“And Americans Get The Bill”: The Pay’s The Thing; How America’s CEOs Are Getting Rich Off Taxpayers
It’s proxy season again, and we will soon be deluged with news profiles of CEOs living in high style as our ongoing debate on CEO pay ramps up. Last week, the floodgates opened when the New York Times released its annual survey of the 100 top-earning CEOs. Lawrence Ellison from Oracle Corporation led the list again with over $78 million in mostly stock options and valued perks, an 18 percent drop in pay from last year. Poor Larry.
Rising CEO pay has been a hugely contested issue in the U.S. since the early 20th century, particularly in the midst of economic downturns and rising inequality (these two often go together). Because the numbers are just so staggering, most of the current debate focuses on the rapid rise in CEO pay over the past four decades. While executive pay remained below $1 million (in 2000 dollars) between 1940 and 1970, since 1978 it has risen 725 percent, more than 127 times faster than worker compensation over the same period.
With any luck, ascendant French economist Thomas Piketty and the English-language release of his book Capital in the Twenty-First Century will build much-needed momentum in D.C. to institute reforms that address our CEO pay problem. This is a major driver of America’s rising income inequality, which is the central focus of Piketty’s magnum opus. One reform in particular that is critical to slowing down the growth of CEO pay and its costly impact on our economy is closing the performance pay tax loophole.
Inspired by compensation guru Graef Crystal’s bestseller on corporate excesses and skyrocketing executive pay, then-presidential candidate Bill Clinton elevated CEO pay as a core issue of his 1992 campaign with a pledge to eliminate corporate tax deductions for executive pay that topped $1 million. Clinton was successful only in part; his policy did become part of the U.S. tax code as Section 162(m), but it came with a few unfortunate qualifiers, namely the exception for pay that rewarded targeted performance goals, or “performance pay.”
The logic of performance pay comes from Chicago-school economists Michael C. Jensen and Kevin J. Murphy, who published a hugely influential piece in the Harvard Business Review in the early 1990s that argued executive pay should align CEO interests with what shareholders care about, which is higher stock prices. Otherwise known as agency theory, this idea has profoundly shaped the executive pay debate and is arguably the primary reason the performance pay loophole made it into the tax code.
Once Section 162(m) became law, what do you suppose happened next? Predictably, companies started dispensing more compensation that qualified as performance pay, particularly stock options. Median executive compensation levels for S&P 500 Industrial companies almost tripled in the 1990s, mainly driven by a dramatic growth in stock options, which doubled in frequency.
Most of us think of skyrocketing CEO pay as simply a moral problem. However, economists like Piketty and my Roosevelt Institute colleague Joseph Stiglitz have been expounding about the havoc that rising income inequality wreaks on our economy (and democracy). When middle-class wages stagnate, consumer demand diminishes, which has tremendous spillover effects in terms of investment, job creation, tax revenue, and so forth. That particular set of problems relates to how much CEOs are paid. But there are also costly problems with the structure of CEO pay, i.e. what they’re paid with.
Performance pay can (and has) made executives very wealthy, very quickly, which creates incentives for shortsighted, excessively high-risk, and occasionally fraudulent decisions in order to boost stock prices. What kind of effect does this behavior have on the economy at large? Think mortgage crisis and subsequent global financial meltdown. Performance pay also diminishes long-term business investments. According to William Lazonick, in order to issue stock options to top executives while avoiding the dilution of their stock, corporations often use free cash flow for stock buybacks rather than spending on research and development, capital investment, and increased wages and new hiring.
All this and Americans get the bill. Beyond the innumerable costs we’ve borne from the recent economic crisis, the Economic Policy Institute calculated that taxpayers have subsidized $30 billion to corporations for the performance pay loophole between 2007 and 2010. According to a recent Public Citizen report, the top 20 highest-paid CEOs received salaries totaling $28 million, but had deductible performance-based compensation totaling over $738 million. Assuming a 35 percent tax rate, that’s a $235 million unpaid tax bill. The Institute for Policy Studies calculated that during the past two years, the CEOs of the top six publicly held fast food chains “pocketed more than $183 million in performance pay, lowering their companies’ IRS bills by an estimated $64 million.”
