washington is running, it's certainly a start.

Just how do these tax havens work?  By opening a subsidiary in a jurisdiction with low corporate tax levels, American corporations transfer the intellectual rights to their products to these tax holiday resorts.  This is a favourite ploy of both technology and drug companies.  Once the intellectual rights for certain properties are transferred to the out-of-country subsidiary, the United States-based operations are charged inflated amounts for the use of these rights which, you guessed it, get deducted from United States earnings (and taxes).  On top of this insult to those of us that actually pay taxes, Corporate America once again has its hands out looking for another cut in taxes to a 5.25 percent rate on overseas profits should they be allowed to bring the money back to these hallowed shores.  As I mentioned, technology and drug companies are fond of these particular havens, however, a couple of companies that American taxpayers and mortgage holders are very familiar with, are loaded with tax haven bliss.  Citigroup has 427 tax haven subsidiaries and Bank of America has a rather paltry 115.  It's most reassuring to know that those TARP funds that everyone chipped into were used to support the most needy of America.

Now, let's get back to the subject of this posting; executive excess.  The IPS study details ten companies that pay their CEOs more than they pay the United States Treasury, but I'll select three that are particularly interesting.

Let's start with General Electric.  Why GE?  Because, GE's CEO Jeffery Immelt just happens to be President Obama's job czar.  Mr. Immelt earned $15.2 million in 2010, a rather handsome sum.  As background information, GE happens to be the 14th most profitable American corporation in 2010 with net earnings of $11.6 billion.  Not to worry, some of those profits are sheltered in one of the company's 14 tax havens including Bermuda, Singapore and Luxembourg.  Now to the bottom line.  What did GE pay in United States taxes in 2010?  The answer: a $3.3 billion refund despite making more than $5 billion in profits in the United States.  Oh, and by the way, GE has shuttered 31 plants in the United States since 2008 and laid off 19,000 workers over the past two years.

Now let's look at bank because who doesn't love banks!  The CEO of the Bank of New York Mellon, one Robert Kelly, took home $19.4 million in 2010.  The BNY Mellon availed themselves of $3 billion in TARP assistance but, fortunately for Mr. Kelly, the funds that American taxpayers loaned to BNY Mellon were repaid before restrictions on CEO pay were put into place.  This has allowed Mr. Kelly to earn over $10 million annually over each of the past 3 years, poor fellow that he is.  What has the BNY Mellon earned for its shareholders in 2010?  The bank earned $2.4 billion in United States pre-tax income in 2010 and paid a massive negative $670 million in taxes.  Yup, they got a tax refund too.

Lastly, let's look at the highest paid CEO in this sampling of ten corporations.  Stanley Black and Decker, manufacturers of the most manly of man toys, paid its CEO, John Lundgren, $32.6 million last year, a 253 percent pay increase from the previous year thanks to more than $25 million in stock.  Stanley Black and Decker actually got a $75 million federal tax refund, in part due to its 50 tax haven subsidiaries.  That's nice if you can get it.

Just to put these numbers into perspective, let's take a historical look at just how much of the United States Treasury's overall revenue comes from corporation taxation:

For the first 11 months of fiscal 2011, corporate taxes remitted to the Treasury totalled $142 billion, unchanged from the previous year.  In the same eleven months, individual income tax brought in $977 billion, up 23.5 percent on a year-over-year basis.

Apparently, Citizens for Tax Justice is in the process of completing a study on tax avoidance among the Fortune 500 corporations.  They have identified 12 corporations that paid an effective tax rate of negative 1.5 percent on profits of $171 billion.  That is a subject for another posting.  However, I'd suggest that you keep that number in mind when Washington tells those Americans who live on Main Street that we must lower corporate tax rates to remain competitive.  It's also worth remembering this posting when you hear executives whine about America's 35 percent corporate tax rate.

As an aside, and just in case you were interested, the 25 corporations highlighted in the IPS report spent more than $150 million in 2010 lobbying Congress and contributing to election campaigns.  Their near tax exempt status is simply an unfortunate coincidence.  Sad, isn't it?


