Taxing Progressively

The Bait-and-Switch on Fleecing Taxpayers

Lavishly paid corporate executives, flush with tax-deductible taxpayer dollars, have plenty of reason to relish the right-wing assault on ‘overpaid’ public employees. But we can wipe that grin off their faces.

By Sam Pizzigati

Somebody is getting rich off our tax dollars. That somebody, governors in Wisconsin, New Jersey, and a host of other states would have us believe, just happens to be our neighbor the public employee.

Teachers, fire fighters, cops, and case workers, have become, in effect, the new “welfare queens.” Ambitious pols the nation over, taking a page from the Ronald Reagan playbook, are creating mythic tax dollar-gobbling stereotypes that demonize Americans just struggling to get by.    

These stereotypes do more than demonize. They distract. They shove off the political radar screen the fortunates who really are getting rich off our tax dollars. Fortunates like William Swanson, the CEO of Raytheon, the high-tech giant.

CEO Swanson has taken home $97.8 million over the past five years. His company gets 27 percent of its revenue from federal contracts.

Bank CEO paySwanson’s rival, Lockheed Martin CEO Robert Stevens, has pocketed $111.1 million over the past five years. The company he runs gets 37 percent of its revenue from federal contracts, with most of that coming from the Pentagon.

And don’t forget Louis Chenevert, the chief exec at United Technologies, the Connecticut-based company that ranks as the 21st biggest federal contractor. News reports last week revealed that Chenevert made $22.1 million in 2010, a 7.7 percent jump over the $20.5 million he pulled in the year before.

Chenevert “bolstered” the United Tech bottom line, says the Hartford Business Journal, “in part through job cuts and plant closings.” The $1.5 billion in tax dollars his company collected from federal contracts did a bit of bolstering, too.

Companies like UT, Lockheed, and Raytheon don’t just lavish our tax dollars on their top execs. They deduct all the multiple millions they lavish on these execs off their taxes. In other words, the more CEOs pocket, the less their corporations pay at tax time — and the heavier the tax burden on average Americans.

Top executives at America’s biggest corporations, in effect, get us coming and going. Our tax dollars pump up their pay. Then they deduct their pay off their corporate tax bills, a move that enhances their corporate bottom-line “performance” and sets them up, in turn, for even bigger executive paydays.

A half-century ago, American taxpayers could count on a much better deal. Back then, our law and our courts did not accept, as a given, a corporate executive right to get rich at taxpayer expense.

Back in the 1950s, Indiana corporate executive Frederick Ernest thought he had that right. Poor Ernest thought wrong.

Ernest served as the top exec at a 1948 start-up in the machine tool trade. The Korean War, beginning in 1950, had made that trade a hot one. The revenues at Ernest’s company had soared from $213,400 in 1949 to $3,237,000 in 1952.

Executive pay had soared, too. The company’s four top officers saw their take-home jump over ten-fold to $85,000, the equivalent of over $700,000 today.

Accountants at Ernest’s hot new company claimed this executive pay as a “reasonable” corporate outlay and an appropriate corporate tax deduction. But the IRS rejected that claim. A displeased Ernest would take the IRS to court.

The legal dust wouldn’t settle until 1961. A federal appeals court that year ruled that Ernest’s machine tool firm could only deduct $35,000 — about $300,000 today — of the $85,000 each of the top four execs received in compensation.

These execs, the court concluded, owed their fabulous pay increases to the demand the Korean War created for industrial retooling, not any individual business “sagacity and industry.” Consequently, their company had no right to claim their huge paychecks as a reasonable and deductible corporate expense.

signupCorporate executives today face nothing remotely close to that sort of scrutiny. Major corporations can now deduct any executive pay up to $1 million, no questions asked, and any compensation over $1 million as well, so long as they define that excess over $1 million as a “performance-based” incentive.

A small but valiant band of lawmakers has been trying to shut this gaping “pay for performance” loophole ever since Congress legislated the current deductibility standard in 1993.

In the last Congress, Rep. Barbara Lee from California proposed legislation that would, if passed, have denied tax deductions on any executive pay that runs over $500,000 or 25 times the pay of a company’s lowest-paid workers.

Rep. Lee’s proposed Income Equity Act didn’t go anywhere. But Congress, in the landmark health care reform enacted last year, did opt to deny health insurers tax deductions on any executive pay that runs over $500,000 a year.

Will this limit in the health care reform legislation turn out to be the first step toward ending taxpayer subsidies for excessive executive pay? That outcome now seems, for the first time in ages, somewhat politically plausible.

What’s changing the plausibility calculus? A newly launched — and incredibly imaginative — “US Uncut” grassroots campaign against corporate tax avoidance has, for starters, begun to build some appreciable political momentum.

Couple this momentum with the energy cascading out of Wisconsin — from the massive push back against demonizing public employees — and a sense of real change, not just spring, suddenly seems to be breaking out all over.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.

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2 comments for “The Bait-and-Switch on Fleecing Taxpayers”

  1. Everyone always seems to forget that corporate taxation is the greatest scam ever run on the citizens of any nation. Simply put, corporations do not pay taxes! Corporations pass (some) money on to the government and then charge it off as a cost of doing business — to be paid by consumers. At the same time they spend hundreds of millions (even billions) of dollars in an attempt to avoid and/or evade taxation and to lobby against taxation — again passed through to the consumer as a cost of doing business and then written off against tax as a business expense. Corporate tax actually costs the average taxpayer almost three dollars for every dollar collected (passed through) by the government.

    In addition, it is also the single largest source of graft and corruption extant. It is nothing more than an illusory process intended to deceive the average smuck into believing that corporations are helping to carry the weight of government. Nothing could be further from the truth. All corporate taxes are, by necessity, additional taxes on consumers and are in no way beneficial to consumers, human taxpayers or the government.

    Posted by Cyrus Rex | March 10, 2011, 11:25 pm
  2. Since it has not yet been determined whether the above comment is appropriate for display, I should add that there is a simple solution for this conundrum. That is to dump the U.S. tax system and replace it with a single graduated tax on income (eliminating all other federal income and employment taxes, including Social Security) of humans and non-corporate non-charitable not-for-profit organizations (i.e. foundations and think tanks – sorry IPS); with no deductions, depreciation, capital gains differentials, etc. to cover all federal expenses. There could be a $15,000 exemption for all taxpayers to make it fair for low income workers.

    Such a system at a 25% maximum marginal rate would bring in almost a trillion dollars more than does the current abomination of a tax system. This is simply because it would effectively tax the rich, which, under the current system does not happen effectively. It also has the advantage of being fair, simple and effective. If you would like further information, I have this worked out in detail and would be happy to send you a copy.

    Posted by Cyrus Rex | March 11, 2011, 7:32 pm

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