Congress is long overdue to close the performance pay loophole. The Supreme Court just made that harder. Thanks to Citizens United and now the McCutcheon decision, the same CEOs who are benefitting from the loophole are much freer to draw upon the corporate coffers to donate big money to politicians to maintain these loopholes.
Nevertheless, there is potential for getting it done. Senators Blumenthal (CT) and Reed (RI) have introduced the Stop Subsidizing Multi-Million Dollar Corporate Bonuses Act (S. 1476), which would finally end taxpayers’ subsidies to CEOs by closing the performance pay loophole and capping the tax deductibility of executive pay at $1 million. In the House, Rep. Lloyd Doggett (D-TX) has introduced a companion bill, HR 3970.
There are many policy ideas for how to curb skyrocketing CEO pay. Piketty and his colleague Emmanuel Saez argue for a much higher income tax rate for top incomes. (The growth rate of CEO pay was at its lowest when the U.S. had confiscatory tax rates for the very rich.) In the current political climate, a more viable step toward slowing the growth of CEO pay and the damage it does to our economy is to, at long last, close the performance pay loophole. It should never have been there in the first place.
By: Susan Holmberg, a Fellow and Director of Research at the Roosevelt Institute; The National Memo, April 21, 2014
“Real Vs. Republican Populism”: How To Win The War On Inequality
So Republicans are going populist, or at least two of them are, reports The Daily Beast’s Patricia Murphy. And perhaps it’s only in the sense that unlike Mitt Romney and many in the House GOP, they’re not speaking of working people with contempt. Well, it’s a start. But I wish they’d pick up copies of Thomas Piketty’s Capital in the Twenty-First Century. Oh, of course Ted Cruz and Rand Paul would find ways to pooh-pooh the book’s findings and conclusions, but it’s nice to think of them merely having to immerse themselves in empirical reality for a few hours instead of the magical economic fairy tales that undoubtedly constitute their usual diet.
If you’ve not heard of Piketty or Capital, it’s certainly the economic book of the year, and probably of the decade so far. (You can read Paul Krugman’s rave in The New York Review of Books here.) I admit I’ve only waded into it so far, but I went to see the author, a French economist, speak at the Economic Policy Institute in Washington to a room full of people who braved a hideous, monsoon-ish rain Tuesday morning. (The video of the event is here.) What Piketty has done, my economist friends tell me, is nothing short of revolutionary and deserves to change the way we think about wealth and inequality. Much more important, it also deserves to alter what we do about them.
Here’s the story in a ridiculously small nutshell. Thirty scholars collected data from 20 countries over about 100 years. Piketty pored over the data trying to pinpoint salient reasons for our insane levels pf income inequality, which is worse in the United States, where the richest 1 percent own nearly 40 percent of the wealth, than in most other advanced countries but hardly endemic to America.
The one key: In all times and places under study, the rate of return on capital increases at a faster rate than general economic growth. Growth averages 1, 1.5 percent. Rate of return averages 4 or 5 percent. So presto, the people with the capital—money and assets of all kinds, land and equipment and what have you—are getting richer a lot faster than the rest of us. And as Nobel Prize-winning economist Robert Solow, a panelist at the event, pointed out: “Note that this is not a market failure.” This disparity (r > g, in wonk-speak) is a feature, not a bug, as they say, and it’s just our fate, and on and on it shall go, as the rivers roll to the sea.
And is there anything we can do to mitigate this? Three things, said panelist Josh Bivens of the Economic Policy Institute: 1) Make sure more people enjoy more access to r; 2) raise g; 3) lower r.
Now, if you are reasonably conversant in our economic debates, you already have some idea of what all this means. It means what Cruz and Paul would call “socialism” and what I would call “the kinds of reasonable, worker-focused economic policies this country had for about 40 years that were, on balance, the best years this country ever had.” We had large-scale public investment, near full employment at times, a more heavily unionized work force, a minimum wage that until 1968 kept pace with productivity, a more progressive tax system, a much more heavily regulated financial sector in which banks couldn’t gamble against themselves, and all the rest. Even with all these measures in place, r still grew faster than g, but not the way it does in today’s America.
