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?