  1. PJ:

    In theory, should you income tax(penalize) a corporation that comes to your country; begins operation of a manufacturing plant; and exports all products produced?
    I would say No! Just having another firm employing individuals and purchasing resources is justified in itself.

    This is why I believe a consumption tax (preferably VAT) is a better solution in comparison to the income tax system:
    1. A consumption tax would not penalize a pure exporting corporation.
    2. A consumption tax would encourage savings over consumption.
    3. A consumption tax would fairly tax the 10K square foot house CEO with a yatch and a jet.

    This was another fantastic article PJ; I really think you should give the "fair-tax" a second look!


  2. JR. Companies right now are not penalized by a tax burden. Did you not read the information or do not believe the info? That's your prerogative, but the fact remains that today's corps pay the lowest in history, giving their CEO's, and CFO's and such all bonus' that out weight even the corps tax burden. And then they pare the job market - keep it lean - that way they only need to pay the least for employees while demanding the most. WB

  3. A very interesting post. The consumption tax idea is something we have had in Canada since 1989 (GST - goods and services tax).

    The rationale then was that the government would eliminate the manufacturer's tax of 13.5% (which is what wholesaler's would pay when buying goods from indigenous manufacturer's) and thus lower the cost of goods by the additional 6.5% over the GST's rate of 7% once introduced. They also figured that it would encourage investment by manufacturer's here in Canada.

    However, the tax burden shifted from manufacturer's to the individual consumer. Several years after the GST was introduced it was shown that manufacturer's had not reduced the cost of their goods once the manufacturer's tax was eliminated (and the GST had been brought in). They simply increased their prices to the tune of the 13.5% and pocketed the money.

    The result: overall federal government revenue went up but the cost of goods did not go down. Thus the individual consumer took the hit. This is one of the reasons Canada has faired better than the United States during this recession, however, consumer spending remains weak due to the increased tax burden on the consumer. And we have a 16.5% corporate tax rate.

    Now our federal consumption tax has been merged with provincial sales tax to create a super consumptiont tax (HST - 13%). Although this streamlines tax collection to one entity (the feds who simply transfer to the provinces their share). But there are now taxes applicable to some goods and services that were previously exempt from either the federal tax or provincial one prior to the merger. So nothing escapes consumptions taxes now (i.e. closed loop hole).

    So... in the end the burden has shifted once again to the individual.

  4. WB. My post was regarding the corporate taxation issue and not on the executive compensation issue.

    It just depends how you see business taxation in theory. Can you really tax a business? Fact is that every single business tax is always passed on to individuals; either to the employees; consumers; or shareholders.

    WB. If companies did not really feel "over-taxed" compared to other jurisdictions; then would there not be any real incentive to attempt expensive tax avoidance strategies?

    Andrew. I understand that another significant difference between "HST vs GST+PST" was that HST and GST are a value-added-tax where the PST is a retail sales tax. This makes the VAT alot more business friendly to account for in comparison to the retail sales tax method (along with the exemptions you've mentioned).


  5. I'm curious why there has never been an Alternative Minimum Tax on corporate taxes. This would help stem the tide of abuse among the corporate giants as they try to deduct everything. However, I'm not familiar enough with corporate taxes to know whether or not this is feasible and what the effect would be. Any thoughts?


  6. Did you notice on the Citizens for Tax Justice study that the corporations are paying less taxes each year that President Obama is in office?

    The Obama administration is not going after these companies. I guess since many of them are donors, they expect kickbacks.

  7. This is same story in the whole world . making fool of people in the name democracy. right now democracy is for the rich and famous only. law protecs them and allows them to continue to abuse the coomon workers. all the corporations only have to give rich donations to the politicians and they are set for generations to stay rich . none of their children and further generarions ever have to work

  8. Obama is a very clever man . he says one thing but all his actions prove to be the opposite.

  9. Why is the USA the only place on this earth that does not have a viable political party to represent the public interest? I would have thought and hope that something would be born out of the Occupy movement. The "US" party or variant would fit perfectly. The people on the lower rung of the ladder has no representation in America. The fear of this happening may be why Occupy is being moved by authorities. It is long past overdue. Give them what they fear.