In other words, Piketty makes the case that inequality will just grow and grow unless societies take affirmative steps to reduce the gap between the rate of return on capital and overall economic growth. The problem is the old one: In our present political climate, there’s not a chance of that happening.
As I sat there Tuesday morning, I kept wondering to myself: Is there any way a politician, a presidential candidate, can turn these concepts into plain English, something that can capture people’s imaginations—an answer to the right’s vacuous “a rising tide lifts all boats,” but which happens to have the benefit of being true? We now have ample evidence that the “rising tide” of the better part of the last 30 years has not lifted all boats. The ocean liners are getting farther and farther away from the pack.
I think there must be a way, but before we ponder that question, we first have to wonder whether the presidential candidate I have in mind (it’s not Cruz or Paul) even believes all this. I think she does, or most of it. But this is class politics—not “class warfare,” just class politics—and that hasn’t exactly been Hillary Clinton’s game over the years. The great question looming over her expected campaign is the extent to which she’ll address the inequality crisis head on.
Given the 1 percent’s ownership of our political system these days, we’re probably stuck with living out this crisis for a very long time, until even the 1 percenters are finally forced to agree that something has to be done. We seem a long way away from that. But things do change sometimes. “In 1910 in America, everybody would have said a progressive income tax was impossible,” Piketty said Tuesday. “It could not be permissible under the Constitution, and so forth. But, you know, things happen.” Three years later, we had one. So it’s not impossible. And if trickle-down could start on a dinner napkin, surely the process of reversing its malignant effects can start with a book.
By: Michael Tomasky, The Daily Beast, April 16, 2014
“An Invitation To Oligarchy”: McCutcheon, And The Vicious Cycle Of Concentrated Wealth And Political Power
If wealth and income weren’t already so concentrated in the hands of a few, the shameful “McCutcheon” decision by the five Republican appointees to the Supreme Court wouldn’t be as dangerous. But by taking “Citizen’s United” one step further and effectively eviscerating campaign finance laws, the Court has issued an invitation to oligarchy.
Almost limitless political donations coupled with America’s dramatically widening inequality create a vicious cycle in which the wealthy buy votes that lower their taxes, give them bailouts and subsidies, and deregulate their businesses – thereby making them even wealthier and capable of buying even more votes. Corruption breeds more corruption.
That the richest four hundred Americans now have more wealth than the poorest 150 million Americans put together, the wealthiest 1 percent own over 35 percent of the nation’s private assets, and 95 percent of all the economic gains since the start of the recovery in 2009 have gone to the top 1 percent — all of this is cause for worry, and not just because it means the middle class lacks the purchasing power necessary to get the economy out of first gear.
It is also worrisome because such great concentrations of wealth so readily compound themselves through politics, rigging the game in their favor and against everyone else. “McCutcheon” merely accelerates this vicious cycle.
As Thomas Piketty shows in his monumental “Capital in the Twenty-First Century,” this was the pattern in advanced economies through much of the 17th, 18th, and 19th centuries. And it is coming to be the pattern once again.
Picketty is pessimistic that much can be done to reverse it (his sweeping economic data suggest that slow growth will almost automatically concentrate great wealth in a relatively few hands). But he disregards the political upheavals and reforms that such wealth concentrations often inspire — such as America’s populist revolts of the 1890s followed by the progressive era, or the German socialist movement in the 1870s followed by Otto von Bismarck’s creation of the first welfare state.
In America of the late nineteenth century, the lackeys of robber barons literally deposited sacks of money on the desks of pliant legislators, prompting the great jurist Louis Brandeis to note that the nation had a choice: “We can have a democracy or we can have great wealth in the hands of a few,” he said. “But we cannot have both.”
Soon thereafter America made the choice. Public outrage gave birth to the nation’s first campaign finance laws, along with the first progressive income tax. The trusts were broken up and regulations imposed to bar impure food and drugs. Several states enacted America’s first labor protections, including the 40-hour workweek.
The question is when do we reach another tipping point, and what happens then?
By: Robert Reich, The Robert Reich Blog, April 3, 2014
“America’s Taxation Tradition”: Public Policy Should Seek To Limit Inequality For Political As Well As Economic Reasons
As inequality has become an increasingly prominent issue in American discourse, there has been furious pushback from the right. Some conservatives argue that focusing on inequality is unwise, that taxing high incomes will cripple economic growth. Some argue that it’s unfair, that people should be allowed to keep what they earn. And some argue that it’s un-American — that we’ve always celebrated those who achieve wealth, and that it violates our national tradition to suggest that some people control too large a share of the wealth.
And they’re right. No true American would say this: “The absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power,” and follow that statement with a call for “a graduated inheritance tax on big fortunes … increasing rapidly in amount with the size of the estate.”
Who was this left-winger? Theodore Roosevelt, in his famous 1910 New Nationalism speech.
The truth is that, in the early 20th century, many leading Americans warned about the dangers of extreme wealth concentration, and urged that tax policy be used to limit the growth of great fortunes. Here’s another example: In 1919, the great economist Irving Fisher — whose theory of “debt deflation,” by the way, is essential in understanding our current economic troubles — devoted his presidential address to the American Economic Association largely to warning against the effects of “an undemocratic distribution of wealth.” And he spoke favorably of proposals to limit inherited wealth through heavy taxation of estates.
Nor was the notion of limiting the concentration of wealth, especially inherited wealth, just talk. In his landmark book, “Capital in the Twenty-First Century,” the economist Thomas Piketty points out that America, which introduced an income tax in 1913 and an inheritance tax in 1916, led the way in the rise of progressive taxation, that it was “far out in front” of Europe. Mr. Piketty goes so far as to say that “confiscatory taxation of excessive incomes” — that is, taxation whose goal was to reduce income and wealth disparities, rather than to raise money — was an “American invention.”
And this invention had deep historical roots in the Jeffersonian vision of an egalitarian society of small farmers. Back when Teddy Roosevelt gave his speech, many thoughtful Americans realized not just that extreme inequality was making nonsense of that vision, but that America was in danger of turning into a society dominated by hereditary wealth — that the New World was at risk of turning into Old Europe. And they were forthright in arguing that public policy should seek to limit inequality for political as well as economic reasons, that great wealth posed a danger to democracy.
So how did such views not only get pushed out of the mainstream, but come to be considered illegitimate?
Consider how inequality and taxes on top incomes were treated in the 2012 election. Republicans pushed the line that President Obama was hostile to the rich. “If one’s priority is to punish highly successful people, then vote for the Democrats,” said Mitt Romney. Democrats vehemently (and truthfully) denied the charge. Yet Mr. Romney was in effect accusing Mr. Obama of thinking like Teddy Roosevelt. How did that become an unforgivable political sin?
You sometimes hear the argument that concentrated wealth is no longer an important issue, because the big winners in today’s economy are self-made men who owe their position at the top of the ladder to earned income, not inheritance. But that view is a generation out of date. New work by the economists Emmanuel Saez and Gabriel Zucman finds that the share of wealth held at the very top — the richest 0.1 percent of the population — has doubled since the 1980s, and is now as high as it was when Teddy Roosevelt and Irving Fisher issued their warnings.
We don’t know how much of that wealth is inherited. But it’s interesting to look at the Forbes list of the wealthiest Americans. By my rough count, about a third of the top 50 inherited large fortunes. Another third are 65 or older, so they will probably be leaving large fortunes to their heirs. We aren’t yet a society with a hereditary aristocracy of wealth, but, if nothing changes, we’ll become that kind of society over the next couple of decades.
In short, the demonization of anyone who talks about the dangers of concentrated wealth is based on a misreading of both the past and the present. Such talk isn’t un-American; it’s very much in the American tradition. And it’s not at all irrelevant to the modern world. So who will be this generation’s Teddy Roosevelt?
By: Paul Krugman, Op-Ed Columnist, The New York Times, March 27, 2014
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